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Specialty Pharmaceuticals - Death_ Taxes and Generics - Credit Suisse

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Specialty Pharmaceuticals - Death_ Taxes and Generics - Credit Suisse Powered By Docstoc
					                                                                                                              13 December 2010
                                                                                                         Americas/United States
                                                                                                                Equity Research
                                                                                                       Specialty Pharmaceuticals




                                                Specialty Pharmaceuticals
                         Research Analysts
                                                    INITIATION
                             Michael Faerm
                              212 538 1771
             michael.faerm@credit-suisse.com
                                                Death, Taxes and Generics
                             Arti Sanganeria
                                212 538 5206    ■    We are initiating coverage on the specialty pharmaceuticals sector.
            arti.sanganeria@credit-suisse.com
                                                ■    We broadly favor generic pharmaceuticals stocks to branded specialty
                                                     pharmaceuticals, although we believe that selected attractive branded
                                                     opportunities are available. Branded specialty pharma stocks are largely
                                                     stock-specific, in our view, whereas generics are more interrelated.
                                                ■    Five themes underpin our preference for generics over branded
                                                     specialty pharma stocks
                                                      o   Pipelines: generics face a superior pipeline opportunity in the coming
                                                          years – the inverse of the “patent cliff” – while branded pipelines are
                                                          challenged
                                                      o   Pricing: branded companies have become increasingly reliant on price
                                                          increases as a key growth driver, a dependence that we believe will be
                                                          increasingly difficult to sustain in the post healthcare reform world
                                                      o   Regulatory: branded specialty pharma companies face an increasingly
                                                          conservative FDA with respect to drug approvals and safety, while
                                                          generic companies are filing record numbers of ANDAs to create future
                                                          pipeline opportunities
                                                      o   International: most branded US specialty pharma companies have
                                                          little or no international presence, while several generics have greater
                                                          access to global opportunities for growth and diversification
                                                      o   Biosimilars: a promising future for a select few generics, though
                                                          uncertainty remains, but we like the option value
                                                ■    We are initiating coverage on five stocks, 2 branded and 3 generics
                                                ■    Branded:
                                                      o   Salix, SLXP, rated Outperform, TP $55
                                                      o   Endo, ENDP, rated Neutral, TP $40
                                                ■    Generic:
                                                      o   Watson, WPI, rated Outperform, TP $60
                                                      o   Mylan, MYL, rated Outperform, TP $25
                                                      o   Teva, TEVA, rated Neutral, TP $58




DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. FOR
OTHER IMPORTANT DISCLOSURES, visit www.credit-suisse.com/ researchdisclosures or call +1 (877) 291-2683.
U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result,
investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors
should consider this report as only a single factor in making their investment decision.
                                              13 December 2010




Table of contents
Investment Summary                        3

Salix Pharmaceuticals, Ltd. (SLXP)       18

Endo Pharmaceuticals (ENDP)              53

Watson Pharmaceuticals (WPI)             85

Mylan Inc. (MYL)                        120

Teva Pharmaceutical Industries (TEVA)   148




Specialty Pharmaceuticals                                   2
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Investment Summary
We are initiating coverage of the US Specialty Pharmaceuticals group. Our initiation
includes the following five stocks; in addition to currently-covered Alimera
Sciences (ALIM), this brings our coverage to six stocks (Exhibit 1).

Overall, We Prefer Generics to Branded Specialty
Pharma…but Select Branded Opportunities Are
Available
We believe that overall, the generics subsector presents a more attractive investment
opportunity than the branded subsector.
Branded specialty pharma stocks are to a great extent stock-specific in their investment
attributes, in our view, while generics are more interrelated. We believe that there are
several themes that broadly favor generics, while at the same time leaving room for
opportunity to invest in specific attractive branded stocks.
We will discuss five themes driving our preference for generics on the following pages.
They are:
(1) Pipelines: generics face superior pipeline opportunity – the flip side of the “patent cliff”
    – while branded pipelines are challenged in this regard
(2) Pricing: branded companies have become reliant on pricing power as a key growth
    driver – which is not likely sustainable in the post-reform environment
(3) Regulatory: FDA approvals climate has become increasingly challenging for brands
(4) International: an important source of revenue growth and diversification for generics,
    little or no presence for branded cos.
(5) Biosimilars: a call option for generics stocks

Exhibit 1: Summary of Credit Suisse Specialty Pharmaceuticals Coverage Universe
US$ in millions, except per share
  Name   Ticker Market   Rating     Target Price     Upside/                           Thesis                                            Risks
                  Cap              (Current Price) (Downside)
Branded Specialty Pharmaceuticals:

Alimera* ALIM       $320    Outperform $16 ($10.29)       55.5%   Large opportunity in area of high unmet need      Iluvien FDA approval for DME
                                                                  in DME

Salix       SLXP   $2,895 Outperform $55 ($43.91)         25.3%   The start of a prolonged organic growth           Xifaxan IBS non-C approval
                                                                  ramp with significant margin expansion            Unsuccessful commercialization in IBS non-C

Endo        ENDP   $4,759        Neutral   $40 ($36.46)   9.7%    Acquisitions drive revenue growth but also        Early Lidoderm or Opana ER generics,
                                                                  margin erosion; patents > pipeline                Reliance on acquisitions for growth

Generics:

Watson      WPI    $6,190 Outperform $60 ($49.40)         21.5%   Generic leverage, branded diversification,        Branded and generic pipeline failures;
                                                                  and potential international upside                Bad international expansion deals

Mylan       MYL    $9,791 Outperform $25 ($20.14)         24.1%   Strong US generics pipeline complemented by       Generic pipeline failures,
                                                                  international footrprint in established markets   global pricing pressures

Teva        TEVA $51,506         Neutral   $58 ($53.80)   7.8%    Copaxone overhang and slowing growth              Copaxone generics,
                                                                  limit upside                                      reliance on acquisitions for growth
*previously initiated coverage
Source: Company data, Credit Suisse estimates

In Exhibit 2, we summarize our revenue and EPS estimates and compare them to Street
consensus estimates.




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Exhibit 2: Comparison of Credit Suisse Estimates to Wall Street Consensus
US$ in millions, unless otherwise stated
  Name        Ticker          CS         % Street                   Revenues ($ MM)                                  EPS
                            Rating        Buys               2011   2012         2013          2014     2011      2012       2013      2014
Branded Specialty Pharmaceuticals:

Alimera*    ALIM            Outperform     100%
                                      CS Estimates         $89.2     $191.4      $263.7     $445.4     $0.27     $1.53     $2.36     $4.63
                                       Consensus            67.6      134.8       193.7      284.2      0.60      1.58      1.87      2.72
                                         Difference        $21.6      $56.6       $70.0     $161.2    ($0.33)   ($0.05)    $0.49     $1.91

Salix       SLXP            Outperform      92%
                                      CS Estimates       $604.6      $852.3     $1,100.4   $1,359.4   $2.15     $3.21       $4.63    $6.93
                                       Consensus          546.7       792.2      1,052.1    1,276.3    1.72      3.02        4.68     6.34
                                         Difference       $57.9       $60.1        $48.4      $83.1   $0.43     $0.19      ($0.05)   $0.59

Endo        ENDP              Neutral         54%
                                        CS Estimates    $2,264.8    $2,404.8    $2,496.0   $2,627.3    $4.15     $4.54     $4.45     $4.59
                                         Consensus       2,269.6     2,424.5     2,374.2    2,445.9     4.20      4.58      4.41      4.49
                                           Difference      ($4.8)     ($19.7)     $121.8     $181.4   ($0.05)   ($0.04)    $0.04     $0.10

Generics:

Watson      WPI             Outperform      62%
                                      CS Estimates      $3,521.4    $4,114.3    $5,367.4   $5,037.7   $4.22     $5.68      $5.96     $6.64
                                       Consensus         3,521.6     4,155.7     4,737.1    4,538.7    4.08      4.94       5.15      5.55
                                         Difference        ($0.2)     ($41.4)     $630.2     $498.9   $0.14     $0.74      $0.81     $1.09

Mylan       MYL             Outperform      72%
                                      CS Estimates      $6,173.0    $6,766.5    $6,977.6   $7,351.0   $1.99     $2.30      $2.45      $2.56
                                       Consensus         6,073.9     6,537.8     6,896.2    7,282.2    1.98      2.24       2.38       2.63
                                         Difference        $99.1      $228.7       $81.4      $68.8   $0.01     $0.06      $0.07     ($0.07)

Teva        TEVA              Neutral         81%
                                        CS Estimates $18,817.7 $20,677.0 $21,777.9 $21,737.3           $5.20     $5.71      $6.04     $5.59
                                         Consensus 18,980.2 20,659.5      21,712.5  22,669.2            5.30      5.90       6.10      6.42
                                           Difference  ($162.5)    $17.5     $65.4   ($931.9)         ($0.10)   ($0.19)    ($0.06)   ($0.83)
*previously initiated coverage
Source: Factset, First Call, IBES, Credit Suisse estimates




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Five Themes Lead Us to Favor
Generics
Generics Face a Superior Pipeline Opportunity
The well-known pharmaceutical patent cliff that has weighed on branded companies will
provide unprecedented pipeline opportunities for generics. But with much of the focus
centering on 2011-2012 patent expirations, it may not be fully appreciated that the
opportunity (for generics) and the threat (for brands) don’t end in 2012. Although
2012 is undoubtedly the peak year of patent expirations, particularly in the US (Exhibit 3),
the opportunity reaccelerates in 2014 and remains substantial through 2016.

Exhibit 3: Patent Expirations in US Peak in 2013, But Are Substantial Beyond
in billions, unless otherwise stated

                                 $35
                                                     $30
                                 $30
   2009 US sales at risk ($bn)




                                 $25


                                 $20
                                              $17
                                       $15
                                                                   $14                       $13
                                 $15
                                                                                $11
                                 $10

                                                            $5
                                  $5


                                  $0
                                       2010   2011   2012   2013   2014         2015         2016


Source: IMS data, Credit Suisse estimates. Chart shows for selected drugs 2009 IMS US sales, in year of
loss of US exclusivity.




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Exhibit 4: US Generic Utilization Rate Will Rise from Current 72% to 84% in 2016
                             90.0%
                                                                                 US Generic TRx
                                                                                                                              83.3% 84.1%
                                                                                                                      81.9%
                                                                                                              80.1%
                             80.0%                                                                    77.7%
    Generic % of Total TRx




                                                                                              73.9%
                                                                                      72.4%
                                                                              71.5%
                             70.0%
                                                                      69.1%

                                                              65.0%

                                                      61.2%
                             60.0%            58.0%
                                     54.8%


                             50.0%
                                     2004     2005    2006     2007   2008     2009   2010E   2011E   2012E   2013E   2014E   2015E   2016E

Source: IMS, Credit Suisse estimates

The patent cliff will contribute to a steadily increasing rate of generic utilization in the US
market, as forecasted by the Credit Suisse Healthcare Services team (Exhibit 4).
Furthermore, the broader opportunity for generics, including international markets and
biosimilars, underscores the durability of the generics industry pipeline through 2016
(Exhibit 5).

Exhibit 5: Global Opportunities Are Also Substantial
in billions, unless otherwise stated

                             $60
                                                         $52                                                          $51
                                                                        $50
                             $50                                                                       $48
   WW Sales at Risk ($bn)




                             $40
                                                                                        $33                                           $33

                             $30            $28



                             $20


                             $10


                              $0
                                            2010         2011           2012           2013            2014           2015            2016


Source: Evaluate Pharma. Includes biologics.

Among the three generic companies in our coverage, Teva has the largest pipeline of
ANDA filings and first to file ANDA opportunities, and the highest underlying branded sales
value of these opportunities. However relative to its smaller revenue base, Watson’s
portfolio compares favorably (Exhibit 6, Exhibit 7, Exhibit 8).




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Exhibit 6: Robust US Generic PIpelines                                                                                                                                           Exhibit 7: WPI Holds Its Own
                  250                                                                                                          $140                                                                               4.5%                               1.9%                           2.0%
                                                                                                                                                                                                                                3.9%




                                                                                                                                                                                                                                                                                           Branded Revenues of Filed Products/Total
                                                                                                          $117                                                                                                    4.0%                                                              1.8%
                                                                                                                   203         $120




                                                                                                                                      Revenues of Branded Products, $ Bn
                  200                                                                                                                                                                                                                                                               1.6%




                                                                                                                                                                                  No. of Filings/Total Revenues
                                                                                                                                                                                                                  3.5%
                                                                                                                                                                                                                                                     3.1%                           1.4%
                                                                                   $95                                         $100
                                                                                                                                                                                                                  3.0%
                                                                                              153
                                                                                                                                                                                                                                                                                    1.2%
 No. of Filings




                                                                                                                                                                                                                                                                                                         Revenues
                  150                                                                                                                                                                                             2.5%
                                                                                                                               $80
                                                                                                                                                                                                                                                                             0.8%   1.0%
                                                                         110                                                                                                                                      2.0%
                                                                                                                               $60                                                                                                                                                  0.8%
                  100                                                                                                    $55                                                                                                                                                 1.5%
                                                                                                            83                                                                                                    1.5%
                                                                                                                                                                                                                                              0.5%                                  0.6%
                                                                                                                               $40                                                                                                                                    0.4%
                                                                                                                                                                                                                  1.0%   0.8%          0.9%
                                                                                                                                                                                                                                                                                    0.4%
                                                                                         45
                        50                                                                                                                                                                                                                                     0.6%
                                                                                                    $24                                                                                                           0.5%
                                                                                                                               $20                                                                                                                                                  0.2%
                                                                   21
                                                                                                                                                                                                                  0.0%                                                              0.0%
                             0                                                                                                 $0                                                                                          WPI                  MYL                    TEVA
                                                                     WPI                  MYL                    TEVA
                                                                                                                                                                                                                         FTF/Total Rev.                     ANDAs/Total Rev.
                                                                   FTF     ANDAs         Revenue-ANDAs      Revenue-FTFs                                                                                                 Revenue-FTFs/Total Rev.            Revenue-ANDAs/Total Rev.


Source: Company data, Credit Suisse estimates                                                                                                                                    Source: Company data, Credit Suisse estimates



Exhibit 8: WPI P-IV Pipeline Is Magnified by Its Smaller Revenue Base
                  Revenues from Major P-IV Challenges as % Total




                                                                   30%


                                                                   25%


                                                                   20%
                                   Revenues




                                                                   15%


                                                                   10%


                                                                     5%


                                                                     0%
                                                                                         2011                            2012                                                               2013                                        2014                                 2015

                                                                                                                                                                           WPI                      MYL                  TEVA

Source: Company data, Credit Suisse estimates

Branded Specialty Pharma’s Growing Reliance on
Pricing Is Risky
Over the past three years, price increases have grown dramatically in importance as a
revenue growth driver for many branded specialty pharma companies.
For a basket of companies analyzed in Exhibit 9, price increases grew as a proportion of
total revenue growth from 47% in 2007 to 163% in 2009. In the post-healthcare reform
environment, pharmaceutical pricing power will likely be weakened, and could make a key
source of branded companies’ revenue growth less sustainable.




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Exhibit 9: Price Increase – Major Contributor to Growth
Based on WAC price increases reported for products of AGN, FRX, ENDP, CEPH, MRX representing 77%-
80% of total company revenues

                            Price Increases           Revenue Growth                   Price Increase as % of Revenue Growth
                   180%
                                                                                                                                                  163%
                   160%

                   140%

                   120%
                                            105%
                   100%

                   80%
                                                                                                          63%
                   60%                                                     47%

                   40%
                                                                   17.1%                          14.2%
                   20%       13.9% 13.3%                                                   9.0%                                       8.5% 5.2%
                                                            8.0%

                    0%
                                     2006                        2007                             2008                                    2009

Source: PriceRx.com, Company data, Credit Suisse estimates

Regulatory Climate Remains Challenging for
Branded Pharmaceuticals
Branded specialty pharmaceutical companies continue to face a challenging and
conservative FDA approval process, as evidenced by flat approval rates overall (Exhibit
10) and underscored by declining approval rates for priority reviews (Exhibit 11), which are
often conducted for more novel drugs.

Exhibit 10: FDA Approval Rates for All NDAs Are Flattish                                                   Exhibit 11: FDA Approval Rates for Priority Review NDAs
                                                                                                           Have Fallen
                   60%           First-Cycle Approval Rates for Original NDAs                                                            First-Cycle Approval Rates for Priority Review NDAs
                                                                                                                                80%
                                                                                                                                                                               70%
                                     48%                                         48%                                            70%
                   50%                                              45%                                                                                              62%                 63%
                                               42%       41%                               42%
                                                                                                                                60%               54%      55%                                  53%
   Approval Rate




                   40%    37%
                                                                                                                Approval Rate




                                                                                                                                       47%
                                                                                                                                50%
                   30%
                                                                                                                                40%
                   20%
                                                                                                                                30%
                   10%                                                                                                          20%

                    0%                                                                                                          10%
                          2003       2004      2005      2006       2007         2008      2009                                 0%
                                                                                                                                       2003       2004    2005       2006      2007      2008   2009


Source: Parexel White Paper, Credit Suisse estimates                                                       Source: Parexel White Paper, Credit Suisse estimates

In addition, since April, the number of FDA approvals this year has been down almost
every month versus the year-prior month (Exhibit 12).




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Exhibit 12: Number of NDA and sNDA Approvals in 2009 and 2010E

                                                                                    FDA Approvals in 2009 and 2010
                                                     30
                                                                                                                            25
                                                     25                                                  23
                               Number of Approvals



                                                                                                                                       19
                                                     20                                                                                                                                17

                                                     15                            12         13                                                                 12
                                                                        10                                                                     10                              10
                                                     10                                                              7
                                                             6
                                                      5

                                                      0
                                                             J           F          M          A          M          J          J          A    S                        O      N       D


Source: In-Vivo, Credit Suisse estimates

At the same time, generic companies are filing record numbers of ANDA
applications, stocking their pipelines for the future (Exhibit 13, Exhibit 14).

Exhibit 13: Paragraph IV Lawsuits Continue to Rise                                                                                              Exhibit 14: Large Increase in New Products Receiving
                                                                                                                                                Paragraph IV Challenges
                                                                   Paragraph IV Lawsuits                                                                                      Number of Products Receiving a PIV challenge for the first time
                        250                                                                                                                                              70                                                                     64

                                                                                                                                    194                                  60
   Number of Lawsuits




                        200
                                                                                                                                                    Number of Products




                                                                                                              162        165                                             50                                                     44      43
                        150                                                                                                                                                                    38
                                                                                                                                                                         40                                     33      32
                                                                  96          90
                        100                                                              81         87                                                                   30
                                                                                                                                                                                                        21
                                                                                                                                                                         20    16      16
                         50   35                       33
                                                                                                                                                                         10
                         0
                                                                                                                                                                          0
                              2001                    2002       2003        2004       2005       2006       2007       2008       2009
                                                                                                                                                                              2001    2002    2003     2004    2005    2006    2007     2008    2009



Source: Paragraphfour.com,Credit Suisse estimates                                                                                               Source: Paragraphfour.com,Credit Suisse estimates

Generics Have More Extensive International
Opportunities
Most US-based branded specialty pharmaceutical companies have little or no international
revenue contribution. This can have some advantages, such as shelter from government
price reductions and exchange rate volatility, but on balance we favor the greater
international exposure of the generics (Exhibit 15) as a way to diversify from the US
market and to access higher growth markets.




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Exhibit 15: Generics Have Greater International Exposure than Branded Companies
US$ in millions, unless otherwise stated
                      2010          2015         2010       2015           Intl        Total
                       Intl          Intl         Intl        Intl       Revenue      Revenue
                     % Total      % Total         $ Bn       $ Bn         CAGR         CAGR
                    Revenue      Revenue        Revenue    Revenue      2010-2015    2010-2015
Branded
SLXP                  0%          0%              $0          $0              NM       35.9%
ENDP                  0%          0%              $0          $0              NM        9.6%

Generic
TEVA                  38%        47%             $6,212    $10,396         10.8%        6.4%
MYL                   49%        49%             $2,707     $3,684          6.4%        6.3%
WPI                   13%        12%              $444       $640           7.6%        9.1%
Source: Company data, Credit Suisse estimates

In addition to their overall quantity and proportion of international exposure, generics
companies can be differentiated by the specific regions and countries from which they
source their international revenues, the relative desirability of these markets, and the
companies’ competitive strength in each market.
We summarize the competitive positioning of Teva, Mylan and Watson across
multiple international markets, along with some key metrics for these markets, in
Exhibit 16, to the extent this information was available from various sources. .
The common thread among the international footprints of the three companies: all were
built to a great extent through acquisitions, for example:

■   Teva: acquisitions of Ratiopharm, Barr (which had acquired Pliva), Bentley

■   Mylan: acquisitions of Merck KGaA generics business, Matrix

■   Watson: acquisition of Arrow
We have grouped the countries by geographic region. In Western Europe, a key driver of
generic volume growth will likely be increases in generic utilization, particularly in countries
with relatively low utilization currently. This tends to predominate in the countries of
Southern Europe, such as France, Spain and Italy, while the Northern European countries
such as UK and Germany are often more penetrated and mature markets (for generics),
though their large size holds some degree of attraction.
Teva is the clear leader across the widest range of Western European markets, and
is dominant in several countries of Central and Eastern Europe. Teva is the market
leader in the fast growing generic markets of Italy and Spain, in part due to the recent
Ratiopharm acquisition, where Mylan also has a significant presence. Mylan dominates
the French generic market with a 31% share. In the more penetrated Northern European
markets, Teva leads by a substantial margin in the UK, and has raised its rank in Germany
from 5 to 2 with Ratiopharm.
In Asia, both Teva and Mylan are significant players in the Japanese market,
although Teva’s participation is not reflected in its revenue line, as it participates through a
collaboration and does not book revenues. Mylan is number one in Australia.
Watson currently has a modest international presence, but we expect the company to
actively grow its international footprint, particularly in emerging markets such as Brazil,
Russia, and India. The company’s recent deal with Moksha in Brazil is indicative of the
type of deals Watson could pursue.




Specialty Pharmaceuticals                                                                                       10
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Exhibit 16: International Market Positioning of Teva, Mylan and Watson
US$ in billions, unless otherwise stated
                   TEVA         TEVA        MYL        MYL        WPI        WPI       Generic       Generic       Total Pharma Mkt
                   Share        Rank       Share      Rank       Share      Rank      Utilization    Market, $     Sales, $    CAGR
                (by value)* (by value)** (by value) (by value) (by value) (by value) (by volume)    in billions   in billions 2009-14
USA                 21.8%             1          11.3%    2      6.3%        4          72%            $31.9       $286.7      0.3%
Canada                                1                          4.0%        7                          $2.9        $17.3      4.3%
EU - Low Generic Utilization
France       10-11%          3                   31.0%     1     5.0%        7          23%             $4.1        $37.9      1.4%
Spain         >10%           1                             5                            20%             $2.0        $19.9      7.1%
Italy                       1***                           2                            10%             $2.3        $23.8      2.0%
Portugal                                                 Top 3                          10%                          $5.7      2.7%
Belgium                                                    3                            13%                          $6.5      5.9%
Ireland                                                  Top 5                          5%                           $2.7      7.2%
EU - High Generic Utilization                                                0
UK            29.0%           1                  11.0%     3     5.0%        5          57%             $2.9        $19.2      1.6%
Germany                       2                            7                            57%             $6.1        $38.4      4.4%
Netherlands                   1                          Top 5                          50%                          $7.3      5.4%
Sweden                                                     3     3.0%                   44%                          $4.7      4.3%

Central and Eastern Europe
Hungary                               1                                                 40%                          $3.2      6.7%
Czech Republic                        2                                                 62%                          $3.0      6.7%
Poland         7.0%                   3                                                 77%                          $8.0      7.8%
Russia                                2                                                 70%                          $6.7     19.3%
Asia
Japan                              top 3                   4                            17%             $3.7        $76.8      2.0%
Australia                                        60%*    1****               2          30%             $0.8         $9.7      4.4%
New Zealand                                                                  2          0%                           $1.0      5.0%
Latin America
Brazil                             small                                                17%                         $10.7      8.6%
Mexico                                                                                                               $9.5      7.5%
* All Teva shares pre-Ratiopharm
** All Teva ranks are pro-forma Ratiopharm
*** Teva is ranked no.1 both by share and rank
****MYL is ranked no.1 by volume
Source: Company data, Credit Suisse estimates



Biosimilars: a Promising Future for a Select Few
Generics Companies, but Uncertainty Remains
A large opportunity…
The biosimilars opportunity is created by the confluence of several factors. First, a large
and growing market (Exhibit 17). Second, a shift in R&D efforts, increasing the emphasis
on biologics (Exhibit 18). And third, the beginning of a coming wave of biologics patent
expirations, totaling about $60 bn in cumulative sales by 2015 (Exhibit 19).




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                                                                     13 December 2010



Exhibit 17: Biotech Market had a 21% CAGR over the Past Decade




Source: IMS Health, MIDAS, Teva-Sep-08 presentation, Ernst & Young



Exhibit 18: R&D Efforts Increasingly Focused on Biologics




Source: Hopsira Biosimilars Education Forum, August 19, 2010




Specialty Pharmaceuticals                                                         12
                                                                                          13 December 2010



Exhibit 19: $60 Bn of Impending Biologics Patent Expiries Fuel the Biosimilars
Opportunity
                                                                                  20
        $59


        $49

                                                                       9
        $39

 $ BN                                                        17
        $29


        $20
                                                    8

        $10
                                        2    1
                  1          1
         $0
                2008        2009    2010    2011   2012     2013      2014       2015

Source: Lonza Presentation, June 2010

We estimate that the biosimilars opportunity underlying these patent-exposed products
could be $10-$15 bn. We assume that biosimilars will gain approximately a 40-50% share
of the patent-exposed biologics, and that biosimilars will experience about 50% price
erosion.
…with significant barriers to entry…
The biosimilars market, in addition to being large and untapped, will likely have high
barriers to entry, that leave the opportunity to be shared by relatively few players.
These include biologics manufacturing capabililties, clinical development and
regulatory know-how, and specialized sales and marketing capabilities. All will
require significant expertise and investment.
…that leave a few major players to reap the rewards
These barriers will leave the market to be a finite number of major players with the
requisite resources, including:

■   Generic companies: Teva/Lonza, Sandoz/Momenta, Hospira/Celltrion, Mylan/Biocon,
    Watson/Eden

■   Major pharma: Merck, Pfizer, Boerhinger Ingelheim
The limited number of major competitors should help make biosimilars an attractive
market, with more stable pricing and more durable profitability than is seen in typical
small molecule generics markets.




Specialty Pharmaceuticals                                                                              13
                                                                                                                                        13 December 2010




Valuation Perspective and
Methodology
Historical and Current Valuation Perspective –
Generics At a 10 Year Low, Branded Have Rallied in
Past 1.5 Years
Over the past 10 years, a composite of branded specialty pharma companies has traded
at an average of a 27% premium to the S&P 500 (Exhibit 20), based on next 12 months
market cap-weighted price/earnings ratios, while a generics composite has traded at a
10% premium.
Both subsectors have traded down from their averages, generally in tandem, since March
2008. However, since April 2010 the valuations of the two groups have diverged. Branded
companies are trading at a 3% premium to the S&P, while generics are at a 10 year low,
23% below the S&P multiple.
We believe that this disparity contributes to the investment opportunity in generics.

Exhibit 20: Generics Trading At a 10 Year Low (Price/Next 12 Months Earnings Ratio, Relative to S&P 500)

                                                 2.00
                                                 1.90
                                                 1.80
                                                 1.70
      US Pharma Market Weighted Relative P/FE




                                                 1.60
                                                 1.50
                                                 1.40
                                                 1.30                                                                            Branded Average: 1.27x

                                                 1.20
                                                 1.10                  Generic Average: 1.10x
                                                                                                                                                     1.03
                                                 1.00
                                                 0.90
                                                 0.80
                                                                                                                                                    0.77
                                                 0.70
                                                              US Branded Spec Pharma Sector     US Generics Spec Pharma Sector
                                                 0.60
                                                 0.50
                                                 0.40
                                                 0.30
                                                  1/ 04




                                                  7/ 08




                                                           09
                                                           02

                                                  7/ 03




                                                  7/ 10
                                                  7/ 05

                                                  1/ 05

                                                  7/ 06
                                                          06


                                                  7/ 0 7

                                                  1/ 0 7



                                                          08

                                                  7/ 0 9




                                                           10
                                                            1

                                                            1




                                                  1/ 03

                                                  7/ 04
                                                  7/ 0 2
                                                         00

                                                         00




                                                        20




                                                        20
                                                        20




                                                        20

                                                        20

                                                        20

                                                        20




                                                        20
                                                        20

                                                        20




                                                        20



                                                        20
                                                        20




                                                        20

                                                        20

                                                        20




                                                        20

                                                        20
                                                      /2

                                                      /2




                                                     1/



                                                     1/




                                                     1/




                                                     1/

                                                     1/

                                                     1/
                                                     1/

                                                     1/

                                                     1/

                                                     1/

                                                     1/

                                                     1/

                                                     1/



                                                     1/



                                                     1/




                                                     1/
                                                     1/




                                                     1/
                                                   1

                                                          1




                                                  1/
                                                  1/




                                                  1/




                                                  1/
                                                1/

                                                       7/

                                                  1/




Source: Factset data, Credit Suisse estimates, market cap-weighted composites. Branded pharma composite includes ENDP, CEPH, FRX, KG,
MRX, AGN. Generics composite includes TEVA, MYL, WPI.

Below, we show current trading multiples for the Credit Suisse Specialty Pharma coverage
group (Exhibit 21).




Specialty Pharmaceuticals                                                                                                                                 14
                                                                                                                                                                        13 December 2010



Exhibit 21: Comparable Company Valuation Multiples, Credit Suisse Specialty Pharmaceuticals Coverage
US$ in millions, unless otherwise stated
                                               Price                                 Market                                     2010-2013                                     Short
                      Target  Upside/             52 week                             Cap   2011        2012         2011         EPS             2011          2012 Stock % Interest
Ticker Company Rating Price (Downside) Current High Low                              ($ MM) P/E         P/E       Target P/E     CAGR %           PEG           PEG    YTD    Ratio


Branded Pharmaceuticals
ALIM* Alimera          O          $16          55%      $10.29 $12.70        $6.30      $337 N/M        6.7x            NM          NM            N/M           N/M       (6.9%)      14.7
ENDP Endo              N          $40          10%       36.46 38.20         19.19      4,759 8.8x      8.0x            9.6x        9.6%          0.9x          0.8x     77.7%        5.7
SLXP Salix             O          $55          25%       43.91 46.39         22.47      2,895 20.5x     13.7x           25.6x       N/M           N/M           N/M      72.9%        10.9

Branded Pharmaceuticals - Mean (Equal - Weighted)                                              14.6x    9.5x            17.6x       9.6%          0.9x          0.8x      47.9%       10.4
Branded Pharmaceuticals - Median (Equal - Weighted)                                            14.6x    8.0x            17.6x       9.6%          0.9x          0.8x      72.9%       10.9
Generic Pharmaceuticals
MYL     Mylan          O          $25          24%      $20.14 $23.63 $16.55 $9,791 10.1x               8.8x            12.6x      14.9%          0.7x          0.6x      9.3%        7.8
TEVA Teva              N          $58            8%      53.80 64.95         46.99 51,506 10.3x         9.4x            11.1x      10.1%          1.0x          0.9x      (4.2%)      1.0
WPI     Watson         O          $60          21%       49.40 52.20         37.26      6,190 11.7x     8.7x            14.2x      20.2%          0.6x          0.4x     24.7%        2.2
Generic Pharmaceuticals - Mean (Equal - Weighted)                                              10.7x    9.0x            12.7x      15.0%          0.8x          0.7x      9.9%        3.7
Generic Pharmaceuticals - Median (Equal - Weighted)                                            10.3x    8.8x            12.6x      14.9%          0.7x          0.6x      9.3%        2.2
S&P 500                                                 1,240     1,240 1,011                  13.6x    N/A             N/A

*ALIM - previously initiated coverage
Source: Company data, Credit Suisse estimates. Short interest ratio is calculated by dividing the short interest by average 30-day daily volume.
The ratio implies the number of days it takes to cover the outstanding short interest.

Our Target Prices Are Derived Using a Blend of DCF
and Relative P/E Methodologies
We value most of our covered specialty pharma companies using a 50/50 blend of
discounted cash flow (DCF) analysis and relative multiples of 2011 EPS, in order to
capture the merits of each method.
Our target price derivations are summarized in Exhibit 22.

Exhibit 22: Credit Suisse Price Target Summary, Specialty Pharmaceuticals Sector
US$ in millions, unless otherwise stated
                                                                         CS Price Target (1)               DCF                               Relative Valuation
                               Current         Rating           Price         Upside/       2011 PT        DCF           Premium/      Relative      Target             2011       Rel. Val.
                                 Price                          Target      (Downside)    Implied P/E     Price         Discount (2)   Multiple     Multiple       EPS Est.         Price
S&P 500, Current                  $1,240
S&P 500, as of 12/3/2010          $1,225                                                                                                             13.5x             $91.00

Weighting                                                                                                  50%                                                                       50%
Branded Specialty Pharma Group                                   ---             ---            ---         ---            (10%)          0.90x      12.1x               ---          ---
ALIM                        $10.29          Outperform          $16            55.5%            NM         $16                                                         $0.27
ENDP                        $36.46           Neutral            $40            9.7%            9.6x        $40             (20%)          0.80x          9.7x          $4.15         $40
SLXP                        $43.91          Outperform          $55            25.3%           25.6x       $55                                                         $2.15

Generic Specialty Pharma Group                                   ---             ---            ---         ---            (10%)          0.90x      12.1x               ---          ---
MYL                         $20.14          Outperform          $25            24.1%           12.6x       $25              5%            1.05x      12.7x             $1.99         $25
TEVA                        $53.80           Neutral            $58             7.8%           11.1x       $59             (10%)          0.90x      10.9x             $5.20         $57
WPI                         $49.40          Outperform          $60            21.5%           14.2x       $64              10%           1.10x      13.3x             $4.22         $56



(1) Average of DCF and relative valuation, weighted as shown.
(2) Each group's valuation is relative to S&P 500, while each stock is relative to its group (parity to group = 1.0).

Source: Company data, Credit Suisse estimates

We believe that DCF is an appropriate method for valuing specialty pharmaceutical
companies, as it enables us to capture the full life cycles individual products, and helps to
avoid overweighting short-lived events like 180 day exclusivity periods for successful first-
to-file generic challenges. DCF is particularly relevant at the present time in the industry,



Specialty Pharmaceuticals                                                                                                                                                                   15
                                                                                                 13 December 2010


in that it allows us to look beyond the impending “patent cliff” – peaking for the industry in
2011-2012 – and value the cash flows before and after the cliff.
We model cash flows to 2020 and calculate a terminal value. We employ company-
specific discount rates based on the capital asset pricing model and our assessment of
each company’s investment risk, and perpetuity growth rates, tailored to each company’s
growth prospects, in the terminal value calculation.
In addition, we include a relative P/E component in our valuation due to the common
use of this metric among investors, and also due to the tendency of specialty pharma
stocks to respond to near-term earnings performance. For our P/E based valuation, we
start by assigning an estimated premium or discount for each subsector, relative to the
S&P 500. We then assign premiums or discounts to the individual stocks, relative to their
subgroup multiple.
For branded specialty pharma valuations, we assume that the subsector will trade down
from its current 3% premium to a 10% discount to the S&P 500. We believe that the
headwinds facing the group, as discussed in this report, including the headwinds to
revenue and earnings growth caused by the approaching patent cliff, the unreliability of
future pricing power, and the challenging drug approvals environment, will weigh on the
branded group’s valuations.
We think the picture is brighter for generics, and estimate that the group will trade up from
a 23% discount to a 10% discount to the S&P 500. We attribute this to the strong and
improving fundamentals of the group, including burgeoning generics pipelines as the
patent cliff approaches, increased international opportunities, and eventually, the prospect
of reaping the rewards of the biosimilars opportunity, for a select group of companaies with
the requisite capabilities.




Specialty Pharmaceuticals                                                                                     16
                                                                                                               13 December 2010




Our Stock Selection Criteria Favor
Organic Growth, Margin Expansion
Opportunity and Portfolio
Diversification
Our criteria for evaluating and recommending specialty pharmaceutical stocks are
summarized in Exhibit 23.

Exhibit 23: Credit Suisse Specialty Pharmaceuticals Stock Selection Criteria
     Branded Specialty Pharma                                        Generics

 1)    Organic, top line growth                                     1)   Strong generics pipeline
 2)    Leverageable P&L and margin expansion                        2)   International opportunities – quantity and quality
       opportunities
                                                                    3)   Branded products in the mix
 3)    Visibility of top line growth – minimal
       clinical/regulatory and patent risk                          4)   Biosimilars – limited competition and potential
                                                                         long term value
 4)    Takeout potential – not a reason to buy, but nice to
       have option value – and big pharma needs products

Source: Credit Suisse estimates

We believe that these criteria each contribute stock price performance with their impact on
one or more of growth, visibility and sustainability of earnings, and/or mitigation of risk.
We favor stories that can generate revenue growth without reliance on acquisitions. Three
examples are Salix, which is just beginning a potentially long revenue ramp towards a
blockbuster product in Xifaxan, and Watson and Mylan, which both are positioned to enjoy
strong generics pipeline-driven growth into the patent cliff, while branded companies, such
as Endo with Lidoderm, face significant revenue declines of key products.
Specialty pharma stocks trade to a large extent on earnings performance, so companies
with significant margin expansion opportunities are attractive for their ability to drive
levered earnings growth. Margin expansion can come through different means, such as by
leveraging strong revenue growth across a slower-growth expense base (eg, Salix), or
through revenue mix improvement (eg, WPI’s growth of its higher margin branded
business).
Companies with well-diversified portfolios can help to mitigate the risks of their
businesses. For example, Teva’s broad international reach in developed and emerging
markets provides access to a higher-growth revenue opportunity, as well as a means to
reduce the volatility of Paragraph IV challenges in the US generics market. Watson and
Teva benefit from the longer life cycles and higher margins of their branded portfolios, as
complements to their generic businesses.
While we do not cite takeover prospects, in isolation, as a reason to own a stock, we
believe that certain stocks in the specialty pharma group are more likely than others to
attract the attention of potential acquirers. Among the companies in our coverage, we
think Salix (among branded companies) and Watson (among generics) are potentially the
most likely takeout targets. We elaborate further on our rationale in the individual report
sections on these companies. In addition, we have analyzed potential acquisition
valuations of each of the companies we are initiating. These analyses are presented in
each company report section, and are summarized in the next section as well.




Specialty Pharmaceuticals                                                                                                     17
                                                                                                                                                                    13 December 2010




                                                                                                                                                        Americas / United States




                                                                              Salix Pharmaceuticals, Ltd. (SLXP)
  Rating                   OUTPERFORM* [V
  Price (10 Dec 10, US$)               43.91
  Target price (US$)                  55.00¹
  52-week price range       45.29 - 22.83                                     Initiating with Outperform Rating and $55 TP
  Market cap. (US$ m)           2,544.01
  Enterprise value (US$ m)          2,330.38                                  ■   Initiating coverage with an Outperform rating and $55 target price.
*Stock ratings are relative to the relevant country benchmark.
¹Target price is for 12 months.                                               ■   Investment Case: We rate SLXP Outperform because it offers (1) a specialty
[V] = Stock considered volatile (see Disclosure Appendix).
                                                                                  pharma story with scarcity value; high organic revenue growth at the early
                                                 Research Analysts                stages; (2) significant clinical and regulatory derisking of its lead product,
                                           Michael Faerm                          Xifaxan; and (3) an underappreciated margin expansion opportunity. We also
                                            212 538 1771
                           michael.faerm@credit-suisse.com
                                                                                  believe SLXP’s attractiveness as a takeout candidate adds option value.
                                                                              ■   Key Risks for SLXP Include: (1) Underappreciated potential for Xifaxan
                                                                                  generic competition ahead of 2024 patents (our model and target price
                                                                                  account for this risk by conservatively assuming generics after expiration of
                                                                                  orphan drug exclusivity in 2017); (2) failure to obtain FDA approval of
                                                                                  Xifaxan in IBS non-C; and (3) unsuccessful execution of primary care
                                                                                  commercialization of Xifaxan.
                                                                              ■   Catalysts: SLXP’s stock price is most sensitive to events involving Xifaxan.
                                                                                  The most impactful catalyst is the March 7, 2011, FDA approval date for IBS
                                                                                  non-C. The most near-term is Salix’s anticipated announcement of a primary
                                                                                  care strategy in 4Q10. Other IBS approval-related news flow will also have
                                                                                  an impact, such as a potential FDA panel.
                                                                              ■   Valuation: Our $55 target price is based on a discounted cash flow (DCF)
                                                                                  analysis. Since the vast majority of the stock’s value is attributable to Xifaxan,
                                                                                  we believe DCF is the most appropriate method to value the life cycle of the
                                                                                  product. Our DCF analysis assumes an 11% WACC and a 90% probability
                                                                                  of FDA approval for Xifaxan in IBS non-C. Our valuation drops from $55 to
                                                                                  $32 in the event of an outright rejection, which we see as highly unlikely.


Share price performance                                                       Financial and valuation metrics
           Daily Dec 14, 2 009 - Dec 10, 2010, 12/14 /09 = US$23.91           Year                                              12/09A           12/10E        12/11E        12/12E
                                                                              EPS (CS adj.) (US$)                                  -0.88           0.35           2.15         3.21
 41                                                                           Prev. EPS (US$)                                         —              —              —             —
 31                                                                           P/E (x)                                                NM           125.3           20.5         13.7
 21
                                                                              P/E rel. (%)                                           NM           873.7         163.3         123.9
                                                                              Revenue (US$ m)                                     232.9           335.2         604.6         852.3
  Dec-09          Mar-10            Jun-10          Sep-10
                                                                              EBITDA (US$ m)                                       -25.6           40.2         208.4         391.8
                 Pric e                         Indexed S&P 500
                                                                              OCFPS (US$)                                          -1.14           0.81           2.20         3.20
On 12/10/10 the S&P 500 index closed at 1240.4                                P/OCF (x)                                            -22.2           53.9           20.0         13.7
                                                                              EV/EBITDA (current)                                  -94.4           58.0           10.6           5.1
                                                                              Net debt (US$ m)                                      -127           -214           -330         -533
                                                                              ROIC (%)                                           -15.79           13.14         76.64        106.15
Quarterly EPS                    Q1            Q2           Q3          Q4    Number of shares (m)                              57.94      IC (12/10E, US$ m)                940.87
2009A                          -0.29         -0.32        -0.15       -0.13   BV/share (current, US$)                              6.0     EV/IC (x)                             2.5
2010E                          -0.45          0.13         0.05        0.54   Net debt (current, US$ m)                        -213.6      Dividend (12/09A, US$)                 —
2011E                           0.58          0.63         0.58        0.35   Net debt/tot. cap. (current, %)                     -8.4     Dividend yield (%)                     —
                                                                              Source: Company data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                                                                                        18
                                                                                                                                                           13 December 2010




Investment Summary
We are initiating coverage of Salix Pharmaceuticals (SLXP) with an Outperform
rating and a 12 month target price of $55 per share.
We believe that Salix offers an investment opportunity with scarcity value in the specialty
pharmaceuticals sector. Our thesis on Salix is fourfold.

■       Top-Line Growth at the Starting Gate: Salix is at the early stages of an
        organically-driven revenue growth phase with potentially rapid uptake and high peak
        potential.

■       Clinical and Regulatory De-risking: Salix’s lead product, Xifaxan, has had all of the
        clinical risk and much of the regulatory risk removed. It has been approved in hepatic
        encephalopathy (HE) and has reported strong Phase III data in IBS non-C (irritable
        bowel syndrome, non-constipation predominant), and is awaiting a March 7, 2011,
        PDUFA date. We expect this indication to be approved and assign a 90% probability
        of approval in our model.

■       Margin Expansion Opportunity: Driven by evolving manufacturing deals, Salix’s
        commercial model and high revenue growth, and unencumbered by the presence of
        significant royalty burdens to any commercialization partners. We believe Xifaxan will
        enable Salix to expand its gross margin and operating margin by amounts and at rates
        that are underappreciated.

■       Potential Takeout Candidate: We do not cite this as a reason to own the stock in its
        own right, but we believe that it provides some option value. Xifaxan makes Salix one
        of the more attractive specialty pharma acquisition targets available to potential major
        pharma acquirers, in our view.

Salix Is in the Early Stages of a High Organic Growth
Ramp-Up
Salix’s 2010 guidance is summarized in Exhibit 24.
Our Salix revenue model is summarized in Exhibit 25, and our forecasted sales growth is
depicted in Exhibit 26.

Exhibit 24: SLXP – 2010 Financial and Operating Guidance
Company          Sales Guidance                                  EPS Guidance                                Other Variables

Salix            2010:                                           2010 EPS: $0.34 fully diluted               2010:
                 $80 MM Xifaxan in 4Q ($247 MM for 2010)         2010 guidance excludes impact of interest   Gross margin: 80% to 81% at end of the year
                 $334 million product revenue                    expense on the 2015 convertible bond        R&D: $85 mm
                 Run-rate as of 6/30/2010 - Xifaxan - $232 MM,   issued in June 2010.                        SG&A: $150 mm
                 Bowel Cleansing - $88 MM, Apriso - $32 MM,                                                  Net Income: $20 MM
                 Other products - $25 MM


Source: Company data, Credit Suisse estimates




Specialty Pharmaceuticals                                                                                                                                               19
                                                                                                                                   13 December 2010



Exhibit 25: Salix Credit Suisse Estimates versus the Consensus
USD in millions except EPS, unless otherwise noted

                                             SLXP                  2009          2010E        2011E         2012E    2013E       2014E
                                           Xifaxan Revenues
                                                          HE           $41.3      $105.7       $141.3       $185.4    $238.4       $316.0
                                                   IBS non-C            23.6        84.7        226.2        389.4     518.8        639.3
                                                        Other           53.1        58.4         69.1         78.7      88.3         99.1
                                               Total Xifaxan          $117.9      $248.7       $436.6       $653.5    $845.4     $1,054.4
                                   Total Xifaxan - consensus           117.9       217.0        345.0        559.0     792.0      1,009.0
                                                   Difference           $0.0       $31.7        $91.6        $94.5     $53.4        $45.4
                              Xifaxan Revenue Growth - CS                         110.9%        75.5%        49.7%     29.4%        24.7%

                              Other Products                          $115.0       $86.4       $168.0       $198.8     $255.0      $305.1
                         Total Revenue - CS                           $232.9      $335.2       $604.6       $852.3   $1,100.4    $1,359.4
                  Total Revenue - consensus                            232.9       337.5        546.7        792.2    1,052.1     1,276.3
                                   Difference                           $0.0        ($2.4)      $57.9        $60.1      $48.4       $83.1
                        Revenue Growth - CS                                        43.9%        80.4%        41.0%      29.1%       23.5%
                         Gross Margin % - CS                           77.7%      81.2%        82.0%        85.0%      85.4%       86.5%
                 Gross Margin % - consensus                            77.7%      81.1%        83.4%        82.8%      83.4%       84.7%
                                   Difference                            0.0%       0.1%        (1.4%)        2.2%       2.0%        1.8%
                     Operating Margin % - CS                          (17.2%)       7.8%       32.5%        43.9%      47.7%       54.5%
              Operating Margin % - consensus                          (17.2%)       8.3%       27.0%        37.7%      43.9%       50.0%
                                   Difference                           (0.0%)     (0.5%)        5.5%         6.2%       3.8%        4.5%
                                    EPS - CS                           ($0.88)     $0.35        $2.15        $3.21      $4.63       $6.93
                            EPS - consensus                            ($0.88)     $0.29        $1.72        $3.02      $4.68       $6.34
                                   Difference                           $0.00      $0.06        $0.43        $0.19     ($0.05)      $0.59
                            EPS Growth - CS                                           NM      512.5%        49.3%      44.3%       49.8%
Source: Company data, FACTSET, Evaluate Pharma, Credit Suisse estimates.



Exhibit 26: Salix Annual Revenues 2009A–2015E
USD in millions, unless otherwise noted

                                                          SLXP - Annual Sales Trends


                                    $1,800
                                                       6 year sales CAGR of                        $1,581
                                    $1,600             38% from 2009-2015
                                                                                          $1,359
                                    $1,400
              Annual Sales ($ MM)




                                    $1,200                                       $1,100

                                    $1,000                               $852

                                     $800                      $605
                                     $600

                                     $400               $335
                                                $233
                                     $200

                                       $0
                                               2009A 2010E 2011E 2012E 2013E 2014E 2015E


Source: Company data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                                                       20
                                                                                                                                                                                        13 December 2010


We estimate that Salix will be able to nearly triple sales from 2010 to 2015, to
approximately $1.5 billion. This represents a compound annual growth rate of 38%.
This growth is nearly all driven by Xifaxan. The drug has the opportunity to address two
high potential markets, HE and IBS non-C. Both markets are characterized by high unmet
medical need, as the existing treatment methods leave many patients inadequately
satisfied, and both areas have few meaningful competitive threats.
Hepatic Encephalopathy (HE): HE has a modestly sized patient population
(approximately 200,000 in the United States), but can be a life-threatening condition and
currently leaves patients with an unmet need for an efficacious, tolerable therapy. The
current standard of care, lactulose, has significant tolerability issues. Xifaxan is poised to
capitalize on this opportunity with a therapy that has been shown to be effective, with a
benign safety and tolerability profile, positioning it for broad use and good compliance as a
chronic HE therapy.
IBS non-C: This represents an enormous underserved patient population. Over 30 million
people in the United States are estimated to have IBS. The disease pathology is not well
understood, the effects can be episodic, and it is not a life-threatening disease.
Consequently, a substantial proportion of patients are undiagnosed and untreated.
However, there still remains a large treatment-seeking patient pool with an unmet medical
need (over 3 million with IBS non-C in the United States), representing a major revenue
opportunity for Salix.

Xifaxan’s Approval in IBS Has Been Largely
De-Risked
As a result of Xifaxan’s clean safety profile, superior efficacy in Phase III trials, and
approval in HE, we believe the clinical and regulatory risk associated with Xifaxan in non-C
IBS is minimal.
Clinical Risk
Xifaxan met all primary and secondary endpoints in the pivotal Phase III clinical trials
evaluating the drug in the treatment of non-C IBS. Detailed results presented at Digestive
Disease Week (DDW) in May 2010 demonstrated the superior efficacy and excellent
safety and tolerability profile of the molecule (Exhibit 27, Exhibit 28 and Exhibit 29, and
further discussed in the clinical data section later in this report).

Exhibit 27: Xifaxan Non-C IBS Phase III Trial Results—                                               Exhibit 28: Xifaxan Non-C IBS Phase III Trial Results—
Primary Endpoint                                                                                     Bloating
                                       Primary Endpoint - SGA IBS                                                                 Key Secondary Endpoint - IBS Bloating
                                           Xifaxan              Placebo                                                                         Xifaxan              Placebo
                    45%                                                                                                  45%
                          p = 0.0125                    p = 0.0263                   p = 0.0008                                p = 0.0045                   p = 0.0167                     p = 0.0002
                    40%                                                                                                  40%
                           41%                         41%                          41%                                                                     41%
                                                                                                                               40%                                                       40%
                    35%                                                                                                  35%
  % of Responders




                                                                                                       % of Responders




                    30%                                        32%                          32%                          30%                                        32%
                                   31%
                                                                                                                                       29%                                                        30%
                    25%                                                                                                  25%

                    20%                                                                                                  20%

                    15%                                                                                                  15%

                    10%                                                                                                  10%

                    5%                                                                                                   5%

                    0%                                                                                                   0%
                            Target I                     Target 2                Combined Data                                   Target I                    Target 2                  Combined Data

                          Responder: Patient responding ‘yes’ to adequate relief of SGA-IBS weekly                              Responder: Patient responding ‘yes’ to adequate relief of IBS-bloating
                                     question for = 2 of the 4 weeks during weeks 3 - 6                                              weekly question for = 2 of the 4 weeks during weeks 3 - 6


Source: Company data, Credit Suisse estimates.                                                       Source: Company data, Credit Suisse estimates.
Footnote: SGA—subject’s global assessment.




Specialty Pharmaceuticals                                                                                                                                                                                21
                                                                                              13 December 2010



Exhibit 29: Adverse Events in both Trials Combined—TARGET 1 and TARGET 2
           Adverse Events                                 Xifaxan       Placebo
           Any AEs                                             28.5%        29.7%
             SAEs                                                0.3%        0.8%
             AEs resulting in discontinuation                      1%        0.9%
             Deaths                                                  0          0
           Common AEs
             Headache                                              4%         4%
             Abdominal Pain                                        3%         3%
             Nausea                                                3%         2%
             Nasopharyngitis                                       1%         3%
             Upper Respiratory Tract Infection                     1%         2%
           *most AEs were mild or moderate in intensity
           *No AEs of C.difficile associated diarrhea or ischemic colitis
Source: Company data, Credit Suisse estimates.

The molecule has a clean safety profile due to its chemical properties with less than 0.4%
systemic absorption resulting in low incidence of adverse events. In fact, in the Phase III
trials, the adverse event occurrences in the Xifaxan arm were similar to the ones observed
in the placebo arm demonstrating Xifaxan’s benign safety profile. No significant
constipation was observed with patients being administered Xifaxan, as opposed to 11%
in the 0.5 mg twice daily arm of Lotronex, an approved therapy for IBS-D (irritable bowel
syndrome, non-diarrhea predominant).
One possible concern with any antibiotic is potential resistance with long-term use.
Although this risk was mentioned a few times during our expert physician checks, we
believe the risk is mitigated by the three year durability of treatment reported in studies
3001 and 3002 evaluating Xifaxan in the treatment of Hepatic Encephalopathy, which is a
chronic treatment. Additionally, Xifaxan has been on the market since 2004 for traveler’s
diarrhea.
Regulatory
Xifaxan’s PDUFA date is March 7, 2011, and despite a three month FDA delay, we believe
that the regulatory risk associated with approvability is relatively low. We assign a 90%
probability of approval in non-C IBS in our model. The three-month delay is not alarming,
in our view, because management stated that FDA has not asked for any additional
studies or new data. The company has been constantly engaged with the FDA and
meeting its requests in an orderly manner. Besides, a couple of months delay due to FDA
backlog and slow processing is usually the norm, not an exception.
Salix had extensive conversations with the FDA while designing the trials and defining
endpoints. Both the primary endpoint of subject’s global assessment of symptoms and the
key secondary endpoint of bloating were met in the Xifaxan arm of the trial. The data when
analyzed for the efficacy outcomes per newly guided FDA endpoints of daily abdominal
pain and daily abdominal stool consistency were in favor of Xifaxan. All these factors lead
us to believe that Xifaxan has a compelling efficacy profile in the treatment of non-C IBS
(Exhibit 52).
We do not expect the FDA will require an advisory committee for Xifaxan in non-C IBS
because the drug was already reviewed by the GI committee during the HE panel, which
gave the drug’s safety a thumbs-up. Additionally, the Phase III trials conclusively
demonstrate Xifaxan’s efficacy in treating non-C IBS, even per the newly guided FDA
endpoints.
We acknowledge that previous IBS drugs therapies, like Lotronex, currently marketed for
IBS-D with a black box warning, and Zelnorm, pulled from the market for IBS-C, have had
a checkered past, creating a cautious environment. However, it is important to note that



Specialty Pharmaceuticals                                                                                  22
                                                                                                                   13 December 2010


issues surrounding the withdrawal of Lotronex and Zelnorm were different and driven by
specific, bad, serious adverse events, and incorrect dosing. No risk of ischemic colitis or
cardiovascular side effects have been observed with Xifaxan.
We gain additional comfort from the fact that Salix has not received a 74 day letter from
the FDA, which is typically when the FDA would raise substantive issues with a drug
application.
IBS-D versus Non-C IBS on the Label? We believe there is a reasonable chance that
the FDA approves Xifaxan in IB-D only, rather than Salix’s proposed indication of non-C
IBS, comprising of both IBS-D and IBS-A (IBS with alternating symptoms of diarrhea and
constipation). Furthermore, GSK’s experience with the FDA review and approval of
Lotronex when it was granted only IBS-D on the label (even though the sought indication
was non-C IBS), provides an interesting precedent. In Xifaxan’s final Phase III trials, 6
patients suffered from IBS-D per Rome II criteria and no subjects were IBS-D patients per
Rome III criteria. In the event that Xifaxan is indicated for only non-C IBS, it will not have a
meaningful impact on our estimates because our discount on IBS-A share can
accommodate a non-C IBS or IBS-D label. We discount our forecast share of IBS-A
patients versus IBS-D patients to account for the fact that by definition, IBS-A patients
alternate between diarrhea and constipation experiencing IBS-D symptoms for fewer days
in a year, as compared with IBS-D patients.

High Operating Leverage and Margin Expansion
We Believe that Salix Has Underappreciated Margin Expansion Opportunity: This is
driven by its high revenue growth, leveraged over a largely fixed cost commercial
infrastructure, along with gross margin enhancement, as Xifaxan supply agreements
evolve.

Exhibit 30: Salix Annual Operating Income and Margins 2009A–2015E
USD in millions, unless otherwise noted


                                        SLXP - Annual Operating Income and Margins
                                                 Operating Income    Operating Margin     Gross Margin
                $1,200                                                                                   100.0%


                $1,000
                                                                                                         80.0%


                              $800                                                      54.5%   60.2%
    Operating Income ($ MM)




                                                                                                         60.0%
                                                                             47.7%
                              $600
                                                                    43.9%

                                                           31.7%                                         40.0%
                              $400

                                                                                                         20.0%
                              $200                7.8%

                                       (17.2%)
                                                                                                         0.0%
                                $0
                                       2009A      2010E     2011E   2012E     2013E     2014E    2015E

                              $(200)                                                                     (20.0%)

Source: Company data, Credit Suisse estimates.

We expect Salix to be a highly profitable company, with about $952 million in operating
income and 60.2% operating margin by 2015.



Specialty Pharmaceuticals                                                                                                       23
                                                                                                13 December 2010


The Gross Margin Expansion Opportunity: Salix currently is sourcing its commercial
needs for Xifaxan active pharmaceutical ingredient (API) from Alfa Wassermann (AW), an
Italian company from whom Salix also licensed rights to market the product. Under the
terms of the deal, Salix pays Alfa Wassermann via the following streams:

■    Upfront and milestone payments ($5 million upfront paid)

■    A royalty on sales (estimated in the mid-single digits percentage of net sales of
     Xifaxan), in effect until the expiration of Salix’s last patent (currently 2024);

■    A cost-plus-markup manufacturing payment. The supply agreement extends until July
     2014, during which period Salix has committed to buy its annual commercial
     requirements of Xifaxan API from Alfa Wassermann.
Salix’s gross margin is also impacted by a low-single digit royalty to Cedars-Sinai Medical
Center on sales for the IBS indication only.
Salix also has a manufacturing supply agreement with Lupin, under which it must buy API
each year, amounting to an additional 50% of its commercial requirements, at similar
terms as Alfa Wassermann. Salix currently is inventorying the Lupin API and will work it
down after the end of the AW agreement.
The opportunity for gross margin expansion comes into play with the expiration of the AW
supply agreement. Salix’s terms with AW are not disclosed, but we believe that they are
above market-rate, since AW outsources its production (adding another layer of profit),
and since the supply deal was negotiated as part of the licensing agreement. After
expiration of the AW deal, Salix is free to purchase API at the best market rate. We believe
that this will enable Salix to expand gross margins on Xifaxan, which is Salix’s highest-
margin product. As Xifaxan sales grow rapidly, corporate gross margins will receive a mix
benefit and rise to 88.2% in 2015E from 81.2% in 2010E.
Sales and Marketing Leverage Provide Additional Boost to Operating Margins: Salix
will grow its current gastroenterologist-focused sales force, and will develop a primary care
physician (PCP) commercialization capability. The company has not formally announced
its PCP strategy yet, but we believe that they are more likely to build a PCP sales force
than sign a partnership, in order to retain full economic rights.
In order to build a PCP capability, Salix will need to commit upfront investment, but we
believe that the amounts required are manageable within the scope of the Xifaxan
opportunity, and once set up, will behave largely as a fixed cost, creating a base on which
to leverage growing Xifaxan revenues.
We project that SG&A expense will more than double to 2013 ($308 million) from 2010
($150 million), but then will grow quite modestly. In 2010-2015, SG&A CAGR will be 17%,
while revenues grow at a 36% clip. This will drive operating margin expansion to 60.2%
from 2.1%.
We believe this margin expansion is overlooked by the Street. In 2014 we estimate 54.5%
operating margin, versus the consensus of 50%.

Potential Takeout Candidate
For reasons detailed in Credit Suisse’s September 17, 2009, report, Biopharma M&A:
Biotech and Specialty Pharma Could Be the Next Course, we continue to believe that
industry dynamics favor continued consolidation of specialty pharma and biotech
companies by major pharma companies.
While we do not cite this as a reason to own the stock in its own right, we note that Salix
represents one of the more attractive specialty pharma acquisition targets, in our view, for
several reasons:




Specialty Pharmaceuticals                                                                                    24
                                                                                            13 December 2010



■    Xifaxan is a blockbuster, high-growth revenue opportunity at the early stages of its
     growth cycle.

■    Xifaxan revenues are minimally encumbered by partnership economics, and consist
     only of technology licenses and manufacturing agreements with modest single-digit
     royalties, with no commercialization partners to share meaningful economics.

■    Xifaxan’s commercialization effort will have a substantial primary care component.
     This would be highly synergistic with most large-cap pharma acquirers, as the PCP
     sales force that would be used by Salix would be redundant with an acquirer’s
     capabilities. Some potential acquirers may also be able to exploit redundancy in the
     other area of Xifaxan promotion, gastroenterologist sales forces.
We have further analyzed potential purchase prices that could be paid for a Salix takeout
in a later section of this report.




Specialty Pharmaceuticals                                                                                25
                                                                                                13 December 2010




Investment Risks
Xifaxan Generic Competition
Although Xifaxan has orphan drug exclusivity until March 24, 2017, in Hepatic
Encephalopathy and has patents with expiration dates as late as 2024, there could be a
generic Xifaxan on the market as early as March 25, 2017, posing a significant threat to
SLXP’s Xifaxan franchise, and thus significantly reducing the value of Salix’s primary
asset. A generic could potentially launch with an HE indication in March 2017. It could also
launch with an IBS indication after expiration of the March 2013 new product exclusivity, if
the 2019 IBS use patents are invalidated. A generic launch in only one of the two main
indications (HE and non-C IBS) could result in significant off-label use in the other
indication.
Failure to Obtain FDA Approval, or Delay in FDA Approval, of Xifaxan in Treatment
of non-C IBS
Xifaxan in treatment of non-C IBS has been granted priority review by the FDA. However,
the PDUFA date has been postponed by three months from December 7, 2010, to March
7, 2011. Any further delays in Xifaxan approval, including a potential advisory committee,
could be negative headlines for the stock.
Approval in non-C IBS not Resulting in Meaningful Market Share Gains and hence,
Weaker-than-Expected Top-Line Growth because of Rampant Off-Label Usage
Xifaxan currently is using off-label in treating non-C IBS. However, there is no clear metric
or statistic to tease out what percentage of Xifaxan’s scripts are being written for non-C
IBS and quantify how much of the non-C IBS population already is taking Xifaxan. A major
risk to our thesis is that FDA approval in non-C IBS may not translate to higher script
numbers or meaningful share gains in treatment of non-C IBS resulting in less than
projected top-line revenue growth.
Risk of Successful Execution of Marketing Xifaxan to Primary Care Physicians
Salix intends to initiate marketing of Xifaxan to PCPs after receiving approval for non-C
IBS. This effort would be a new enterprise for Salix, requiring substantial investment and
expertise. Salix’s failure to successfully fund or execute this endeavor could result in
lower-than-expected revenues and profitability, as well as materially reduced cash flow.
Competition from Developing Therapies in non-C IBS and HE
There are several therapies in development for treatment of non-C IBS and HE, which
could potentially compete with Xifaxan in the non-C IBS market and HE market. However,
we note that Xifaxan is the furthest along in development and it would take at least a
couple of years before any of these competing drugs are marketed.
Although Unlikely, Potential Antibiotic Resistance Risk Associated with Xifaxan, a
Nonsystemic Antibiotic, due to Higher Dosing
Xifaxan has less than 0.4% systemic absorption and has shown no evidence of antibiotic
resistance. However, any signs of potential antibiotic resistance due to widespread usage
or higher dosing could hamper the uptake of Xifaxan, SLXP’s major growth driver.
Dependence on Third Parties for Manufacturing of Products
Out-licensing manufacturing activities goes hand-in-hand with Salix’s strategy to in-license
late-stage development products. Salix owns no manufacturing facilities. All of its products
are manufactured by third parties under contract, at times the licensor of the molecule
under development. This outsourcing leads Salix with little control over supply of API and
the finished product. Failure to perform by these third parties could result in reputational
damage and substantial financial loss by Salix due to delays in product timelines and FDA




Specialty Pharmaceuticals                                                                                    26
                                                                                            13 December 2010


approvals. Case in point is recent FDA hold on approval of GIAZO, due to unresolved
issues with the third party manufacturer.
Failure to Obtain FDA Approval of other Pipeline Assets: Budesonide Foam and
Crofelemer
While Budesonide foam and Crofelemer do not have a significant impact on revenue or
earnings, failure of any of the pipeline assets could create negative sentiment around a
company that has high concentration of value around a single product (Xifaxan) and a thin
pipeline of drugs.




Specialty Pharmaceuticals                                                                                27
                                                                                                                                                                      13 December 2010




Valuation
Historical Perspective and Stock Drivers
In the past 12 months, SLXP’s stock price has moved on expectations of Xifaxan clinical
trial results and FDA decisions, including advisory committees and approvals. Going
forward, we expect Xifaxan related news flow to continue to impact the stock price.
Positive top-line data from non-C IBS trials lifted the stock in September 2009. HE priority
review, a favorable advisory committee, and final FDA approval drove the stock higher to
almost $41 in March 2010. The stock sold off following Salix’s non-C IBS Phase III results
presentation at DDW in early May 2010. In early October, expectations of an advisory
panel for Xifaxan for non-C IBS treatment and a delay in the PDUFA date for non-C IBS
weighed on the stock. Since then, Lumacan in-licensing agreement, 3Q10 earnings and
positive Crofelemer results have lifted the stock.

Exhibit 31: Stock-Price Chart with Key Events—SLXP

                                                                                          SLXP
                                                                                                                                                             Salix Reports 3Q10
               $51.00                                                                                 Xifaxan receives                                         results, Xifaxan
                                                                                                                                            Xifaxan
                                                                                                     priority review for                                     550mg sales exceed
                                                                                                                                          PDUFA date
                                                                                                  treatment in non-C IBS                                        expectations.
                                                                                                                                          postponed to
                                                          SLXP presents                                                                     March 7,
               $46.00                                  positive full data for                                                                 2011
                                                       Xifaxan in non-C IBS
                                                            at the DDW

               $41.00



               $36.00        Negative sentiment
                              around Xifaxan's                                                                               SLXP announces
                                FDA Ad com                                                                                 settlement of pending
                             briefing documents                                                                             litigation regarding
 Stock Price




               $31.00                                                                                                             MoviPrep
                                                                                        The FDA
                                                                                        approves
                                                                                     Xifaxan for HE         SLXP submits a                                Crofeler ADVENT
                                                                                                           sNDA to expand                                 trial demonstrates
               $26.00                                                                                      Xifaxan's label for      SLXP announces       statistical significant
                                                                                                          use in treating non-      Lumacan product      results in treatment
                                                                                                                 C IBS               acquisition from     of HIV-associated
                                                                                                                                       Photocure; a             Diarrhea
               $21.00                                                         SLXP wins the                                           potential colon
                                                                            backing of an FDA                                       cancer detection
                                                                           panel for Xifaxan as                                           agent
                                                                               a therapy for
               $16.00                                                             Hepatic
                                                                             Encephalopathy


               $11.00



                $6.00
                    Nov-09    Dec-09      Jan-10   Feb-10      Mar-10           Apr-10    May-10         Jun-10       Jul-10     Aug-10       Sep-10     Oct-10       Nov-10



Source: Company data, Credit Suisse estimates.

Clinical data outcomes, FDA decisions, and expectations thereof, seem to be main drivers
of investor trade positioning in SLXP. Short-interest (Exhibit 32 and Exhibit 33) in the stock
drastically fell around mid-September 2009, when SLXP reported solid top-line results
from Phase III trials evaluating Xifaxan in treatment of non-C IBS. Heading in to the FDA
Advisory Committee panel on Xifaxan in HE in February 2010, short interest increased
only to fall when the committee recommended approval. Short interest in the stock rose in
October because the FDA postponed the PDUFA date for Xifaxan in non-C IBS, to March
7, 2011 from December 7, 2011. Lately, short interest as a percentage of outstanding
shares has remained range-bound between 10 – 12%.



Specialty Pharmaceuticals                                                                                                                                                          28
                                                                                                                              13 December 2010



Exhibit 32: Short Interest Ratio in SLXP has been Volatile

                                                               SLXP Short Interest Ratio

                              16.0


                              14.0


                              12.0
   Short Interest Ratio




                              10.0


                               8.0


                               6.0


                               4.0


                               2.0


                               0.0
                                 11/30/2009      01/29/2010   03/31/2010   05/28/2010   07/30/2010   9/30/2010   11/30/2010


Source: Bloomberg, Credit Suisse estimates. Short interest ratio is calculated by dividing the short interest
by average 30-day daily volume. The ratio implies the number of days it takes to cover the outstanding
short.



Exhibit 33: Short Interest as a % of Outstanding Shares has been relatively Constant

                                              SLXP Short Interest Expressed as % of Outstanding Shares

                              14%


                              12%


                              10%
       Short Interest Ratio




                               8%


                               6%


                               4%


                               2%


                               0%
                                11/30/2009       01/29/2010   03/31/2010   05/28/2010   07/30/2010   9/30/2010   11/30/2010


Source: Bloomberg, Credit Suisse estimates. Short Interest Ratio is calculated by dividing the short interest
by number of outstanding shares. The ratio implies what percentage of outstanding shares are currently
held as short positions.




Specialty Pharmaceuticals                                                                                                                  29
                                                                                                  13 December 2010



Our Salix Target Price of $55 Is Based on DCF
Analysis
We believe that discounted cash flow (DCF) analysis is the most appropriate way to
value Salix, in order to capture the full life cycle of the key value driver, Xifaxan. With
most of our stocks we blend DCF with relative 2011 P/E, but we exclude a P/E-based
valuation with Salix since the company and Xifaxan are at the early stages of a rapid
growth ramp that is markedly different from the growth trajectory of most sector peers,
making average multiples based on peers unsuitable. Historical P/E multiples for Salix are
not meaningful, as the company has not been profitable since 2007.
We model cash flows to 2020 and calculate a terminal value. We use an 11% discount
rate and a 1% perpetuity growth rate in the terminal value. Our assumptions and valuation
are detailed below in Exhibit 34, and a sensitivity analysis assuming a range of discount
rates and terminal growth rates is shown in Exhibit 35.

Exhibit 34: SLXP DCF: Assumptions and Valuation
$ in millions, except for stock price and unless otherwise stated
Assumptions:                                                 Valuation:
Risk-Free Rate (10 yr UST)               3.3%                PV Cash Flow 2010-2020      $2,281
Market Risk Premium                      8.0%                PV Terminal Value           $1,185
Beta                                     1.11                Enterprise Value            $3,466
Cost of Equity                          12.2%
MV Equity to Capital                    89.4%                Less: Net Debt/(Cash)       ($146)
Debt Rate                                6.5%                Equity Value                $3,612
Tax Rate                                20.0%
Cost of Debt                             5.2%                Diluted shares (MM)           65.9
MV Debt to Capital                      10.7%                Current Stock Price*        $43.91
WACC                                    11.4%                Equity value per share         $55
Terminal Growth Rate                     1.0%                Upside                        22%
* closing price as of 12/10/2010
Source: Company data, FactSet, Credit Suisse estimates.



Exhibit 35: DCF Sensitivity Exhibit
                Discount Rate                            Equity Value per Share (b)
                    (WACC)                            0.0%         1.0%          2.0%
                      9.0%                           $64.19       $67.42        $71.57
                     10.0%                           $58.06       $60.45        $63.42
                     11.0%                           $53.00       $54.80        $56.99
                     12.0%                           $48.73       $50.11        $51.77
                     13.0%                           $45.09       $46.16        $47.44
Source: Company data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                      30
                                                                                                                                                                          13 December 2010




Forecast Summary
Credit Suisse Physician Survey Provides Context
Per our Credit Suisse Physician Survey, about one-half of IBS-D patients do not get
adequate relief with diet and behavior modification. Patients are typically then given OTC
medications, which provide some incremental relief. However, 38.1% patients are still
suffering. Patients respond slightly more to a treatment paradigm involving prescription
drugs, in addition to diet and behavior modification and OTC meds. However, 28.6%
IBS-D patients still are suffering from symptoms.

Exhibit 36: Percent of IBS-D Patients with Inadequate                                          Exhibit 37: Percent of IBS-D Patients Receiving Xifaxan Is
Response to Treatment (Credit Suisse Physician Survey)                                         on the Rise Preapproval (Credit Suisse Physician Survey)
                            % of IBS-D Patients with Inadequate Response                                                            % of IBS-D Patients on Xifaxan


                 60%                                                                                            20%
                              51.3%
                 50%                                                                                                                                                       15.6%
                                                                                                                16%
                                                    38.1%                                                                                          12.4%
                 40%
    % Patients




                                                                                                   % patients
                                                                                                                12%
                                                                            28.6%                                           9.6%
                 30%

                                                                                                                 8%
                 20%

                 10%                                                                                             4%


                  0%
                                                                                                                 0%
                       Diet & Behavior (D&B)   D&B Modification +      D&B Modificiation +                              12 months ago             Currently          12 months from now
                            Modification          OTC meds            OTC meds + Rx drugs

Source: Credit Suisse Physician Survey estimates.                                              Source: Credit Suisse Physician Survey estimates.

Physicians surveyed revealed that they currently give about 12.4% IBS-D patients Xifaxan,
which has increased about 30% from 9.6% 12 months ago. Physicians are seeing positive
results with Xifaxan and they expect to use this drug in about 26% more patients in the
next 12 months. We expect FDA approval and reimbursement clearance to further drive
physician uptake of this drug.
Xifaxan currently is not a first-line therapy with only 3.4% IBS-D patients receiving Xifaxan
on their first physician visit. Upon FDA approval, we think physicians will gain further
comfort in prescribing Xifaxan and more patients will receive Xifaxan as a first-line therapy.

Exhibit 38: Percent of IBS-D Patients Receiving Xifaxan                                        Exhibit 39: Percent of IBS-D Patients Receiving Xifaxan
(Credit Suisse Physician Survey)                                                               from GI doctors (Credit Suisse Physician Survey)
                                  % of IBS-D Patients Receiving Xifaxan                                                  % of IBS-D Patients Receiving Xifaxan from GIs


                 16%                                                                                            24%
                                                                                                                                                                           20.4%
                                                                              12.1%                             20%
                 12%                                                                                                                               16.5%
                                                                                                                16%
                                                                                                % patients
 % patients




                                                      8.3%
                 8%                                                                                             12%
                                                                                                                            8.4%
                                                                                                                8%
                 4%            3.4%
                                                                                                                4%


                 0%                                                                                             0%
                         1st Physician visit    2nd Physician visit      3rd Physician visit                          1st Physician visit     2nd Physician visit     3rd Physician visit



Source: Credit Suisse Physician Survey estimates.                                              Source: Credit Suisse Physician Survey estimates.

GIs currently give about 8.4% IBS-D patients Xifaxan on their first physician visit, 16.5%
patients get Xifaxan during their second physician visit, and 20.4% patients get Xifaxan on



Specialty Pharmaceuticals                                                                                                                                                                   31
                                                                                                                             13 December 2010


their third physician visit. We believe that with FDA approval, GIs will start using Xifaxan
as a first-line therapy more often.

Exhibit 40:About One-Half of IBS-D Patients Complete Less than 60% of Their
Prescriptions (per Credit Suisse Physician Survey)

                              Patient's Xifaxan Prescription Compliance
                                     % Patients       Cumulative % Patients
              25%                                                                             100%
                    20.5%                                                                     90%
              20%                                                                             80%




                                                                                                     Cumulative % Patients
                                                                                              70%
                            15.1%        14.5%
 % Patients




              15%                                              12.7%                          60%
                                                    15.1%                             11.9%
                                                                              10.2%           50%
              10%                                                                             40%
                                                                                              30%
              5%                                                                              20%
                                                                                              10%
              0%                                                                              0%
                    100%    81-99%      61-80%     41-60%     21-40%          1-20%    0%
                                         % Prescriptions - Compliance

Source: Credit Suisse Physician Survey estimates.

The Credit Suisse Physician Survey reveals that about one-half of IBS-D patients
complete less than 60% of their prescriptions. Salix assumes 80% compliance in their
revenue estimates, which we think may be little too high. In our IBS model, we assume
50% compliance, in-line with the survey results.

Summary of Our Forecast Assumptions
Hepatic Encephalopathy, $502 MM peak sales. Our revenue build for Xifaxan in
Hepatic Encephalopathy derives peak HE sales of $502.2 MM in 2016. Based on our
opinion leader interviews, we estimate that a peak about 35% of treated overt HE patients
will receive a Xifaxan prescription (compared to the company’s 40% estimate). Our target
population of 200 K patients is significantly lower than Salix’s estimate of 340 K patients.
We arrive at this assumption by assuming that 30% of liver cirrhotics have overt HE and
that prevalence of cirrhosis is growing at 2% annually. Salix guides to about $1 billion
sales in 2016 in Xifaxan treating HE.

Exhibit 41: HE Market Model Assumptions—Credit Suisse versus Company
Peak Year Assumptions                         Credit Suisse Estimates   Company Guidance      Difference
Peak Year                                                2016                  2016
Treated Overt HE patients ('000s)                       200.3                 340.0            (41.1%)
Annual Patient Growth Rate                               2.0%                 8.0%             (75.0%)
Xifaxan Market Share                                    35%                   40%              (12.5%)
Days of therapy/Year                                      270                  270                   -
Compliance                                               60%                   60%                   -
Number of 550mg pills per day                              2                     2                   -
WAC $/Tablet                                            $22.1                 $23.0             (3.9%)
Xifaxan Revenue ($ MM)                                 $502.2               $1,000.0           (49.8%)
Source: Company data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                                                 32
                                                                                                                                       13 December 2010



Exhibit 42: Hepatic Encephalopathy Market Model—Xifaxan HE Revenues
                    HE Model Summary     2010E      2011E     2012E      2013E      2014E     2015E      2016E     2017E      2018E     2019E      2020E

      Patients Diagnosed with overt HE       177,850   181,407   185,035   188,735   192,510   196,360   200,288   204,293   208,379   212,547   216,798
                  Xifaxan Market-Share           23%       25%       27%       29%       31%       33%       35%       25%       15%       10%        8%
                Xifaxan treated patients
                    % Treated with 200mg         75%       20%        0%        0%        0%        0%        0%        0%        0%        0%        0%
                    % Treated with 550mg         25%       80%      100%      100%      100%      100%      100%      100%      100%      100%      100%
                Total Patients on Xifaxan      40,905    45,352    49,959    54,733    59,678    64,799    70,101    51,073    31,257    21,255    17,344
                            Annual growth                10.9%     10.2%     9.6%      9.0%      8.6%      8.2%    (27.1%)   (38.8%)   (32.0%)   (18.4%)
                              Compliance         60%       60%       60%       60%       60%       60%       60%       60%       60%       60%       60%
                         Pricing of Tablet
               Net price per 200mg tablet      $6.00     $6.90     $7.25     $7.61     $7.99     $8.39     $8.81     $9.25     $9.71    $10.19    $10.70
                            Annual growth      50.0%     15.0%      5.0%      5.0%      5.0%      5.0%      5.0%      5.0%      5.0%      5.0%      5.0%
               Net price per 550mg tablet     $16.50    $17.33    $18.19    $19.10    $20.06    $21.06    $22.11    $23.22    $24.38    $25.60    $26.88
                            Annual growth                 5.0%      5.0%      5.0%      5.0%      5.0%      5.0%      5.0%      5.0%      5.0%      5.0%
               Revenue per patient/year
   Revenue per patient/year - 200mg tablet $ 2,520.0 $ 3,105.0 $ 3,695.0 $ 4,336.1 $ 5,271.8 $ 6,038.6 $ 7,133.1 $ 7,489.8 $ 7,864.3 $ 8,257.5 $ 8,670.4
   Revenue per patient/year - 550mg tablet $ 2,772.0 $ 3,118.5 $ 3,711.0 $ 4,355.0 $ 5,294.7 $ 6,064.9 $ 7,164.2 $ 7,522.4 $ 7,898.5 $ 8,293.4 $ 8,708.1
                           Total HE sales $ 105.7 $ 141.3 $ 185.4 $ 238.4 $ 316.0 $ 393.0 $ 502.2 $ 384.2 $ 246.9 $ 176.3 $ 151.0
                            Annual growth               33.7%     31.2%     28.6%     32.6%     24.4%     27.8%    (23.5%)   (35.7%)   (28.6%)   (14.3%)

Source: Company data, Credit Suisse estimates.

IBS non-C $840 MM peak sales (before risk adjustment). We model peak sales for
Xifaxan in IBS non-C of $893.9 MM in 2016 (before applying a 90% risk adjustment for
probability of success, given the pending FDA decision).
Salix is seeking the indication of non-constipation IBS, which includes IBS-D and IBS-A.
Our patient share assumptions are informed by our opinion leader interviews. We estimate
that about 30% of IBS-D patients will receive Xifaxan at peak. With IBS-A patients
displaying alternating symptoms, they will have times when they are experiencing
constipation symptoms rather than diarrhea, and will then be less likely to use a
medication like Xifaxan that addresses IBS-D symptoms.
We therefore assume that Xifaxan’s share of IBS-A patients will be half of its share of IBS-
D patients, which equates to a 15% IBS-A share at peak. The mix results in an overall
18.8% of the 3.2 MM treated non-C IBS patients will be treated with Xifaxan at peak, as
compared to the company’s 30% estimate.
Based on results of the Credit Suisse Proprietary Survey (Exhibit 40), which displays that
compliance is typically low in the IBS population, we assume 50% compliance in our
model. Salix assumes 80% compliance, one of the key assumptions where we vary from
the company, yielding about $2.1 billion sales in 2016 with Xifaxan treating about 30%
patients.

Exhibit 43: Non-C IBS Market Model Assumptions—Credit Suisse versus Company
Peak Year Assumptions                        Credit Suisse Estimates      Company Guidance            Difference
Peak Year                                               2016                     2017                   1 year
IBS treatment seeking patients (MM)                     4.02                     4.00                   0.5%
% non-c IBS treatment seeking patients                 80%                      75%                     6.7%
Non-c IBS drug treated patients (MM)                    3.22                     3.00                   7.2%
Number of treatments in a year                            3                        3                          -
Number of days per treatment                             14                       14                          -
Compliance                                              50%                      80%                   (37.5%)
Number of 550mg pills per day                             3                        3                          -
WAC $/Tablet                                           $22.1                    $23.0                   (3.9%)
Xifaxan market-share                                   18.8%                    30.0%                  (37.5%)
Xifaxan Revenue ($ MM)                                $839.9                  $2,100.0                 (60.0%)
Source: Company data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                                                             33
                                                                                                                                                           13 December 2010



Exhibit 44: Non-C IBS Model Summary—Xifaxan Non-C IBS Revenues
                        IBS Model Summary       2010E        2011E        2012E        2013E        2014E        2015E        2016E       2017E    2018E    2019E    2020E

        Patients Diagnosed with IBS (all types)       7.6       7.7       7.7       7.8       7.9       8.0       8.0       8.1       8.2       8.2       8.3
                   Treatment-seeking population       3.8       3.8       3.9       3.9       3.9       4.0       4.0       4.1       4.1       4.1       4.1
                  IBS population segmentation
                                       % IBS-D      20%        20%       20%       20%       20%       20%       20%       20%       20%       20%       20%
                                       % IBS-A      60%        60%       60%       60%       60%       60%       60%       60%       60%       60%       60%
      Xifaxan penetration of each IBS segment
                                       % IBS-D        5%       12%       19%       24%       28%       30%       30%       26%       22%       18%        6%
                                       % IBS-A        3%        6%       10%       12%       14%       15%       15%       13%       11%        9%        3%
                       Xifaxan treated patients
                                          IBS-D      0.04      0.09      0.15      0.19      0.22      0.24      0.24      0.21      0.18      0.15      0.05
                                          IBS-A      0.06      0.14      0.22      0.28      0.33      0.36      0.36      0.32      0.27      0.22      0.07
                                           Total     0.10      0.23      0.37      0.47      0.55      0.60      0.60      0.53      0.45      0.37      0.12
                                 Annual growth               0.0%    124.7%     59.9%     27.6%     17.7%      8.1%      0.9%    (12.6%)   (14.7%)   (17.5%)
                                   Compliance       50%        50%       50%       50%       50%       50%       50%       50%       50%       50%       50%
                            Net price per tablet $16.50    $17.33     $18.19   $19.10     $20.06   $21.06     $22.11    $23.22    $24.38    $25.60    $26.88
                                 Annual growth               5.0%      5.0%      5.0%      5.0%      5.0%      5.0%      5.0%      5.0%      5.0%      5.0%
                      Revenue per patient/year $ 1,039.5 $ 1,091.5 $ 1,146.0 $ 1,203.4 $ 1,263.5 $ 1,326.7 $ 1,393.0 $ 1,462.7 $ 1,535.8 $ 1,612.6 $ 1,693.2

                            Total IBS sales $   106.5   $     251.2   $    421.8   $    565.0   $    698.4   $    792.7   $   839.9   $    770.4 $ 689.9 $ 597.5 $ 210.8
                             Annual growth                  135.9%        67.9%        34.0%        23.6%        13.5%        5.9%        (8.3%)  (10.4%) (13.4%) (64.7%)

Source: Company data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                                                                               34
                                                                                                 13 December 2010




Takeout Analysis
As discussed in the Investment Summary section of this report, we believe that Salix could
potentially be an attractive acquisition target for a major pharmaceutical company.
We have analyzed the potential takeout value of Salix using the following two
methodologies, and the results are shown below in Exhibit 45:
(6) Breakeven acquirer EPS; and
(7) Comparable transactions, focusing on average premiums paid to target stock prices,
    since a multiples-based approach would not be meaningful due to Salix’s emerging
    sales ramp and profitability, versus many of the comparables which were not at the
    beginning of a potentially long and substantial growth ramp.
With breakeven acquirer EPS, we analyze the maximum price per share that a variety of
potential acquirers could pay for Salix and maintain breakeven 2012 EPS with no
synergies (excluding amortization of transaction-related intangible assets). Some of our
key assumptions in this analysis are as follows:

■    Our analysis is purely financial. We are not opining on the strategic fit of potential
     buyers in the scope of this analysis, and are simply posing a few theoretical buyers as
     illustrative examples.

■    High proportion of cash consideration: we believe that most potential acquirers would
     aim to maximize the extent of cash consideration (and minimize stock) used in the
     deal. Most potential buyers have large cash balances and substantial access to
     inexpensive debt, both of which would be cheaper capital than their relatively low-
     multiple stock. Our model assumes use of cash up to the following caps:
                o    all of the target’s cash and 10% of an acquirer’s cash; then
                o    new debt up to the lesser of 1.5 times pro forma total debt/EBITDA, at an
                     interest rate of 5.0% (which is conservative for many major pharma
                     companies in light of recent debt raises such as MRK’s 10 year bonds at
                     3.875%); or
                o    $10 billion maximum new debt issuance.

■    No synergies. We believe that an acquirer of Salix could potentially realize meaningful
     synergies. However, because synergies could be variable among potential buyers,
     and in order to take a conservative approach to this analysis of maximum purchase
     price, we have not included any potential synergies.
With comparable transaction analysis, we have used a basket of historical specialty
pharmaceutical acquisitions (Exhibit 46), and applied the average and median premiums
paid in these deals to estimate a potential takeout price for Salix.
As a result of these analyses, we estimate that Salix could be valued at $63-$67 per
share based on premiums paid and $54 - $113 per share based on potential acquirer
breakeven 2012 EPS assuming no synergies. However, in part due to access to very
cheap capital, many potential buyers could afford to pay substantially more than that, and
this ability to pay could drive bidding higher. Of course, other considerations such as
strategic fit and available alternatives would be important for any acquirer and could limit a
purchase price to levels below these EPS dilution-driven takeout values.




Specialty Pharmaceuticals                                                                                     35
                                                                                                                      13 December 2010



Exhibit 45: Potential Maximum Price Assuming No Synergies and Based on Comparable
Acquisition
  $125
                                                  Takeout Value Analysis
                     $112.69
                                                           $106.09

  $100
                                  $91.38       $90.26                               Current stock price




   $75                                                                                                      $66.90
                                                                       $61.12                     $62.81
          $53.73

   $50

                                                                                $43.91


   $25




    $0
          Abbott     Johnson &     Pfizer        Lilly       Merck     Forest                      1 mo.     1 mo.
                      Johnson                                                                     Premium   Premium
                      Based on Potential Acquirer's Breakeven EPS in                               mean      median
                                           2012                          Based on Comparable Acquisition Multiples

Source: Company data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                                          36
                                                                                                                                                                     13 December 2010



Exhibit 46: Comparable Acquisitions in Branded Specialty Pharmaceuticals
in millions, unless otherwise stated
     DATE                                                                                                                EQUITY   ENTERPRISE               LTM              Premium
  ANNOUNCED           ACQUIRER                                  TARGET                                                   VALUE      VALUE       REVENUES         EBITDA      1 Month

     10/12/10         Pfizer                                    King Pharmaceuticals                                     3,566         $3,377      2.0x           7.8x       52.1%
     09/28/09         Abbott                                    Solvay Pharma                                            6,600         $6,600      1.8x           6.8x        NA
     02/09/09         Lundbeck                                  Ovation Pharma                                              NA           $900      4.4x          20.9x        NA
     01/05/09         Endo Pharmaceuticals                      Indevus Pharmaceuticals                                    370            420     15.9x           NM         66.0%
     09/01/08         Shionogi                                  Sciele Pharma                                            1,099          1,424      3.5x          13.6x       63.3%
     08/22/08         King Pharma                               Alpharma                                                 1,600          1,400      2.0x           NM         47.7%
     10/17/07         Galenica                                  Aspreva                                                    943            915      3.8x           7.2x       37.6%
     12/14/06         Forest Labs                               Cerexa                                                      NA            494      NA             NA          NA
     12/12/06         Indevus Pharmaceuticals                   Valera Pharmaceuticals                                     121            105      5.3x           NM         63.9%
     11/09/06         Private Equity Investors                  3M Pharma Assets                                           875          2,081      2.8x           NA          NA
     11/06/06         Abbott                                    Kos                                                      3,698             NA      4.5x          21.4x       60.2%
     10/23/06         Stiefel                                   Connectics                                                  NA            682      3.8x          19.7x       60.6%
     09/25/06         UCB                                       Schwarz                                                     NA       €€4,148       4.2x           NM         26.5%
     09/21/06         Nycomed                                   Altana Pharma                                               NA        €€4,215      1.8x           6.1x        NA
     12/06/05         Cephalon                                  Zeneus Holdings                                            360            360      4.5x           NA          NA
     11/20/05         Mentor Corp                               Medicis Pharmaceutical Corp                              2,010          1,835      NA             NA         16.4%
     08/08/05         Meda                                      Viatris                                                    696            606      2.0x          15.3x        NA
     07/28/05         Actavis Group hf                          Amide Pharmaceutical Inc                                   500             NA      NA             NA          NA
     07/07/05         Allied Capital Corp                       Spear Pharmaceuticals Inc                                   NA             77      NA             NA         55.7%
     06/23/05         Salix Pharmaceuticals                     InKine Pharmaceuticals                                     184            174      7.4x           NM          NA
     04/19/05         Jazz Pharmaceuticals                      Orphan Medical                                             129            116      4.9x           NM         14.9%
     03/21/05         Medicis                                   Inamed                                                   2,769          2,661      6.9x          30.6x        6.5%
     03/10/05         Nordic Capital                            Nycomed                                                  2,414          2,414      2.8x           NA          NA
     02/02/05         Valeant Pharmaceuticals Intl.             Xcel                                                       236            280      4.6x           NA          NA
     01/25/05         Protein Design Labs                       ESP Pharma                                                 475            489      5.4x          18.1x        NA
     09/18/04         DLJMB / JP Morgan Partners                Warner Chilcott PLC                                      3,029          3,035      6.2x          11.7x       11.1%
     07/26/04         Mylan Laboratories                        King Pharmaceuticals (1)                                 4,030          4,139      2.8x           6.9x        NA
     06/09/04         Bradley Pharmaceuticals                   Bioglan Pharma(2)                                          183            183      3.3x           NA          NA
     05/20/03         Axcan Pharma                              Salix Pharmaceuticals (Terminated)                         236            189      4.9x           NM          NA
     11/29/02         DLJMB                                     Nycomed                                                    644          1,200      2.3x           9.5x        NA
     05/23/02         Advent International                      Viatris                                                     NA            375      0.8x          10.4x        NA
     06/29/01         Barr Laboratories                         Duramed Pharmaceuticals                                    562            613      6.5x           NM         52.7%
     06/07/01         Bristol-Myers Squibb                      Dupont Pharmaceuticals                                   7,800          7,800      5.2x           NA          NA
     05/07/01         Private Equity Group                      MedPointe Inc.                                              NA            408      1.9x           NA          NA
     12/15/00         Abbott Laboratories                       Knoll Pharmaceuticals                                    6,900          6,900      3.0x          12.6x        NA
     09/11/00         Elan Pharmaceuticals                      Dura Pharmaceuticals                                     1,687          1,750      5.3x          20.3x       54.0%
     07/13/00         King                                      Jones Pharma                                             2,477          2,277     15.3x          24.5x        NA
     05/04/00         Galen Holdings PLC                        Warner Chilcott PLC                                        341            496      4.0x          12.0x        NA
     12/01/99         King                                      Medco Research                                             348            293      8.6x          19.2x        NA
     07/26/99         Shire                                     Roberts                                                  1,034          1,111      5.7x          20.5x        NA

                                                                                                                                  Mean             4.7x          15.0x       43.1%
                                                                                                                                  Median           4.3x          13.6x       52.4%
Source: Company filings and press releases.
(1) Withdrawn.
(2) Enterprise purchase price does not include direct costs associated with inventory transfer, to be paid at closing.
(3) Transaction value.

Source: Company data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                                                                                         37
                                                                                                                             13 December 2010




Catalysts
The stock price will be most sensitive to key catalysts involving Xifaxan’s approval and
marketing, including management’s PCP marketing strategy to be finalized by year-end
2010 and the March 7, 2011, PDUFA date for Xifaxan in non-C IBS. Furthermore, FDA
decision on whether to hold an advisory panel for Xifaxan in non-C IBS will give further
clarity on Xifaxan’s approval timeline and prospects.
Of secondary importance to the stock, we expect news flow from several pipeline assets in
late 2010 and early 2011. In November, Salix reported positive top-line data from Phase III
clinical studies evaluating Crofelemer’s safety and efficacy in treating HIV associated
diarrhea. Pre-NDA meeting for Crofelemer, designated with fast track status, is expected
in mid 1Q11. Budesonide foam, the other late-stage pipeline candidate, being studied in
treatment of Ulcerative Proctitis and Protcosigmoiditis is expected to complete Phase III
enrollment by 1Q 2011 with the data read out in 3Q 2011. Lastly, management has
indicated that they expect to resolve GIAZO approvability from the FDA by year-end 2010.

Exhibit 47: Salix’s Catalyst Calendar
         Timing                  Catalyst/Event    Sensitivity                                 Fundamentals
          4Q10              Xifaxan: P III IBS Data    *       Possible publication of previously announced PIII data demonstrating
                                                               Xifaxan's safety and efficacy in treating non-C IBS
          4Q10              GIAZO (balsalazide):       *       The manufacturer and SLXP are in conversations with the relevant
                            FDA decision                       committees of the FDA regarding the complete response letter.
  4Q 2010 - 1Q 2011         Xifaxan: potential        ***      Given the new trial design guidelines and history of drugs in IBS-D, Xifaxan
                            Advisory Committee                 could potentially have an Ad Com, although SLXP does not expect one
                            Meeting                            because of the recent Ad Com on HE
                            Xifaxan: PCP marketing    ***      PCP marketing plan in place for Xifaxan in IBS-non constipation (more
      End of 2010           plan in place                      likely to build PCP salesforce than co-promote, though may sign fee per
                                                               call deal)
     March 7, 2011          Xifaxan: FDA decision     ***      Expect FDA approval for Xifaxin in IBS-non constipation upon priority
                            on IBS application                 review; original PDUFA date of December 7, 2011 was postponed
                            Crofelemer: Pre-NDA        **      SLXP expects to meet with FDA for pre-filing meeting in mid 1Q11 and with
        1Q 2011             meeting with FDA                   designated fast track status, we estimate NDA for Crofelemer in HIV
                                                               associated diarrhea to be filed by the end of the year.
        1Q 2011             Budesonide Foam:              *       SLXP expects to complete enrollment in 2 450-patient P III studies in
                            Complete enrollment in                Ulcerative Proctitis and Proctosigmoiditis by 1Q 2011
                            Phase III trials
        3Q 2011             Budesonide Foam: PII          *       Top-line results from study evaluating Budesonide Foam's safety and
                            data in Proctosigmoiditis             efficacy in treatment of Proctosigmoiditis

        3Q 2011             Budesonide Foam: PII          *       Top-line results from study evaluating Budesonide Foam's safety and
                            data in Proctitis                     efficacy in treatment of Proctitis
        3Q 2011             Budesonide Foam:              *       SLXP expects to file Budesonide Foam NDA to FDA for treatment of
                            NDA submission to FDA                 Ulcerative Proctitis and Proctosigmoiditis

      End of 2011           Xifaxan: Extended             *       SLXP begins clinical trials of Xifaxan Extended Release, implementing
                            Release Trials                        technology licensed from Lupin, by end of 2011
Source: Company data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                                                 38
                                                                                                                                                            13 December 2010




Company Overview
Summary
Salix Pharmaceuticals is a specialty pharmaceutical company focused on licensing,
developing, and marketing drugs targeting gastrointestinal therapies. The company’s
strategy is to acquire/in-license late-stage and/or marketed branded pharmaceuticals
treating gastrointestinal disorders and commercialize them with Salix’s gastrointestinal
focused sales force.
Xifaxan (licensed from Alfa Wassermann), is the company’s main product currently
indicated for traveler’s diarrhea, recently approved for hepatic encephalopathy, and
pending approval for nonconstipation irritable bowel syndrome.
The product portfolio also includes Moviprep and Osmoprep (bowel cleansers), Apriso
(ulcerative colitis), and Metozolv ODT (gastro-oesophageal reflux disease drug). In
addition, Salix has an attractive pipeline with late-stage assets like Budesonide foam
(licensed from Dr. Falk Pharma) for treatment of ulcerative colitis in Phase III, and
Crofelemer (licensed from Napo pharmaceuticals) for HIV-associated diarrhea.

Exhibit 48: Salix—2010E Sales by Products                                               Exhibit 49: Salix—2015E Sales by Products
                               SLXP 2010E Revenue Breakdown                                                          SLXP 2015E Revenue Breakdown

                                      Others
                       Purgatives                                                                                        Others
                                       2%                                                                      Purgatives 9%
                          18%                                                                                                                     Xifaxan - HE
                                                                                                                  8%                                  25%
                                                           Xifaxan - HE
                                                               32%
                                                                                                            Apriso
                                                                                                             5%
                  Apriso
                   6%                                                                              Xifaxan - Other
                                                                                                         7%



             Xifaxan - Other
                  17%

                                                  Xifaxan - IBS                                                                   Xifaxan - IBS
                                                      25%                                                                             46%

   Xifaxan - HE     Xifaxan - IBS      Xifaxan - Other    Apriso      Purgatives   Ot      Xifaxan - HE     Xifaxan - IBS     Xifaxan - Other      Apriso        Purgatives    Ot


Source: Company data, Credit Suisse estimates.                                          Source: Company data, Credit Suisse estimates.

We expect Xifaxan to become the dominant driver of Salix Revenues, accounting for 78%
in 2015 from 74% in 2010.

Xifaxan—Clinical Data
Xifaxan is a gut-targeted antibiotic with minimal systemic absorption (<0.4%) and low risk
of antibiotic resistance. Rifaximin is clinically proven to be active against a variety of
bacteria, including gram-positive, gram-negative, aerobe, and anaerobe pathogens.
Owing to the aforementioned properties, Xifaxan has proven an effective therapy in
treating non-C IBS. Salix presented detailed results of its Phase III Target I and Target II
studies at DDW in May 2010.
The parallel, large-scale, randomized, double-blind, placebo-controlled trials were
designed to evaluate Xifaxan’s safety and efficacy in treating non-C IBS over the course of
a 14 day, 550 mg, thrice a day, drug course and observed for 10 weeks post-drug
administration.
The primary endpoint was adequate relief for subject’s global assessment (SGA) IBS
symptoms. Xifaxan met the primary and secondary endpoints both in the individual studies
and when treated as a combined data set. In the combined data set, 41% patients
receiving Xifaxan met the primary endpoint (p=0.0008) compared with 32% patients on



Specialty Pharmaceuticals                                                                                                                                                     39
                                                                                                                                                                                                                                                                13 December 2010


placebo, where responder was defined as a patient reporting adequate relief of SGA-IBS
weekly question for at least 2 weeks during weeks 3-6 of the trial. In addition, 40% patients
met the secondary endpoint of adequate relief of IBS bloating, as opposed to 30% patients
on placebo.

Exhibit 50: Xifaxan Non-C IBS Phase III Trial Results—                                                                                                   Exhibit 51: Xifaxan Non-C IBS Phase III Trial Results—
Primary Endpoint                                                                                                                                         Bloating
                                                   Primary Endpoint - SGA IBS                                                                                                                            Key Secondary Endpoint - IBS Bloating
                                                           Xifaxan                  Placebo                                                                                                                            Xifaxan                Placebo
                    45%                                                                                                                                                            45%
                                   p = 0.0125                             p = 0.0263                         p = 0.0008                                                                               p = 0.0045                   p = 0.0167                        p = 0.0002
                    40%                                                                                                                                                            40%
                                     41%                                 41%                                41%                                                                                                                    41%
                                                                                                                                                                                                      40%                                                           40%
                    35%                                                                                                                                                            35%
  % of Responders




                                                                                                                                                           % of Responders
                    30%                                                            32%                                     32%                                                     30%                                                     32%
                                              31%
                                                                                                                                                                                                                29%                                                         30%
                    25%                                                                                                                                                            25%

                    20%                                                                                                                                                            20%

                    15%                                                                                                                                                            15%

                    10%                                                                                                                                                            10%

                    5%                                                                                                                                                              5%

                    0%                                                                                                                                                              0%
                                        Target I                           Target 2                       Combined Data                                                                                 Target I                    Target 2                   Combined Data

                                   Responder: Patient responding ‘yes’ to adequate relief of SGA-IBS weekly                                                                                            Responder: Patient responding ‘yes’ to adequate relief of IBS-bloating
                                              question for = 2 of the 4 weeks during weeks 3 - 6                                                                                                            weekly question for = 2 of the 4 weeks during weeks 3 - 6


Source: Company data, Credit Suisse estimates.                                                                                                           Source: Company data, Credit Suisse estimates.
Footnote: SGA—subject’s global assessment.


As demonstrated in Exhibit 52, in the observation period from week 3 to week 6, following
the two week treatment period, Xifaxan displayed favorable efficacy outcomes when
compared with placebo in other secondary endpoints, like IBS bloating daily, SGA-IBS
daily, and IBS abdominal pain daily. Statistical significance was met in every endpoint.
When evaluated based on newly-proposed FDA endpoints, like abdominal pain and stool
daily, abdominal pain daily, and stool consistency daily, odds ratio favored Xifaxan
compared to placebo.
Xifaxan demonstrated consistency in treating symptoms with greater than placebo
changes in SGA-IBS daily over the entire 10 week post-treatment observation period
(Exhibit 53.)

Exhibit 52: Consistency across Endpoints                                                                                                                 Exhibit 53: Durability of Primary Endpoint
Consistency Across Endpoints                                                                                                                              Daily SGA IBS Symptoms
Weeks 3 Through 6                                                                                                                                         Change from Baseline at Wks 1 through 12
                          Efficacy
                          Efficacy                                                                           Odds
                          Outcome                                                                            Odds
                          Outcome          Study
                                           Study                                                             Ratio (9 5% CI) p -value
                                                                                                             Ratio (9 5% CI) p -value
                                           TAR GET 1
                                           TAR GET 1                                                             1 .53
                                                                                                                 1 .53   (1.10,2 .12)
                                                                                                                         (1.10,2 .12)   0.0125
                                                                                                                                        0.0125
          SGA-IBS
  Primary SGA-IBS
          Weekly
                                           TAR GET 2
                                           TAR GET 2                                                             1 .45
                                                                                                                 1 .45   (1.05,2 .01)
                                                                                                                         (1.05,2 .01)   0.0263
                                                                                                                                        0.0263                                                 Chang e fro m Baseline in Average Daily Score of IBS S ym pto ms b y
                          Weekly           C om bine d
                                           C om bine d                                                           1 .49
                                                                                                                 1 .49   (1.18,1 .88)
                                                                                                                         (1.18,1 .88)   0.0008
                                                                                                                                        0.0008
                                                                                                                                                                                                             W eek - I TT Pop ula tion (Com bin ed Data)
                                           TAR GET 1                                                             1 .62   (1.16,2 .27) 0.0045                                       -0.20
      Key IBS Bloating
          IBS Bloating                     TAR GET 1
                                           TAR GET 2
                                                                                                                 1 .62
                                                                                                                 1 .49
                                                                                                                         (1.16,2 .27) 0.0045
                                                                                                                         (1.08,2 .06) 0.0167
          Weekly
Secondary Weekly                           TAR GET 2                                                             1 .49   (1.08,2 .06) 0.0167                                                                                                                  Rifaxim in
                                           C om bine d
                                           C om bine d                                                           1 .56
                                                                                                                 1 .56   (1.23,1 .96) 0.0002
                                                                                                                         (1.23,1 .96) 0.0002                                       -0.30                                                                      Placebo
                                                                                                                                                                                                                                                            ♦ p-value < 0.050
                                                                                                                                                           Change from Baseli ne




                                           TAR GET 1                                                             1 .76   (1.26,2 .47)    0.0009
    Other                                  TAR GET 1                                                             1 .76   (1.26,2 .47)    0.0009                                    -0.40
          SGA-IBS Daily                    TAR GET 2                                                             1 .59   (1.13,2 .24)    0.0072
Secondary SGA-IBS Daily                    TAR GET 2
                                           C om bine d
                                           C om bine d
                                                                                                                 1 .59
                                                                                                                 1 .61
                                                                                                                 1 .61
                                                                                                                         (1.13,2 .24)
                                                                                                                         (1.28,2 .04)
                                                                                                                         (1.28,2 .04)
                                                                                                                                         0.0072
                                                                                                                                        < 0.000 1
                                                                                                                                        < 0.000 1
                                           TAR GET 1                                                             1 .41   (1.01,1 .97)    0.0486
                                                                                                                                                                                   -0.50
                          IBS Bloating     TAR GET 1                                                             1 .41   (1.01,1 .97)    0.0486
                          IBS Bloating     TAR GET 2
                                           TAR GET 2                                                             1 .76
                                                                                                                 1 .76   (1.26,2 .44)
                                                                                                                         (1.26,2 .44)    0.0008
                                                                                                                                         0.0008
                          Da ily
                          Da ily                                                                                                                                                   -0.60
                                           C om bine d
                                           C om bine d                                                           1 .52
                                                                                                                 1 .52   (1.21,1 .92)
                                                                                                                         (1.21,1 .92)    0.0004
                                                                                                                                         0.0004
                                           TAR GET 1
                                           TAR GET 1                                                             1 .45
                                                                                                                 1 .45   (1.05,2 .02)
                                                                                                                         (1.05,2 .02)    0.0255
                                                                                                                                         0.0255
                          IBS Ab Pain
                          IBS Ab Pain
                          Da ily
                                           TAR GET 2
                                           TAR GET 2                                                             1 .46
                                                                                                                 1 .46   (1.05,2 .03)
                                                                                                                         (1.05,2 .03)    0.0232
                                                                                                                                         0.0232                                    -0.70
                          Da ily           C om bine d                                                           1 .42   (1.13,1 .78) 0.0028
                                           C om bine d                                                           1 .42   (1.13,1 .78) 0.0028
                                                                                                                                                                                   -0.80
                                           TAR GET 1
                                           TAR GET 1                                                             1 .40
                                                                                                                 1 .40   (1.02,1 .92)
                                                                                                                         (1.02,1 .92)    0.0401
                                                                                                                                         0.0401
          Ab Pa in & Stool
      FDA Ab Pa in & Stool                 TAR GET 2                                                             1 .55   (1.12,2 .13)    0.0077
 Proposed Da ily (FDA)                     TAR GET 2                                                             1 .55   (1.12,2 .13)    0.0077                                    -0.90
 Proposed Da ily (FDA)                     C om bine d
                                           C om bine d                                                           1 .47
                                                                                                                 1 .47   (1.17,1 .84)
                                                                                                                         (1.17,1 .84)    0.0009
                                                                                                                                         0.0009
                                           TAR GET 1                                                             1 .48   (1.08,2 .03)    0.0157
                          Ab Pa in Daily
                          Ab Pa in Daily   TAR GET 1                                                             1 .48   (1.08,2 .03)    0.0157
                                                                                                                                                                                   -1.00
                          (FDA)
                          (FDA)
                                           TAR GET 2
                                           TAR GET 2                                                             1 .46
                                                                                                                 1 .46   (1.06,2 .00)
                                                                                                                         (1.06,2 .00)    0.0194
                                                                                                                                         0.0194                                                      2wk 10wk post-
                                           C om bine d                                                           1 .46   (1.17,1 .83)    0.0009
                                           C om bine d                                                           1 .46   (1.17,1 .83)    0.0009                                                treatment treatment
                          Stool Consist.
                                           TAR GET 1
                                           TAR GET 1                                                             1 .80
                                                                                                                 1 .80   (1.25,2 .59)
                                                                                                                         (1.25,2 .59)    0.0015
                                                                                                                                         0.0015                                    -1.10
                          Stool Consist.   TAR GET 2                                                             1 .57   (1.12,2 .21)    0.0096
                          Da ily (FDA)     TAR GET 2                                                             1 .57   (1.12,2 .21)    0.0096
                          Da ily (FDA)     C om bine d
                                           C om bine d                                                           1 .67
                                                                                                                 1 .67   (1.31,2 .14)
                                                                                                                         (1.31,2 .14)   < 0.000 1
                                                                                                                                        < 0.000 1
                                                                                                                                                                                           0      1         2      3   4      5     6     7       8     9      10      11    12
                                                                                                                                                                                                                                  We ek
                                               0.0
                                               0.0           0.5
                                                             0.5        1.0
                                                                        1.0         1.5
                                                                                    1.5        2.0
                                                                                               2.0         2.5
                                                                                                           2.5
                                                                     Odds Ratio and 95% CI
                                                                     Odds Ratio and 95% CI                                                                                                                                 Mean baseline = 3.39
                                                     Favors P lacebo
                                                     Favors P lacebo                  Favors Rifax imin
                                                                                      Favors Rifax imin                                             72                                                                                                                            82

Source: Company data.                                                                                                                                    Source: Company data.

The benign safety profile of Xifaxan was further validated as 0.3% serious adverse events
were reported, less than 0.8% occurrences in placebo population. Both the trial arms



Specialty Pharmaceuticals                                                                                                                                                                                                                                                         40
                                                                                                 13 December 2010


reported equal occurrences of common adverse events, like headache (4%) and
abdominal pain (3%). Slightly higher nausea (3% versus 2%) was observed in the Xifaxan
arm, and lower nasopharynigitis (1% versus 3%), and upper respiratory tract infection (1%
versus 2%) was observed in the Xifaxan arm.

Exhibit 54: Adverse Events in both Trials Combined—TARGET 1 and TARGET 2
          Adverse Events                                  Xifaxan        Placebo
          Any AEs                                             28.5%          29.7%
            SAEs                                                0.3%          0.8%
            AEs resulting in discontinuation                      1%          0.9%
            Deaths                                                  0            0
          Common AEs
            Headache                                              4%             4%
            Abdominal Pain                                        3%             3%
            Nausea                                                3%             2%
            Nasopharyngitis                                       1%             3%
            Upper Respiratory Tract Infection                     1%             2%
          *most AEs were mild or moderate in intensity
          *No AEs of C.difficile associated diarrhea or ischemic colitis
Source: Company data, Credit Suisse estimates.

Xifaxan’s Competition
While there currently are no approved therapies for nonconstipation IBS, other than the
black-boxed Lotronex, there are a few therapies in development that could potentially
compete with Xifaxan in non-C IBS (Exhibit 55) and HE (Exhibit 56).
In IBS, Tioga’s Asimadoline leads the pack with two Phase III studies of 600 patients each
underway. A peripheral opioid kappa receptor agonist, Asimadoline, has reported positive
Phase II results.
Lexicon reported positive top-line results from Phase II proof of concept studies evaluating
LX-1031 in nonconstipation IBS in November 2009, and plans to develop the drug further.
Dextofisopam missed the primary endpoint in the Phase II trial due to high placebo rate
and Pharmos has indicated that they are seeking a pharmaceutical partner or venture fund
to continue development.
Ocera’s AST-120 showed promising results in the proof of concept study, results of which
were presented at DDW earlier this year. Primary endpoint of greater than placebo pain
relief was met both in week four and week eight of observation. Ocera plans to initiate
Phase 2b studies soon.
Lastly, we highlight that Santarus’ Rifamycin MMX, currently in clinical trials for traveler’s
diarrhea, could potentially be used in treatment of IBS. Rifamycin is a derivate of rifaximin
and MMX is the patented targeted extended release technology that could give Rifamycin
a favorable dosing regimen, as compared with Xifaxan.




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                                                                                                                                                                                  13 December 2010



Exhibit 55: Emerging Non-C IBS Therapies—Potential Xifaxan Competitors
    Drug             Asimadoline                          LX-1031                               Dextofisopam                                   AST-120                       Rifamycin SV MMX

Company         Tioga Pharmaceuticals             Lexicon Pharmaceuticals                 Pharmos Pharmaceuticals                       Ocera Pharmaceuticals             Santarus Pharmaceuticals
               (outlic from Merck KGaA                                                        (acquired Vela)
             funded by Forward Ventures)
Indication                IBS-D                            IBS-D                                  Non-C IBS                                    Non-C IBS                      Traveler's Diarrhea
                      P III initiated                PII POC completed                          P II completed                            P II POC complete                      PIII ongoing
   Phase                                                                         Evaluating secondary endpoints and subgroup                                           Evaluating safety and efficacy in
               PIII Initiated in May 2010        Topline results in Nov 2009                                                           P IIb to be initiated soon
                                                                                                analysis of PII                                                              traveller's diarrhea

             peripheral opiod K-receptor         TPH1 Inhibitor (tryptophan       Act at subcortical level via a non-GABAergic
    MOA                                                                                                                                 NF-kappa B inhibitors                Rifaximin Derivative
                       agonist                       hydroxylase 1)                                    MOA
                                                  Based on the positive data        The Company switched CROs mid way
                                                 obtained, Lexicon intends to      through the trial to accelerate enrollment.     POC study preseneted at DDW -
              Funding PIII with $18MM                                                                                                                                  Potential to be evaluated in non-C
                                                  pursue the development of          Interestingly, practically all the efficacy   Met Primary endpoint of reduction
              equity raised in Feb 2010                                                                                                                                    IBS; not easily absorbed
                                               LX1031 as a novel treatment for   resulted from one CRO. This information will       in pain at week 4 and week 8
 Comments
                                                  patients with IBS - website          be used in developing the next trial.
                                                                                    PII missed primary endpoint due to high
             2 trials involving 600 patients                                                                                                                               Targeted extended release
                                                                                  placebo rate. Co. is now seeking a pharma
                           each                                                                                                                                          technology makes it attractive
                                                                                      partner or venture funds to continue

Source: Company data, Credit Suisse estimates.

Although there are no drugs in development for overt HE, there are a couple of early-stage
drugs that are being tested for various forms of HE. The furthest along is AST-120, a
NF-kappa B inhibitor, being developed by Ocera Pharmaceuticals. After receiving positive
results from a Phase IIa trial evaluating the drug in minimal HE, the company initiated a
Phase IIb trial in March 2009, which was completed in June 2010 (according to
clinicaltrials.gov). We are not aware of a public announcement of the results yet, but we
highlight that there is a high likelihood that it is presented at AASLD this year.
HPN-100, formerly GT4P, has been granted orphan drug status by the FDA in September
2009 for the treatment of intermittent or chronic treatment of patients with cirrhosis and
any grade of HE. Hyperion initiated Phase II trials evaluating the safety and efficacy of
HPN-100 for maintaining remission in patients with cirrhosis and episodic HE in October
2009. Per clinicaltrials.gov’s last update on August 2010, the study is actively recruiting
participants and the primary endpoint is defined as the percentage of patients who exhibit
a HE episode during the treatment period.

Exhibit 56:Emerging HE Therapies—Potential Xifaxan Competitors
       Drug                                      HPN-100                                                       AST-120

Company                                          Hyperion                                         Ocera Pharmaceuticals


Indication                                         HE                                                     minimal HE
                                               Recruiting PII                                         PIIb trial completed
      Phase                                                                                   PIIa trial in mild HE reported
                                PII initiated in October 2009
                                                                                                       positive data


       MOA                      glyceryl tri-4-phenylbutyrate                                       NF-kappa B inhibitors

                        FDA granted HPN-100 orphan drug
                                                              According to clinicaltrials.gov,
                         status in September 2009 for the
                                                             ASTUTE study evaluating AST-
                        treatment of intermittent or chronic
                                                             120 in mild HE was completed in
                        treatment of patients with cirrhosis
  Comments                                                              June 2010
                               and any grade of HE
                        Dosing is 3 teaspoons of HPN-100 -
                                                                 We expect results to be
                         equivalent to 40 tablets of sodium
                                                                presented at AASLD 2010
                                   phenylbutyrate
Source: Company data, Clinicaltrials.gov, Credit Suisse estimates.




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                                                                                                                               13 December 2010



Xifaxan Intellectual Property
The composition of matter patents for the active ingredient in Xifaxan (rifaximin), are no
longer in effect, having expired in May 2001 in the United States and Canada. Salix has
not received notification from the FDA of any Paragraph IV generic filings, and the FDA
has been able to accept such filings since May 2008 (a year prior to rifaximin’s NCE
exclusivity expiration).
Xifaxan’s commercial life is protected by the following patents, intellectual property, and
exclusivity, as summarized in Exhibit 57.

■     2 polymorph patents expiring in 2024 (patents ‘620 and ‘199).

■     2 use patents with claims for use in IBS, expiring in 2019 (‘608 and ‘857).

■     1 use patent with a claim for treating a subject suffering from bloating, expiring in 2019
      (’240).

■     Orphan Drug exclusivity, expiring on March 24, 2017.

■     New Molecular Entity exclusivity, expiring on March 24, 2013.

Exhibit 57: Xifaxan Related Intellectual Property
                                                                                                                          Licen-
     Patent No.      Expiration Date       Patent Type                              Patent Coverage                              OB Listed
                                                                                                                           sor
    1) # 7,045,620 June 19, 2024         Formulation         Covers several physical states of rifaximin                  AW       Yes

    2) # 7,612,199 June 19, 2024         Formulation         Covers several physical states of rifaximin                  AW       Yes
                                                             Relating to a method of treating a subject suffering from           Upon IBS
    3) # 7,718,608 August 2019           Method of use                                                                    Cedars
                                                             irritable bowel syndrome                                            approval
                                                             Treatment of bloating caused by small intestinal bacterial          Upon IBS
    4) # 7,605,240 August 11, 2019 Method of use                                                                          Cedars
                                                             overgrowth associated with IBS                                      approval
                                                             Treatment of IBS caused by small intestinal bacterial               Upon IBS
    5) # 7,452,857 August 11, 2019 Method of use                                                                          Cedars
                                                             overgrowth                                                          approval
    Exclusivity     March 24, 2017                           Orphan Drug Designation - Hepatic Encephalopathy
    (for 550mg)     March 24, 2013                           New Product Exclusivity
OB - Orange Book, AW - Alfa Wasserman S.p.a, Cedars - Cedars-Sinai Medical Center
Source: Orange Book, Company data, Credit Suisse estimates.

Salix is working on additional patents, not yet issued, including additional polymorphs, use
patents in HE, and use patents in IBS. The use patents in HE were filed in March 2009,
thus if issued, could provide protection until 2029.
Therefore, Xifaxan has several layers of protection, each of differing breadth, strengths,
and weaknesses. After review of this IP with patent counsel, our views and corresponding
assumptions in our model are as follows.
Intellectual Property Views
At a minimum, Salix’s molecule has virtually ironclad protection for all uses until 2013, and
for HE until 2017. We believe the 2 IBS use patents (‘608 and ‘857) provide reasonably
strong protection for use in IBS until 2019. The ‘240 patent could be more difficult to
defend, as it is a claim against a symptom, rather than the treatment of a disease, but due
to the presence of the aforementioned IBS use patents, this potential weakness is less
concerning.
The 2024 patents (‘620 and ‘199) are polymorph patents, which can be less protective
than composition or use patents, as they leave open the possibility of a competitor
designing around them and marketing a different form of the rifaximin. This is particularly
concerning in the absence of a composition of matter patent.




Specialty Pharmaceuticals                                                                                                                   43
                                                                                                   13 December 2010


Salix has other factors that may ultimately provide it some additional protection. First,
Xifaxan has extremely low systemic absorption (less than 0.4%). FDA has not thus far
provided guidance as to what methods a generic filer should use to demonstrate
bioequivalence. As demonstrated by the lack of Paragraph IV filers in the approximately
2.5 years that an ANDA could have been filed (since May 24, 2008 for the 200 mg
strength), this provides some degree of protection; however, FDA could issue guidance at
some point. The lack of any Paragraph IV filers could provide some indication of the
difficulty of producing a bioequivalent copy of Xifaxan.
Second, Salix is working with its partner Lupin on a once-daily formulation of Xifaxan. The
molecule currently is in early preclinical studies, and Salix is aiming to begin clinical trials
by year-end 2011. This formulation could potentially extend the life cycle of the franchise
considerably, via FDA exclusivity and/or patents, although it is fairly speculative at this
early stage.
Possible Generic Filing Strategies
A generic challenger could pursue various filing strategies, including:

■   File with an HE indication. FDA would not be able to approve the ANDA until after
    the orphan drug exclusivity expiration in March 2017, and for a generic to launch at
    that time, the filer would need to successfully challenge the 2024 polymorph patents.

■   File with an IBS indication. In this case the application would not be blocked by the
    HE orphan exclusivity, but the filer would need to defeat the 2019 use patents, as well
    as the 2024 polymorph patents. If successful in challenging the patents, the generic
    filer could potentially launch after the March 2013 expiration of new product exclusivity
    (on the 550 mg strength).
Our Take and Modeling Assumptions
For our forecast model and target price, we have taken what we believe is a conservative
stance on Xifaxan’s protection.

■   We assume that the 2024 polymorph patents will ultimately be overcome by a
    generic filer. The patents could be found invalid on the grounds of inherent
    anticipation, or a challenger could design around them by creating a generic
    equivalent without using these particular polymorphs. Our assumption in this regard is
    admittedly conservative in that it assumes a generic filer is able to come up with a
    bioequivalent form (which first requires FDA guidance), that is different enough to not
    infringe the patent, but similar enough to not require clinical trials and to retain
    Xifaxan’s advantages conferred by its minimal absorption, low permeability, and low
    solubility.

■   We assume that the 2019 IBS use patents remain in force until expiration.

■   We assume that a generic competitor is launched upon the expiration of
    Xifaxan’s orphan exclusivity in March 2017, and that in HE, Salix experiences rapid
    generic erosion typical of small molecule generics in the U.S. market.

■   We assume that in IBS, Salix assumes some erosion due to off-label use after a
    2017 generic launch in HE, with accelerated erosion after expiration of the use patents
    in IBS in August 2019. We would expect to see meaningful off-label use of the generic
    in IBS once it is on the market, as well as potential substitution. However, we stop
    short of assuming full-scale erosion in IBS in 2017-2019, on the premise that the
    brand will have an IBS indication, while the generic will not, influencing some
    physicians to keep their patients on branded Xifaxan.

Other Pipeline
Salix’s three other late-stage drugs are Crofelemer, Budesonide foam, and GIAZO.



Specialty Pharmaceuticals                                                                                       44
                                                                                                         13 December 2010



Exhibit 58: SLXP’s Product Pipeline
     Product                Indication           Status                   Next Catalyst
Crofelemer           HIV-associated Diarrhea PIII               Pre-NDA FDA meeting in mid 1Q11
Budesonide Foam Ulcerative Proctitis             PIII           Complete PIII trial enrollment by 1Q11

Lumacan              Ulcerative Proctitis        Pre-clinical   Complete oral formulation
GIAZO                Ulcerative Colitis          NDA            FDA Approval by end of 2010
Source: Company data, Credit Suisse estimates.

Crofelemer
Crofelemer, being evaluated by Salix for treatment of HIV associated diarrhea,
demonstrated positive top-line results in November 2010. Full data will be presented at an
upcoming medical meeting, possibly ICAAC in September 2011. Salix believes they could
have a pre-NDA meeting with the FDA as early as mid 1Q of 2011 . Licensed from Napo
Pharmaceuticals, Crofelemer has an IND fast track designation. Salix expects to file an
NDA seeking approval of Crofelemer in HIV associated diarrhea by 1Q11 and estimates
Crofelemer to be about a $60 million opportunity.
Budesonide Foam
By 1Q 2011, Salix expects to complete enrollment in Phase III trials to test Budesonide
foam in treatment of Ulcerative Proctitis. Salix has in-licensed this drug from Dr. Falk
Pharma. Given the unmet meet of a topical agent for treating proctitis and the positive data
from the Phase II trials, we are increasingly positive on the potential of this drug in this
niche indication. According to key opinion leaders in the field, Budesonide foam is a very
promising drug, which has so far demonstrated a better efficacy and side effect profile
than Proctofoam, a hydrocortisone and pramoxine medication that is sometimes used for
proctitis. Canasa suppositories are also indicated for inflammations of the colon, but our
physician checks reveal that the drug is not as efficacious in proctitis. (We believe that
Budesonide MMX, being developed by Santarus, will not directly compete with
Budesonide foam because Salix’s foam is a topical agent for treating proctitis and
Budesonide is an oral pill.)

Exhibit 59: Proctitis Therapies—Budesonide Foam Competition
                                                            Active
          Name                   Company                                  Form                Phase
                                                          Compound
 Canasa                     Axcan Pharma                Mesalamine     Suppository          Marketed
                                                        Hydrocortisone
 Proctofoam - HC            Alaven Pharma                              Foam                 Marketed
                                                        and Pramoxine
 Budesonide Foam            Salix Pharma                Budesonide     Foam                 P III
Source: Company data, Credit Suisse estimates.

Lumacan
In October 2010, SLXP acquired Lumacan, a novel agent used for earlier detection and
diagnosis of colon cancer, from Photocure, a Norwegian specialty pharmaceutical
company. Hexamiolevulinate, an active ingredient in Lumacan, is currently marketed by
GE healthcare for the detection of bladder cancer under the trademark Cysview. Salix is
working in developing an oral formulation of Lumacan which when used in conjunction with
colonoscopy will improve the success rate of identifying colon cancers.
GIAZO
SLXP is seeking FDA approval of GIAZO (balsalazide disodium) tablets for the treatment
of mild-to-moderate ulcerative colitis. GIAZO’s NDA application has been held up at the
FDA due to deficiencies at a third-party manufacturing facility. While the company expects
approval by year end, it is cited as $25-30 million opportunity. Due to limited visibility on
the resolution of the manufacturer-FDA conversations, we assign risk-adjusted sales of
$3.5 MM and $7 MM in 2011 and 2012, respectively.



Specialty Pharmaceuticals                                                                                             45
                                                                                                              13 December 2010




Management
Management Team
Salix’s management team comprising of Carolyn J. Logan, CEO, Adam C. Derbyshire,
EVP, finance and administration and CFO, and William P. Forbes, Pharm D., EVP, R&D
and chief development officer brings with it collectively over 100 years in pharmaceuticals
experience.

Exhibit 60: Salix’s Management Team̵—Collectively over 100 Years in Pharmaceuticals
       Name            Principal Position                                Comments

                                           ■ At Salix since 10 years beginning July 2000 as SVP, Sales & Marketing
                                           ■ Approximately 30 years in specialty pharmaceutical sales and marketing
                     President and Chief ■ Tenures with Watson Pharmaceuticals, Oclassen Pharmaceuticals, Galderma
 Carolyn J. Logan
                       Executive Officer   Laboratories, Ulmer Pharmacal, and Westwood Pharmaceuticals
                                           ■ B.S. in Biology and Dental Hygiene from the University of North Carolina at
                                           Chapel Hill
                                           ■ At Salix since the past 10 years beginning June 2000
                                           ■ Approximately 18 years of extensive pharmaceutical industry experience
                        Executive Vice     ■ Various roles in finance, accounting, investor relations, and general corporate
      Adam C.       President, Finance and ■ Tenures with Medco Research, Inc (acquired by King Pharmaceuticals in
     Derbyshire      Administration, Chief February 2000) in various capacities including Vice President, Corporate
                       Financial Officer   Controller, and Secretary
                                           ■ Received his MBA from the University of North Carolina at Charlotte, B.S. from
                                           the University of North Carolina at Wilmington
                                           ■ At Salix since the past five years beginning in January 2005 as VP, R&D and
                                           Chief Development Officer
                        Executive Vice
                                           ■ Over 20 years of experience in pharmaceutical development
                     President, Research
 William P. Forbes,                        ■ Tenures with Metabasis Therapeutics, Otsuka America Pharmaceutical,
                    and Development, and
      Pharm.D.                             aaaGlaxo
                      Chief Development
                                           ■ Received a Pharm.D. from Creighton University
                            Office
                                           ■ Conducted post-doctoral work at the Creighton Cardiac Center and the
                                           Cardiovascular Clinical Research department at Glaxo
Management compensation at SLXP is linked to corporate objectives, including product
development, revenue, earnings and business development goals, and individual
management objectives. One of the primary objectives driving executive compensation is
creating incentives for management to enhance stockholder value. Long-term equity
incentives are awarded in the form of restricted stock that vest over time. Board of
directors believe that this provides a particularly strong incentive to employees because
the awards gain in value as the stock price increases. Furthermore, the restricted stock
vests fully only after the employee has been with the company for a minimum amount of
time, generally three or four years.
We consider Salix a potential acquisition target and in the event that SLXP is taken out,
we highlight the management termination agreements below (Exhibit 61). Notably, the
CEO would receive $6.5 million in the event of termination without cause or for good
reason after change in control.




Specialty Pharmaceuticals                                                                                                  46
                                                                                                                                      13 December 2010



Exhibit 61: Management Termination Agreements
                                                                                     Termination without Cause or for Good
                          Name                        Designation
                                                                                        Reason after Change in Control
                 Carolyn J. Logan
                 President & CEO             Salary                                                                            $2,224,500
                                             Bonus                                                                              1,204,938
                                             Benefit Continuation                                                                  17,388
                                             Accelerated Vesting                                                                3,013,158
                                             Total Value                                                                       $6,459,984

               Adam C. Derbyshire
                     CFO                     Salary                                                                            $1,025,000
                                             Bonus                                                                                384,375
                                             Benefit Continuation                                                                  31,350
                                             Accelerated Vesting                                                                  823,093
                                             Total Value                                                                       $2,263,818

                William P. Forbes
                                             Salary                                                                             $720,000
                                             Bonus                                                                                303,750
                                             Benefit Continuation                                                                  37,296
                                             Accelerated Vesting                                                                  718,486
                                             Total Value                                                                       $1,779,532

                           Total, 3 named executives                                                                        $10,503,334
Source: Company Data, Credit Suisse estimates.

Board of Directors
John F. Chappell chairs the six person board of directors and is a member of the audit
committee, nominating and corporate governance committee, and pricing committee.

Exhibit 62: Salix Board of Directors
                                                                      Number of Issued
                                                                                           % Share
                                                                          Shares-
            Name                            Afflitiation                                  Benificial                Position                Independent
                                                                         Beneficial
                                                                                          Ownership
                                                                        Ownership
                                                                                                          Chairman of the Board, Audit
                                                                                                            Committee, Nominating &
       John F. Chappell                  Main Line Health                 859,120           1.51%                                              Yes
                                                                                                        Corporate Governance Committee,
                                                                                                               Pricing Committee
                                                                                                            Chairman of Nominating &
                                                                                                             Corporate Governance
      Thomas D'Alonzo              Amarillo Biosciences, Plexigen         168,910        less than 1%                                          Yes
                                                                                                           CommitteeAudit Committee,
                                                                                                            Compensation Committee
                                                                                                           Chairman of Compensation
 Richard A. Franco, Sr., R.Ph.    The Richards Group, NeoMatrix            96,244        less than 1%       Committee, Nominating &            Yes
                                                                                                        Corporate Governance Committee
                                                                                                         Chairman of Audit Committee,
                                 Biotechnology and Pharmaceutical
      William P. Keane                                                    106,573        less than 1%   Compensation Committee, Pricing        Yes
                                          Industry Expert
                                                                                                                 Committee
       Carolyn J. Logan                        CEO                       1,208,106          2.10%       President, CEO, Pricing Committee       No
                                                                                                           Compensation Committee,
   Mark A. Sirgo, Pharm. D.      BioDelivery Sciences International        35,156        less than 1%       Nominating & Corporate             Yes
                                                                                                            Governance Committee
Source: Company Data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                                                            47
                                                                                                                                                                   13 December 2010




Financial Models
Exhibit 63: Salix Revenue Forecast Summary
USD in millions, unless otherwise stated
                                         FY 2007    FY 2008     FY 2009     1QA       2QA       3QA        4QE       FY 2010     FY 2011    FY 2012    FY 2013     FY 2014     FY 2015
Marketed
Xifaxan                                     $64.3      $79.9      $117.9     $29.9     $72.4      $65.2     $81.3      $248.7      $436.6     $653.5      $845.4    $1,054.4    $1,227.3
Purgatives (Visicol/Moviprep/Osmoprep)       47.7       62.9        76.3      10.5       6.1       17.3      25.0        58.9       106.4      112.1       117.5       122.2       125.8
Apriso (& Colazal)                           92.4       10.5         5.8       0.6      12.6       (1.4)      7.4        19.2        44.4       56.5        65.6        74.0        82.1
Metozolv                                      0.0        0.0         0.1       0.5       0.6        0.7       0.8         2.6         4.9        6.4         8.1         9.9        11.9
Others                                       28.5       25.4        32.7       2.6       2.0       (1.1)      2.2         5.7         5.8        5.8         5.9         6.0         6.0
Total Marketed                             $232.9     $178.8      $232.9     $44.1     $93.8      $80.6    $116.7      $335.2      $598.1     $834.3    $1,042.4    $1,266.4    $1,453.0
Pipeline
Budesonide Foam                              $0.0       $0.0        $0.0       $0.0     $0.0       $0.0       $0.0       $0.0        $3.0       $6.0       $24.0      $42.0        $60.0
Crofelemer                                    0.0        0.0         0.0        0.0      0.0        0.0        0.0        0.0         0.0        5.0        20.0       30.0         40.0
GIAZO                                         0.0        0.0         0.0        0.0      0.0        0.0        0.0        0.0         3.5        7.0        14.0       21.0         28.0
Total Pipeline                               $0.0       $0.0        $0.0       $0.0     $0.0       $0.0       $0.0       $0.0        $6.5      $18.0       $58.0      $93.0       $128.0

Total Salix Revenues                       $232.9     $178.8      $232.9      $44.1    $93.8      $80.6    $116.7      $335.2      $604.6     $852.3    $1,100.4    $1,359.4    $1,581.0

Growth Rates
Marketed
Xifaxan                                                24.4%       47.6%     23.9%    175.8%     52.7%     226.3%      110.9%      75.5%      49.7%       29.4%      24.7%        16.4%
Purgatives (Visicol/Moviprep/Osmoprep)                 31.8%       21.4%    (17.1%)   (63.1%)     3.7%     (17.9%)     (22.8%)     80.8%       5.3%        4.8%       4.0%         2.9%
Apriso (& Colazal)                                    (88.6%)     (45.2%)   (78.5%)       NM        NM       0.6%      232.0%     131.1%      27.3%       16.1%      12.8%        10.9%
Metozolv                                                                                                   477.6%    1,779.5%      85.7%      31.3%       26.1%      22.6%        20.1%
Others                                                (10.8%)     28.7%     (50.6%)   (82.4%)       NM     (70.0%)     (82.5%)      1.0%       1.0%        1.0%       1.0%         1.0%
Total Marketed                                        (23.2%)     30.3%      (1.6%)    79.5%     22.8%      66.2%       43.9%      78.4%      39.5%       24.9%      21.5%        14.7%
Pipeline
Budesonide Foam                                                                                                                              100.0%     300.0%       75.0%        42.9%
Crofelemer                                                                                                                                              300.0%       50.0%        33.3%
GIAZO                                                                                                                                        100.0%     100.0%       50.0%        33.3%
Total Pipeline                                                                                                                               176.9%     222.2%       60.3%        37.6%

Total Salix Revenues                                  (23.2%)     30.3%      (1.6%)   79.5%      22.8%     66.2%       43.9%       80.4%      41.0%       29.1%      23.5%        16.3%

Revenue Contribution
Marketed
Xifaxan                                    27.6%      44.7%       50.6%      67.8%     77.2%     80.8%      69.7%      74.2%       72.2%      76.7%       76.8%      77.6%        77.6%
Purgatives (Visicol/Moviprep/Osmoprep)     20.5%      35.2%       32.8%      23.9%      6.5%     21.4%      21.4%      17.6%       17.6%      13.1%       10.7%       9.0%         8.0%
Apriso (& Colazal)                         39.7%       5.9%        2.5%       1.3%     13.5%     (1.7%)      6.3%       5.7%        7.3%       6.6%        6.0%       5.4%         5.2%
Metozolv                                    0.0%       0.0%        0.1%       1.2%      0.7%      0.8%       0.7%       0.8%        0.8%       0.8%        0.7%       0.7%         0.8%
Others                                     12.2%      14.2%       14.1%       5.9%      2.1%     (1.3%)      1.9%       1.7%        1.0%       0.7%        0.5%       0.4%         0.4%
Total Marketed                            100.0%     100.0%      100.0%     100.0%    100.0%    100.0%     100.0%     100.0%       98.9%      97.9%       94.7%      93.2%        91.9%
Pipeline
Budesonide Foam                             0.0%       0.0%        0.0%       0.0%     0.0%       0.0%       0.0%       0.0%        0.5%       0.7%        2.2%        3.1%        3.8%
Crofelemer                                  0.0%       0.0%        0.0%       0.0%     0.0%       0.0%       0.0%       0.0%        0.0%       0.6%        1.8%        2.2%        2.5%
GIAZO                                       0.0%       0.0%        0.0%       0.0%     0.0%       0.0%       0.0%       0.0%        0.6%       0.8%        1.3%        1.5%        1.8%
Total Pipeline                              0.0%       0.0%        0.0%       0.0%     0.0%       0.0%       0.0%       0.0%        1.1%       2.1%        5.3%        6.8%        8.1%

Total Salix Revenues                      100.0%     100.0%      100.0%     100.0%    100.0%    100.0%     100.0%     100.0%      100.0%     100.0%     100.0%      100.0%       100.0%

Source: Company data, Credit Suisse estimates




Specialty Pharmaceuticals                                                                                                                                                            48
                                                                                                                  13 December 2010



Exhibit 64: Salix Xifaxan Revenue Forecast Summary
USD in millions, unless otherwise stated
                                           2008        2009      2010E      2011E      2012E      2013E      2014E       2015E
Share of Sales By Indication
Travelers Diarrhea                             5%          5%        2%         1%          1%         1%         1%          1%
Hepatic encephalopathy (HE)                   35%         35%       42%        31%         27%        27%        28%         30%
Crohns                                        15%         15%        9%         6%          4%         4%         3%          3%
IBS - off label                               20%         20%       34%        21%         14%        12%        10%          9%
IBS- incremental from label                    0%          0%        0%        33%         47%        52%        53%         52%
IBS                                           20%         20%       34%        53%         61%        63%        63%         61%
Other                                         25%         25%       12%         8%          6%         6%         5%          5%
Total Xifaxan                                100%        100%      100%       100%        100%       100%       100%        100%

Sales By Indication
Travelers Diarrhea                              $4.0     $5.9       $6.2       $6.5       $6.7       $6.9        $7.1        $7.3
   % growth                                            47.6%       5.0%       5.0%       3.0%       3.0%        3.0%        3.0%
Hepatic encephalopathy (HE)                     28.0     41.3      105.7      141.3      185.4      238.4       316.0       393.0
   % growth                                            47.6%     156.0%      33.7%      31.2%      28.6%       32.6%       24.4%
Crohns                                          12.0      17.7       21.2       25.5       29.3       32.2        35.4        37.2
   % growth                                            47.6%      20.0%      20.0%      15.0%      10.0%       10.0%        5.0%
IBS - total                                     16.0     23.6       84.7      241.0      421.8      565.0       698.4       792.7
   % growth                                            47.6%     259.1%     184.5%      75.0%      34.0%       23.6%       13.5%
Other                                           20.0     29.5       31.0       37.2       42.7       49.1        56.5        65.0
   % growth                                            47.6%       5.0%       5.0%       5.0%       5.0%        5.0%        5.0%
Total Xifaxan                                $79.9     $117.9     $248.7     $451.4     $685.9     $891.6    $1,113.4    $1,295.3
   % growth                                             47.6%    110.9%      81.5%      51.9%      30.0%      24.9%       16.3%

Probability Adjustments
Travelers Diarrhea                           100%        100%      100%       100%        100%      100%        100%        100%
Hepatic encephalopathy (HE)                  100%        100%      100%       100%        100%      100%        100%        100%
Crohns                                       100%        100%      100%       100%        100%      100%        100%        100%
IBS                                          100%        100%      100%        94%         92%       92%         92%         91%
Other                                        100%        100%      100%       100%        100%      100%        100%        100%

Probability Adjusted Sales
Travelers Diarrhea                            $4.0       $5.9       $6.2       $6.5       $6.7       $6.9        $7.1        $7.3
Hepatic encephalopathy (HE)                   28.0       41.3      105.7      141.3      185.4      238.4       316.0       393.0
Crohns                                        12.0       17.7       21.2       25.5       29.3       32.2        35.4        37.2
IBS                                           16.0       23.6       84.7      226.2      389.4      518.8       639.3       724.8
Other                                         20.0       29.5       31.0       37.2       42.7       49.1        56.5        65.0
Total Xifaxan                                $79.9     $117.9     $248.7     $436.6     $653.5     $845.4    $1,054.4    $1,227.3
% growth                                               47.6%     110.9%      75.5%      49.7%      29.4%       24.7%       16.4%
Source: Company data, Credit Suisse estimates




Specialty Pharmaceuticals                                                                                                        49
Specialty Pharmaceuticals




                            Exhibit 65: Salix Income Statement Forecast
                            USD in millions, unless otherwise stated
                                                                                                                                 2010
                                                                                                             Mar-10       Jun-10      Sep-10      Dec-10
                                                                       FY 2007     FY 2008      FY 2009       1QA          2QA         3QA         4QE         FY 2010      FY 2011      FY 2012      FY 2013      FY 2014      FY 2015
                                        Product Sales                      232.9       178.8        232.9         44.1         93.8       80.6       116.7         335.2        604.6        852.3      1,100.4      1,359.4      1,581.0
                                        Other Revenue                        2.9         0.0          0.0          0.0          0.0        0.0          0.0          0.0          0.0          0.0          0.0          0.0          0.0
                                    Total Revenues                        $235.8      $178.8       $232.9       $44.1        $93.8       $80.6      $116.7        $335.2       $604.6       $852.3     $1,100.4     $1,359.4     $1,581.0
                                        Cost of products sold               55.0        36.7         52.0          9.8         17.2       14.5         21.5         63.0        102.3        127.6        160.5        183.6        186.3
                                    Gross Profit                          $180.8      $142.1       $180.9       $34.3        $76.6       $66.1       $95.2        $272.2       $502.3       $724.7       $939.9     $1,175.8     $1,394.8
                                        License fees                         1.9         7.1          0.5         0.0          0.0         0.0          0.0          0.0          0.0          0.0          0.0          0.0          0.0
                                        SG&A                                86.5        95.1        120.0        36.5         40.8        39.4         33.3        150.0        210.1        245.7        307.7        324.3        328.7
                                        R&D                                 71.9        76.6         89.0        18.8         23.0        19.7         23.5         85.0         89.3         93.7         96.5         99.4        102.4
                                    EBITDA                                 $22.5      ($33.7)      ($25.6)      ($20.2)      $13.5        $7.7       $39.2         $40.2      $208.4       $391.8       $544.8       $764.5       $980.1
                                        Depreciation (incl. above)           2.0         3.1          3.0          0.8         0.7         0.7         0.8           3.0         5.4          6.6          9.1         12.4         16.5
                                        Amortization                         8.6         9.9         11.5          2.8         2.8         2.5         3.1          11.2        11.2         11.2         11.2         11.2         11.2
                                    Operating Profit (Loss)                $11.9      ($46.7)      ($40.1)      ($23.8)      $10.0        $4.5       $35.3         $26.0      $191.8       $374.0       $524.5       $740.9       $952.4
                                        Interest & Other Income,net          3.3        (1.1)        (5.5)        (1.4)        (1.4)      (0.7)        (0.6)        (4.0)       (24.9)       (25.2)       (24.0)       (19.5)        (6.4)
                                    Pretax Income                          $15.2      ($47.7)      ($45.6)      ($25.2)       $8.6        $3.8       $34.7         $22.0      $166.9       $348.7       $500.5        $721.4      $946.0
                                        Income tax expense                   7.0        (0.1)        (2.0)         0.0         0.2         0.5         0.7           1.4        30.5        132.5        190.2         274.1       359.5
                                    Net Income (Loss)                       $8.2      ($47.6)      ($43.6)      ($25.2)       $8.4        $3.3       $34.0         $20.6      $136.3       $216.2       $310.3       $447.3       $586.5
                                    Average Shares (Diluted)                48.7        47.9        49.35         56.4         65.1       65.1         66.0         58.7         66.0         73.4         71.0         66.9         62.3
                                    Earnings Per Share                     $0.17      ($0.99)      ($0.88)      ($0.45)      $0.13       $0.05       $0.54         $0.35        $2.15        $3.21        $4.63        $6.93        $9.48

                                    Margin Analysis
                                    Gross margin                          76.7%       79.5%        77.7%        77.8%       81.7%       82.0%        81.6%        81.2%        83.1%        85.0%        85.4%        86.5%        88.2%
                                    SG&A as % of sales                    36.7%       53.2%        51.5%        82.9%       43.5%       48.9%        28.5%        44.8%        34.8%        28.8%        28.0%        23.9%        20.8%
                                    R&D % sales                           30.5%       42.9%        38.2%        42.6%       24.6%       24.5%        20.1%        25.4%        14.8%        11.0%         8.8%         7.3%         6.5%
                                    Operating margin                       5.0%      (26.1%)      (17.2%)      (54.0%)      10.7%        5.6%        30.2%         7.8%        31.7%        43.9%        47.7%        54.5%        60.2%
                                    Pre-tax margin                         6.4%      (26.7%)      (19.6%)      (57.2%)       9.2%        4.8%        29.8%         6.6%        27.6%        40.9%        45.5%        53.1%        59.8%
                                    Tax rate, effective                   45.8%        0.2%         4.4%        (0.0%)       2.6%       13.5%         2.0%         6.5%        18.3%        38.0%        38.0%        38.0%        38.0%
                                    Net margin                             3.5%      (26.6%)      (18.7%)      (57.2%)       9.0%        4.1%        29.2%         6.1%        22.5%        25.4%        28.2%        32.9%        37.1%

                                    Year/Year Changes
                                    Sales                                            (24.2%)       30.3%        (1.6%)      79.5%       22.8%        66.2%        43.9%        80.4%        41.0%        29.1%        23.5%        16.3%
                                    Gross profit                                     (21.4%)       27.3%        (1.7%)      87.7%       26.1%        80.5%        50.5%        84.5%        44.3%        29.7%        25.1%        18.6%
                                    SG&A                                               9.9%        26.2%        46.0%       40.6%       33.1%        (8.6%)       25.0%        40.1%        17.0%        25.2%         5.4%         1.4%
                                    R&D                                                6.5%        16.1%        (6.6%)       0.8%      (24.5%)       18.0%        (4.5%)        5.0%         5.0%         3.0%         3.0%         3.0%
                                    Operating profit                                (493.7%)          NM           NM          NM          NM           NM           NM       637.9%        95.0%        40.2%        41.3%        28.6%
                                    Net income                                      (678.8%)          NM           NM          NM          NM           NM           NM       562.7%        58.6%        43.5%        44.1%        31.1%
                                    Earnings per share                              (688.2%)          NM           NM          NM          NM           NM           NM       512.5%        49.3%        44.3%        49.8%        36.9%


                            Source: Company data, Credit Suisse estimates.




                                                                                                                                                                                                                                             13 December 2010
50
Specialty Pharmaceuticals




                            Exhibit 66: Salix Balance Sheet Forecast
                            USD in millions, unless otherwise stated
                                                                                                                                                 2010
                                                                                                                            Mar-10      Jun-10          Sep-10      Dec-10
                                                                                       FY 2007     FY 2008     FY 2009       1QA         2QA             3QA         4QE        FY 2010     FY 2011     FY 2012     FY 2013     FY 2014     FY 2015

                                Current Assets
                                Cash and Cash Equivalents                                $111.3      $120.2      $192.5       $198.0      $461.2          $491.5      $539.0      $539.0      $672.7      $892.8       $862.2    $1,297.7    $1,430.0
                                Accounts Receivable, net                                   52.2        40.5        98.2         55.5       112.5            95.4       127.9       127.9       185.2        233.5       301.5       372.4       433.2
                                Inventories, net                                           17.7        17.3        24.3         28.7        30.9            24.0        35.4        35.4        45.2         52.5        66.0        75.4        76.6
                                Prepaid expenses and other current assets                  14.2         8.3        10.9         13.5         9.4            13.5        14.0        14.0        20.3         25.6        33.0        40.8        47.4
                                  Total Current Assets                                   $195.4      $186.2       326.0       $295.7      $614.0          $624.3      $716.3      $716.3      $923.4     $1,204.3    $1,262.7    $1,786.3    $1,987.2

                                Long-term assets
                                Property, Plant and Equipment, net                         $5.9        $4.8        $5.3         $6.2        $5.8            $7.6        $9.1        $9.1        $12.8       $19.0       $26.4       $34.3       $41.5
                                Restricted Cash                                             0.0        15.0        15.0         15.0         0.0             0.0         0.0         0.0          0.0         0.0         0.0         0.0         0.0
                                Goodwill                                                   86.4        85.3        85.3         85.3        85.3            85.3        85.3        85.3         85.3        85.3        85.3        85.3        85.3
                                Product Rights and intangibles, net                       105.7       106.8       109.6        106.8        74.0            71.5        68.4        68.4         57.2        46.0        34.8        23.6        12.4
                                Other assets                                                3.8         2.3         1.8          1.7         9.5             9.1         4.7         4.7          6.8         8.5        11.0        13.6        15.8
                                Total Assets                                             $397.1      $400.5       543.0       $510.6      $788.6          $797.7      $883.8      $883.8     $1,085.4    $1,363.1    $1,420.1    $1,943.1    $2,142.1
                                LIABILITIES AND SHAREHOLDERS' EQUITY
                                Current liabilities
                                Accounts Payable                                          $11.9       $10.1       $15.6        $17.0       $14.0           $14.3       $23.6       $23.6       $30.1       $38.5       $48.4       $55.3       $56.1
                                Accrued Liabilities                                        20.6        27.4        60.0         43.6        49.8            49.0        93.4        93.4       135.2       170.5       220.1       271.9       316.2
                                Reserve for product returns, rebates and chargebacks       53.0        34.0        32.0         30.8        37.6            42.9        42.9        42.9        42.9        42.9        42.9        42.9        42.9
                                Current portion of capital lease obligations                1.0         0.8         0.8          0.7         0.6             0.5         0.5         0.5         0.5         0.5         0.5         0.5         0.5
                                 Total Current Liabilities                                $86.5       $72.4       108.5        $92.1      $102.0          $106.8      $160.4      $160.4      $208.8      $252.4      $311.9      $370.6      $415.8

                                Long-term liabilities
                                Convertible senior notes                                   $0.0       $44.8       $47.3        $48.0      $315.3          $319.3      $323.3      $323.3      $340.2      $358.1      $317.0      $334.0        $0.1
                                Borrowings under credit facility                           15.0        15.0        15.0         15.0         0.0             0.0         0.0         0.0         0.0         0.0         0.0         0.0         0.0
                                Lease incentive obligations                                 2.4         2.1         1.7          1.6         1.5             1.4         1.4         1.4         1.4         1.4         1.4         1.4         1.4
                                Long term portion of capital lease obligations              0.6         0.8         0.5          0.4         0.3             0.2         0.2         0.2         0.2         0.2         0.2         0.2         0.2
                                Other long term liability                                   0.0         0.0         0.0          0.0         0.0             0.0         0.0         0.0         0.0         0.0         0.0         0.0         0.0
                                  Total Long-Term Liabilities                             $18.0       $62.7        64.5        $65.0      $317.1          $320.9      $324.9      $324.9      $341.8      $359.7      $318.6      $335.6        $1.7

                                Shareholders' equity
                                Preferred Stock                                            $0.0        $0.0         $0.0        $0.0        $0.0            $0.0        $0.0        $0.0        $0.0        $0.0        $0.0         $0.0        $0.0
                                Common Stock                                                0.0         0.0          0.1         0.1         0.1             0.1         0.1         0.1         0.1         0.1         0.1          0.1         0.1
                                Additional paid-in capital                                397.3       417.7        565.9       574.6       614.1           617.5       617.5       617.5       617.5       617.5       617.5        617.5       617.5
                                Accumulated Deficit                                      (104.7)     (152.3)      (196.0)     (221.2)     (244.8)         (247.5)     (219.1)     (219.1)      (82.8)      133.5       172.0        619.3     1,107.1
                                Total Shareholders' Equity                               $292.6      $265.4        370.0      $353.5      $369.4          $370.1      $398.5      $398.5      $534.8      $751.0      $789.6     $1,236.9    $1,724.6

                                Total Liabilities and Shareholders' Equity               $397.1      $400.5       543.0       $510.6      $788.6          $797.7      $883.8      $883.8     $1,085.4    $1,363.1    $1,420.1    $1,943.1    $2,142.1

                            Source: Company data, Credit Suisse estimates.




                                                                                                                                                                                                                                                        13 December 2010
51
Specialty Pharmaceuticals




                            Exhibit 67: Salix Cash Flow Statement Forecast
                            USD in millions, unless otherwise stated
                                                                                                                                                      2010
                                                                                                                                 Mar-10      Jun-10          Sep-10      Dec-10
                                                                                          FY 2007      FY 2008      FY 2009       1QA         2QA             3QA         4QE        FY 2010      FY 2011      FY 2012      FY 2013      FY 2014     FY 2015
                            Statement of Cash Flows
                            Cash From Operating Activities
                            Net Income (Loss)                                                 $8.2        ($47.6)      ($43.6)     ($25.2)     ($23.6)          ($2.7)      $28.4       ($23.1)     $136.3       $216.2        $38.6       $447.3      $487.7
                              Adjustments to Net Income
                                 Depreciation and Amortization                                10.6         13.0         14.5          3.6         3.5             3.2         3.9        14.2         16.6         17.8         20.3         23.6         27.7
                                 Amortization of debt discount                                 0.0          0.6          2.5          0.7         1.8             4.0         4.0         9.2         16.9         17.9         18.9         17.0         11.2
                                 Stock-based compensation expense                              3.7          4.8          6.4          2.1         2.0             3.0         0.0         7.0          0.0          0.0          0.0          0.0          0.0
                                 Other Non cash items                                          0.0          0.0         (0.0)         0.0        30.0             0.0         0.0        30.1          0.0          0.0          0.0          0.0          0.0
                                 Changes in operating assets and liabilities
                                   Accounts receivable, inventory, prepaid expenses an        11.3          22.6        (66.9)       36.0       (54.7)           20.4       (44.4)      (42.7)       (73.4)       (60.9)       (88.9)       (88.2)      (68.5)
                                   Accounts payable and accrued liabilities                    5.1           4.4         32.7       (15.1)        3.1            (0.6)       53.6        41.0         48.4         43.6         59.5         58.8        45.1
                                   Reserve for product returns, rebates and chargeback        37.2         (18.6)        (2.0)       (1.3)        6.8             5.3         0.0        10.9          0.0          0.0          0.0          0.0         0.0
                            Net Cash From Operations                                         $76.2        ($20.9)      ($56.3)       $0.8      ($31.1)          $32.6       $45.5       $47.8       $144.8       $234.6        $48.4       $458.4      $503.3

                            Cash From Investing Activities
                                Purchases of property and equipment                            (2.4)        (0.9)        (2.9)       (1.6)       (0.4)           (2.6)       (2.3)       (6.9)        (9.1)       (12.8)        (16.5)      (20.4)      (23.7)
                                Purchase of product rights, intangibles and other asset       (55.0)       (11.0)        (9.3)        0.0         0.0             0.0         0.0         0.0          0.0          0.0           0.0         0.0         0.0
                                Increase in other non-current assets                           (2.1)         0.0          0.0         0.0         0.0             0.0         4.4         4.4         (2.1)        (1.8)         (2.5)       (2.6)       (2.2)
                                Decrease in restricted cash                                     0.0        (15.0)         0.0         0.0        15.0             0.0         0.0        15.0          0.0          0.0           0.0         0.0         0.0
                            Cash From Investing Activities                                   ($59.4)      ($26.9)      ($12.1)      ($1.6)      $14.6           ($2.6)       $2.0       $12.5       ($11.2)      ($14.5)       ($19.0)     ($23.0)     ($25.9)
                            Cash from Operating and Investing Activities                      $16.7       ($47.7)      ($68.5)      ($0.8)     ($16.5)          $30.0       $47.6       $60.3       $133.6       $220.1         $29.5      $435.4      $477.3

                            Cash From Financing Activities
                                Proceeds from offering of common stock                         0.0          0.0        128.4          0.0         0.0             0.0         0.0         0.0           0.0          0.0          0.0         0.0          0.0
                                Proceeds from issuance of common stock upon exercis            3.0          0.2         13.6          6.6         4.9             0.0         0.0        11.5           0.0          0.0          0.0         0.0          0.0
                                Borrowing under credit facility                               15.0          0.0          0.0          0.0       (15.0)            0.0         0.0       (15.0)          0.0          0.0          0.0         0.0          0.0
                                Net proceeds from convertible senior note offering             0.0         57.3          0.0          0.0       345.0             0.0         0.0        (9.2)        (16.9)        (0.0)       (60.0)        0.0       (345.0)
                                Principal payments on capital lease obligations               (0.0)        (1.2)        (1.0)        (0.3)       (0.2)           (0.1)        0.0        (0.6)          0.0          0.0          0.0         0.0          0.0
                                Debt issuance costs                                            0.0          0.0          0.0          0.0       (10.8)            0.0         0.0       (10.8)          0.0          0.0          0.0         0.0          0.0
                                Purchase of call options                                       0.0          0.0          0.0          0.0       (44.3)            0.0         0.0       (44.3)          0.0          0.0          0.0         0.0          0.0
                                Excess tax benefit (expense) from stock-based compen           0.1          0.3         (0.3)         0.0         0.1             0.4         0.0         0.4           0.0          0.0          0.0         0.0          0.0
                            Net Cash From Financing Activities                               $18.1        $56.6       $140.8         $6.3      $279.7            $0.2        $0.0      $286.2          $0.0        ($0.0)      ($60.0)       $0.0      ($345.0)

                            Net Cash flow from exchange rate changes                            0.0          0.0          0.0         0.0         0.0             0.0         0.0          0.0          0.0          0.0          0.0          0.0         0.0

                              Increase/(decrease) in cash and cash equivalents                34.8          8.9         72.4          5.5       263.2            30.2        47.6       346.5        133.6        220.1        (30.5)        435.4       132.3
                              Beginning cash balance                                          76.5        111.3        120.2        192.5       198.0           461.2       491.5       192.5        539.0        672.7        892.8         862.2     1,297.7
                            Ending cash balance                                             $111.3       $120.2       $192.5       $198.0      $461.2          $491.5      $539.0      $539.0       $672.7       $892.8       $862.2      $1,297.7    $1,430.0
                              Average cash balance                                           $93.9       $115.7       $156.3       $195.3      $329.6          $476.4      $515.3      $365.8       $605.9       $782.7       $877.5      $1,079.9    $1,363.8




                            Source: Company data, Credit Suisse estimates.




                                                                                                                                                                                                                                                                  13 December 2010
52
                                                                                                                                                                  13 December 2010




                                                                                                                                                      Americas / United States
                                                                                                                                                     Specialty Pharmaceuticals




                                                                             Endo Pharmaceuticals (ENDP)
Rating                                                     NEUTRAL*
Price (10 Dec 10, US$)                                          36.44
Target price (US$)                                             40.00¹
52-week price range                                     37.13 - 19.51        Initiating with Neutral Rating and $40 TP
Market cap. (US$ m)                                         4,212.11
Enterprise value (US$ m)                                    4,907.26         ■   Initiating coverage with a Neutral rating and $40 target price.
*Stock ratings are relative to the relevant country benchmark.
¹Target price is for 12 months.                                              ■   Investment Case: We have a Neutral rating on ENDP because (1) ENDP’s
                                                 Research Analysts               acquisition-driven revenue growth and EPS accretion are impressive in the
                                           Michael Faerm                         near term, but hold sustainability risk; (2) recent acquisitions will create
                                            212 538 1771                         beneficial revenue diversification, but at the cost of margin degradation,
                           michael.faerm@credit-suisse.com
                                                                                 which we think is underappreciated; and (3) ENDP’s unfavorable balance of
                                                                                 pipeline launches and patent expiries will hinder organic growth and holds
                                                                                 downside risk in the stock price.
                                                                             ■   Key risks for ENDP include, to the downside, (1) sooner than expected
                                                                                 generic competition for Lidoderm (30 month stay expires 7/15/2012 versus
                                                                                 Oct. 27, 2015 patent expiration) or Opana ER; (2) approval risk around late
                                                                                 stage pipeline products including Opana TR and Fortesta; (3) integration risk
                                                                                 related to Qualitest and Healthtronics acquisitions. To the upside, approval
                                                                                 of Opana TR (we assume 80% probability, and approval adds $4-$5/share to
                                                                                 our DCF valuation).
                                                                             ■   Catalysts: ENDP’s stock price is most sensitive to events involving pipeline
                                                                                 progress. Opana TR has a 1/7/2011 PDUFA date. Fortesta has a
                                                                                 12/30/2010 PDUFA date, and Endo is expected to report Phase III data on
                                                                                 Octreotide implant in acromegaly by year end.
                                                                             ■   Valuation: Our $40 target price is a 50/50 blend of discounted cash flow
                                                                                 (DCF) analysis and relative P/E multiple valuation. Our DCF value is $40
                                                                                 based on an 10% discount rate and 1% perpetuity growth rate. Our relative
                                                                                 valuation is $40 based on a 9.7x 2011 P/E ratio, which assumes ENDP will
                                                                                 trade at a 20% discount to the group, which will trade at a 10% discount to
                                                                                 the S&P.


Share price performance                                                      Financial and valuation metrics
           Daily De c 14, 2 009 - Dec 10, 2010, 12/14/09 = US$19.81          Year                                              12/09A          12/10E        12/11E        12/12E
 38                                                                          EPS (CS adj.) (US$)                                  2.84           3.37           4.15         4.54
 33                                                                          Prev. EPS (US$)                                        —               —             —             —
 28                                                                          P/E (x)                                              12.8           10.8            8.8           8.0
 23
 18
                                                                             P/E rel. (%)                                         72.6           75.4           70.1         72.6
                                                                             Revenue (US$ m)                                   1,460.8        1,704.1        2,264.8      2,404.8
  Dec-09          Mar-10            Jun-10          Sep-10
                                                                             EBITDA (US$ m)                                      536.7          659.7          827.7        898.0
                 Price                          Indexed S&P 500
                                                                             OCFPS (US$)                                          2.51           3.13           6.16         5.33
On 12/10/10 the S&P 500 index closed at 1240.4                               P/OCF (x)                                             8.2           11.6            5.9           6.8
                                                                             EV/EBITDA (current)                                   7.1             7.4           5.1           4.1
                                                                             Net debt (US$ m)                                     -387            695             31         -521
                                                                             ROIC (%)                                            31.53          17.73          26.07        28.66
Quarterly EPS                    Q1           Q2            Q3         Q4    Number of shares (m)                             115.59     IC (12/10E, US$ m)              2,900.20
2009A                           0.67         0.73          0.63       0.81   BV/share (current, US$)                            14.9     EV/IC (x)                             1.7
2010E                           0.74         0.81          0.86       0.96   Net debt (current, US$ m)                         695.1     Dividend (12/09A, US$)                 —
2011E                           0.97         1.09          1.02       1.07   Net debt/tot. cap. (current, %)                    16.5     Dividend yield (%)                     —
                                                                             Source: Company data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                                                                                      53
                                                                                                        13 December 2010




Investment Summary
We are initiating coverage of Endo Pharmaceuticals (ENDP) with a Neutral rating
and a 12 month target price of $40.
We believe Endo has several positives as an investment story, but we also have several
concerns, which on balance lead us to a Neutral rating. Our investment thesis is threefold.

■   Roll-Up Driven Growth Is Impressive for Now, but Holds Future Risk: Endo has
    executed an impressive string of acquisitions in the past year, but the company is
    becoming increasingly dependent on acquisitions to drive growth, which makes future
    earnings less visible and predictable than a more organically driven company.

■   Acquisitions Have Nicely Diversified the Revenue Base, but at the Cost of
    Margin Degradation: Two of Endo’s key acquisitions in 2010, Healthtronics and
    Qualitest, have reduced Endo’s dependence on the risks of the branded
    pharmaceutical business and added their own strategic benefits. However these
    businesses bring substantially lower margins, and in our model they contribute to a
    gross margin decline from 75.6% in 2010 to 68.6% in 2015.

■   The Balance of Pipeline Launches and Patent Expirations Is Unfavorable, and
    Holds Downside Risk to the Stock Price: Endo is facing two large, relatively near-
    term patent cliffs (Lidoderm in 2015 and Opana ER in 2011 and 2013). These two
    drugs account for 60% of our 2010 estimated revenues. If all goes well with the new
    Opana TR (unofficial name for Endo’s tamper-resistant form of oxymorphone), and
    Endo is able to launch it in advance of the Opana ER expirations, Endo may stave off
    a substantial chunk of erosion. However, any missteps or surprises in this matter could
    entail substantial downside to the stock price; furthermore, the remainder of the
    pipeline is inadequate to drive meaningful organic growth in the face of the Lidoderm
    patent cliff.

Endo’s Recent Acquisitions Have Been Impressive,
but the Reliance on Inorganic Growth Is Risky
We forecast strong double-digit revenue growth in 2010-2011 (Exhibit 68), and double-
digit EPS growth in 2010-2012. (Exhibit 69.)

Exhibit 68: Strong Revenue Growth in 2011 Is Acquisition Driven and Levels Off
USD in millions except EPS, unless otherwise noted

                                                  ENDP - Annual Sales Trends
                                $3,000               6 year sales CAGR of
                                                     10.6% from 2009-2015                      $2,681
                                                                                      $2,627

                                                                    $2,405   $2,496
                                $2,500
          Annual Sales ($ M )
                           M




                                                           $2,265



                                $2,000
                                                  $1,704

                                         $1,461
                                $1,500




                                $1,000
                                         2009A    2010E    2011E    2012E    2013E    2014E    2015E


Source: Company data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                            54
                                                                                                                                                                13 December 2010



Exhibit 69: Endo Estimates, Credit Suisse versus Consensus
USD in millions except EPS, unless otherwise noted

                             ENDP                                  2009             2010E              2011E             2012E              2013E             2014E
                         Total Revenue - CS                       $1,460.8          $1,704.1           $2,264.8          $2,404.8          $2,496.0           $2,627.3
                 Total Revenue - consensus                        $1,460.8          $1,671.0           $2,269.6          $2,424.5          $2,374.2           $2,445.9
                                  Difference                         $0.0             $33.1               ($4.8)          ($19.7)           $121.8             $181.4
                       Revenue Growth - CS                                           16.7%              32.9%              6.2%               3.8%              5.3%
                        Gross Margin % - CS                         79.4%            75.6%              70.0%             69.9%             68.6%              68.0%
                Gross Margin % - consensus                          79.4%            76.2%              70.4%             70.2%             70.4%              69.9%
                                  Difference                        (0.0%)            (0.6%)             (0.4%)            (0.3%)            (1.8%)             (1.9%)
                    Operating Margin % - CS                         34.0%            36.0%              33.2%             33.9%             32.1%              31.4%
             Operating Margin % - consensus                         35.6%            37.7%              35.9%             36.0%             34.2%              35.1%
                                  Difference                        (1.6%)            (1.8%)             (2.7%)            (2.0%)            (2.1%)             (3.7%)
                                   EPS - CS                          $2.84            $3.37              $4.15             $4.54              $4.45             $4.59
                           EPS - consensus                           $2.27            $3.35              $4.20             $4.58              $4.41             $4.49
                                  Difference                         $0.57            $0.02             ($0.05)           ($0.04)             $0.04             $0.10
                           EPS Growth - CS                                           18.6%              23.2%               9.3%             (2.1%)              3.2%
Source: Company data, FACTSET, Credit Suisse estimates.

Endo’s 2010 guidance is summarized in Exhibit 70

Exhibit 70: ENDP – Financial and Operating Guidance
Company        Sales Guidance                                    EPS Guidance                               Other Variables

Endo           2010:                                             2010 EPS: $3.35 - $3.40 adjusted diluted   2010:
               Total Revenues: ~ $1.7 billion from $1.63 Bn to   (raised $0.05 at December 1 - Qualitest    Tax rate: 32-33%
               $1.68 Bn (December 1 - Qualitest closing)         closing)                                   Operating Cash Flow - greater than $400 MM
               Healthcare reform impact: $20 MM                  2010 GAAP EPS: $1.66 - $1.74 ($1.89 -      Minority Interest - $15 MM/Q in 3Q and 4Q
               LIDODERM - low single-digit growth                $1.96 GAAP, diluted previously)            Guidance per Qualitest deal -
               2011 Revenue - $2.2 - $2.3 billion                2011 EPS: $4.15 - $4.25                    Combined generics business sales grow at least 15% CAGR 2010-2012
                                                                 2011 GAAP EPS - $2.42 to $2.52             25 product launches expected in 2011-12
                                                                                                            Combined company 70% gross margin
                                                                                                            Generic revenue >$500 MM for 2011
                                                                                                            $30 MM synergies in 2013
                                                                                                            Pro forma tax rate remains 32-33% per standalone
                                                                                                            Acquisition debt expected to have all-in cost of approx 5%
                                                                                                            3Q- Expenses - $12 MM higher than 2Q, R&D high for ongoing clinical
                                                                                                            programs and regulatory FDA filing expenses. Gross margin will dip slightly
                                                                                                            as compared to 2Q - due to 1st full quarter of HTRN revenues.
                                                                                                            2011:
                                                                                                            Tax rate: ~30%
                                                                                                            Gross Margin - 70%
                                                                                                            SG&A - as % of sales, decline slightly YoY; YoY +20% due to acquistions
                                                                                                            R&D - as % of sales , decline modestly YoY; YoY +30%, reflective of
                                                                                                            thinking, invest in R&D to grow organically
                                                                                                            Guidance per Qualitest deal -
                                                                                                            Combined generics business sales grow at least 15% CAGR 2010-2012
                                                                                                            25 product launches expected in 2011-12
                                                                                                            Combined company 70% gross margin
                                                                                                            Generic revenue >$500 MM for 2011
                                                                                                            Purchase of PPE - $85-$90 MM from HTRN and Qualitest acquistions, with ab
                                                                                                            2012:
                                                                                                            Company expects modest YoY decline in SG&A




Source: Company data, Credit Suisse estimates



Healthtronics and Qualitest Bring Strategic Assets and Demonstrate Endo’s
Dealmaking Prowess
Strategically, Both Deals Offer Significant Benefits: Healthtronics deepens Endo’s
franchise in urology, across multiple points of care. Qualitest gives Endo’s small generics
business immediate scale, taking it from about $100 million to over $500 million in annual
revenues. (Exhibit 71.)



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                                                                                                                                                                     13 December 2010



Exhibit 71: Qualitest Brings Immediate Critical Mass to Endo’s Generics Business
USD in millions, unless otherwise noted

                                                                             Endo                         Pro
                                 Revenue                                    Generics Qualitest           Forma
                                 2011 Revenue ($ MM)                         $111     $400               $511
                                  Pipeline
                                 Total ANDA's                                    16            30            46
                                 2011 E Launches                                 2             15            17
                                 2012 E Launches                                 7             1              8
                                 2011-12 E Filings                               8             16            24
Source: Company data, Credit Suisse estimates.

Financially, Both Deals Made a Lot of Sense: Owing to the prices paid, the growth
profiles of the assets, and the low financing costs, both deals will be immediately (and
increasingly over time) accretive (guided by Endo in 2011, HTRN $0.10 and Qualitest
$0.40). Neither deal relies upon synergies to generate this accretion. HTRN will have
minimal cost synergies due to its minimal overlap with Endo’s operations, and Endo
expects a modest $30 MM of synergies by year three (2013) from Qualitest.
Qualitest is the sixth largest generic maker in the United States that focuses on
manufacturing products with a high barrier, including opioid pain drugs and liquids.
HealthTronics brings with it more breadth and depth in urology, a key therapeutic focus for
ENDP, serving as an entry point into the services side of healthcare, and making ENDP a
full service provider for urology practices.
But the Deals Highlight Endo’s Reliance on More Deals to Drive Growth
However, a large portion of this growth is due to Endo’s 2010 acquisitions of Healthtronics
and Qualitest. As shown in Exhibit 72 and Exhibit 73, organic revenues will be nearly flat in
2010-2015 (+3.0% CAGR), while almost all revenue growth comes from the two deals.
Furthermore, these transactions will account for 33.2% of 2015 revenues (from zero in
2009).


Exhibit 72: Nearly All of ENDP’s Revenue Growth Is from                                             Exhibit 73: 33.2% of ENDP’s 2015 Revenue Will Be from
Acquisitions                                                                                        Acquisitions
USD in millions, unless otherwise noted                                                             USD in millions, unless otherwise noted

                 $3,000                                                                               100%


                                                                                                       90%

                 $2,500
                                                                                                       80%


                                                                                                       70%
                 $2,000

                                                                                                       60%
 $ in millions




                 $1,500                                                                                50%


                                                                                                       40%

                 $1,000
                                                                                                       30%


                                                                                                       20%
                  $500

                                                                                                       10%



                    $0                                                                                 0%
                          2009    2010      2011        2012         2013        2014   2015                  2009    2010     2011         2012         2013         2014    2015

                                         Organic revenues   Inorganic revenues                                               Organic revenues   Inorganic revenues

Source: Company data, Credit Suisse estimates                                                       Source: Company data, Credit Suisse estimates

With Endo’s Flattening Organic Growth and Larger Base, the Company’s Need to
Make More (and Larger) Acquisitions to Drive Future Growth Will Intensify: Endo’s
track record of deals this year (Penwest in addition to the aforementioned two) evidences



Specialty Pharmaceuticals                                                                                                                                                            56
                                                                                              13 December 2010


the company’s dealmaking savvy and ability to search outside the box for growth while
adding strategic building blocks. However, these deals were each a perfect storm of
strategic fit, reasonable price, and importantly, extremely low financing costs to boost
accretion. As the need for deals grows in frequency and size, and as Endo’s financial
leverage grows, each of these factors becomes more difficult to reliably attain.
Deals in the Pharmaceutical Space Continue to Become More Intensely
Competitive: As more companies chase fewer deals of scarcer quality, many armed with
excess cheap capital, deals with the financial and strategic fit of HTRN and Qualitest will
become harder to execute.
Financing Costs May Not Always Be as Favorable to an Acquisition Strategy: Endo’s
leverage remains manageable, and the company’s strong cash flow should enable it to
pay down much of its debt readily. However Endo’s cost of acquisition financing could rise
materially from its current extremely low levels (debt at an average of approximately 5%
interest and cash on hand yielding approximately 1% for Qualitest), for any of several
reasons.

■   Larger and/or more frequent deals could raise Endo’s leverage (and thus cost of
    borrowing).

■   More deals could also potentially move the company to use equity to some extent as a
    form of consideration; of course, using stock at a P/E multiple of 10 versus cash at
    1-5% would result in a substantially higher bar for accretion.

■   Credit markets may not maintain the current, friendly low interest environment.
Given These Risks, We’d Prefer a More Organically Driven Growth Story: We believe
that a growth strategy heavily based on continued acquisitions, such as Endo’s, offers
investors less visibility than a more organic grower.

Revenue Diversification Will Be Costly as Margins
Decline
Gross Margins Will Decline from 75.6% to 68.6% from 2010 to 2015: Along with
strategic benefits, the Healthtronics and Qualitest acquisitions bring substantially lower
gross margins than Endo’s branded pharmaceutical business. This margin gap, plus the
disparity between the higher growing acquired assets and the slower growth organic
products, will materially reduce overall gross margins.
We do not believe that this margin risk is adequately appreciated. Our 2013-2014 gross
margins are 1.8-1.9% below consensus estimates. Our forecast is based on a detailed
build of individual product gross margins, and thus captures the impact of mix shifts.




Specialty Pharmaceuticals                                                                                  57
                                                                                                                         13 December 2010



Exhibit 74: Endo’s Annual Operating Income and Margins, 2009A–2015E

                                              ENDP - Annual Operating Income and Margins
                                                Operating Income           Operating Margin     Gross Margin
                                     $1,000                                                                     100.0%

                                      $900
                                               79.4%
                                      $800              75.6%                                                   80.0%
    Annual Operating Income ($ MM)




                                                                   70.0%      69.9%    68.6%   68.0%   68.6%
                                      $700

                                      $600                                                                      60.0%

                                      $500

                                      $400                                                                      40.0%

                                      $300     36.2%    37.4%                 35.9%
                                                                   35.3%               33.9%   33.1%   32.6%
                                      $200                                                                      20.0%

                                      $100

                                        $0                                                                      0.0%
                                                2009A   2010E      2011E      2012E    2013E   2014E    2015E

Source: Company data, Credit Suisse estimates.

Endo’s Pipeline Cannot Scale the Patent Cliffs
Endo’s balance of pipeline launches and patent expirations is unfavorable, and
holds downside risk to the stock price.
Endo is facing two large, relatively near-term patent cliffs (Lidoderm in 2015 and Opana
ER in 2011 and 2013). These two drugs account for 60% of our 2010 estimated revenues.
If all goes well with the new Opana TR (unofficial name for Endo’s tamper-resistant form of
oxymorphone), and Endo is able to launch it in advance of the Opana ER expirations,
Endo may stave off a substantial chunk of erosion. However, if Endo is unable to
successfully execute a switch, there could be substantial downside to the stock price;
furthermore, the remainder of the pipeline is inadequate to drive meaningful organic
growth in the face of the Lidoderm patent cliff. In addition, Watson has initiated a generic
challenge against Lidoderm, with a 30 month stay till July 15, 2012. Thus the possibility
exists for Endo to face generic Lidoderm as early as three years before the Oct. 27, 2015
patent expiration.
By 2015, products accounting for 74% of Endo’s 2010 revenues will be exposed to patent
expiries. In the meantime, product launches will contribute revenues equal to only 32% of
2010 revenues, resulting in a net deficit of 42%. If Endo successfully executes a switch
from Opana ER to Opana TR, then this Opana ER is effectively removed as patent-
exposed revenue, and deficit drops to 27% (Exhibit 75.) This patents/pipeline imbalance
is at the root of Endo’s meager organic growth, and underscores the company’s
acquisition appetite.




Specialty Pharmaceuticals                                                                                                             58
                                                                                                     13 December 2010



Exhibit 75: ENDP Patent Erosion Not Compensated by 2015 Pipeline



                                        ENDP                            ENDP (excl Opana ER)
                         40%
                                31.5%                                  31.5%
                                                     2015 Pipeline
                                                     Patent Expiries
                         20%                         Difference



                          0%
    % of 2010 Revenues




                         -20%


                                                                                           (27.3%)

                         -40%
                                                  (42.0%)


                         -60%
                                                                               (58.8%)


                                        (73.5%)
                         -80%

Source: Company data, Credit Suisse estimates.

Opana ER Patent Cliff Could Be Mitigated by New Tamper Resistant Form; Our
Estimates and Valuation Assume Successful Switching
Opana (oxymorphone) ER is a key franchise for Endo, and faces several potential
generic entrants via settlement agreements, most notably Actavis in July 2011 (with
dose strengths comprising about 10% of the franchise, 7.5 mg and 15 mg), and Impax in
Jan. 2013 with the remaining meaningful -doses. A near term potential cliff on a large and
growing franchise is cause for concern, however Endo may be able to mitigate or even
eliminate generic competition with a successful switching strategy to its new form, tamper
resistant oxymorphone (which we’ll refer to by the unofficial name Opana TR).
Opana ER has been a star performer for Endo, rising from its mid 2006 launch to
$251 million in 2010E revenues. The product continues to grow at a high rate (38% and
39% year over year in the last 2 quarters), and is steadily taking share from Oxycontin
(branded and generic versions), though Oxycontin remains the clear leader. Opana ER’s
success has been driven to a large extent by a strong marketing push by Endo.
Endo is awaiting a Jan. 7, 2011 PDUFA date on Opana TR. The company has already
been notified by the FDA that it will not require an advisory committee as part of its review.
This not only provides some degree of positive signaling on the ultimate FDA decision, but
also increases Endo’s chances of thwarting generic Opana ER entrants.
A window into Endo’s strategy with the Opana franchise may have been opened by
Purdue Pharma, which launched its crush resistant form of Oxycontin (Oxycontin TR) in
June 2010. The company withdrew the NDA on the marketed form, and replaced this
version in the market with the new TR form. The potential benefit to Purdue is that with
the NDA of the old form withdrawn, new generics are prevented from filing ANDAs (since
there is no longer a reference listed drug), and marketed generics are forced to come off t
he market. A logical extension to this thinking is that Endo could benefit from a similar
strategy with Opana TR.
There are different schools of thought about the ultimate success of this strategy.
Some have the view that an NDA holder must justify withdrawing an NDA to the FDA on
grounds of safety or efficacy (i.e. the old form had issues in this regard that the new form



Specialty Pharmaceuticals                                                                                         59
                                                                                                13 December 2010


improves upon). It’s likely that TR opioids will not show greater efficacy than ER forms,
and while the premise for increased safety is plausible, FDA has not yet fully defined the
studies that will be needed to prove abuse resistance benefits to an extent that would
justify labeling.
However, based on our conversations with industry executives and regulatory
experts, we believe that such a strategy could be successful, and Endo could be a
beneficiary.
There is a distinction between suspending marketing and withdrawing an NDA. In
the former scenario, the NDA remains active and generics can still reference it. In the
latter case, the NDA is withdrawn, and any existing generics must come off the market and
new generics cannot file against it. A key point in our view is that an NDA holder is able to
withdraw an NDA without justifying this action on safety or efficacy grounds to the FDA.
Therefore, Endo’s chances of extending its Opana franchise via Opana TR would
seem to be promising. However there are some risks.

■   First, the FDA could reject Opana TR.

■   Second, FDA could delay its decision. FDA decision delays are never shocking, and
    in this product category, with the extensive FDA and industry debate about tamper
    resistant opioids, a delay would not be at all surprising. A long enough delay could
    provide a window for some generic strengths (7.5, 15 mg) to launch while the Opana
    ER NDA is in effect, and not only take major market current market share, but also
    stock the channel with generic supply.

■   Third, the generics with whom Opana has reached settlements would be financially
    harmed should generic Opana ER never come to market, and we would be surprised if
    there were not some financial protections built in to their deals with Endo. Endo has
    not elaborated on the agreement details but has acknowledged that the generic
    settlers have obtained some sort of economic protection.
Taken together, we think the above implies a reasonably high likelihood that Endo
will extend the Opana franchise beyond the ER patent dates, and we model our
forecast accordingly. However in order to account for risks around approval, the
possibility of a generic making it through to market, and the likelihood of some
indeterminate amount and structure of financial recompense to the generic companies
with which Endo has settled, we have made the following modeling assumptions:

■   We assume that Opana ER continues to grow until mid 2011, remaining on the market
    long enough to allow adequate time for the early launch weeks of Opana TR, which
    has a Jan. 7, 2011 PDUFA date, as well as some cushion for any moderate FDA
    delays.

■   Opana TR replaces ER on the market and picks up where ER left off and continues to
    grow the franchise’s share

■   The Opana ER NDA is withdrawn along with the TR launch

■   We assume 80% probability of TR approval

■   As a result our Opana ER/TR franchise revenues grow steadily from $251 MM in 2010
    to $360 MM (risk-adjusted for 80% probability of approval of TR form) in 2015.




Specialty Pharmaceuticals                                                                                    60
                                                                                               13 December 2010




Investment Risks
Lidoderm, accounting for 44% Revenues in 3Q10, Patent Expires in October 2015
and Generic Competition Is One of the Biggest Headline Risks for the Company
Even after the recent business development deals, Lidoderm accounts for about nearly
one-third of 2015 estimated sales. Generic Lidoderm remains one of the main headline
risks for the company. If WPI is allowed to launch a generic version before the patent
expiration in October 2015 or WPI launches at risk prior at the end of the 30-month stay on
July 15, 2012, or there are other generic filers, it will tilt investor sentiment on Endo to
bearishness.
Integration Risk Associated with the Healthtronics and Qualitest Acquisitions
Endo has recently announced two acquisitions and it is vital that Endo integrates both
businesses swiftly and neatly. Recognizing and executing strategic overlaps, extracting
possible synergies, and fully integrating all aspects of the businesses will be crucial to
successful value creation. Integrating two, let alone one business, is a challenging task
and Endo’s progress on this front will be closely watched.
A Patient Facing Service Is Very Different from Drug Manufacturing Business, and It
Remains to Be Seen How Successful Endo Will Be in Catering to All Elements in the
Urology Chain
Management always points to cross synergies on the urology front with the acquisition of
HealthTronics’ services business. However, a patient facing service is a completely
different ball game, and it remains to be seen how successful Endo will be at acquiring this
skill set and then packaging it together with therapeutic drug marketing.
Potential Financial Exposure to Generic Settlement Partners, in the Event Endo
Launches a New Opana TR, and Effectively Blocks the Generic Companies’ Launch
of Generic Opana ER
Endo has reached settlements with generic drug manufacturers, allowing each to enter the
market with generics on different dosages of Opana ER. Per the first-to-file settlements,
Actavis can enter on July 15, 2011, and Impax can enter on January 1, 2013. In the event
that Endo is able to launch Opana TR and remove Opana ER from the market, and such
action results in generic companies being unable to market generic Opana ER, then there
is the risk that Endo could be exposed to financial losses. The settlement agreements are
not disclosed, but there is the possibility that they contemplated such an event and
provided some form of compensation as a contingency to the generic companies. There is
also the potential for litigation by one or all of the generic companies.
Delay in Development or Failure to Obtain FDA Approval of Pipeline Assets
Endo has a very active pipeline, and a delay or setback in development of any of these
assets or failure to obtain FDA approval is a risk to future earnings power of the company.
Unsuccessful Commercialization of Currently Marketed Products
Endo may not be able fully to realize the commercial value of its currently marketed
products owing to supply disruptions, market dynamics, or FDA hold ups, hurting its
top-line growth prospects.
In the Event of Generization of Lidoderm and Opana from 2012 Onward,
Management Will Face Heightened Pressure to Successfully Find Marketable Assets
Through Business Development that Can Be Accretive as Soon as Possible
To decrease dependence on Lidoderm, management needs to continue to tap into
opportunities that will add to the top line right away.




Specialty Pharmaceuticals                                                                                   61
                                                                                                                                                                   13 December 2010




Valuation
Historical Perspective and Stock Drivers
In the past 12 months, ENDP’s stock price has risen more than 50%, moving on business
development announcements, Opana litigation, and pipeline catalysts. We expect
transaction related newsflow, opioid regulatory guidance, Lidoderm ANDA events, and
pipeline-related news to affect the stock price going forward.
Sentiment in the latter part of 2009 was negative owing to the FDA’s complete response
letters for two key pipeline drugs, Fortesta and Aveed. However, higher-than-expected
2010 guidance in February 2010 helped raise the stock price. Endo’s announcement to
acquire HealthTronics received an ambivalent response from the Street in May 2010. But
Endo’s Opana litigation settlement with Impax (allowing a generic launch on January 1,
2013) removed an overhang on the stock.
As the announcement of the Penwest Acquisition contributed to a stock rally, helped with
the news that ENDP’s crush-resistant oxymorphone was granted priority review. Endo’s
announcement to acquire Qualitest, a generics business, in late September has helped
sustain the rally because of the diversification it brings to Endo’s top line, reducing
dependence on Lidoderm sales. Lastly, FDA’s decision to not an advisory committee
panel for Opana TR has somewhat allayed investor fears of a possible delay in FDA
decision.
Clinical data outcomes, business development announcements, FDA decisions, and
expectations thereof seem to be main drivers of stock price movement in ENDP.

Exhibit 76: Stock Price Chart with Key Events—ENDP

                                                                                       ENDP
                                                                                                                                                         Penwest
                                                                                                                                                   shareholders approve
                 $39.00                                                                                                                              merger with Endo
                                                                                                                              Endo acquires
                                                                                                                           Qualitest, a generics
                                                                                                                            company, for $1.2
                                                                                                                                  billion



                 $34.00
                                                                                                                 FDA grants crush-                        Endo
                                                                                                                      resistant                          reports
                                                                                                                   Oxymorphone                            3Q10
                                                                                                                  Priority Review;                       results
                                                                                                                  January 7, 2011
                                                                                                                   PDUDFA date

                 $29.00
   Stock Price




                             FDA issues                                                                                                                            Endo announces
                                                    ENDP gives                                                                                                     FDA's decision to
                              complete             2010 Financial
                           response letter                                                                                                                         not hold Advisory
                                                     Guidance                                                                                                       Committee for
                             for Fortesta                                                                                           ENDP announces
                                                                                                                                       PenWest                      crush resistant
                 $24.00                                                                  Endo to acquire
                                                                                                                                   Acquistion; Reveals              Oxymorphone
                                                                                          HealthTronics
                                                                                                                                   NDA filing of crush
                                                                                                                                        resistant
                                                                                                                                     Oxymorphone


                                                                                                           Endo settles Opana ER litigation
                 $19.00
                             ENDP receives                                                                  with Impax; Impax to launch 5,
                            FDA's complete                                                                 10, 20, 30, 40mg generic tablets
                           response letter for                                                                    on January 1, 2013
                                Aveed



                 $14.00
                      Nov-09     Dec-09          Jan-10     Feb-10   Mar-10   Apr-10   May-10    Jun-10         Jul-10      Aug-10       Sep-10      Oct-10        Nov-10


Source: Company data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                                                                                              62
                                                                                                                     13 December 2010


Short interest (Exhibit 77 and Exhibit 78) in the stock fell drastically after the FDA issued
complete response letters for two key pipeline drugs, Fortesta and Aveed. Heading in to
4Q09 earnings, short interest rose with weak guidance expectations and dropped
dramatically when management guided to a solid 2010. Short interest rose again before
1Q10 earnings and then dropped after a strong quarter and following announcement of the
HealthTronics deal. Short interest increased slightly heading into 2Q10 earnings, but
dropped dramatically after the PenWest acquisition and FDA awarding Opana TR priority
review. Since the announcement of the Qualitest acquisition, short interest has steadily
been rising.

Exhibit 77: Short Interest in ENDP has been Steadily Rising

                                                     ENDP Short Interest Ratio
                          8.0


                          7.0


                          6.0
   Short Interest Ratio




                          5.0


                          4.0


                          3.0


                          2.0


                          1.0


                          0.0
                           11/30/2009   01/29/2010   03/31/2010   05/28/2010   07/30/2010   9/30/2010   11/30/2010


Source: Bloomberg, Company data, Credit Suisse estimates. Short interest ratio is calculated by dividing
the short interest by average 30-day daily volume. The ratio implies the number of days it takes to cover the
outstanding short interest.




Specialty Pharmaceuticals                                                                                                         63
                                                                                                                                                                  13 December 2010



Exhibit 78: Endo’s Short Interest as a Percentage of Outstanding Shares is on the Rise

                                   ENDP Short Interest Expressed as % of Outstanding Shares

                           9%

                           8%

                           7%
    Short Interest Ratio




                           6%

                           5%

                           4%

                           3%

                           2%

                           1%

                           0%
                            11/30/2009   01/29/2010    03/31/2010   05/28/2010       07/30/2010            9/30/2010      11/30/2010


Source: Bloomberg, Company data, Credit Suisse estimates. Short Interest Ratio is calculated by dividing
the short interest by number of outstanding shares. The ratio implies what percentage of outstanding shares
are currently held as short positions.

Our Endo Target Price of $40 Is a Blend of P/E and
DCF Methodologies
We have valued Endo using a 50/50 blend of discounted cash flow (DCF) analysis
and relative multiples of 2011 EPS, in order to capture the merits of each method.
Our target price derivation is summarized in Exhibit 79.

Exhibit 79: Our Blended Target Price Is $40 per Share
                                                                            CS Price Target (1)                   DCF                           Relative Valuation
                                            Current     Rating      Price        Upside/          2011 PT         DCF        Premium/      Relative   Target      2011      Rel. Val.
                                             Price                  Target     (Downside)    Implied P/E          Price     Discount (2)   Multiple   Multiple   EPS Est.    Price
S&P 500, Current                              $1,240
S&P 500, as of 12/3/2010                      $1,225                                                                                                   13.5x     $91.00

Weighting                                                                                                         50%                                                        50%
Branded Specialty Pharma Group                                        ---           ---              ---           ---         (10%)        0.90x      12.1x        ---       ---
ALIM                        $10.29                     Outperform    $16          55.5%             NM            $16                                             $0.27
ENDP                        $36.46                      Neutral      $40          9.7%              9.6x          $40          (20%)        0.80x       9.7x      $4.15       $40
SLXP                        $43.91                     Outperform    $55          25.3%            25.6x          $55                                             $2.15


Source: Company data, Credit Suisse estimates.

We believe that DCF is an appropriate method for valuing branded specialty pharma
companies, as it takes into account the often long product life cycles of these companies.
DCF is particularly relevant at the present time, in that it allows us to look beyond the
impending “patent cliff” – peaking for the industry in 2011-2012 but for Endo in 2015 with
the Lidoderm patent expiry – and value the cash flows before and after the cliff.
We model cash flows to 2020 and calculate a terminal value. We use a 10% discount rate
and a 1% perpetuity growth rate in the terminal value. Although we calculate a weighted
average cost of capital of 8.98% using CAPM, we have elected to use a 10% discount rate
for a more conservative estimate of a return expected by an investor commensurate with
Endo’s risks. Our assumptions and valuation are detailed below in Exhibit 80, and a



Specialty Pharmaceuticals                                                                                                                                                           64
                                                                                                  13 December 2010


sensitivity analysis assuming a range of discount rates and terminal growth rates is shown
in Exhibit 81.

Exhibit 80: ENDP DCF: Assumptions and Valuation Exhibit
$ in millions, except for stock price and unless otherwise stated
Assumptions:                                                    Valuation:
Risk-Free Rate (10 yr UST)                  3.3%                PV Cash Flow 2010-2020   $3,892
Market Risk Premium                         8.0%                PV Terminal Value        $1,746
Beta                                        0.80                Enterprise Value         $5,638
Cost of Equity                              9.7%
MV Equity to Capital                       86.0%                Less: Net Debt/(Cash)     $370
Debt Rate                                   6.5%                Equity Value             $5,268
Tax Rate                                   32.0%
Cost of Debt                                4.4%                Diluted shares (MM)       130.4
MV Debt to Capital                         14.0%                Current Stock Price*     $36.46
WACC                                        9.0%                Equity value per share      $40
Terminal Growth Rate                        1.0%                Upside                     11%
* closing price as of 12/10/2010
Source: Company data, FactSet, Credit Suisse estimates.



Exhibit 81: Our DCF Analysis Values Endo at $40 per Share
                  Discount Rate                      Equity Value per Share (b)
                      (WACC)                      0.0%         1.0%            2.0%
                        8.0%                     $47.20       $49.96         $53.65
                        9.0%                     $42.64       $44.62         $47.17
                       10.0%                     $38.95       $40.41         $42.23
                       11.0%                     $35.90       $37.00         $38.34
                       12.0%                     $33.32       $34.17         $35.18
Source: Company data, Credit Suisse estimates.

In addition, we include a relative P/E component in our valuation due to the common
use of this metric among investors, and also due to the tendency of the specialty pharma
stocks to respond to near-term earnings performance. For our P/E based valuation, we
start by assuming that the branded specialty pharma group will trade at a 10% discount to
the S&P 500, as discussed in our industry note, and then we apply a 20% discount for
ENDP. We base this discount on plummeting earnings in 2016 after the expiration of the
Lidoderm patent, and on acquisition risk, as we think Endo will need to execute more
acquisitions to compensate for its modest organic revenue growth. This 20% discount is
less than Endo’s current 36% discount to the group, based on next twelve months’
earnings (Exhibit 82, Exhibit 83). Current 2011 and 2012 multiples for Endo and
comparable companies are shown in Exhibit 84.




Specialty Pharmaceuticals                                                                                      65
                                                                                                                   13 December 2010



Exhibit 82: Endo Trades below the Branded Specialty Pharma Group
U.S Branded Spec Pharma Sector comprises of AGN, CEPH, ENDP, FRX, KG*, and MRX; *KG until the day of announced acquisition by PFE
                         50.0


                         45.0

                                                          US Branded Spec Pharma Sector
                         40.0
                                                          ENDP

                         35.0                             S&P
    NTM Price/Earnings




                         30.0


                         25.0
                                                                               Average: 20.9x

                         20.0
                                                                                                              Average: 16.1x
                         15.0


                         10.0
                                                                                                                           8.8
                          5.0                                                                            Average: 15.8x


                          0.0
                                01

                                01

                                02

                                02

                                03

                                03

                                04

                                04

                                05

                                 05

                                 06

                                06

                                07

                                07

                                08

                                08

                                09

                                09

                                10

                                10
                              20

                              20

                              20

                              20

                              20

                              20

                              20

                              20

                              20

                              20

                              20

                              20

                              20

                              20

                              20

                              20

                              20

                              20

                              20

                              20
                           1/

                           1/

                           1/

                           1/

                           1/

                           1/

                           1/

                            1/

                            1/

                            1/

                            1/

                            1/

                           1/

                            1/

                           1/

                           1/

                           1/

                           1/

                           1/

                           1/
                         1/

                         7/

                         1/

                         7/

                         1/

                         7/

                         1/

                         7/

                         1/

                         7/

                         1/

                         7/

                         1/

                         7/

                         1/

                         7/

                         1/

                         7/

                         1/

                         7/
Source: FactSet, Company data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                                        66
                                                                                                                                                                                                          13 December 2010



Exhibit 83: Endo Trades at a 36% Discount to the Group
Branded Spec Pharma comprises of AGN, CEPH, ENDP, FRX, KG*, and MRX; *KG until the day of announced acquisition by PFE

                                                          2.00
                                                          1.90
        ENDP Branded Spec Pharma Weighted Relative P/FE




                                                          1.80
                                                          1.70
                                                          1.60
                                                                                                                            ENDP Relative to Branded Spec Pharma
                                                          1.50
                                                          1.40
                                                          1.30
                                                          1.20
                                                          1.10
                                                          1.00
                                                          0.90                                                                                                                   Average: 0.7x
                                                          0.80
                                                          0.70
                                                                                                                                                                                                                      0.64
                                                          0.60
                                                          0.50
                                                          0.40
                                                          0.30
                                                                   01

                                                                   01

                                                                   02

                                                                   02

                                                                   03

                                                                   03

                                                                   04

                                                                  04

                                                                  05

                                                                  05

                                                                  06

                                                                   06

                                                                  07

                                                                  07

                                                                  08

                                                                  08

                                                                  09

                                                                  09

                                                                  10

                                                                  10
                                                                20

                                                                20

                                                                20

                                                                20

                                                                20

                                                                20

                                                                20

                                                                20

                                                                20

                                                                20

                                                                20

                                                                20

                                                                20

                                                                20

                                                                20

                                                                20

                                                                20

                                                                20

                                                                20

                                                               20
                                                             1/

                                                             1/

                                                             1/

                                                             1/

                                                             1/

                                                             1/

                                                             1/

                                                             1/

                                                             1/

                                                             1/

                                                             1/

                                                             1/

                                                             1/

                                                             1/

                                                             1/

                                                             1/

                                                             1/

                                                             1/

                                                             1/

                                                             1/
                                                          1/

                                                          7/

                                                          1/

                                                          7/

                                                          1/

                                                          7/

                                                          1/

                                                          7/

                                                          1/

                                                          7/

                                                          1/

                                                          7/

                                                          1/

                                                          7/

                                                          1/

                                                          7/

                                                          1/

                                                          7/

                                                          1/

                                                          7/
Source: FactSet, Company data, Credit Suisse estimates.



Exhibit 84: Branded Specialty Pharmaceutical Valuation Comparables
*rows highlighted in grey i.e. ENDP and SLXP are Credit Suisse covered stocks and use Credit Suisse estimates
                                                                          Price             Market    Enterprise     Relative Valuation            Relative Valuation     Relative Valuation     Relative Valuation
                                                                             52 week         Cap        Value        2011         2012      EPS    2011        2012       2011        2012       2011         2012
 Ticker Company                                              Current      High     Low      ($ MM)     ($ MM)         P/E         P/E     CAGR % PEG           PEG      EV/Sales    EV/Sales   EV/EBITDA EV/EBITDA      YTD
                                                                                                                CS Branded SpecPharma Index (Equal Weighted)
AGN                Allergan                                      $69.27   $74.94   $55.25   $20,975      $20,073     19.1x        16.6x     14.8   1.3x      1.1x         3.9x        3.6x       11.2x        9.8x     9.9%
CEPH               Cephalon                                       63.23    72.87    55.00     5,044        4,864      7.8x        10.5x      6.0   1.3x      1.8x         1.6x        1.9x        4.3x        5.8x     1.3%
ENDP               Endo                                           36.46    38.20    19.19     4,759        4,368      8.8x         8.0x     11.8   0.7x      0.7x         1.9x        1.8x        5.3x        4.9x    77.7%
FRX                Forest                                         32.68    34.17    24.17     9,395        5,952     8.0x         15.5x     -1.4   -5.6x    -10.9x        1.3x        1.7x        3.9x        7.6x     1.8%
MRX                Medicis                                        27.43    30.94    21.02     1,774        1,294     10.7x        10.5x     10.1   1.1x      1.0x         1.6x        1.5x        4.3x        4.4x     1.4%
SLXP               Salix                                          43.91    46.39    22.47     2,895        2,748     20.9x        13.9x     42.5   0.5x      0.3x         4.6x        3.2x       13.5x        7.1x    72.9%
SHPGY              Shire                                          70.40    74.30    56.21    13,064       13,372     14.8x        13.0x     13.9   1.1x      0.9x         3.5x        3.2x        9.8x        9.1x    19.9%
CS Branded SpecPharma Index (Equal Weighted)                                                                         12.9x        12.6x    14.0x   0.0x        -0.7x      2.6x        2.4x       7.5x         7.0x      26%
CS Branded SpecPharma Index Median (Equal Weighted)                                                                  10.7x        13.0x    11.8x   1.1x        0.9x       1.9x        1.9x       5.3x         7.1x      10%

Source: FactSet, Company data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                                                                                                                                    67
                                                                                                13 December 2010




Takeout Analysis
We have analyzed the potential takeout value of Endo using the following two
methodologies, and the results are shown below in Exhibit 85.
(8) Breakeven acquirer EPS; and
(9) Comparable transactions, focusing on average premiums paid to target stock prices,
    and a multiples-based comparables approach, including LTM mean and median
    multiples for revenue and EBITDA.
With breakeven acquirer EPS, we analyze the maximum price per share that a variety of
potential acquirers could pay for Endo and maintain breakeven 2012 EPS with no
synergies (excluding amortization of transaction-related intangible assets). Some of our
key assumptions in this analysis are as follows:

■   Our analysis is purely financial. We are not opining on the strategic fit of potential
    buyers in the scope of this analysis, and are simply posing a few theoretical buyers as
    illustrative examples.

■   High proportion of cash consideration. We believe that most potential acquirers would
    aim to maximize the extent of cash consideration (and minimize stock) used in the
    deal. Most potential buyers have large cash balances and substantial access to
    inexpensive debt, both of which would be cheaper capital than their relatively low-
    multiple stock. Our model assumes use of cash up to the following caps:
               o    all of the target’s cash and 10% of an acquirer’s cash; then
               o    new debt up to the lesser of 1.5 times pro forma total debt/EBITDA, at an
                    interest rate of 5.0% (which is conservative for many major pharma
                    companies in light of recent debt raises such as MRK’s 10 year bonds at
                    3.875%); or
               o    $10 billion maximum new debt issuance.

■   No synergies. We believe that an acquirer of Endo could potentially realize
    meaningful synergies. However, because synergies could be variable among
    potential buyers, and in order to take a conservative approach to this analysis of
    maximum purchase price, we have not included any potential synergies.
With comparable transaction analysis, we have used a basket of historical specialty
pharmaceutical acquisitions (Exhibit 86), and applied the average and median premiums
and multiples paid in these deals to estimate a potential takeout price for Endo.
As a result of these analyses, we estimate that Endo could be valued at $52 -$56 per
share based on premiums paid; $63 - $75 share based on comparable transaction
multiples; and $55 - $115 per share based on potential acquirer breakeven 2012 EPS
assuming no synergies. However, in part due to access to very cheap capital, many
potential buyers could afford to pay substantially more than that, and this ability to pay
could drive bidding higher. Of course, other considerations such as strategic fit and
available alternatives would be important for any acquirer and could limit a purchase price
to levels below these EPS dilution-driven takeout values.




Specialty Pharmaceuticals                                                                                    68
                                                                                                                       13 December 2010



Exhibit 85: Potential Maximum Price Assuming No Synergies and Based on Comparable Acquisition Multiples
  $125
                    $114.99                               Takeout Analysis

  $100                                           $91.33
                                                                                                 $81.82
                                       $75.88
                              $71.71                                                                      $74.77
    $75                                                                     $68.73
           $55.38                                                                       $62.94
                                                          Current stock price                                               $55.55
                                                                                                                   $52.16
    $50
                                                                $36.46



    $25




     $0
           Abbott Johnson     Pfizer    Lilly    Merck                           Mean   Median   Mean     Median  1 mo.    1 mo.
                     &                                                          LTM rev LTM rev EBITDA    EBITDA Premium Premium
                  Johnson                                                                                         mean    median

                  Based on Potential Acquirer's                                    Based on Comparable Acquisition Multiples
                     Breakeven EPS in 2012

Source: Company data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                                            69
                                                                                                                                                                    13 December 2010



Exhibit 86: Comparable Acquisitions in Branded Specialty Pharmaceuticals
in millions, unless otherwise stated
     DATE                                                                                                                EQUITY   ENTERPRISE               LTM             Premium
  ANNOUNCED           ACQUIRER                                  TARGET                                                   VALUE      VALUE       REVENUES         EBITDA     1 Month

     10/12/10         Pfizer                                    King Pharmaceuticals                                     3,566         $3,377      2.0x           7.8x      52.1%
     09/28/09         Abbott                                    Solvay Pharma                                            6,600         $6,600      1.8x           6.8x       NA
     02/09/09         Lundbeck                                  Ovation Pharma                                              NA           $900      4.4x          20.9x       NA
     01/05/09         Endo Pharmaceuticals                      Indevus Pharmaceuticals                                    370            420     15.9x           NM        66.0%
     09/01/08         Shionogi                                  Sciele Pharma                                            1,099          1,424      3.5x          13.6x      63.3%
     08/22/08         King Pharma                               Alpharma                                                 1,600          1,400      2.0x           NM        47.7%
     10/17/07         Galenica                                  Aspreva                                                    943            915      3.8x           7.2x      37.6%
     12/14/06         Forest Labs                               Cerexa                                                      NA            494      NA             NA         NA
     12/12/06         Indevus Pharmaceuticals                   Valera Pharmaceuticals                                     121            105      5.3x           NM        63.9%
     11/09/06         Private Equity Investors                  3M Pharma Assets                                           875          2,081      2.8x           NA         NA
     11/06/06         Abbott                                    Kos                                                      3,698             NA      4.5x          21.4x      60.2%
     10/23/06         Stiefel                                   Connectics                                                  NA            682      3.8x          19.7x      60.6%
     09/25/06         UCB                                       Schwarz                                                     NA       €€4,148       4.2x           NM        26.5%
     09/21/06         Nycomed                                   Altana Pharma                                               NA        €€4,215      1.8x           6.1x       NA
     12/06/05         Cephalon                                  Zeneus Holdings                                            360            360      4.5x           NA         NA
     11/20/05         Mentor Corp                               Medicis Pharmaceutical Corp                              2,010          1,835      NA             NA        16.4%
     08/08/05         Meda                                      Viatris                                                    696            606      2.0x          15.3x       NA
     07/28/05         Actavis Group hf                          Amide Pharmaceutical Inc                                   500             NA      NA             NA         NA
     07/07/05         Allied Capital Corp                       Spear Pharmaceuticals Inc                                   NA             77      NA             NA        55.7%
     06/23/05         Salix Pharmaceuticals                     InKine Pharmaceuticals                                     184            174      7.4x           NM         NA
     04/19/05         Jazz Pharmaceuticals                      Orphan Medical                                             129            116      4.9x           NM        14.9%
     03/21/05         Medicis                                   Inamed                                                   2,769          2,661      6.9x          30.6x       6.5%
     03/10/05         Nordic Capital                            Nycomed                                                  2,414          2,414      2.8x           NA         NA
     02/02/05         Valeant Pharmaceuticals Intl.             Xcel                                                       236            280      4.6x           NA         NA
     01/25/05         Protein Design Labs                       ESP Pharma                                                 475            489      5.4x          18.1x       NA
     09/18/04         DLJMB / JP Morgan Partners                Warner Chilcott PLC                                      3,029          3,035      6.2x          11.7x      11.1%
     07/26/04         Mylan Laboratories                        King Pharmaceuticals (1)                                 4,030          4,139      2.8x           6.9x       NA
     06/09/04         Bradley Pharmaceuticals                   Bioglan Pharma(2)                                          183            183      3.3x           NA         NA
     05/20/03         Axcan Pharma                              Salix Pharmaceuticals (Terminated)                         236            189      4.9x           NM         NA
     11/29/02         DLJMB                                     Nycomed                                                    644          1,200      2.3x           9.5x       NA
     05/23/02         Advent International                      Viatris                                                     NA            375      0.8x          10.4x       NA
     06/29/01         Barr Laboratories                         Duramed Pharmaceuticals                                    562            613      6.5x           NM        52.7%
     06/07/01         Bristol-Myers Squibb                      Dupont Pharmaceuticals                                   7,800          7,800      5.2x           NA         NA
     05/07/01         Private Equity Group                      MedPointe Inc.                                              NA            408      1.9x           NA         NA
     12/15/00         Abbott Laboratories                       Knoll Pharmaceuticals                                    6,900          6,900      3.0x          12.6x       NA
     09/11/00         Elan Pharmaceuticals                      Dura Pharmaceuticals                                     1,687          1,750      5.3x          20.3x      54.0%
     07/13/00         King                                      Jones Pharma                                             2,477          2,277     15.3x          24.5x       NA
     05/04/00         Galen Holdings PLC                        Warner Chilcott PLC                                        341            496      4.0x          12.0x       NA
     12/01/99         King                                      Medco Research                                             348            293      8.6x          19.2x       NA
     07/26/99         Shire                                     Roberts                                                  1,034          1,111      5.7x          20.5x       NA

                                                                                                                                  Mean             4.7x          15.0x       43.1%
                                                                                                                                  Median           4.3x          13.6x       52.4%
Source: Company filings and press releases.
(1) Withdrawn.
(2) Enterprise purchase price does not include direct costs associated with inventory transfer, to be paid at closing.
(3) Transaction value.

Source: Company data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                                                                                        70
                                                                                            13 December 2010




Catalysts
ENDP’s catalyst calendar has multiple clinical and regulatory events related to pipeline,
opioid regulatory and clinical guidance, and Lidoderm-related news.
Fortesta’s PDUFA date is December 30, 2010, and we expect the FDA to approve it for
the treatment of male hypogonadism. The PDUFA date for Opana TR is January 7, 2011.
Given the potential generic overhang of Opana ER, we expect approval of Opana TR is a
closely watched catalyst among investors.
Data from a PIII study evaluating Octreotide implant’s safety and efficacy in treating
acromegaly are expected by year-end 2010 or early 2011. If the results are favorable,
ENDP expects to file the NDA by mid-2011. PII results from the study of Carcinoid
syndrome, the second indication in which Octreotide implant is being developed, are
expected in 1H 2011. In the same period, management expects to report data from PII
study investigating Axomadol in the treatment of back pain.
Actavis can launch generic Opana ER (7.5mg and 15mg) on July 15, 2011, and Impax can
launch the remaining doses on January 1, 2013. Lidoderm’s method of use patents expire
on May 2, 2012, and patch formulation patent expires on October 27, 2015. On July 15,
2012, the 30-month stay in Lidoderm’s patent infringement case against WPI expires.




Specialty Pharmaceuticals                                                                                71
                                                                                                                               13 December 2010



Exhibit 87: Endo’s Catalyst Calendar
        Timing                   Catalyst/Event       Sensitivity                                 Fundamentals
                            Urocidin: Report PIII         **      ENDP is currently analyzing and will report results from 120 patient PIII
                            study data                            study of Urocidin as second line treatment in non-muscle-invasive bladder
       4Q 2010                                                    was expected by end of September but will probably come sometime in
                                                                  4Q10; news of milestone payment would likely indicate successful data
                                                                  (partner is Bioniche).
                            Urocidin: Initiate 2nd        **      ENDP plans on initiating the 2nd PIII study to evaluate safety and efficacy
       4Q 2010              PIII study                            of Urocidin as first-line treatmetn of non-muscle-invasive bladder

                            HYDRON implant                **      ENDP will report data from the 2nd generation implant version of HYDRON
       4Q 2010              technology: 2nd                       in 4Q 2010
                            Generation data
                            SYNERGO: Expected             **      Exclusive negotiation rights to acqure SYNERGO expire on December 31,
       4Q 2010
                            acquisition                           2010
                            Fortesta: PDUFA Date          **      PDUFA date for Fortesta in treatment of male hypogonadism
  December 30, 2010

                            Octreotide Implant:           **      Results from PIII study evaluating octreotide implant's safety and efficacy in
      End of 2010
                            Phase III acromegaly                  treatment of Acromegaly
                            Oxymorphone TR:               **      PDUFA date for Endo's tamper resistant long-acting oxymorphone that
    January 7, 2011         PDUFA date                            could help extend Opana franchise. High likelihood of FDA panel which
                                                                  could delay approval
                            Octreotide Implant:           **      Results from PII study evaluating octreotide implant's safety and efficacy in
        1H 2011             Phase II Carcinoid                    treatment of carcinoid syndrome
                            syndrome
                            Axomadol: Report PII          **      ENDP will report data from the back pain PIII study of Axomadol in 1H
      mid - 2011
                            back pain study data                  2011
                            Octreotide Implant:           **      ENDP submits octreotide implant's NDA for treatment of Acromegaly
       Mid 2011
                            NDA Submission
                            Opana ER: Generic             **      Actavis can launch 7.5 mg and 15 mg Opana ER
     July 15, 2011
                            Launch
                            Sanctura XR: 30 month         **      ENDP receives royalties - 30 month stay expiration on Sanctura XR patent
  December 2, 2011
                            stay expiration                       infringement case against WPI by AGN
                            Axomadol: Report PII          **      ENDP will report data from the neuropathic pain PIII study of Axomadol in
        2H 2011             back neuropathic pain                 2H 2011
                            data
                            Octreotide Implant:           **      ENDP launces octreotide implant for treatment of acromegaly upon FDA
         2012
                            FDA approval/launch                   approval
      2011 - 2012           Aveed: FDA materials          **      ENDP will file necessary additions to Aveed's NDA with the FDA
                            Opana ER: Generic             **      Other generic players like Teva, Impax, Sandoz can launch 7.5 mg and 15
   January 11, 2012
                            Launch                                mg Opana ER
                            Lidoderm: 30 month            **      30 month stay expiration in patent infringement case against WPI by ENDP
     July 15, 2012
                            stay expiration
                            Opana ER: Generic             **      Impax can launch 5, 10, 20, 30, & 40 mg Opana ER
    January 1, 2013
                            Launch
                            Opana ER: Generic             **      Teva, Watson, Sandoz, Actavis and others can launch 5, 10, 20, 30, & 40
     June 30, 2013
                            Launch                                mg Opana ER
                            Lidoderm: Patent Expiry       **      Lidoderm's patch formulation patent expires
   October 27, 2015

Source: Company data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                                                    72
                                                                                                                                         13 December 2010




Company Overview
Summary
Endo Pharmaceuticals, a specialty pharmaceutical company historically focused on
researching, developing, selling, and marketing branded and generic drug therapies
targeting pain management, has a new initiative to diversify into other therapeutic
categories, such as urology, endocrinology, and oncology, as well as device and
diagnostic markets that leverage existing commercial infrastructure.
The company’s key products in the pain franchise include Opana ER for chronic and acute
pain, Percocet for acute pain, Lidoderm for postherpetic neuralgia, and Voltaren Gel for
osteoarthritis. In the urology marketplace, Endo markets Vantas for advanced prostate
cancer, Supprelin LA for precocious puberty, and Valstar for bladder cancer.
Along with a commercial product portfolio led by Lidoderm and Opana ER, the company’s
pipeline includes Fortesta and Aveed, awaiting FDA approval for hypogoandism,
Octreodite implant for acromegaly in Phase III, and Axomadol for moderate to severe pain
in Phase II.
In addition, with the HealthTronics acquisition, Endo will offer urologists a wider range of
drugs, devices, and services in-line with the new corporate strategy to branch out into
complementary markets.
The recent Qualitest deal has deepened ENDP’s ANDA pipeline and given it an increased
presence in the controlled substance extended release and liquid generic product
marketplace.

Exhibit 88: Endo—2010E Sales by Products                                 Exhibit 89: Endo—2015E Sales by Products
                            ENDP 2010E Revenue Breakdown                                           ENDP 2015E Revenue Breakdown
                                        Health Tronics
                                Other         7%                                                         Pipeline
                    Generic                                                                                7%
                                 1%
                      6%                                                                Health Tronics
                                                                                             11%                                 Lidoderm
           Oncology/                                                                                                                27%
         Endocrinology
              5%
                                                           Lidoderm
                                                              46%
               Other Pain                                                          Qualitest
                  17%                                                                22%



                                                                                     Oncology/                                   Opana Franchise
                                                                                   Endocrinology                                      14%
                                                                                        6%       Other
                     Opana Franchise                                                              1% Generic        Other Pain
                          18%
                                                                                                       4%              9%
   Lidoderm                      Opana Franchise            Other Pain      Lidoderm                        Opana Franchise                 Other Pain
   Oncology/ Endocrinology       Generic                    Other           Oncology/ Endocrinology         Generic                         Other
   Qualitest                     Health Tronics                             Qualitest                       Health Tronics                  Pipeline

Source: Company data, Credit Suisse estimates.                           Source: Company data, Credit Suisse estimates.




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                                                                                                                                  13 December 2010



Pipeline
Exhibit 90: Endo’s Pipeline
         Product                   Indication           Status                      Next Catalyst
Fortesta                    Male Hypogonadism         NDA             PDUFA date on December 30, 2010
Oxymorphone TR              Severe and chronic pain   NDA             PDUFDA date in January 7, 2011
Aveed                       Male Hypogonadism         NDA             FDA meeting to determine next steps
                                                                      Results from PIII study at the end of
Octreotide Implant          Acromegaly                PIII
                                                                      2010
                            Non-muscle-invasive                       4Q 2010 - Results from 1st PIII study,
Urocidin                                              PIII
                            bladder Cancer                            Initiate 2nd PIII study
                            Moderate-to-severe                        Results from chronic back pain study in
Axomadol                                              PII
                            chronic pain                              1H 2011
Octreotide Implant          Carcinoid Syndrome        PII             Results from PII study in 1H 2011
                                                                      ENDP analysing results (not meet
Pagoclone                   Stuttering                PIIb            primary endpoint), considering next
                                                                      steps; Teva returned rights.
Source: Company data, Credit Suisse estimates

Fortesta
The PDUFA date for Fortesta, a 2% testosterone transdermal gel, is December 30, 2010.
Endo is seeking approval for this drug in the $1 billion testosterone replacement therapy
market for treatment of male hypogonadism. In response to the FDA’s complete response
letter, Endo ran lab data gain yielding results consistent with original report and submitted
the response in mid-2010. The FDA had issued a complete response letter in October
2009, asking for a reanalysis of existing clinical samples and a REMS study to evaluate
the risk of transference.

Exhibit 91: Key Testosterone Replacement Therapies
                                                                                                                                  Testosterone
      Therapy:              Fortesta          Aveed             Axiron           Androgel          Testim          Testopel
                                                                                                                                    Injection
                                                                                                  Auxilium                        Many, led by
Company                 Endo (ENDP) Endo (ENDP)               Lilly (LLY)     Abbott (ABT)                      Slate (private)
                                                                                                   (AUXL)                         Watson (WPI)

US Development
                        NDA              NDA                 NDA              Marketed         Marketed         Marketed          Marketed
Status

                                         ENDP to
                                                      PDUFA date
                        PDUFA date       respond to
Next catalyst                                         approx.                 None             None             None              None
                        12/30/2010       2Q10 meeting
                                                      11/29/2010
                                         with FDA
                                         Intramuscular                                                                            Intramuscular
Mode of                                                No-touch                                                 Subcutaneous
                        Topical Gel      Depot                                Topical Gel      Topical Gel                        Depot
Administration                                         applicator                                               Implant
                                         Injection                                                                                Injection
                                                                              Shoulders and
                                         Gluteal                              upper arms    Shoulders and                Gluteal
Site of Application     Thighs                               Armpit                                       Gluteal muscle
                                         muscle                               and/or        upper arms                   muscle
                                                                              abdomen
                                         Every 10                                                               Every 3 to 6      Every 2 to 4
Freqeuncy of Use        Once daily                           Once daily       Once Daily       Once Daily
                                         weeks                                                                  months            weeks

                                         FDA complete
                                         response had                                                         Can cause
                                         concerns                                                             injection site
                                         about rare but                                        Has an odor    pain and
Other issues                             serious events                                        that many find inflammation
                                         incl                                                  unpleasant     and rare
                                         anaphylaxis                                                          anaphylactoid
                                         and pulmonary                                                        reactions
                                         oil embolism

Source: Company data, Credit Suisse estimates




Specialty Pharmaceuticals                                                                                                                        74
                                                                                                13 December 2010


Oxymorphone TR
Endo revealed that an NDA for a crush-resistant formulation of oxymorphone ER was filed
with the FDA in late June and the PDUFA date is January 7, 2011. The molecule has been
developed in partnership with Grunenthal GMBH, a private German pharmaceutical
company.
We believe an advisory committee panel to discuss the merits and claims of the crush
resistance of an opioid drug is likely, resulting in postponement of the PDUFDA date.
Aveed
A long-acting testosterone undecanoate depot injection, Aveed is already marketed in over
80 countries. Partnered with Bayer Schering AG and inherited by Endo through the
Indevus acquisition, Endo is developing this therapy for the United States.
The FDA issued a complete response letter and Endo is determining appropriate next
steps. Management has indicated that it is committed to the development of the product
and want to ensure it proceeds in the right direction after extensive dialog with the FDA. In
the United States, Aveed has patent protection until 2027.
We model this drug to reach about $59 MM in 50% probability adjusted sales by 2020.
Octreotide Implant—Acromegaly
Awarded orphan drug status by the FDA, octreotide implant is being evaluated in PIII trial
in treatment of acromegaly. Leveraging the Hydron technology, the device delivers six
months of octreotide upon implantation, having an obvious compliance and convenience
advantage over existing therapies like somatostatin. PIII trial data are expected at the end
of 2010. Management guides to a $300 MM worldwide opportunity.
Urocidin Invtravesical Therapy — Non-muscle Invasive Bladder Cancer
In-licensed from Bioniche Pharma by Endo, Urocidin is a patented formulation of
mycobacterial cell wall-DNA complex that stimulates the immune system and directs
anticancer activity. Endo is developing the molecule in treatment of non-muscle invasive
bladder cancer. P III trials results from first study are awaited anytime now; we note,
milestone receipt announcement by Bioniche suggests positive results are likely. Next
steps before filing for NDA involve initiating a second P III trial based on the first trial
results. If approved, this drug would add another drug in Endo’s Urology basket and
bolster its therapeutic offerings in this key therapeutic area.
Axomadol
Axomadol is a new chemical entity being investigated in the treatment of moderate to
severe chronic pain and diabetic peripheral neuropathic pain. Endo has licensed the drug
from Grunenthal. Results from PII study in back pain are expected in 1H 2011.
Octreotide Implant—Carcinoid Syndrome
In addition to Acromegaly, Endo is evaluating octreotide implant in the treatment of
carcinoid syndrome. Carcinoid syndrome is a group of symptoms associated with
carcinoid tumors. PII studies are currently under way and results are expected in 1H 2011.
Pagoclone
Results from the PII b study evaluating safety and efficacy of Pagoclone in treatment of
stuttering did not meet its primary endpoint, and Teva returned the rights to Endo.
Management has indicated that it will decide the next steps for this program after it
finishes analyzing results from the PII b study in detail.




Specialty Pharmaceuticals                                                                                    75
                                                                                                                            13 December 2010




Management
Management Team
Endo’s management team is headed by David P. Holveck, who was appointed CEO in
April 2008. David and his team have collectively over 100 years in pharmaceuticals and
are working toward modifying the business model to better suit postreform macro like
greater access, cheaper treatments and better outcomes, involving greater emphasis on
cost-effective outcomes and access. They are also navigating the challenge of diversifying
the revenue base to reduce top-line dependence on Lidoderm, exclusivity for which
expires in 2015.

Exhibit 92: Endo’s Management Team—Collectively, over 100 Years in Pharmaceuticals
          Name                Principal Position                                            Comments
                                                     ■ CEO and a Director at Endo for a little over two and half years since April 2008
                                                     ■ Over 18 years experience in senior management positions
                                                     ■ Tenures at Johnson & Johnson, Centocor, General Electric Company, Corning
                               President, Chief
                                                     Glass Works, and Abbott Laboratories in various capacities including President, Vice
     David P. Holveck         Executive Officer,
                                                     President, Chief Executive Officer, Chief Operating Officer
                                    Director
                                                     ■ Currently serving on Board of Directors of the Science Center in Philadelphia, Light
                                                     Sciences Oncology and the Board of Trustees for the Fund for West Chester
                                                     University
                                                     ■ Joined ENDP a little over a year ago in June 2009
                                                     ■ Over 20 years experience in a variety of executive positions
                                                     ■ Tenures at Texas Pacific Group, Pfizer, in various capacities including Chief
                            Chief Financial Officer,
                                                     Financial Officer and Treasurer
      Alan G. Levin             Executive Vice
                                                     ■ Received a Master’s degree from New York University’s Stern School of Business
                                   President
                                                     and a Bachelor’s degree from Princeton University
                                                     ■ Currently an Editorial Advisor for the Journal of Accountancy, and a member of the
                                                     Finance Council of the American Management Association
                                                  ■ Been at Endo for more than 5 years beginning in May 2005
                                                  ■ Over 15 years experience in various areas of pharmaceutical businesses
                               Corporate Vice
  Robert K. Cobuzzi Jr.,                          ■ Tenures at Adolor Corporation, Centocor, Johnson & Johnson and AstraMerck
                             President, Corporate
          Ph.D                                    ■ He overlooked the global regulatory filings for Remicade at J&J
                                Development
                                                  ■ Post-doctoral fellowship in Experimental Therapeutics at Roswell Park Cancer
                                                  Institute, Ph.D. in Molecular and Cellular Biochemistry from Loyola University Chicago
                                                    ■ Joined ENDP in March 2010 as COO
                                                    ■ Previously served as President and CEO for Nora Therapeutics, was Company
                                                    Group Chairman for the Global Virology Business Unit at Johnson & Johnson, and
                                                    President of Centocor
     Julie H. McHugh        Chief Operating Officer ■ Currently serving on the Board of Visitors for the Smeal College of Business of the
                                                    Pennsylvania State University, the Board of Directors for the Nathaniel Adamczyk
                                                    Foundation
                                                    ■ 2009 Chairman of the Board of Directors for the Pennsylvania Biotechnology
                                                    Association
                                                   ■ Been at Endo for over 2 years beginning April 2008
                                                   ■ Over 21 years experience in Pharmaceutical Research and Development
                                                   ■ Previously served the Forest Research Institute of Forest Laboratories Inc. in
                                Executive Vice
                                                   various capacities including Senior Vice President of Scientific Affairs and President
   Ivan P. Gergel, M.D.     President - Research &
                                                   ■ Received his MBA from the Wharton School and M.D. from the Royal Free Medical
                                 Development
                                                   School of the University of London
                                                   ■ Currently a member of the Board of Directors of Pennsylvania BIO and a member of
                                                   PhRMA’s Research and Development Executive Committee

Source: Company Data, Credit Suisse estimates.

Endo’s management is granted performance-based annual cash and long-term equity
incentive compensation in accordance with the policies designed by the compensation
committee of the board of directors and approved by the shareholders. Annual
performance-based annual cash is determined by evaluating the company’s performance.
In keeping with the company’s philosophy of creating an ownership culture to encourage



Specialty Pharmaceuticals                                                                                                                   76
                                                                                                         13 December 2010


long-term performance, employees are awarded stock options, performance share units
and restricted stock units, which vest over time. Criteria for determining amount and timing
of vesting include market data on total compensation packages, the value of long-term
incentive grants at the Data Point Companies, total shareholder return, share usage and
shareholder dilution and, except in the case of the award to the chief executive officer, the
recommendations of the chief executive officer.
We consider Endo a potential acquisition target, and in the event that Endo is bought, we
highlight the management termination agreements below (Exhibit 93). Notably, the CEO
would receive $3.0 MM in the event of termination without cause or for good reason after
change in control.


Exhibit 93: Management Termination Agreements
                                                                        Termination without Cause or for the Good
  Name & Designation               Compensation Component
                                                                             Reason after Change in Control
     David P. Holveck                   Cash Compensation                                  $1,680,000
     President, CEO &
                                      Incentive Compensation                               1,344,000
          Director
                                             Benefits                                           29,894
                               Accelaration and Continuity of Equity
                                                                                                  0
                                             Awards
                                      Excise Tax Gross -up                                 1,534,629
                                             Total Value                                   $3,053,894
       Alan G. Levin                    Cash Compensation                                  $1,200,000
   Executive VP & CFO                Incentive Compensation                                 660,000
                                             Benefits                                          0
                               Accelaration and Continuity of Equity
                                                                                                  0
                                              Awards
                                       Excise Tax Gross -up                                    0
                                           Total Value                                     $1,860,000
        Ivan Gergel                    Cash Compensation                                   $1,192,550
        Executive VP                 Incentive Compensation                                 655,902
                                             Benefits                                        42,054
                               Accelaration and Continuity of Equity
                                                                                                  0
                                              Awards
                                       Excise Tax Gross -up                                    0
                                           Total Value                                     $1,890,506
   Caroline B. Manogue                  Cash Compensation                                   $858,000
    Executive VP, Chief
                                      Incentive Compensation                                595,140
      Legal Officer
                                             Benefits                                           40,929
                               Accelaration and Continuity of Equity
                                                                                                  0
                                             Awards
                                      Excise Tax Gross -up                                        0
                                             Total Value                                   $1,494,069

                      Total, 4 named executives                                            $8,298,469
Source: Company Data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                             77
                                                                                                                                              13 December 2010



Board of Directors
Roger H. Kimmel chairs the eight-people board of directors and is chairman of the
nominating and governance committee and member of audit committee and transactions
committee.

Exhibit 94: Endo Board of Directors
                                                                     Number of Issued
                                                                         Shares-        % Share Benificial
         Name                            Afflitiation                                                                     Position                 Independent
                                                                        Beneficial         Ownership
                                                                       Ownership
                                                                                                             Chairman of the Board, Chairman of
                                                                                                                 Nominating & Governance
    Roger H. Kimmel               Healthcare Industry Expert             271,662           less than 1%                                               Yes
                                                                                                               Committee, Audit Committee,
                                                                                                                  Transactions Committee
                            ITC Deltacom, Enzo Biochem, The Elliot                                             Chairman of Audit Committee,
     John J. Delucca                                                      51,664           less than 1%                                               Yes
                                Company, British Energy PLC.                                                      Compensation Committee

    David P. Holveck               Light Sciences Oncology               961,634          less than 1%        President, Chief Executive Officer       No

                                                                                                                Compensation Committee,
                                Cubist Pharmaceuticals, Inspire
     Nancy J. Hutson                                                      27,927           less than 1%         Nominating & Governance               Yes
                                       Pharmaceuticals
                                                                                                             Committee, Transactions Committee
                                                                                                                 Chairman of Transactions
      Michael Hyatt                   Irving Place Capital               327,414           less than 1%          Committee, Nominating &              Yes
                                                                                                                  Governance Committee
                                                                                                               Audit Committee, Transactions
   William P. Montague                Gibraltar Industries                26,870           less than 1%                                               Yes
                                                                                                                        Committee
                                                                                                                Chairman of Compensation
    Joseph C. Scodari                      Covance                        37,230           less than 1%                                               Yes
                                                                                                             Committee, Transactions Committee
                                                                                                               Audit Committee, Compensation
   William F. Spengler       Smith & Wesson Holding Corporation           34,159           less than 1%                                               Yes
                                                                                                                        Committee
Source: Company Data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                                                                   78
                                                           13 December 2010




Financial Models
Please find our financial models on the following pages.




Specialty Pharmaceuticals                                               79
                                                                                                                                          13 December 2010



Exhibit 95: Endo Summary Revenue Model
USD in millions, unless otherwise stated
                                           FY 2007    FY 2008     FY 2009     FY 2010     FY 2011     FY 2012     FY 2013     FY 2014     FY 2015
         Branded Pharmaceuticals
         Pain products
           Lidoderm                          $705.6      $765.1      $763.7      $775.3      $784.7      $789.5      $796.2      $808.2     $747.1
           Opana                               21.4        36.6        45.6        42.1        18.0        10.0         8.0         6.4        6.1
           Opana ER                            85.7       143.8       185.0       251.0       143.7         0.0         0.0         0.0        0.0
           Percocet                           121.7       130.0       127.1       120.5       114.5       108.8       103.3        98.2       93.2
           Voltaren Gel                         0.0        23.8        78.9       103.1       118.1       114.8        83.5        78.2       76.8
           Frova                               52.4        58.0        57.9        58.6        59.2        59.7        60.3        60.9       57.9
         Total Pain Products                 $986.8    $1,157.3    $1,258.2    $1,350.5    $1,238.2    $1,082.8    $1,051.3    $1,051.9     $981.1
         Oncology/Endocrinology
           Supprelin LA                        $0.0        $0.0       $27.8      $47.0        $56.3       $62.0       $65.1       $67.0       $68.4
           Vantas                               0.0         0.0        20.0       17.8         19.3        20.3        21.3        22.3        23.0
           Valstar                              0.0         0.0         3.4       13.9         23.8        27.0        30.3        33.8        37.6
         Total Oncology/Endocrinology          $0.0        $0.0       $51.2      $78.6        $99.5     $109.2       $116.7      $123.2     $128.9
         Other Branded Products               $11.1       $10.9       $18.8      $10.9        $10.9       $10.9       $10.9       $10.9       $10.9
         Total Branded Products              $998.0    $1,168.2    $1,328.1   $1,440.0     $1,348.5    $1,202.9    $1,178.9    $1,186.0    $1,120.9

         Total Generics                       $87.6      $92.3      $124.7      $139.7      $510.8      $576.4      $635.1      $676.3      $704.1

         HealthTronics                         $0.0        $0.0       $0.0      $112.0      $240.3      $264.3      $277.5      $291.4      $306.0

         Total Royalty and Other Revenue       $0.0       $0.0        $8.0       $12.4       $12.0       $12.1       $12.2       $12.2       $12.3

         Total Pipeline                        $0.0        $0.0       $0.0         $0.0     $153.1      $349.1      $392.3      $461.4      $537.2

         Total Revenues                    $1,085.6    $1,260.5    $1,460.8   $1,704.1     $2,264.8    $2,404.8   $2,496.0     $2,627.3   $2,680.5

         Growth Rates
         Branded Pharmaceuticals
         Pain products
           Lidoderm                                       8.4%       (0.2%)       1.5%        1.2%        0.6%        0.8%        1.5%       (7.6%)
           Opana                                         71.4%       24.6%       (7.7%)     (57.2%)     (44.4%)     (20.0%)     (20.0%)      (5.0%)
           Opana ER                                      67.8%       28.7%       35.7%      (42.8%)    (100.0%)
           Percocet                                       6.8%       (2.2%)      (5.2%)      (5.0%)      (5.0%)      (5.0%)      (5.0%)      (5.0%)
           Voltaren Gel                                             231.5%       30.8%       14.6%       (2.8%)     (27.3%)      (6.4%)      (1.7%)
           Frova                                         10.6%       (0.2%)       1.1%        1.0%        1.0%        1.0%        1.0%       (5.0%)
         Total Pain Products                             17.3%        8.7%        7.3%       (8.3%)     (12.5%)      (2.9%)       0.1%       (6.7%)
         Oncology/Endocrinology
           Supprelin LA                                                          68.8%       20.0%       10.0%        5.0%        3.0%        2.0%
           Vantas                                                               (11.2%)       8.7%        5.0%        5.0%        5.0%        3.0%
           Valstar                                                              313.3%       71.7%       13.3%       12.4%       11.6%       10.9%
         Total Oncology/Endocrinology                                            53.5%       26.6%        9.8%        6.8%        5.6%        4.6%
         Other Branded Products                          (1.5%)      72.0%      (42.0%)       0.0%        0.0%        0.0%        0.0%        0.0%
         Total Branded Products                          17.1%       13.7%        8.4%       (6.4%)     (10.8%)      (2.0%)       0.6%       (5.5%)

         Total Generics                                   5.4%       35.1%       12.0%      265.8%       12.8%       10.2%        6.5%        4.1%

         HealthTronics                                                                      114.5%       10.0%        5.0%        5.0%        5.0%

         Total Royalty and Other Revenue                                         56.0%       (3.2%)       0.5%        0.5%        0.5%        0.5%

         Total Pipeline                                                                                 128.0%       12.4%       17.6%       16.4%

         Total Revenues                                  16.1%       15.9%       16.7%       32.9%        6.2%        3.8%        5.3%        2.0%

         Revenue Conribution
         Branded Pharmaceuticals
         Pain products
           Lidoderm                          65.0%       60.7%       52.3%       45.5%       34.6%       32.8%       31.9%       30.8%       27.9%
           Opana                              2.0%        2.9%        3.1%        2.5%        0.8%        0.4%        0.3%        0.2%        0.2%
           Opana ER                           7.9%       11.4%       12.7%       14.7%        6.3%        0.0%        0.0%        0.0%        0.0%
           Percocet                          11.2%       10.3%        8.7%        7.1%        5.1%        4.5%        4.1%        3.7%        3.5%
           Voltaren Gel                       0.0%        1.9%        5.4%        6.1%        5.2%        4.8%        3.3%        3.0%        2.9%
           Frova                              4.8%        4.6%        4.0%        3.4%        2.6%        2.5%        2.4%        2.3%        2.2%
         Total Pain Products                 90.9%       91.8%       86.1%       79.3%       54.7%       45.0%       42.1%       40.0%       36.6%
         Oncology/Endocrinology               0.0%        0.0%        0.0%        0.0%        0.0%        0.0%        0.0%        0.0%        0.0%
           Supprelin LA                       0.0%        0.0%        1.9%        2.8%        2.5%        2.6%        2.6%        2.6%        2.6%
           Vantas                             0.0%        0.0%        1.4%        1.0%        0.9%        0.8%        0.9%        0.9%        0.9%
           Valstar                            0.0%        0.0%        0.2%        0.8%        1.1%        1.1%        1.2%        1.3%        1.4%
         Total Oncology/Endocrinology         0.0%        0.0%        3.5%        4.6%        4.4%        4.5%        4.7%        4.7%        4.8%
         Other Branded Products               1.0%        0.9%        1.3%        0.6%        0.5%        0.5%        0.4%        0.4%        0.4%
         Total Branded Products              91.9%       92.7%       90.9%       84.5%       59.5%       50.0%       47.2%       45.1%       41.8%

         Total Generics                        8.1%       7.3%        8.5%        8.2%       22.6%       24.0%       25.4%       25.7%       26.3%

         HealthTronics                         0.0%       0.0%        0.0%        6.6%       10.6%       11.0%       11.1%       11.1%       11.4%

         Total Royalty and Other Revenue       0.0%       0.0%        0.5%        0.7%        0.5%        0.5%        0.5%        0.5%        0.5%

         Total Pipeline                        0.0%       0.0%        0.0%        0.0%        6.8%       14.5%       15.7%       17.6%       20.0%

         Total Revenues                     100.0%      100.0%      100.0%      100.0%      100.0%      100.0%      100.0%      100.0%      100.0%

Source: Company data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                                                              80
Specialty Pharmaceuticals




                            Exhibit 96: ENDP New Product Revenue Model
                            USD in millions, unless otherwise stated
                            New Products Model                        FY 2010   FY 2011   FY 2012   FY 2013    FY 2014    FY 2015    FY 2016    FY 2017    FY 2018    FY 2019    FY 2020    Comments
                            Opana TR
                            Potential sales                                      $143.7    $326.7     $369.2     $414.9     $450.4     $488.0     $527.8     $553.9     $580.8     $608.4 Crush resistant, partnered with Grunenthal
                              Risk Adjustment                                     95.0%     90.0%      80.0%      80.0%      80.0%      80.0%      80.0%      80.0%      80.0%      80.0% PDUFA date January 7, 2011
                              Sales in model                                     $136.5    $294.0     $295.3     $331.9     $360.3     $390.4     $422.2     $443.2     $464.7     $486.7

                            Fortesta
                            Potential sales                                        20.8      48.4       77.3       87.9      110.8      124.2      138.6      154.2      171.0      189.1 2% testosterone gel; partnered with ProStraken
                              Risk Adjustment                                     80.0%     80.0%      80.0%      80.0%      80.0%      80.0%      80.0%      80.0%      80.0%      80.0% Testosterone gel 2% - PDUFA date on Dec 30, 2010
                              Sales in model                                       16.6      38.7       61.9       70.3       88.6       99.3      110.9      123.3      136.8      151.3 Launch in early 2011 assumed

                            Aveed 3-month Injection
                            Potential sales                                                  15.8       33.5       52.7       73.9       97.0      101.9      107.1      112.5      118.2 Testosterone long acting injection for hypogonadism
                              Risk Adjustment                                               50.0%      50.0%      50.0%      50.0%      50.0%      50.0%      50.0%      50.0%      50.0% Co. evaluating path fwd after discussions with FDA in May 2010
                              Sales in model                                                  7.9       16.7       26.4       36.9       48.5       51.0       53.5       56.2       59.1 2012 launch assumed

                            Octreotide 6-month (Acromegaly)
                            Potential sales                                         0.0      14.2       30.6       41.3      53.4        66.9       82.1       87.9       94.0       94.2 6 month implant using Hydron technology
                              Risk Adjustment                                     60.0%     60.0%      60.0%      60.0%     60.0%       60.0%      60.0%      60.0%      60.0%      60.0% Phase III expected completion early 2011; assume 2012 launch
                              Sales in model                                        0.0       8.5       18.4       24.8      32.0        40.2       49.2       52.7       56.4       56.5 US revenues estimated here; assume ENDP partners ex-US

                            Octreotide 6-month (Carcinoid syndrome)
                            Potential sales                                                              0.0       39.9       56.5       74.9       95.4      118.0      161.0      170.8 6 month implant using Hydron technology
                              Risk Adjustment                                                          20.0%      20.0%      20.0%      20.0%      20.0%      20.0%      20.0%      20.0% Phase II carcinoid tumor
                              Sales in model                                        0.0       0.0        0.0        8.0       11.3       15.0       19.1       23.6       32.2       34.2 2013 launch (carcinoid tumor) assumed

                            Urocidin Intravesical Therapy
                            Potential sales                                                                                  20.0        30.0       40.0       50.0       60.0       70.0 Patented formulation of Mycobacterial Cell Wall-DNA Complex (MCC)
                              Risk Adjustment                                                                               40.0%       40.0%      40.0%      40.0%      40.0%      40.0% Initiate 2nd Phase III for non-muscle-invasive bladder cancer in 2H10
                              Sales in model                                                                                  8.0        12.0       16.0       20.0       24.0       28.0 Analysis of data from 1st PIII patient refractory study in 4Q10

                            Axomadol
                            Potential sales                                                                                              20.0       30.0       40.0       50.0       60.0 PII back pain study initiated Dec 2009, data in 1H11
                              Risk Adjustment                                                                                           20.0%      20.0%      20.0%      20.0%      20.0% Licensed from Grunenthal
                              Sales in model                                                                                              4.0        6.0        8.0       10.0       12.0
                            Pagoclone
                            Potential sales                                                                                                                                                 GABA receptor modulator for stuttering
                              Risk Adjustment                                                                                                                                               Phase IIb trial results not as expected, Teva terminated agreement
                              Sales in model                                                                                                                                                Endo evaluating future of program
                            Total Sales                                  $0.0    $153.1    $349.1     $392.3     $461.4     $537.2     $609.4     $674.4     $724.4     $780.3     $827.7
                             % growth                                               NM     128.0%      12.4%      17.6%      16.4%      13.4%      10.7%       7.4%       7.7%       6.1%




                                                                                                                                                                                                                                                                  13 December 2010
                            Source: Company data, Credit Suisse estimates.
81
Specialty Pharmaceuticals




                            Exhibit 97: Endo Income Statement Forecast
                            USD in millions, unless otherwise stated
                                                                                                                                                        2010
                                                                                                                                    Mar-10      Jun-10       Sep-10      Dec-10
                                                                                               FY 2007     FY 2008     FY 2009       1QA         2QA          3QA         4QE        FY 2010      FY 2011     FY 2012     FY 2013     FY 2014      FY 2015
                                    Total Revenues                                              $1,085.6    $1,260.5     $1,460.8     $364.4      $396.5       $444.1      $499.1     $1,704.1     $2,264.8    $2,404.8    $2,496.0    $2,627.3     $2,680.5
                                        Cost of revenues                                           217.4       236.4        300.9        76.9        90.1       113.1       135.1        415.2        679.5       725.0       783.7       839.5        842.4
                                    Gross Profit                                                  $868.2    $1,024.1     $1,160.0     $287.6      $306.4       $331.0      $364.0     $1,288.9     $1,585.3    $1,679.8    $1,712.3    $1,787.7     $1,838.1
                                      Total SG&A                                                  398.6       475.6        532.0       128.3       129.2        130.8       145.0        533.3        632.8       645.4       677.7       711.6        740.0
                                      Total R&D                                                   102.7        92.8        108.2        25.7        28.7         31.1        33.1        118.6        152.8       171.1       188.2       207.0        223.6
                                    Total SG&A and R&D                                            501.3       568.4        640.2       154.0       158.0        161.9       178.1        652.0        785.5       816.5       865.9       918.6        963.6

                                    EBITDA                                                       $378.1      $468.7       $536.7      $137.8      $152.6       $176.4      $192.9      $659.7       $827.7      $898.0      $890.3       $916.6      $925.6
                                      Depreciation (incl. above)                                   11.2         13.0        16.9          4.2        4.1          7.3         7.0         22.7         27.9        34.8        43.9        47.4         51.1
                                    Operating Profit (Loss)                                      $366.9      $455.7       $519.8      $133.5      $148.5       $169.1      $185.9      $637.0       $799.7      $863.2      $846.4       $869.1      $874.4
                                        Interest Expense/Income                                    (0.1)       16.5        (23.0)       (5.8)       (5.8)        (8.7)       (4.3)       (24.6)      (47.8)      (47.1)      (45.9)       (44.7)       (39.4)
                                        Other, net                                                 36.1         1.6         (0.2)        0.4         0.2          0.1         0.0          0.7         0.0         0.0         0.0          0.0          0.0
                                    Pretax Income                                                $402.9      $473.8       $496.6      $128.2      $142.9       $160.4      $181.6       $613.1      $751.9      $816.2      $800.4       $824.4       $835.1
                                        Income tax expense                                        144.8       168.0        162.3        41.0        48.2         44.3        55.0        188.5        207.6       226.9       222.1       229.3        232.5
                                    Net Income (Loss)                                            $258.1      $305.7       $334.3       $87.2       $94.7       $116.1      $126.6      $424.6       $544.3      $589.3      $578.3       $595.1      $602.5
                                    Non-controlling Interest                                                                                                     15.3        15.0        30.3         60.0        60.0        60.0         60.0        60.0
                                    Net Income (Loss) Attributable to Endo                       $258.1      $305.7       $334.3       $87.2       $94.7       $100.8      $111.6      $394.3       $484.3      $529.3      $518.3       $535.1      $542.5
                                    Average Shares (Diluted)                                      134.5       123.8        117.5       118.0       116.7        116.6       116.6        117.0        116.6       116.6       116.6       116.6        116.6

                                    Earnings Per Share                                            $1.92       $2.47        $2.84       $0.74       $0.81        $0.86       $0.96        $3.37        $4.15       $4.54       $4.45       $4.59        $4.65



                                    Margin Analysis
                                    Gross Profit                                                 80.0%        81.2%        79.4%       78.9%      77.3%        74.5%       72.9%        75.6%        70.0%       69.9%       68.6%       68.0%        68.6%
                                    Total SG&A % sales                                           36.7%        37.7%        36.4%       35.2%      32.6%        29.4%       29.1%        31.3%        27.9%       26.8%       27.2%       27.1%        27.6%
                                    Total R&D % of sales                                          9.5%         7.4%         7.4%        7.0%       7.2%         7.0%        6.6%         7.0%         6.7%        7.1%        7.5%        7.9%         8.3%
                                    EBITDA margin                                                34.8%        37.2%        36.7%       37.8%      38.5%        39.7%       38.7%        38.7%        36.5%       37.3%       35.7%       34.9%        34.5%
                                    Operating margin                                             33.8%        36.2%        35.6%       36.6%      37.4%        38.1%       37.3%        37.4%        35.3%       35.9%       33.9%       33.1%        32.6%
                                    Pre-tax margin                                               37.1%        37.6%        34.0%       35.2%      36.0%        36.1%       36.4%        36.0%        33.2%       33.9%       32.1%       31.4%        31.2%
                                    Tax rate, effective (excluding non controlling interest)     35.9%        35.5%        32.7%       32.0%      33.7%        30.5%       33.0%        30.7%        30.0%       30.0%       30.0%       30.0%        30.0%
                                    Net margin                                                   23.8%        24.3%        22.9%       23.9%      23.9%        22.7%       22.4%        23.1%        21.4%       22.0%       20.8%       20.4%        20.2%

                                    Year/Year Changes
                                    Sales                                                                     16.1%        15.9%        8.7%       6.3%        23.0%       27.5%        16.7%        32.9%        6.2%        3.8%        5.3%         2.0%
                                    Gross profit                                                              18.0%        13.3%        8.4%       3.1%        15.6%       17.0%        11.1%        23.0%        6.0%        1.9%        4.4%         2.8%
                                    Total SG&A                                                                19.3%        11.9%        6.9%      (0.3%)       (4.8%)       0.0%         0.3%        18.6%        2.0%        5.0%        5.0%         4.0%
                                    Total R&D                                                                 (9.7%)       16.6%       35.3%       4.4%         7.5%        1.0%         9.6%        28.8%       12.0%       10.0%       10.0%         8.0%
                                    Operating profit                                                          24.2%        14.1%        5.7%       5.9%        40.9%       39.4%        22.5%        25.6%        7.9%       (2.0%)       2.7%         0.6%
                                    Net income                                                                18.5%         9.3%       10.3%      10.3%        35.8%       17.3%        18.0%        22.8%        9.3%       (2.1%)       3.2%         1.4%
                                    Earnings per share                                                        28.7%        15.1%        9.6%      10.9%        37.0%       18.6%        18.6%        23.2%        9.3%       (2.1%)       3.2%         1.4%


                            Source: Company data, Credit Suisse estimates.




                                                                                                                                                                                                                                                                13 December 2010
82
Specialty Pharmaceuticals




                            Exhibit 98: Endo Balance Sheet Forecast
                            USD in millions, unless otherwise stated
                                                                                                                                                                  2010
                                                                                                                                          Mar-10         Jun-10          Sep-10       Dec-10
                                                                                                    FY 2007     FY 2008      FY 2009       1QA            2QA             3QA          4QE         FY 2010      FY 2011      FY 2012      FY 2013      FY 2014       FY 2015

                                                   Current Assets
                                                   Cash and Cash Equivalents                           $350.3      $775.7       $708.5      $820.0         $992.3           $774.1      $290.0        $290.0       $974.5     $1,548.2     $2,137.4      $2,741.7     $2,692.4
                                                   Restricted cash                                        0.0         0.0          1.5          0.0            0.0             0.0          0.0          0.0          0.0          0.0          0.0           0.0          0.0
                                                   Marketable securities                                313.4         6.5         25.3         15.0            0.0             0.3          0.3          0.3          0.3          0.3          0.3           0.3          0.3
                                                   Accounts Receivable, net                             249.8       246.3        323.5        324.3          354.4           419.1        437.5        437.5        520.3        527.1        547.1         575.8        587.5
                                                   Income taxes receivable                                0.0         1.6         13.8          0.0           16.5             0.0          0.0          0.0          0.0          0.0          0.0           0.0          0.0
                                                   Inventories, net                                      69.2        80.7         84.9         87.1           85.3            94.8        121.4        121.4        216.2        218.5        236.2         253.0        253.9
                                                   Prepaid expenses and other current assets             26.5        24.5         17.1         18.1           88.7            19.0         99.8         99.8         35.6         36.1         37.4          39.4         40.2
                                                   Auction-rate Securities Rights, at fair value          0.0         0.0         15.7         13.7            0.0             0.0          0.0          0.0          0.0          0.0          0.0           0.0          0.0
                                                   Deferred income taxes                                 56.2        48.4         90.4         92.1           91.2           103.4        103.4        103.4        103.4        103.4        103.4         103.4        103.4
                                                     Total Current Assets                            $1,065.4    $1,183.7     $1,280.6     $1,370.3       $1,628.4        $1,410.7     $1,052.4     $1,052.4     $1,850.3     $2,433.5     $3,061.8      $3,713.7     $3,677.7

                                                   Long-term assets
                                                   Marketable Securities                               $283.3      $239.2       $211.8      $192.0           $22.0           $22.2        $22.2        $22.2        $22.2        $22.2        $22.2         $22.2        $22.2
                                                   Auction-rate Securities Rights, at fair value          0.0        27.3          0.0          0.0            0.0             0.0          0.0          0.0          0.0          0.0          0.0           0.0          0.0
                                                   Property, Plant and Equipment, net                    44.9        44.4         47.5         46.2           45.0            75.0        472.9        472.9        479.0        492.3        498.3         503.4        511.2
                                                   Goodwill                                             181.1       181.1        302.5        302.5          302.5           492.7        492.7        492.7        492.7        492.7        492.7         492.7        492.7
                                                   Other intangibles, net                                70.9       205.1        609.9        592.6          562.3           719.8      1,501.1      1,501.1      1,373.0      1,244.8      1,127.0       1,024.1        925.1
                                                   Note Receivable                                       46.0         0.0          0.0          0.0            0.0             0.0          0.0          0.0          0.0          0.0          0.0           0.0          0.0
                                                   Other assets                                          10.9        28.0         36.5         35.9           36.0            43.4         49.9         49.9         59.3         60.1         62.4          65.7         67.0
                                                   Total Assets                                      $1,702.6    $1,908.7     $2,488.8     $2,539.7       $2,596.2        $2,763.8     $3,591.2     $3,591.2     $4,276.5     $4,745.6     $5,264.3      $5,821.6     $5,695.8
                                                   LIABILITIES AND SHAREHOLDERS' EQUITY
                                                   Current liabilities
                                                   Accounts Payable                                    $178.9      $160.5      $176.1        $171.0        $178.8           $157.8      $266.5        $266.5       $393.2       $397.3      $429.4         $460.0      $461.6
                                                   Accrued Expenses                                     185.3       226.0       286.6         289.6         314.0            375.4       359.3         359.3        474.8        481.0        499.2         525.5        536.1
                                                   Income taxes payable                                  17.8         0.0         9.5          13.7           0.0              4.0         4.0           4.0          4.0          4.0          4.0           4.0          4.0
                                                   Short−term debt                                                                                                            64.6         2.5           2.5          2.5          2.5          2.5           2.5          2.5
                                                   Estimated amount due seller                           15.0         0.0          0.0             0.0         0.0             0.0         0.0           0.0          0.0          0.0          0.0           0.0          0.0
                                                   Acquisition-related contingent consideration           0.0         0.0          0.0             0.0         0.0             0.0         0.0           0.0          0.0          0.0          0.0           0.0          0.0
                                                   Line of credit                                                                                                                        300.0         300.0        300.0        300.0        300.0         300.0        300.0
                                                   6.25% convertible notes payable                        0.0         0.0         0.0           0.0           0.0              0.0         0.0           0.0          0.0          0.0          0.0           0.0          0.0
                                                     Total Current Liabilities                         $397.0      $386.5      $472.2        $474.4        $492.7           $601.8      $932.3        $932.3     $1,174.4     $1,184.8     $1,235.1      $1,292.0     $1,304.2

                                                   Long-term liabilities
                                                   Deferred income taxes                                 $0.0        $1.3       $49.2         $55.9         $50.5            $23.4       $23.4         $23.4       $23.4         $23.4        $23.4        $23.4         $23.4
                                                   Estimated amount due seller                            0.0         0.0         0.0           0.0           0.0              0.0         0.0           0.0         0.0           0.0          0.0          0.0           0.0
                                                   Acquisition retated contingent consideration           0.0         0.0        58.5          59.4          59.6             60.6        60.6          60.6        60.6          60.6         60.6         60.6          60.6
                                                   Convertible senior subordinated Notes due 2015         0.0       243.2       260.3         264.8         269.4            274.1       279.0         279.0       299.9         320.9        343.8        368.9           0.0
                                                   Non-recourse notes payable                             0.0         0.0        62.3          62.2          62.1              3.6         3.6           3.6         3.6           3.6          3.6          3.6           3.6
                                                   Other debt                                                                                                                            400.0         400.0       400.0         400.0        400.0        400.0         400.0
                                                   Other Liabilities                                     13.4        70.7        89.0          88.7          90.5            111.1        99.7          99.7       125.2         122.5        129.9        137.8         144.5
                                                    Total Long-Term Liabilities                         $13.4      $315.1      $519.2        $530.9        $532.0           $472.8      $866.3        $866.3      $912.7        $931.0       $961.3       $994.3        $632.2

                                                   Shareholders' equity
                                                   Preferred Stock                                       $0.0        $0.0         $0.0         $0.0           $0.0            $0.0         $0.0         $0.0         $0.0         $0.0         $0.0          $0.0         $0.0
                                                   Common Shares                                          1.3         1.3          1.4          1.4            1.4             1.4          1.4          1.4          1.4          1.4          1.4           1.4          1.4
                                                   Additional paid in capital                           704.3       793.3        817.5        822.6          829.9           841.6        841.6        841.6        841.6        841.6        841.6         841.6        841.6
                                                   Retained Earnings                                    583.6       839.0      1,105.3      1,165.6        1,217.1         1,271.3      1,374.7      1,374.7      1,771.4      2,212.0      2,650.0       3,117.5      3,341.5
                                                   Accumulated other comprehensive loss                   3.0        (1.7)        (1.9)        (1.4)          (2.0)           (1.9)        (1.9)        (1.9)        (1.9)        (1.9)        (1.9)         (1.9)        (1.9)
                                                   Tresury Stock                                          0.0      (424.8)      (424.8)      (453.8)        (474.9)         (483.8)      (483.8)      (483.8)      (483.8)      (483.8)      (483.8)       (483.8)      (483.8)
                                                   Total Shareholders' Equity                        $1,292.3    $1,207.1     $1,497.4     $1,534.4       $1,571.5        $1,628.5     $1,731.9     $1,731.9     $2,128.6     $2,569.2     $3,007.2      $3,474.7     $3,698.7
                                                   Non controlling interests                                                                                                   60.7         60.7         60.7         60.7         60.7         60.7          60.7         60.7
                                                   Total Liabilities and Shareholders' Equity        $1,702.6    $1,908.7     $2,488.8     $2,539.7       $2,596.2        $2,763.8     $3,591.2     $3,591.2     $4,276.5     $4,745.6     $5,264.3      $5,821.6     $5,695.8

                            Source: Company data, Credit Suisse estimates.




                                                                                                                                                                                                                                                                                  13 December 2010
83
Specialty Pharmaceuticals




                            Exhibit 99: Endo Cash Flow Statement Forecast
                            USD in millions, unless otherwise stated
                                                                                                                                                                         2010
                                                                                                                                                   Mar-10       Jun-10          Sep-10       Dec-10
                                                                                                            FY 2007      FY 2008      FY 2009       1QA          2QA             3QA          4QE         FY 2010      FY 2011      FY 2012      FY 2013      FY 2014         FY 2015
                                      Statement of Cash Flows
                                      Cash From Operating Activities
                                      Net Income (Loss)                                                        $227.4       $255.3      $266.3         $60.4       $51.5            $69.5      $103.4        $284.6      $396.8        $440.6       $437.9       $467.5          $224.0
                                        Adjustments to Net Income
                                           Depreciation and Amortization                                         17.4         46.4         80.4         21.5        21.4             26.9         25.7         95.6       156.0         162.9        161.8        150.4           150.1
                                           Stock-based compensation                                              13.9         16.9         19.6          3.8         6.6              6.4          0.0         16.8         0.0           0.0          0.0          0.0             0.0
                                           Amortization of deferred financing/debt issuance costs and pre        (1.1)        13.8         19.5          5.7         5.9              5.9          4.9         22.4        20.9          21.0         22.9         25.0            10.6
                                           Impairment of long-lived assets                                        2.7         12.8         69.0          0.0        13.0             (0.0)         0.0         13.0         0.0           0.0          0.0          0.0             0.0
                                           Other non-cash items                                                  (5.1)         6.1       (171.8)         6.6        (4.1)           (13.4)        (6.5)       (17.4)       (9.4)         (0.8)        (2.3)        (3.3)           (1.3)

                                          Changes in operating assets and liabilities
                                            Accounts receivable                                                  30.4          3.5       (62.6)         (0.8)      (30.0)           (20.8)      (18.4)        (70.0)       (82.8)        (6.8)       (20.0)       (28.8)          (11.7)
                                            Inventories                                                          (7.1)       (11.4)       12.9          (2.2)        1.8              3.3       (26.6)        (23.7)       (94.8)        (2.3)       (17.7)       (16.8)           (0.9)
                                            Note Receivable                                                       0.1         (0.5)        0.0           0.0         0.0              0.0         0.0                                     0.0          0.0          0.0             0.0
                                            Prepaid expenses and other current assets                             0.2         (1.8)       13.6          (0.9)       (1.7)             9.9       (80.8)        (73.5)       64.2          (0.5)        (1.4)        (2.0)           (0.8)
                                            Accounts payable                                                     52.5        (18.0)       12.1          (4.7)        7.8            (24.1)      108.7          87.7       126.7           4.1         32.1         30.6             1.6
                                            Accrued expenses                                                     22.9         40.6        34.1           3.1        24.4             26.9       (16.1)         38.4       115.4           6.2         18.2         26.3            10.6
                                            Other liabilities                                                     4.3         11.0         9.7          (1.1)        0.8              0.3       (11.4)        (11.4)       25.5          (2.8)         7.4          7.9             6.8
                                            Income taxes receivable/payable                                       7.3        (19.2)       (7.3)         18.0       (30.3)            15.9         0.0           3.6         0.0           0.0          0.0          0.0             0.0
                                      Net Cash From Operations                                                 $365.7       $355.6      $295.4       $109.41      $66.95          $106.63       $82.9        $365.9      $718.5        $621.8       $639.2       $656.8          $389.1

                                      Cash From Investing Activities
                                          Purchase and sale of Property, Plant & Equipment, net                 (19.8)       (17.4)       (12.4)        (3.2)       (3.0)            (5.2)        (5.0)       (16.3)      (34.0)        (48.1)       (49.9)       (52.5)          (59.0)
                                          Purchases and proceeds from sales of securities                      (591.5)       313.9         23.8         32.5       129.3             69.1          0.0        230.9         0.0           0.0          0.0          0.0             0.0
                                          Principal payments on note receivable                                   0.0          3.3          0.0          0.0         0.0              0.0          0.0          0.0         0.0           0.0          0.0          0.0             0.0
                                          License fees                                                            0.0        (85.0)        (4.5)         0.0         0.0              0.0          0.0          0.0         0.0           0.0          0.0          0.0             0.0
                                          Acquisition, net of cash acquired                                       0.0        (15.0)      (250.4)         0.0         0.0           (333.3)    (1,200.0)    (1,533.3)        0.0           0.0          0.0          0.0             0.0
                                          Funding of acquisition related escrow                                                0.0          0.0          0.0         0.0              0.0          0.0          0.0         0.0           0.0          0.0          0.0             0.0
                                          Distribution of equity method investment                                2.1          0.0          0.0          0.0         0.0              0.0          0.0          0.0         0.0           0.0          0.0          0.0             0.0
                                          Other investments                                                      (5.3)       (20.0)        (2.0)         0.0        (0.8)            (0.8)         0.0         (1.6)        0.0           0.0          0.0          0.0             0.0
                                      Cash From Investing Activities                                          ($614.5)      $179.8      ($245.5)       $29.3      $125.5          ($270.2)   ($1,205.0)   ($1,320.4)     ($34.0)       ($48.1)      ($49.9)      ($52.5)         ($59.0)
                                      Cash from Operating and Investing Activities                            ($248.8)      $535.4        $49.9       $138.7      $192.4          ($163.6)   ($1,122.0)     ($954.5)     $684.6        $573.7       $589.2       $604.3          $330.1

                                      Cash From Financing Activities
                                          Capital lease obligations repayments                                   (1.1)        (0.6)        (0.3)        (0.1)        (0.1)           (0.1)        0.0          (0.3)         0.0          0.0          0.0              0.0         0.0
                                          Tax sharing payments to Endo Pharma LLC                               (38.5)        (0.7)         0.0          0.0          0.0             0.0         0.0           0.0          0.0          0.0          0.0              0.0         0.0
                                          Tax benefits of stock awards                                            2.9          0.3          0.7          0.4          0.1             1.6         0.0           2.1          0.0          0.0          0.0              0.0         0.0
                                          Deferred financing fees                                                 0.0          0.0         (5.2)         0.0          0.0             1.2         0.0           1.2          0.0          0.0          0.0              0.0         0.0
                                          Exercise of Endo Pharmaceuticals Holdings Inc. Stock Options            7.7          2.2          8.0          1.5          0.9             6.3         0.0           8.7          0.0          0.0          0.0              0.0         0.0
                                          Principal payments on line of credit                                                                                                                  300.0         300.0
                                          Principal payments on 6.25% convertible notes due July 2009             0.0          0.0        (72.0)         0.0          0.0             0.0         0.0           0.0         0.0           0.0          0.0           0.0            0.0
                                          Principal payments on non-recourse notes payable & other deb            0.0          0.0        (48.5)         0.0          0.0           (40.0)      337.9         297.9         0.0           0.0          0.0           0.0            0.0
                                          Net proceeds from issuance of convertible senior subordinated           0.0        370.7          0.0          0.0          0.0             0.0         0.0           0.0         0.0           0.0          0.0           0.0         (379.5)
                                          Purchase of hedge on convertible senior subordinated notes d            0.0       (107.6)         0.0          0.0          0.0             0.0         0.0           0.0         0.0           0.0          0.0           0.0            0.0
                                          Sale of common stock warrants                                           0.0         50.4          0.0          0.0          0.0             0.0         0.0           0.0         0.0           0.0          0.0           0.0            0.0
                                          Distribution to/Buy-out of non controlling interests                                                           0.0          0.0           (14.7)        0.0         (14.7)        0.0           0.0          0.0           0.0            0.0
                                          Purchase of common stock                                                0.0       (424.8)         0.0        (29.0)       (21.1)           (8.9)        0.0         (59.0)        0.0           0.0          0.0           0.0            0.0
                                      Net Cash From Financing Activities                                       ($29.0)     ($110.1)     ($117.1)      ($27.2)      ($20.1)         ($54.6)     $637.9        $536.0        $0.0          $0.0         $0.0          $0.0        ($379.5)

                                        Increase/(decrease) in cash and cash equivalents                       (277.8)       425.4       (67.2)        111.5       172.3           (218.2)     (484.1)       (418.5)      684.6         573.7        589.2         604.3          (49.4)
                                        Beginning cash balance                                                  628.1        350.3       775.7         708.5       820.0            992.3       774.1         708.5       290.0         974.5      1,548.2       2,137.4        2,741.7
                                      Ending cash balance                                                      $350.3       $775.7      $708.5        $820.0      $992.3           $774.1      $290.0        $290.0      $974.5      $1,548.2     $2,137.4      $2,741.7       $2,692.4
                                        Average cash balance                                                   $489.2       $563.0      $742.1        $764.2      $906.1           $883.2      $532.0        $499.2      $632.2      $1,261.4     $1,842.8      $2,439.6       $2,717.1

                            Source: Company data, Credit Suisse estimates.




                                                                                                                                                                                                                                                                                           13 December 2010
84
                                                                                                                                                                  13 December 2010




                                                                                                                                                      Americas / United States




                                                                             Watson Pharmaceuticals (WPI)
Rating                                               OUTPERFORM*
Price (10 Dec 10, US$)                                        49.40
Target price (US$)                                           60.00¹
52-week price range                                   51.95 - 37.69          Initiating with Outperform Rating and $60 TP
Market cap. (US$ m)                                       6,546.17
Enterprise value (US$ m)                                  7,446.48           ■   Initiating Coverage with an Outperform Rating and $60 Target Price.
*Stock ratings are relative to the relevant country benchmark.
¹Target price is for 12 months.                                              ■   Investment Case: We rate WPI outperform because: (1) Watson’s generics
                                                 Research Analysts
                                                                                 business has a favorable product mix; individual product wins can have an
                                           Michael Faerm
                                                                                 outsized positive P&L and cash flow impact due to WPI’s smaller size than TEVA
                                            212 538 1771                         or MYL; (2) WPI’s growing branded pharmaceuticals business provides
                           michael.faerm@credit-suisse.com                       diversification and complements its generics franchise; (3) Watson’s small
                                                                                 international business leaves it relatively shielded from price cut risk in Western
                                                                                 Europe compared to TEVA and MYL, while leaving room for upside via
                                                                                 incremental emerging markets bolt-ons (4) its strong balance sheet and cash
                                                                                 flows facilitate deals, in particular in the international business.
                                                                             ■   Key Risks for WPI: (1) High dependence on successful Paragraph IV
                                                                                 challenges and ANDA approvals; (2) value-destroying transactions, as the
                                                                                 company pursues deals to augment its international generics and branded
                                                                                 pharma businesses; and (3) global pricing pressures and foreign exchange
                                                                                 effects could add increased volatility and risk to revenue and earnings if the
                                                                                 international business grows.
                                                                             ■   Catalysts: WPI’s stock price could be sensitive to clinical and regulatory events
                                                                                 in the branded pipeline, as well as trials and 30 month stay expirations for
                                                                                 generic challenges. Two potentially near-term events are a patent trial decision
                                                                                 on Fentora (anytime), and a 30 month stay expiration on Ortho Tri-Cyclen Lo.
                                                                                 Launches of either would be upside to our model.
                                                                             ■   Valuation: Our $60 TP is a 50/50 blend of discounted cash flow (DCF) analysis
                                                                                 and relative P/E multiple valuation. Our DCF value is $64, based on a 9%
                                                                                 discount rate and 0.5% perpetuity growth rate. Our relative valuation is $56,
                                                                                 based on a 13.3x 2011 P/E ratio, which assumes WPI will trade at a 10%
                                                                                 premium to the group, which will trade at a 10% discount to the S&P.


Share price performance                                                      Financial and valuation metrics
           Daily De c 14, 2 009 - Dec 10, 2010, 12/14/09 = US$38.65          Year                                              12/09A          12/10E        12/11E        12/12E
 50
                                                                             EPS (CS adj.) (US$)                                  3.04           3.44           4.22         5.68
 45
                                                                             Prev. EPS (US$)                                        —               —             —             —
                                                                             P/E (x)                                              16.2           14.4           11.7           8.7
 40
 35
                                                                             P/E rel. (%)                                         92.0          100.2           93.6         78.7
                                                                             Revenue (US$ m)                                   2,793.0        3,521.4        4,114.3      5,367.4
  Dec-09          Mar-10            Jun-10          Sep-10
                                                                             EBITDA (US$ m)                                      662.4          800.2          998.6      1,425.8
                 Price                          Indexed S&P 500
                                                                             OCFPS (US$)                                          3.24           3.35           3.94         6.25
On 12/10/10 the S&P 500 index closed at 1240.4                               P/OCF (x)                                            12.2           14.7           12.5           7.9
                                                                             EV/EBITDA (current)                                  11.8             9.3           7.1           4.5
                                                                             Net debt (US$ m)                                    1,256            900            509         -140
                                                                             ROIC (%)                                             6.73           6.26           9.34        16.13
Quarterly EPS                    Q1           Q2            Q3         Q4    Number of shares (m)                             132.51     IC (12/10E, US$ m)              4,776.82
2009A                           0.69         0.73          0.78       0.85   BV/share (current, US$)                            26.4     EV/IC (x)                             1.6
2010E                           0.81         0.83          0.85       0.95   Net debt (current, US$ m)                         900.3     Dividend (12/09A, US$)                 —
2011E                           0.83         0.95          1.05       1.39   Net debt/tot. cap. (current, %)                    13.8     Dividend yield (%)                     —
                                                                             Source: Company data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                                                                                      85
                                                                                                        13 December 2010




Investment Highlights
We initiated coverage of Watson Pharmaceuticals (WPI) with an Outperform rating
and a 12-month target price of $60 per share.
We believe that Watson has several positives as an investment story, leading us to an
Outperform rating. Our investment thesis is fourfold:

■          Watson’s generics business has a favorable product mix, and individual product wins
           can have an outsized effect on earnings and cash (relative to Teva and Mylan);

■          The company’s developing branded pharmaceuticals business complements its
           generics franchise;

■          Watson’s small international business leaves it relatively shielded from price cut risk in
           Western Europe compared to TEVA and MYL, while leaving room for upside via
           incremental emerging markets bolt-ons;

■          Strong balance sheet and cash flows facilitate deals, in particular in the international
           business.

Generic Business Has Favorable Product Mix and the
Pros and Cons of Smaller Size
Watson is the third-largest player (by volume; fourth by value) in the U.S. generics market
(Exhibit 100).
                                     rd
Exhibit 100: WPI is the 3 leading Generic Company in the US by TRX market-share
Market-shares are based of generics and branded generics TRx, LTM ending October 2010 per IMS

                       25%                US Generics - TRx Market Share
                             20.9%
                       20%
    TRx Market Share




                       15%
                                                  12.1%

                       10%
                                                                   7.7%
                                                                                      6.8%

                       5%



                       0%
                             Teva                 Mylan          Watson              Sandoz

Source: IMS Health, Company data, Credit Suisse estimates




Specialty Pharmaceuticals                                                                                            86
                                                                                                                                            13 December 2010



Exhibit 101: US and Ex-US Revenue Breakdown
USD in millions, unless otherwise stated
                      2010          2015                                 2010        2015             Intl         Total
                       Intl          Intl                                 Intl         Intl         Revenue       Revenue
                    % Total       % Total                                $ Bn         $ Bn           CAGR          CAGR
                    Revenue      Revenue                               Revenue      Revenue        2010-2015     2010-2015
TEVA                  38%          47%                                  $6,212      $10,396           10.8%         6.4%
MYL                   49%          49%                                  $2,707       $3,684            6.4%         6.3%
WPI                   13%          12%                                     $444         $640           7.6%         9.1%
Source: Company data, Credit Suisse estimates

It lacks the U.S. and international scale of Teva and Mylan (and Sandoz globally) (Exhibit
101), but Watson’s generic footprint has several positive differentiators:

■        A product mix weighted toward extended release formulations and other
         difficult-to-manufacture products, such as patches and injectables. Due to
         technological barriers to entry in making some of these products, Watson enjoys some
         markets with less competition and consequently less share erosion and higher
         margins than in other more commoditized generic markets.
         Watson has the third-most controlled release approvals since 2001 (Exhibit 102). Its
         leadership is further underscored by the fact that it had 73% of the number of
         approvals as the leader, Teva (with 22, versus Teva’s 30), on a sales base only 20%
         of Teva’s.

Exhibit 102: Watson is a Leader in Controlled Release Product Approvals – Particularly
In Proportion to Total Sales
USD in millions, unless otherwise stated

                                           35                                                                  $16.0
    No. of Controlled Release Approvals,




                                                30
                                           30                                                                  $14.0
                                                        26
                                                                                                               $12.0
            1/2001-10/2010 (bars)




                                           25
                                                                                                                       Sales, 2009 (line)

                                                               22
                                                                                                               $10.0
                                           20
                                                                      17
                                                                             16                                $8.0
                                           15
                                                                                                               $6.0
                                                                                    10
                                                                                               9      9
                                           10
                                                                                                               $4.0

                                           5                                                                   $2.0

                                           0                                                                   $0.0
                                                Teva   Mylan Watson Sandoz Impax Actavis   KV        Dr.
                                                                                                   Reddy's

Source: Company data, Credit Suisse estimates

■        A P&L that is highly sensitive and provides strong EPS leverage to individual,
         large, generic, product opportunities. At $2.3 billion, Watson has about one-half of
         Mylan’s generic revenues and a one-quarter of Teva’s. However, Watson competes
         for the same generic opportunities as these other companies, and a win moves the
         needle on Watson’s EPS and valuation substantially more than Teva or Mylan (Exhibit
         103).




Specialty Pharmaceuticals                                                                                                                                87
                                                                                                                 13 December 2010



Exhibit 103: WPI’s P-IV Pipeline Value Magnified by Smaller Revenue Base

                                                       WPI's P-IV Pipeline Magnified by Smaller Base
   Revenues from Major P-IV Challenges as %




                                              30%
                                                                26.6%

                                              25%

                                                                                           19.4%       19.7%
               Total Revenues




                                              20%                            18.7%


                                              15%
                                                    10.2%
                                              10%


                                              5%

                                              0%
                                                       2011         2012         2013          2014       2015

                                                                           WPI   MYL    TEVA

Source: Company data, Credit Suisse estimates

          Two examples of this impact are Concerta and Lipitor.
          Concerta: Watson recently announced a deal with JNJ, whereby it will launch an
          authorized generic version of Concerta on May 1, 2011. This product represents an
          extremely lucrative opportunity to Watson. While the branded product is sizable at
          $986 million in U.S. sales (2009), more importantly, Concerta will present Watson with
          the holy grail in generics, a potentially long-lived market exclusivity. There are no
          approved ANDAs. In addition to Watson, Impax and Kudco (subsidiary of UCB) have
          applications at the FDA, but we believe they may be some time away from reaching
          the market. JNJ has filed a citizen’s petition asking the FDA to apply an additional
          bioequivalence metric, partial area under the curve (pAUC) at certain time intervals, in
          order to prove that the generic and branded drug are both bioequivalent and clinically
          equivalent. Furthermore, with an authorized generic available from May 1, 2011, we
          think the FDA likely does not have a sense of urgency regarding action on the citizen’s
          petition or ANDAs, a view shared by Impax in recent comments by their management.
          Lastly, we would like to point out that in November 2009, JNJ was able to add label
          tamper resistant language on the label which could block a generic entrant until
          November 2012, when the three years of exclusivity due to the additional claim
          expires.




Specialty Pharmaceuticals                                                                                                     88
                                                                                                                                                            13 December 2010



Exhibit 104: Concerta’s Contribution to WPI’s EPS                                             Exhibit 105: Concerta’s contribution to Watson’s Top-line
                                                                                              USD in millions, unless otherwise noted

                                Concerta EPS Contribution                                                         Concerta Revenue Contribution
                                                                                                                 Ex-Concerta      Concerta            % Concerta
    $8                   Ex-Concerta            Concerta       % Concerta               18%    $6,000                                                                         8%
                                     16.2%                                                                                                                          $112
                                                                            $0.28       16%                                 6.8%
    $7                                                      $0.57                                                                                                             7%
                                                  17.0%                                        $5,000                                   7.2%
                                    $0.92                                               14%                                  $362                   $223
    $6                                            $1.01                                                          $188                   $362                                  6%
                                                                                        12%    $4,000
    $5                                                                                                                                                                        5%
                        $0.41                                                           10%
    $4                                                                                         $3,000             4.6%                              4.2%                      4%
           $0.00
                                                            8.5%            $6.79       8%                                                                         $5,342
                       9.7%                                                                                                 $5,005                 $5,050
    $3                                                      $6.07                                                                     $4,675                                  3%
                                                                                        6%     $2,000            $3,927                                             2.0%
                                     $4.76       $4.95                      4.0%                        $3,521
    $2                 $3.80                                                                                                                                                  2%
           $3.44                                                                        4%
                                                                                               $1,000
    $1                                                                                  2%                                                                                    1%
           0.0%                                                                                         0.0%
    $0                                                                                  0%        $0                                                                          0%
           2010        2011          2012         2013      2014            2015                         2010     2011       2012       2013        2014               2015


Source: Company data, Credit Suisse estimates                                                 Source: Company data, Credit Suisse estimates

         Lipitor: As a result of its acquisition of Arrow, Watson will sell Pfizer’s authorized
         generic (AG) of Lipitor starting in November 2011. Although Lipitor presents a high
         revenue opportunity to Watson, the net cash flow impact will be significantly muted by
         earn-out payments to Arrow shareholders required as part of the Arrow acquisition.
         These payments will be booked to WPI’s cash flow statement, rather than as an
         expense. Thus Watson’s GAAP P&L will overstate the contribution of the product on
         WPI’s cash flow. We have chosen to subtract the Arrow payments in arriving at cash
         EPS, as we believe this better reflects the true (cash) economic impact to WPI.

Exhibit 106: Lipitor’s Contribution to WPI’s EPS                                              Exhibit 107: Lipitor’s contribution to WPI’s Top-line
                                                                                              USD in millions, unless otherwise noted

                   Lipitpr EPS Contribution (after Arrow Payments)                                                  Lipitor Revenue Contribution
                                                                                                                   Ex-Lipitor        Lipitor               % Lipitor
    $8                     Ex-Lipitor            Lipitor            % Lipitor           4%     $6,000                                                                         14%
                                                             3.2%               2.9%                                        12.4%
    $7                                                                                  3%                                                                                    12%
                                                   3.2%                                        $5,000
                                        2.6%                                                                                                                      $195
                                                                            $0.21                                                                   $201
    $6                                                       $0.21                                                          $667       $251
                                                                                        3%                                                                                    10%
                                                  $0.19                                        $4,000
    $5                                  $0.15                                                                     $63
                                                                                        2%                                                                                    8%
    $4     $0.00                                                                               $3,000
                       $0.01
                                                                                $6.87   2%                                              5.0%       $5,072         $5,259      6%
                                                            $6.42                                                          $4,700     $4,787
    $3                                            $5.78
                                     $5.53                                                     $2,000            $4,051                                            3.6%
                                                                                        1%              $3,521                                                                4%
    $2                 $4.20
           $3.44                                                                                                                                    3.8%
                                                                                        1%     $1,000                                                                         2%
    $1
           0.0%                                                                                         0.0%      1.5%
    $0                                                                                  0%        $0                                                                          0%
                       0.3%
           2010        2011             2012      2013       2014               2015                     2010     2011      2012        2013        2014           2015


Source: Company data, Credit Suisse estimates                                                 Source: Company data, Credit Suisse estimates

■        Watson has considerably fewer ANDAs than Teva or Mylan, and significantly
         fewer that are potential first-to-file applications, but compares favorably relative
         to its size. This statistic is admittedly rough, since the value of each opportunity is
         case-specific, but it has some value in getting a big-picture view of the companies’
         relative positioning (Exhibit 108 and Exhibit 109).
         Watson has substantially fewer “shots on goal” than Teva or Mylan, however this is
         mitigated to some extent by Watson’s smaller size and greater leverage per
         opportunity.




Specialty Pharmaceuticals                                                                                                                                                      89
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Exhibit 108: Watson Trails Teva and Mylan in ANDAs and                                                                              Exhibit 109: …but WPI Compares Favorably Relative to Its
First-to-File Applications…                                                                                                         Sales Base
Left scale: no. of ANDAs. Right scale: annual revenues in millions                                                                  USD in millions, unless otherwise noted

                     250                                                                $140                                                                          4.5%                               1.9%                           2.0%




                                                                                                                                                                                                                                               Branded Revenues of Filed Products/Total
                                                                                                                                                                                    3.9%                                                1.8%
                                                                   $117                                                                                               4.0%
                                                                            203         $120




                                                                                               Revenues of Branded Products, $ Bn
                                                                                                                                                                                                                                        1.6%




                                                                                                                                      No. of Filings/Total Revenues
                     200                                                                                                                                              3.5%
                                                                                                                                                                                                         3.1%
                                            $95                                         $100                                                                                                                                            1.4%
                                                                                                                                                                      3.0%
                                                       153
                                                                                                                                                                                                                                        1.2%
    No. of Filings




                                                                                                                                                                                                                                                             Revenues
                     150                                                                                                                                              2.5%
                                                                                        $80
                                                                                                                                                                                                                                 0.8%   1.0%
                                  110                                                                                                                                 2.0%
                                                                                        $60                                                                                                                                             0.8%
                     100                                                          $55                                                                                                                                            1.5%
                                                                      83                                                                                              1.5%
                                                                                                                                                                                                  0.5%                                  0.6%
                                                                                        $40                                                                                                                               0.4%
                                                                                                                                                                      1.0%   0.8%          0.9%
                                                                                                                                                                                                                                        0.4%
                      50                          45
                                                             $24                                                                                                                                                   0.6%
                                                                                        $20                                                                           0.5%                                                              0.2%
                             21
                                                                                                                                                                      0.0%                                                              0.0%
                      0                                                                 $0                                                                                     WPI                  MYL                    TEVA
                              WPI                  MYL                    TEVA
                                                                                                                                                                             FTF/Total Rev.                     ANDAs/Total Rev.
                            FTF     ANDAs         Revenue-ANDAs      Revenue-FTFs                                                                                            Revenue-FTFs/Total Rev.            Revenue-ANDAs/Total Rev.

Source: Company data, Credit Suisse estimates                                                                                       Source: Company data, Credit Suisse estimates

Watson is well positioned to capitalize on the well-known patent cliff faced by the major
pharmaceuticals group. Watson has a substantial number of potential upcoming generic
launches. (See Exhibit 110.) Our general rules of thumb for assuming launch dates are as
follows.

■                    Launch on dates provided by settlements, for settled cases

■                    Launch upon expiration of last litigated patent

■                    No at-risk launches assumed: we believe this is a more conservative approach than
                     assuming at risk launches (i.e., launches upon expiration the 30-month stay provided
                     by the Hatch/Waxman Act). We would prefer not to give our forecasts credit for these
                     launches, which are uncertain to occur, difficult to predict case-by-case, and in the
                     aggregate occur relatively infrequently. Our preference is to view them as upside to a
                     generic company stock.




Specialty Pharmaceuticals                                                                                                                                                                                                                                                          90
                                                                                            13 December 2010



Exhibit 110: Watson Upcoming Launches
                                        Upcoming Launches


                                        2009 IMS               Expected Launch
           Brand Name FTF Status          Sales         2010        2011          2012
           Valtrex        N                2,077.9      May
           Exelon             S             390.5        Jul
           Astellin           N             232.0       Aug
           Yasmin             N             108.9       Sep
           Pulmicort          N             883.1                       Early
           Concerta           S            1,186.6                      May
           Lipitor            S            7,552.6                      Nov
           Plavix             N            5,589.4                                May
           Clarinex           S             247.7                                 Jul
           Actos              S          $3,417.6                                 Aug
           Xopenex            Y             544.9                                 Aug
           Opana ER*          N             245.7                                 Sept
           Provigil           N            1,003.5                                Oct


           Total branded sales                           $2,809          $9,622   $11,049
           *certain strengths because IPXL has FTF on other strengths
Source: IMS Health, Paragraphfour.com, Company data, Credit Suisse estimates.

Exhibit 111 shows our summary forecast of selected Paragraph IV challenges and our
estimates of the revenues they will provide to WPI. These opportunities spike upward in
2012, the first full year of revenues from the large Concerta and Lipitor generic
opportunities.




Specialty Pharmaceuticals                                                                                91
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Exhibit 111: WPI PIV Challenges—Key from 2010E–2015E
in millions, unless otherwise stated; FTF is First to File, Y=Yes, N=No, S=Shared
                                2009 IMS   Estimated
           Brand Name                                   FTF   2010E     2011E      2012E     2013E     2014E       2015E                                               CS comments
                                  Sales     Launch

                                                                                                                          WPI to launch in Aug 2012 per settlement; Exclusivity shared with MYL and Ranbaxy. Teva has a
Actos                           $3,417.6    Aug-12                                  112.5      95.6       59.4       44.5
                                                        S                                                                 PIII filed
Ambien CR                         966.8      Jun-20     N                                                   0.0       0.0 WPI case dismissed 8/2008, amended to PIII.
                                                                                                                          WPI to launch in Aug 2015 per settlement; WPI forfeited exclusivity. Par too settled and enters in
AndroGel                          711.3     Aug-15                                                                  122.5
                                                        Y                                                                 Feb 2016

AplenzinTM ER                      16.1      Jun-26                                                                          Trial scheduled for May 2, 2011; Exclusivity shared with Paddock Labs; 30 mnths expire 7/5/2012
                                                        S

                                                                                                                             Per Settlement WPI can launch in August 2010 and will pay 32.5% of their net sales of this product
Astellin                          232.0     Aug-10              16.2      13.8       10.4       6.6         4.4        4.4
                                                                                                                             to Meda until 1 February 2011. Apotex was FTF and was allowed to lauch in March 2010
                                                        N
Azilect                            92.3     Feb-17      S                                                                    WPI, MYL and Orchid have shared exclusivity.30 months stay expires Nov. 2013.
                                                                                                                             Multiple filters all sued 09/2007; 30 mnths expire Nov. 2010. In August 2010 WPI lost litigation and
Boniva Tablets                    736.8    2019-2023                                   0.0      0.0         0.0        0.0
                                                        S                                                                    2012 patent is upheld. 2019 and 2023 patents in litigation.
Cenestin                           35.7      Jan-16     N                                                                    WPI sued on April 26, 2010; Paddock Labs owns exclusivity. 30 mnths expire Sept. 2012
Clarinex                          247.7      Jul-12     S                              6.5      4.8         3.2        2.4   WPI and several other generics have settled. Can launch July 1, 2012
                                                                                                                             Sandoz seems FTF. WPI became the 5th and the latest P-IV sued on 9/2010. 30 mnths expire Jan
Combigan                           80.8      Mar-22
                                                        N                                                                    2013
                                                                                                                             WPI to launch authorized generic 5/1/2011 (deal is thorugh end 2014). Impax 180 days likely lapsed;
                                 1,186.6    May-11                       187.7      362.4     362.4      223.0      111.5
Concerta                                                N                                                                    ANDA approval pending
Crestor                          3,040.2     Jul-16     S                                                                    Patent is valid; WPI potential launch in July 2016 alongwith all other filers.
                                                                                                                             Bench trial scheduled for June 6, 2011; Exclusivity shared with Impax, Wockhardt and Sandoz. 30
                                 2,837.2     Jun-13                                            12.4       84.2       59.4
Cymbalta                                                S                                                                    mnths expire Feb. 2012
                                           March 2016                                                                        Settlement reached with all three - Teva, WPI and Anchen. As per the settlement, generics may
                                  245.3                                                                                9.2
Enablex                                     (settled)   S                                                                    enter 3/15/2016 ( or 6/15/2016 if 6 month pediatric extension is granted)
Evista                            686.1      Oct-14     N                                                 13.9       23.7    Lawsuit against WPI filed on March 3, 2010; FTF Teva lost case. 30 mnths expire July 2012
Exelon                            390.5      Jul-10     S        6.2       6.3         8.1      4.6        3.7        2.6    WPI to launch on July 1, 2010 per settlement ( exclusivity shared with Sun Pharma)

Femcon Fe                           62.8     Jan-13                                             2.9         0.6        0.7 WPI to launch in Jan 2013 per settlement; Teva has exclusivity
                                                        N
                                                                                                                          WPI is sole FTF.Trial concluded in May 2010 ; judgement awaited. Teva has settled for Oct 2018. 30
                                  172.5      Mar-19
Fentora                                                 Y                                                                 mnths expired Oct. 2010
Lidoderm topical patch 5%        1,110.0     Oct-15     Y                                                            62.9 Litigation ongoing; still in discovery. 30 mnths expire July 2012
Lipitor                          7,552.6     Nov-11     S                 63.4      666.9     250.8      200.7      194.5 WPI to launch AG in Nov 2011; Exclusivity shared with Ranbaxy
Lo Seasonique                        5.0     Dec-11     S                                                                 Teva sued on Jan 6, 2010; Exclusivity shared with Lupin. 30 mnths expire May 2012
Loestrin 24 Fe                     307.1     Jan-14     Y                                                115.7       50.9 WPI to launch in Jan 2014 per settlement; Lupin 6 months later per settlement.
Lovenox                          2,758.8    Mid 2011    S                  6.4         6.1      5.3        6.1        6.1 Teva, along with Watson, awaits FDA approval; MNTA and Sandoz have FDA approval.
Lunesta                            761.9     Feb-14     S                                                 19.9       14.1 Shared exclusivity with 10 others. Litigation pending; 30 mnths expires June 2012
                                                                                                                          WPI is the sole FTF. Sandoz is another filer. Case voluntarily dismissed 04/2009. 30 mnths expire
Lybrel                             15.2     3Q2010
                                                        Y                                                                 July 2010.
                                                                                                                          Litigation ongoing; In discovery and consolidated with Teva case; Exclusivity shared with Teva, MYL,
                                 1,602.4    Dec-18
Lyrica                                                  S                                                                 Sandoz, Lupin, Wockhardt, Sun, Actavis. 8 FTF. 30 mnths expie June 2012
Micardis                          231.8      Jan-14     Y                                                 68.2       46.6 WPI to launch after 2014
MucinexDM/D                       166.4      Apr-20     Y                                                                 Reckitt filed suit on April 20, 2009; Litigation ongoing. 30 mnths expire Sept. 2011
                                                                                                                          WPI to launch in January 2015 per settlement; Amneal, Mylan, Dr. Reddy's. Lupin, Teva, Orchid,
                                 1,180.2     Jan-15                                                                  79.7
Namenda                                                 S                                                                 Sun, Upsher-Smith, and Wockhardt enter along with WPI
Nuvigil                            82.2      Jun-24     Y                                                                 Lawsuit against WPI on January 5, 2010; Case consolidated with Teva's
                                                                                                                          WPI setlled for 9/15/2012 launch. Settled with many others -Teva:Sept 2012, Actavis: July 2011,
                                  245.7     Sep-12                                              6.5         4.7       2.2
Opana ER                                                N                                                                 Impax - Jan 2013. Sandoz - ( launch date not known).
                                                                                                                          Litigation pending with WPI, Sandoz, Lupin. 30 mnths expires March 2011. Teva has launched at-risk
                                  276.8      Jun-16                                                                   0.1
Ortho-Tricyclen Lo                                      N                                                                 but then later withdrew and settled for Dec 2015.
                                                                                                                          Generics can launch by May 2012 latest ( if peds exclusivity granted).Around 6-7 players at time of
                                 5,589.4    May-12                                    16.0     12.8         6.1       4.3
Plavix                                                  N                                                                 launch.
Propecia                          156.1     Nov-13      N                                       0.0         8.0       4.8 Reddy's seem FTF. 30 mnths expires Sept. 2012

Provigil                         1,003.5     Apr-12                                   13.6     14.7        11.1        7.0 MYL, Teva and Ranbaxy are FTF and settled for April 2012.WPI and FTC are locked in litigation.
                                                        N
Pulmicort                         883.1    Early 2011   N                 20.3       21.5      15.1       15.1        7.6 WPI to launch in early 2011.Teva launched the AG in Dec. 2009
Rapamune                          208.6      Jul-13     S                                      19.8       11.0       37.9 30 mnths expire Sept. 2012; Exclusivity shared with Ranbaxy
Renvela                           165.0     Sep-14      Y                                                 40.0       62.3 30 mnths expire Oct. 2012. Litigation in Discovery stage.
Rozerem                            87.7      Jul-19     Y                                                                 Teva is FTF. Bench trial for both Teva and WPI on 11/14/11.
Sanctura XR                        56.8     Feb-25      Y                                                                 Bench trial set of May 2, 2011; Sole Exclusivity
Seasonique                         82.7     Jan-24      Y                                                                 WPI lost case, patent upheld
Simcor                             88.4     Mar-14      N                                       0.0         2.9       2.3 Teva is FTF. 30 mnths expire Sept. 2012
Trilipix                          244.2     Jan-25      N                                                                 Impax is FTF. 30 mnths expire Sept. 2012
Xopenex                           544.9     Aug-12      S                             85.7     17.1       12.2        7.3 WPI to launch in Aug 2012 per settlement;Sole exclusivity; Teva to launch in Feb 2013

                                  108.9     Sep-10               2.6       2.1         1.4      0.7         0.7        0.7 Teva launched AG . Bayer's lawsuit against WPI dismissed 9/29/10 clearing way for WPI launch
Yasmin                                                  N
                                                                                                                             TEVA had settled with Bayer and was to launch the AG in July 2011. However Teva launched its
                                           Assumed                                                                           generic version of Yaz ( under the name Gianvi) in June 2010. Bayer has sued Teva over this launch
                                  782.8                                   19.9        15.1      8.5         6.8        3.4
                                           Jan. 2011                                                                         in US. Since Teva was FTF with 180 exclusivity; WPI was to enter in Dec 2011. However in view of
Yaz                                                     N                                                                    Teva's early launch it may lauch early.
Unidentified P-IV opportunity                                   100.0     100.0      100.0     100.0      100.0      100.0
Total P-IV Sales                                              $125.0    $419.7    $1,426.2   $940.7    $1,021.5   $1,075.4

Source: IMS Health, Paragraphfour.com, Company data, Credit Suisse estimates.

Rising Branded Business Complements Generics
A core element of Watson’s strategy is growing its branded pharmaceutical business. We
forecast that branded revenues will grow from 11% of total in 2010 to 15% in 2015.

■         Complements the generics business with non-correlated growth with longer life cycles.

■         Tight therapeutic focus leverages core competency in women’s health, with adjacency
          in urology.

■         Modest R&D investment and risk.




Specialty Pharmaceuticals                                                                                                                                                                                                    92
                                                                                                                                                  13 December 2010


The branded business not only helps drive revenue growth, but contributes meaningfully to
margin upgrades by virtue of its margin premium to Watson’s generics and distribution
businesses (Exhibit 112).

Exhibit 112: Branded Business Contributes Meaningfully to Corporate Gross Margin

                                                    Watson's Business Segment Gross Margin Breakdown
                                                              Branded          Generics            Distribution             Corporate
                                         90%
                                                     80.6%                                                           78.7%              80.2%
                                                                 77.7%       78.3%        78.1%        77.8%
                                         80%

                                         70%

                                         60%
   Gross Margin




                                                                 50.0%       48.7%                     48.9%         48.4%              48.4%
                                                     45.9%                                46.5%
                                         50%

                                         40%         44.4%       44.8%       44.5%                     44.7%         45.0%              45.4%
                                                                                          43.2%
                                         30%
                                                     15.6%       14.7%       15.0%        15.0%        15.0%         15.0%              15.0%
                                         20%

                                         10%

                                         0%
                                                     2009        2010        2011          2012         2013             2014           2015

Source: Company data, Credit Suisse estimates

In Exhibit 113, it can be seen that corporate gross margins increase by 60 bps from 2010
to 45.4% in 2015, and operating margin grows from 14.8% to 21.5%.

Exhibit 113: Watson Annual Operating Income and Margins 2009A–2015E

                                                                 WPI - Annual Operating Income and Margins
                                                                   Operating Income       Operating Margin        Gross Margin

                                         $1,400                                                                                           60.0%


                                         $1,200                             46.6%     47.5%
                                                                                                    46.1%      45.1%            45.3%
        Annual Operating Income ($ MM)




                                                       44.4%      44.8%

                                         $1,000
                                                                                                                                          40.0%

                                          $800


                                          $600

                                                                                      23.8%                                               20.0%
                                          $400                                                      21.0%      20.8%            21.5%
                                                                            18.4%
                                                       16.9%
                                                                  14.8%
                                          $200


                                               $0                                                                                         0.0%
                                                       2009       2010       2011         2012      2013          2014          2015



Source: Company data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                                                                      93
                                                                                                   13 December 2010



International Business Is a Small Contributor but
Could Provide Upside
Watson acquired a beachhead for its international operations with the Arrow acquisition. It
currently represents a relatively small proportion of total revenues, about 13%
(approximately $450 million in 2010, of approximately $3.5 billion in total revenues). The
business is concentrated in a handful of markets: Canada, France, United Kingdom,
Sweden, and Australia, with smaller presences in Germany, Brazil, and Mexico (Exhibit
114).

Exhibit 114: Watson—Main Geographic Markets
                     WPI           WPI         Generic        Generic         Total Pharma Mkt
                    Share         Rank        Utilization    Market, $      Sales, $      CAGR
                  (by value)    (by value)   (by volume)     in billions   in billions   2009-14
USA                  6.3%           4           72%               $31.9      $286.7       0.3%
Canada                4%            7                              $2.9       $17.3       4.3%
EU - Low Generic Utilization
France             5%               7           23%                $4.1       $37.9       1.4%
EU - High Generic Utilization
UK                 5%               5           57%                $2.9       $19.2       1.6%
Germany                                         57%                $6.1       $38.4       4.4%
Sweden             3%                           44%                            $4.7       4.3%

Asia
Australia                           2           30%                $0.8        $9.7       4.4%
New Zealand                         2           0%                             $1.0       5.0%
Latin America
Brazil                                          17%                           $10.7       8.6%
Mexico                                                                         $9.5       7.5%
Source: IMS Health, Company data, Credit Suisse estimates.

Watson trails Teva, Mylan, and Sandoz in the scope of its international operations. In
some ways, this can be seen as a positive, most notably the lesser degree of exposure to
Western European price cuts. However, we believe that on balance, international markets
are a fundamentally important driver of long-term growth in the generics industry.
WPI appears to have a strong desire to expand this business, particularly through deals
such as Moksha8. Earlier this year, Watson announced that it had taken an equity stake in
Moksha8 by investing $30 MM. Watson anticipates leveraging Moksha8’s sales force to
commercialize Watson’s branded products. Currently, Moksha8 is starting by selling eight
of Watson’s drugs. Watson is implementing a dual approach in South America, expanding
through Moksha8 and continuing to grow its legacy generics business in Brazil for the
tender market, and eventually envisions merging the two. By virtue of Watson’s Malta
manufacturing facility geographic proximity to Turkey, Watson has been able to gain
approval for marketing in the country and is excited about the growth opportunity in the
relatively less competitive market.
WPI’s international position now is both a liability (due to its small size and scope) and an
opportunity, in that it underpins very little of the current stock price and thus could create
upside.

Strong Balance Sheet and Cash Flows Facilitate
Deals
Watson has articulated its desire to use acquisitions and business development as one of
its means to drive growth. Management has indicated that growing its international
generics business is its first priority, especially Russia and India. They have also
suggested that they would be interested in a transforming deal that would lower their tax
rate, which at 37% competitively disadvantages them to Teva (15%) and Mylan (28.6%.)


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Watson is the second least levered of the 3 major U.S. generics companies, with an
debt/EBITDA ratio of 1.5x at the end of 3Q10. By 2015, according to our estimates, WPI
will have a debt/EBITDA ratio of 0.3x, giving it enough financial flexibility to do deals.

Exhibit 115: Watson is positioned to be least levered

                                                 Leverage Comparison across Generic Companies

                      4.0x              3.7x                               TEVA                       MYL                     WPI
                                                                   3.0x
   Debt/LTM EBITDA




                      3.0x
                                                                                         2.3x                     2.2x
                      2.0x
                                               1.5x                                                                                     1.5x
                                  1.4x
                                                                          1.0x                                                                                1.0x
                      1.0x                                 0.8x
                                                                                    0.6x          0.6x      0.6x           0.6x    0.6x
                                                                                                                                               0.3x        0.4x       0.3x

                      0.0x
                                        3Q10                       2011                  2012                     2013                  2014                  2015


Source: Company data, Credit Suisse estimates

Watson generates strong cash flows, and we project that the company’s $1.2 billion in
debt will be net cash by 2012, (Exhibit 116 and Exhibit 117) assuming no new debt is
issued and repayments are made only as required. The company should also have
substantial cash flow margin to meet its debt repayment obligations in 2010-15, with over
$3.5 billion in cash flow.

Exhibit 116: Net Debt Will Turn to Net Cash in 2012                                                                               Exhibit 117: Watson Should Generate More than Adequate
USD in millions, unless otherwise stated
                                                                                                                                  Cash to Repay Its Existing Debt
                                                                                                                                  in millions, unless otherwise stated
                                                             Net Debt                                                                                                Debt Repayment Analysis
                                                      Total Debt    Liquid Assets    Net Debt                                                                Cashflow after Operations and Investing   Debt Repayment
  $4,000                                                                                                                            $4,000                                                                         3,555
                                                                                                                                    $3,500
  $3,000
                                                                                                                                    $3,000
                                                                                                                                    $2,500
  $2,000
                          1,235          1,067                                                                                      $2,000
                                  969                       885            848
  $1,000                                         537                                                                                $1,500
                                                                                           398             398
                                                                                                                                                                             841           826          814                800
                                                                                                                                    $1,000                     668
                     $0                                                                                                                        406                                               450
                                                                                                                                      $500           150             200
                             3Q10              2011             (113)
                                                              2012           2013            2014            2015                                                                  0
                                                                                                                                        $0
  ($1,000)
                                                                                 (991)                                               ($500)     2011              2012        2013          2014          2015     2011-2015
  ($2,000)                                                                                                       (2,631)            ($1,000)
                                                                                                 (1,817)


Source: Company data, Credit Suisse estimates.                                                                                    Source: Company data, Credit Suisse estimates.

We forecast WPI’s debt/EBITDA to drop from 1.4x to 0.3x by 2015, assuming mandatory
repayments are made and no new debt is issued (Exhibit 118).
Watson’s strong cash flows and manageable leverage position it well for taking on debt to
fund acquisitions. If the company is willing to raise its leverage to 3x EBITDA, then we
estimate it could borrow $2 billion in 2011 or $3.4 billion in 2012 (Exhibit 119.)This fits well
with the company’s stated desire to pursue deals for international generics businesses and
branded products.




Specialty Pharmaceuticals                                                                                                                                                                                                        95
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Exhibit 118: Leverage Ratios Will Fall Without New Debt                                         Exhibit 119: Debt Issuance within Target 3.0x
                                                                                                Debt/EBITDA
                                                                                                in millions, unless otherwise stated
                               Leverage Ratio Analysis                                                          Debt Issuable within Target 3.0x Debt/EBITDA
                                 Debt/EBITDA             Debt/Book Cap
  1.6x                                                                               30%          $4,500                                                               4,251
          27%                                                                                                                                           3,999
  1.4x                                                                                            $4,000
                        23%                                                          25%                                   3,470
                                                                                                  $3,500                                  3,260
  1.2x
                                     17%                                             20%          $3,000
  1.0x
                                                  15%                                             $2,500     2,001
  0.8x                                                                               15%
          1.4x                                                                                    $2,000
  0.6x
                        1.0x                                    7%                   10%          $1,500
                                                                            6%
  0.4x                                                                                            $1,000
                                     0.6x         0.6x                               5%
  0.2x                                                                                             $500
                                                               0.3x         0.3x
  0.0x                                                                               0%               $0
          2010         2011         2012          2013         2014         2015                              2011          2012          2013           2014           2015


Source: Company data, Credit Suisse estimates.                                                  Source: Company data, Credit Suisse estimates.

Forecast Summary
A summary of our 2010-2014 WPI estimates is shown in Exhibit 69. A comparison to
consensus is imperfect at best, as the consensus numbers include a mix of estimates with
and without the impact of the recent deal for a Concerta authorized generic. This deal is
very material to revenues and earnings in 2011 and beyond, and consensus will be of
minimal use until more brokers have updated their estimates to include this deal.

Exhibit 120: Summary of Credit Suisse Estimates for Watson
USD in millions except EPS, unless otherwise noted

                                   WPI                                   2009             2010E            2011E           2012E              2013E              2014E
                             Total Revenue - CS                          $2,793.0         $3,521.4         $4,114.3        $5,367.4           $5,037.7           $5,273.2
                     Total Revenue - consensus                           $2,793.0         $3,521.6         $4,155.7        $4,737.1           $4,538.7           $4,649.1
                                      Difference                            $0.0             ($0.2)         ($41.4)         $630.2             $498.9             $624.1
                           Revenue Growth - CS                                             26.1%            16.8%           30.5%               (6.1%)             4.7%
                            Gross Margin % - CS                           44.4%            44.8%            44.5%           43.2%              44.7%              45.0%
                    Gross Margin % - consensus                            45.8%            44.4%            43.0%           43.0%              44.9%              46.7%
                                      Difference                          (1.4%)             0.5%             1.5%            0.2%               (0.2%)            (1.7%)
                        Operating Margin % - CS                           16.9%            14.8%            17.5%           21.5%              21.3%              22.1%
                 Operating Margin % - consensus                           17.2%            20.1%            19.9%           20.6%              22.7%              23.1%
                                      Difference                          (0.3%)            (5.3%)           (2.4%)           0.9%               (1.5%)            (1.0%)
                                       EPS - CS                            $3.04            $3.44            $4.22           $5.68               $5.96             $6.64
                              EPS - consensus*                             $2.70            $3.40            $4.08           $4.94               $5.15             $5.55
                                      Difference                           $0.34            $0.04            $0.14           $0.74               $0.81             $1.09
                               EPS Growth - CS                                             13.0%            22.6%           34.6%                5.1%             11.2%
          *2009 change to cash EPS reporting not reflected in 2009 consensus
Source: Company data, FACTSET, Credit Suisse estimates.

Exhibit 121: WPI Guidance per 3Q 2010 Earnings
Company            Sales Guidance                                     EPS Guidance                           Other Variables

Watson             2010:                                              2010 EPS: $3.37 - $3.45                2010:
                   Total Revenue: $3.5 Bn                                                                    Adjusted EBITDA: $835 MM - $850 MM
                   Total Global Generics: $2.3 Bn, International                                             R&D - $265 MM - $275 MM GAAP
                   sales: $500 MM - $550 MM - didn't give an                                                 SG&A - $700 MM - $720 MM GAAP
                   update on Int. Sales - run rate in 2H10 go up as                                          Amortization Expense - $175 MM
                   compared to 1H10,                                                                         GAAP effective tax rate - 30%
                   Total Brands: $400 MM                                                                     Adjusted cash tax rate - 37%
                   Total Distribution: $825 MM                                                               Adjusted EBITDA and Cash EPS - compound growth rate of >10% - no
                                                                                                             significant BD included, includes contribution from some patent challenge
                                                                                                             opportunities


Source: Company data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                                                                                                96
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Exhibit 122: Watson Annual Revenues 2009A–2015E
USD in millions, unless otherwise stated

                                                    WPI - Annual Sales Trends

                                 $6,000                6 year sales                                                $5,454
                                                       CAGR of 11.8%                                   $5,273
                                                                                $5,367       $5,038
                                 $5,000
                                                                     $4,114
           Annual Sales ($ MM)




                                                       $3,521
                                 $4,000
                                           $2,793

                                 $3,000



                                 $2,000



                                 $1,000
                                           2009         2010         2011         2012       2013      2014        2015


Source: Company data, Credit Suisse estimates.



Exhibit 123: Watson Revenue Mix
USD in millions, unless otherwise stated

 in $ M                                                  Watson Revenue Mix
  $6,000
                                              Generics          Branded                 Distribution    Others
  $5,000


  $4,000


  $3,000


  $2,000


  $1,000


     $0
                                 FY 2009     FY 2010       FY 2011            FY 2012        FY 2013     FY 2014          FY 2015


Source: Company data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                                                        97
                                                                                              13 December 2010




Investment Risks
Dependence on successful Paragraph IV challenges involving costly and potentially
prolonged litigation
Paragraph IV challenges present significant windfall profit opportunities and are a major
contributor to Watson’s success story. However, Paragraph IV challenges involve costly
and potentially prolonged litigation. The pendulum can swing in either direction and
unfavorable rulings present significant downside to earnings.
FDA approval delays in ANDA applications
Risks include failure to obtain timely approval, or unexpected delays in FDA approval, of
Watson’s generic drugs.
Intense competitive pressures that accompany the generic industry with regard to
players, pricing, and share
Increasing number of generic players due to low barriers to entry are making it a difficult
playing field. More companies are competing for a piece of the post-patent pie driving
down pricing and compressing margins. Additionally, maintaining sizeable share is
becoming challenging.
Global pricing pressures could affect top-line growth
With the recent economic crisis and fiscal pressures facing governments, especially in
Europe, there have been significant drug legislation amendments leading to price cuts in
some countries. While volumes have offset price decline in certain geographies, further
pricing pressures present significant headwinds to the business. In the event that Watson
is not able to adapt nimbly to this changing pricing environment, the company’s top-line
revenue and global growth are at risk.
Foreign exchange risk due to global revenue exposure
Watson does business in a number of countries and its financials are exposed to a
number of currencies. In the current environment of currency volatility, it is difficult to
predict what turn the exchange rates will take and what impact that will have on Watson’s
profitability.
Delay in development or failure to obtain FDA approval of pipeline assets
Watson has a very active pipeline and a delay or setback in development of any of these
assets or failure to obtain FDA approval is a risk to the future earnings power of the
company.
Unsuccessful commercialization of currently marketed products
Watson may not be able to fully realize the commercial value of the its currently marketed
products due to supply disruptions, market dynamics, or FDA hold ups, hurting its top-line
growth prospects. This is especially relevant to Crinone, ella, and Lo Loestrin FE.
Uncertainty around generic market dynamic of Lipitor and Concerta
Generic Lipitor and generic Concerta are both significant drivers of Watson’s future
earnings. Reduced generic penetration, increased pricing discounts, as well as greater
number of potential generic competitors than assumed could present downside to the
stock.
The biosimilars opportunity proves elusive due to regulatory, clinical, and
competitive reasons
Watson has partnered with Eden Biodesign to harness the biosimilars opportunity.
Biosimilars present a potentially large market opportunity for many years. However, the




Specialty Pharmaceuticals                                                                                  98
                                                                                      13 December 2010


clinical, regulatory and competitive and competitive landscape remain undefined and
depending on how they evolve, could prove to be less lucrative than hoped for.




Specialty Pharmaceuticals                                                                          99
                                                                                                                                                                                   13 December 2010




Valuation
Historical Perspective and Stock Drivers
Watson’s stock price graph has steadily been on an upward trajectory with product
acquisitions, positive pipeline updates, ANDA filings, FDA approvals, and business
development. On November 2, 2010 when WPI announced that it will be selling an
authorized generic version of JNJ’s Concerta beginning May 1, 2011, the stock reached
an intra-day high of $51.20, about 10% above the previous close. The stock typically
trades    on   forward    earnings   expectations   and   we    expect    it  to   be
range-bound until management provides 2011 guidance at WPI’s analyst day on January
21, 2011.

Exhibit 124: Stock-Price Chart with Key Events—WPI

                                                                                                     WPI
                                                                                                                                                                    WPI announces Uracyst
                                                                                                                                                                    Pilot study did not meet
                                                                                                     Abbott sued
               $55.00                                                                                                                                                  efficacy endpoints
                                                                                                     WPI alleging
                                                                                                     infringement
                                                                                                      of eight US
                                                               WPI & HRA
                                                                                                      patents for            Started
                                                                announce                                                                            Watson to launch
                                                                                                        Simcor            shipment of a
               $50.00                                           exclusive                                                                            exclusive AG of
                            Endo's partner Teikoku               licensing                                                   generic
                                                                                                                                                   generic Concerta on
                           received a Paragraph IV            agreement to                                                  version of
                                                                                                                                                        May 2011
                         certification notice from WPI       commercialize                                                   Exelon
                          advising of an ANDA filing           emergency
                                  for Lidoderm               contraceptive                                                                                                       Positive PIII results
               $45.00
                                                                in the US                                                                                                       reported in PIII study
                                                                                                                                                                              evaluating Prochieve 8%
                                                                                                                                                                              reducing risk of pre-term
                        WPI completes
                                                                                                                                                                                         birth
                        acquisition of
               $40.00    Arrow Group                                              Management raised                                                           WPI launches
 Stock Price




                                                                                    its 2010 EPS                                                             generic Yasmin
                                                                                       guidance

                                     Raised FY 2009                            Management issues                                             Watson
                                    revenue guidance                           FY 2010 net income                                         announces Q4
               $35.00                                                                                                                                                              WPI announces
                                                                                 guidance above                                           launch for ella,                            marketing
                            Management                                         analysts' estimates                                        emergency OC                             partnership with
                         reaffirmed FY 2009                                                                                                                                           Moksha8
                          revenue guidance
                                                         WPI completes the
               $30.00                                    acquisition of Eden     WPI's acquisition of US rights to
                                                          Biopharm Group            Crinone from Columbia
                                                                                  Laboratories; Columbia files
                                                                                         definitive proxy

               $25.00
                                                                                                 The US House passed legislation that
                                                                                                  restricts drugmakers' ability to make
                                                                                                 deals that the FTC said keep generic
                                                                                                         medicines off the market
               $20.00
                    Nov-09    Dec-09        Jan-10         Feb-10       Mar-10      Apr-10      May-10        Jun-10      Jul-10          Aug-10       Sep-10        Oct-10      Nov-10



Source: Company data, Credit Suisse estimates.

Since the close of the Arrow acquisition in late 2009, the short interest in WPI has
remained relatively low, notably the lowest among the big-three, Teva, Mylan, and Watson.




Specialty Pharmaceuticals                                                                                                                                                                             100
                                                                                                                                       13 December 2010



Exhibit 125: WPI Short Interest Ratio Expressed as a Percent of Trading Volume Days

                                                         WPI Short Interest Ratio

                           6.0



                           5.0
    Short Interest Ratio




                           4.0



                           3.0



                           2.0



                           1.0



                           0.0
                            11/30/2009   01/29/2010    03/31/2010     05/28/2010     07/30/2010      9/30/2010       11/30/2010


Source: Bloomberg, Credit Suisse estimates, Short interest ratio is calculated by dividing the short interest
by average 30-day daily volume. The ratio implies the number of days it takes to cover the outstanding
short interest.



Exhibit 126: WPI Short Interest as Percent of Outstanding Shares Has Fallen to About 2%
Recently

                                     WPI Short Interest Expressed as % of Outstanding Shares
                           5%


                           4%


                           4%
    Short Interest Ratio




                           3%


                           3%


                           2%


                           2%


                           1%


                           1%


                           0%
                            11/30/2009    01/29/2010     03/31/2010     05/28/2010      07/30/2010       9/30/2010        11/30/2010


Source: Bloomberg, Credit Suisse estimates. Short Interest Ratio is calculated by dividing the short interest
by number of outstanding shares. The ratio implies what percentage of outstanding shares are currently
held as short positions.




Specialty Pharmaceuticals                                                                                                                         101
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Our Watson Target Price of $60 a Blend of P/E and
DCF Methodologies
We have valued Watson using a 50/50 blend of discounted cash flow (DCF) analysis
and relative multiples of 2011 EPS, in order to capture the merits of each method.
Our target price derivation is summarized in Exhibit 127.

Exhibit 127: Our Blended Target Price Is $60 per Share
                                                                      CS Price Target (1)                  DCF                              Relative Valuation
                                Current        Rating         Price        Upside/          2011 PT        DCF           Premium/      Relative   Target      2011      Rel. Val.
                                 Price                       Target      (Downside)     Implied P/E       Price         Discount (2)   Multiple   Multiple   EPS Est.    Price
S&P 500, Current                  $1,240
S&P 500, as of 12/3/2010          $1,225                                                                                                           13.5x     $91.00

Weighting                                                                                                  50%                                                           50%
Generic Specialty Pharma Group                                  ---           ---             ---           ---            (10%)        0.90x      12.1x        ---       ---
MYL                         $20.14          Outperform         $25          24.1%            12.6x         $25              5%          1.05x      12.7x      $1.99      $25
TEVA                        $53.80           Neutral           $58          7.8%             11.1x         $59             (10%)        0.90x      10.9x      $5.20      $57
WPI                         $49.40          Outperform         $60          21.5%            14.2x         $64              10%         1.10x      13.3x      $4.22      $56



(1) Average of DCF and relative valuation, weighted as shown.
(2) Each group's valuation is relative to S&P 500, while each stock is relative to its group (parity to group = 1.0).
Source: Company data, Credit Suisse estimates.

We believe that DCF is an appropriate method for valuing generic specialty pharma
companies, as it avoids overweighting short-lived 180 day exclusivity periods for
successful first-to-file generic challenges. DCF is particularly relevant at the present time,
in that it allows us to look beyond the impending “patent cliff” – peaking for the industry in
2011-2012 and Watson leveraging it in 2011 – 2012 with generic Concerta and generic
Lipitor launches – and value the cash flows before and after the cliff opportunity.
We model cash flows to 2020 and calculate a terminal value. We use a 9% discount rate
and a 0.5% perpetuity growth rate in the terminal value. Although we calculate a weighted
average cost of capital of 7.8% using CAPM, we have elected to use a 9% discount rate
for a more conservative estimate of a return expected by an investor commensurate with
Watson’s risks. Our assumptions and valuation are detailed below in Exhibit 128, and a
sensitivity analysis assuming a range of discount rates and terminal growth rates is shown
in Exhibit 129.

Exhibit 128: WPI DCF: Assumptions and Valuation Exhibit
$ in millions, except for stock price and unless otherwise stated
Assumptions:                                                              Valuation:
Risk-Free Rate (10 yr UST)                       3.3%                     PV Cash Flow 2011-2020                             $5,192
Market Risk Premium                              8.0%                     PV Terminal Value                                  $3,679
Beta                                             0.65                     Enterprise Value                                   $8,870
Cost of Equity                                   8.5%
MV Equity to Capital                            85.7%                     Less: Net Debt/(Cash)                               $969
Debt Rate                                        5.5%                     Equity Value                                       $7,902
Tax Rate                                        35.0%
Cost of Debt                                     3.6%                     Diluted shares (MM)                                 124.3
MV Debt to Capital                              14.3%                     Current Stock Price*                               $49.40
WACC                                             7.8%                     Equity value per share                                $64
Terminal Growth Rate                             0.5%                     Upside                                               30%
* closing price as of 12/10/2010
Source: Company data, Credit Suisse estimates.

.




Specialty Pharmaceuticals                                                                                                                                                    102
                                                                                                                     13 December 2010



Exhibit 129: Our DCF Analysis Values WPI at $64 per Share
                             Discount Rate                   Equity Value per Share (b)
                                (WACC)                    0.0%         0.5%             2.0%
                                  7.0%                   $81.11       $84.65          $99.53
                                  8.0%                   $70.26       $72.73          $82.62
                                  9.0%                   $61.79       $63.57          $70.45
                                 10.0%                   $54.97       $56.29          $61.25
                                 11.0%                   $49.37       $50.37          $54.05


Source: Company data, Credit Suisse estimates.

In addition, we include a relative P/E component in our valuation due to the common
use of this metric among investors, and also due to the tendency of the specialty pharma
stocks to respond to near-term earnings performance. For our P/E based valuation, we
start by assuming that the generic specialty pharma group will trade a 10% discount to the
S&P 500, as discussed in our industry note, and then apply a 10% premium for WPI. We
base this premium on earnings growth beginning in 2011 after the generic Concerta and
generic Lipitor launches and we believe WPI will do more international acquisitions driving
further upside. This 10% premium is slightly less than Watson’s current 16% premium to
the group, based on next twelve months’ earnings (Exhibit 130, Exhibit 131). Current
2011 and 2012 multiples for WPI and comparable companies are shown in Exhibit 132.

Exhibit 130: WPI Has Historically Been In-line with the Generic Specialty Pharma Sector
U.S Generic Spec Pharma Sector comprises of MYL, TEVA and WPI
                      45.0

                                                                    US Generic Spec Pharma Sector
                      40.0                                          WPI

                                                                    S&P
                      35.0


                      30.0
 NTM Price/Earnings




                      25.0                   Average: 17.9x
                                                                                                    Average: 17.1x
                      20.0


                      15.0
                                                                          Average: 16.1x
                      10.0                                                                                                    12.1


                       5.0


                       0.0
                               01

                               01

                               02

                               02

                               03

                               03

                               04

                               04

                               05

                               05

                               06

                               06

                              07

                              07

                              08

                              08

                              09

                              09

                              10

                              10
                            20

                            20

                            20

                            20

                            20

                            20

                            20

                            20

                            20

                            20

                            20

                            20

                            20

                            20

                            20

                           20

                           20

                           20

                           20

                           20
                         1/

                         1/

                         1/

                         1/

                         1/

                         1/

                         1/

                         1/

                         1/

                         1/

                         1/

                         1/

                         1/

                         1/

                         1/

                         1/

                         1/

                         1/

                         1/

                         1/
                      1/

                      7/

                      1/

                      7/

                      1/

                      7/

                      1/

                      7/

                      1/

                      7/

                      1/

                      7/

                      1/

                      7/

                      1/

                      7/

                      1/

                      7/

                      1/

                      7/




Source: FactSet, Company data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                                       103
                                                                                                                                                                                                       13 December 2010



Exhibit 131: WPI Currently Is Trading at a 16% Premium
*Generic Spec Pharma comprises of MYL, TEVA and WPI
                                                     1.50


                                                     1.40
  WPI Generic Spec Pharma Weighted Relative P/FE




                                                                                                                            WPI Relative to Generic Spec Pharma
                                                     1.30


                                                     1.20                                                                                                                                                          1.16


                                                     1.10


                                                     1.00


                                                     0.90                                                                               Average: 0.97x

                                                     0.80


                                                     0.70


                                                     0.60


                                                     0.50
                                                             01

                                                             01

                                                             02

                                                             02

                                                             03

                                                            03

                                                             04

                                                            04

                                                            05

                                                             05

                                                            06

                                                            06

                                                            07

                                                            07

                                                            08

                                                            08

                                                            09

                                                            09

                                                            10

                                                            10
                                                          20

                                                          20

                                                          20

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                                                          20

                                                          20

                                                          20

                                                          20

                                                          20

                                                          20

                                                          20

                                                          20

                                                          20

                                                          20

                                                         20

                                                         20

                                                         20

                                                         20

                                                         20

                                                         20
                                                       1/

                                                       1/

                                                       1/

                                                       1/

                                                       1/

                                                       1/

                                                       1/

                                                       1/

                                                       1/

                                                       1/

                                                       1/

                                                       1/

                                                       1/

                                                       1/

                                                       1/

                                                       1/

                                                       1/

                                                       1/

                                                       1/

                                                       1/
                                                    1/

                                                    7/

                                                    1/

                                                    7/

                                                    1/

                                                    7/

                                                    1/

                                                    7/

                                                    1/

                                                    7/

                                                    1/

                                                    7/

                                                    1/

                                                    7/

                                                    1/

                                                    7/

                                                    1/

                                                    7/

                                                    1/

                                                    7/
Source: FactSet, Company data, Credit Suisse estimates.




Exhibit 132: Generic Specialty Pharmaceutical Valuation Comparables
*rows highlighted in grey i.e. MYL, TEVA and WPI are Credit Suisse covered stocks and use Credit Suisse estimates
                                                                       Price             Market    Enterprise     Relative Valuation            Relative Valuation     Relative Valuation     Relative Valuation
                                                                          52 week         Cap        Value        2011         2012      EPS    2011        2012       2011        2012       2011         2012
 Ticker Company                                              Current   High     Low      ($ MM)     ($ MM)        P/E          P/E     CAGR % PEG           PEG      EV/Sales    EV/Sales   EV/EBITDA EV/EBITDA     YTD
                                                                                                             CS Generic SpecPharma Index (Equal Weighted)
HSP                                                Hospira    $56.27   $60.49   $47.36    $9,566      $10,660     13.0x        11.7x     12.4   1.0x        0.9x       2.5x        2.3x        8.4x        7.7x    10.3%
IPXL                                               Impax       19.11    22.39     7.20     1,251          893     15.2x        13.2x     10.5   1.5x        1.3x       1.8x        1.6x        6.4x        6.2x    40.4%
MYL                                                Mylan       20.14    23.63    16.55     9,791       13,725     10.1x         8.8x     13.4   0.8x        0.7x       2.2x        2.0x        8.2x        7.3x     9.3%
PRGO                                               Perrigo     66.06    68.38    37.46     6,161        7,009     17.2x        15.8x     13.6   1.3x        1.2x       2.5x        2.3x       11.2x       10.4x    65.9%
PRX                                                Par         38.00    38.78    23.09     1,356        1,136     11.0x        11.1x      2.6   4.2x        4.3x       1.3x        1.4x        5.5x        5.7x    40.4%
TEVA                                               Teva        53.80    64.95    46.99    51,506       55,672     10.3x         9.4x     14.7   0.7x        0.6x       3.0x        2.7x        8.8x        8.0x    (4.2%)
WPI                                                Watson      49.40    52.20    37.26     6,190        7,159     11.7x         8.7x     14.5   0.8x        0.6x       1.7x        1.3x        7.0x        4.9x    24.7%
CS Generics SpecPharma Index (Equal Weighted)                                                                     12.7x        11.2x            1.5x        1.4x       2.1x        2.0x       7.9x         7.2x     27%
CS Branded SpecPharma Index Median (Equal Weighted)                                                               11.7x        11.1x            1.0x        0.9x       2.2x        2.0x       8.2x         7.3x     25%
*rows highlighted in grey are CS covered stocks and use CS estimates

Source: FactSet, Company data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                                                                                                                            104
                                                                                                13 December 2010




Takeout Analysis
We have analyzed the potential takeout value of Watson using the following two
methodologies, and the results are shown below in Exhibit 133
(10)Breakeven acquirer EPS; and
(11)Comparable transactions, focusing on average premiums paid to target stock prices,
    and a multiples-based comparables approach, including LTM mean and median
    multiples for revenue and EBITDA.
With breakeven acquirer EPS, we analyze the maximum price per share that a variety of
potential acquirers could pay for Watson and maintain breakeven 2012 EPS with no
synergies (excluding amortization of transaction-related intangible assets). Some of our
key assumptions in this analysis are as follows:

■   Our analysis is purely financial. We are not opining on the strategic fit of potential
    buyers in the scope of this analysis, and are simply posing a few theoretical buyers as
    illustrative examples.

■   High proportion of cash consideration: We believe that most potential acquirers would
    aim to maximize the extent of cash consideration (and minimize stock) used in the
    deal. Most potential buyers have large cash balances and substantial access to
    inexpensive debt, both of which would be cheaper capital than their relatively low-
    multiple stock. Our model assumes use of cash up to the following caps:
               o    all of the target’s cash and 10% of an acquirer’s cash; then
               o    new debt up to the lesser of 1.5 times pro forma total debt/EBITDA, at an
                    interest rate of 5.0% (which is conservative for many major pharma
                    companies in light of recent debt raises such as MRK’s 10 year bonds at
                    3.875%); or
               o    $10 billion maximum new debt issuance.

■   No synergies. We believe that an acquirer of Watson could potentially realize
    meaningful synergies. However, because synergies could be variable among
    potential buyers, and in order to take a conservative approach to this analysis of
    maximum purchase price, we have not included any potential synergies.
With comparable transaction analysis, we have used a basket of historical specialty
pharmaceutical acquisitions (Exhibit 134), and applied the average and median premiums
and multiples paid in these deals to estimate a potential takeout price for Watson.
As a result of these analyses, we estimate that Watson could be valued at $66-$68 per
share based on premiums paid, $80 - $87 per share based on comparable transaction
multiples, and $70 - $79 per share based on potential acquirer breakeven 2012 EPS
assuming no synergies. However, in part due to access to very cheap capital, many
potential buyers could afford to pay substantially more than that, and this ability to pay
could drive bidding higher. Of course, other considerations such as strategic fit and
available alternatives would be important for any acquirer and could limit a purchase price
to levels below these EPS dilution-driven takeout values.




Specialty Pharmaceuticals                                                                                  105
                                                                                                     13 December 2010



Exhibit 133: Potential Maximum Price Assuming No Synergies and Based on Comparable Acquisition Multiples


        $100
                                                 TakeOut Value Analysis
                                                           $87.21
                                                                             $85.42
                 $78.76                                             $79.78            $80.75
                                           Current stock
         $75                                   price
                            $69.07                                                                  $68.40
                                                                                           $65.89



         $50
                                                 $49.40


         $25




           $0
                  Pfizer    Teva                            Mean Median Mean Median 1 mo.        1 mo.
                                                           LTM rev LTM rev EBITDA EBITDA PremiumPremium
                                                                                          mean median

                   Based on Potential Acquirer's                      Based on Comparable Acquisition
                      Breakeven EPS in 2012                                      Multiples

Source: Company data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                       106
                                                                                                                                                                                     13 December 2010



Exhibit 134: Comparable Acquisitions Generic Specialty Pharmaceuticals
USD in millions, unless otherwise stated
     DATE                                                                                                                  EQUITY         ENTERPRISE                       LTM                Premium
  ANNOUNCED           ACQUIRER                                TARGET                                                       VALUE            VALUE               REVENUES          EBITDA       1 Month


     03/18/10         Hospira                                 Baxter's Injectable Business                                      112                     $112       0.7x            7.7x
     10/28/10         Teva                                    Theramex - Merck KGaA Women's Health                           $368                       $368       2.7x           30.7x
     09/28/10         Endo                                    Qualitest                                                      $800                      $1,200      3.8x           16.7x
     05/21/10         Abbott                                  Piramal Heathcare Solutions Business(5)                                                  $3,190      6.4x           31.9x
     03/18/10         TEVA                                    Ratiopharm                                                                               $4,933      2.3x           11.8x
     02/01/10         Cephalon                                Mepha                                                                                     $590       1.6x            NA           NA
     06/17/09         Watson Pharmaceuticals                  Arrow Group                                                                              $1,750      2.7x           11.1x         NA
     05/20/09         Novartis                                EBEWE                                                                                    $1,200      4.4x            NA           NA
     04/09/09         Sanofi-Aventis                          Medley                                                                             € 500
                                                                                                                                                   €               3.5x            NA           NA
     01/23/09         GSK                                     UCB (Generics divison)                                                             € 515
                                                                                                                                                 €                 5.0x            NA           NA
     09/22/08         Sanofi-Aventis                          Zentiva (Czech Republic)                                                         €€ 1,800            2.9x           12.4x
     07/18/08         Teva                                    Barr                                                          7,460                      $8,960      3.2x           13.1x        60.9%
     07/07/08         APP Pharmaceuticals                     Fresenius SE(1)                                               4,150                      $5,090      6.2x           13.7x
     06/11/08         Daiichi Sankyo                          Ranbaxy                                                                                  $8,500      5.4x            NM          49.1%
     03/31/08         Teva                                    Bentley                                                                                   $360       2.9x          38.5x
     11/15/07         Gedeon Richter                          Polpharma (Poland)                                                                       $1,400      3.9x           13.9x
     05/13/07         Mylan Laboratories                      Merck KGaA generic business                                  $6,626                      $6,626      2.7x           14.7x         NA
     03/05/07         Zentiva (Czech Republic)                Eczacibasi                                                                         € 460
                                                                                                                                                     €             3.1x           13.7x
     01/22/07         Hikma (International)                   Ribosepharm (German Oncogenerics)                                                           $45      1.8x            8.0x
     11/30/06         Actavis (Iceland)                       Abrika (US)                                                                      110-125             4.2x            8.9x
     11/21/06         Actavis (Iceland)                       Zio Zdorovje (Russia)                                                                       $30      1.5x            6.4x
     09/21/06         Hospira (International)                 Mayne Pharma (International)                                                             $1,980      3.2x           15.2x
     08/28/06         Mylan Laboratories                      Matrix Laboratories                                           1,011                       1,241      3.9x            NM          21.2%
     06/26/06         Barr Pharmaceuticals                    Pliva                                                         2,200                       2,412      2.4x           18.7x         2.2%
     03/29/06         Ranbaxy                                 Terapia (Romania)                                                                           324      4.3x           12.4x
     03/28/06         Actavis                                 Sindan                                                           177                      $160       2.0x            8.0x         NA
     03/27/06         Sanofi-Aventis                          Zentiva (Czech Republic)                                                                  $430       4.2x           15.1x
     03/13/06         Watson Pharmaceuticals                  Andrx Corporation                                             1,856                      $1,451      1.4x           20.3x        40.1%
     02/15/06         Dr. Reddy's                             betapharm Group                                                 571                       $571       2.9x          11.7x          NA
     10/17/05         Actavis                                 Alpharma(2)                                                     810                         810      0.9x            8.9x         NA
     07/25/05         Teva                                    IVAX                                                          7,420                       8,530      4.2x           25.9x        23.8%
     05/20/05         Actavis                                 Amide Pharmaceutical                                            500                         460      4.3x            8.6x         NA
     02/21/05         Novartis                                Eon Labs                                                      2,687                       2,492      5.8x           13.6x        23.5%
     02/21/05         Novartis                                Hexal AG                                                      5,684                       5,684      3.4x            NA           NA
     06/07/04         Novartis                                Sabex                                                           565                         565      6.3x            NA           NA
     10/31/03         Teva                                    Sicor                                                         3,386                       3,069      5.8x           14.4x        38.5%
     10/18/02         Novartis                                Lek                                                             866                         755      2.1x            9.9x         NA
     07/12/01         Teva                                    FH Faulding (Injectable)(3)                                     365                         365      2.2x           12.7x         NA
     07/12/01         Alpharma                                FH Faulding (Oral)                                              660                         660      3.2x           19.8x         NA
     05/25/00         Watson Pharmaceuticals                  Schein Pharmaceuticals                                          717                         919      2.1x           22.7x        41.2%

                                                                                                                                         Mean                      3.5x           14.4x        33.4%
                                                                                                                                         Median                    3.2x           13.7x        38.5%



Source: Company filings and press releases.
(1) APP Pharmaceuticals - Fresenius SE deal: Enterprise value and revenue multiple based on average, factoring in the contingent value right
(2) 50% of 2004 financials and 1H05 financials.
(3) Withdrawn.
(4) 9 months ending 9/30/04 annualized.
(5) EBITDA of the healthcare solutions business is based on a 20% company wide margin published by Piramal and next years revenues of $500m based on Abbott estimates. The Enterprise Value
is an NPV adjusted value based on Abbott's costs of capital.

Source: Company data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                                                                                                        107
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Catalysts
Approval of Watson’s novel OC, in-licensed from Warner Chilcott, expected anytime in
December is the most near term catalyst. Following FDA approval, Watson plans on
launching ella, the five day emergency contraceptive, and the novel OC together in
January 2011. Recently, Watson reported a positive key data readout from the study
evaluating Crinone in the treatment of pre-term birth.
The stock price will be most sensitive to Watson’s analyst day scheduled for January
2011, when management will provide guidance and give a business as well as pipeline
review. Management has also indicated that they expect approval of generic Ferrlecit
soon. Additionally, the CMS bundling rules for dialysis, affecting many of Watson’s urology
products, will go into effect in 2011.
The Street will be looking for official guidance around Concerta’s authorized generic
margins, which Watson is supposed to launch on May 1, 2011, per settlement with JNJ.
Ranbaxy’s FDA-issue resolutions will also be closely followed for read-through on possible
competition for generic Lipitor when Watson launches the authorized generic on
November 30, 2011.

Exhibit 135: Watson’s Catalyst Calendar
        Timing                   Catalyst/Event     Sensitivity                                Fundamentals
                            Novel OC: FDA Action        *       Watson expects approval later this year for their new oral contraceptive pill
    December 2010
                            Date                                that is licensed from WCRX
                            ella and Novel OC:           *      Watson soft launched this 5 day emergency contraceptive pill in December
     January 2011           Commercial Launch                   2010 (soft launch) and plans a bigger launch of both the Novel OC and ella
                                                                in Jan. 2011. ella will complete with Teva's Plan B.
                            ella: NDA filing with        *      HRA Pharma plans to file before end of 2010 and WPI will be responsible
       4Q 2010
                            Health Canada                       for marketing and commercialization in Canada
                            GELNIQUE: Canada             *      WPI filed the application for GELNIQUE in overactive bladder and expects
      End of 2010
                            Approval                            approval in late 2010
                            RAPAFLO: Canada             **      WPI expects approval in early 2011
      Early 2011
                            Approval
                            Analyst day                 ***     WPI will give 2011 guidance as well as a business and pipeline review in
   January 21, 2011
                                                                the 3rd week of January
                    Crinone: Pre-term birth              *      WPI expects to file NDA for Crinone in pre-term birth after pre-NDA
       2Q 2011
                    NDA filing                                  meeting in 1Q 2011
                    Concerta: Launch AG                  *      WPI to launch AG of Concerta on May 1, 2011
     May 1, 2011
                    Concerta
                    Lipitor: Launch AG                   *      WPI to launch AG of Lipitor on November 30, 2011
  November 30, 2011
                    Lipitor
Source: Company data, Credit Suisse estimates.

A couple of at-risk launches that could provide meaningful upside to Watson’s earnings
are Oral Contraceptives Ortho Tri-Cyclen Lo by JNJ and Yaz by Bayer, and Fentora by
Cephalon which currently is in litigation.

Exhibit 136: WPI Potential Meaningful 30-Month At-Risk Launches in 2010 and 2011
                                         Date                     Drug                   2009 IMS sales

                                  Could be anytime              Fentora                        $172.5

                                      January, 2011               Yaz                          $782.8

                                        March, 2011      Ortho Tri-Cyclen Lo                   $267.8
Source: Company data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                                                108
                                                                                                                                                    13 December 2010




Company Description
Watson Pharmaceuticals is a leading specialty pharmaceutical company engaged in the
development, manufacturing, marketing, sale, and distribution of generic and branded
pharmaceutical products.
The company markets generics in the United States, United Kingdom, Canada, France,
Australia, and various European countries.
The global branded business primarily is focused on urology, including Rapaflo for
treatment of benign prostatic hyperplasia, Genlique for treatment of overactive bladder,
and Trelstar for treatment of prostate cancer. In addition, Watson has a robust pipeline
with promising assets, such as Uracyst for cystitis, and is expanding into women’s health
with products including ella, a novel contraceptive pill.
Furthermore, Watson strategically is positioning itself to capitalize on the potential
biogeneric opportunity by actively developing biologic manufacturing capabilities and has
acquired Eden Biodesign toward that end.

Exhibit 137: Watson—2010E Sales by Products                                         Exhibit 138: Watson—2015E Sales by Products
                        WPI Net 2010E Revenue Breakdown                                                    WPI Net 2015E Revenue Breakdown


                                          Others                                                                              Others
                                           3%                                                                                  2%


                                                                                                      Distribution
                 Distribution                                                                             23%
                     24%


                                                                                                                                                 US Generic
                                                              US Generic
                                                                                                                                                    49%
                                                                 51%

             Total Branded                                                                       Total Branded
                   9%                                                                                 14%



                       International
                                                                                                             International
                          Generic
                                                                                                                Generic
                            13%
                                                                                                                  12%
    US Generic    International Generic     Total Branded   Distribution   Others       US Generic    International Generic    Total Branded   Distribution   Others


Source: Company data, Credit Suisse estimates.                                      Source: Company data, Credit Suisse estimates.

Pipeline
Watson has a fertile women’s health pipeline, with 3 drugs in Phase III. The novel OC in-
licensed from Warner Chilcott, one-year vaginal ring and estrogen-free contraceptive
patch will further bolster Watson’s already robust women’s health franchise. FDA
approved ella and Watson plans on a full launch for both ella and the novel OC in January
2011. FDA decision on the novel OC is expected anytime soon. Prescription drug ella is
the only 5-day emergency contraceptive on the market.
Second generation products of Gelnique and Rapaflo are being studied in overactive
bladder and prostatitis, respectively.
Watson is developing a biosimilars portfolio focused on niche therapeutic categories, such
as women’s health. The first officially announced product being developed in association
with Eden Biodesign is recombinant Follicle Stimulating Hormone, currently in Phase I
trials.




Specialty Pharmaceuticals                                                                                                                                          109
                                                                                               13 December 2010



Exhibit 139: Watson’s Late Stage Pipeline
          Product               Indication        Status                Next Catalyst
Novel OC                       Contraception      NDA      Approval in December 2010

One-year Vaginal Ring          Contraception       PIII

Androderm 2nd                   Testosterone
                                                   PIII
Generation                  Replacement Therapy

Crinone                        Pre-term Birth      PIII    Pre-NDA meeting in 1Q 2011

Gelnique 2nd
                             Overactive Bladder    PIII
Generation

Uracyst                           Cystitis         PII     PII data end of 2010

Estrogen Free
                               Contraception       PII
Contraceptive Patch

Rapaflo - Label
                             Prostate Disorders    PII     Moving into PIII shortly
Extension
Recombinant Follicle
Stimulating Hormone               Infertility       PI
(rFSH)
Source: Company data, Credit Suisse estimates.

Novel OC
In-licensed from Warner Chilcott, Watson expects the FDA to approve the novel OC
anytime now. The company has not disclosed the differentiating factor or market
opportunity for this drug. Upon FDA approval, the company plans on launching both ella
and this drug together.
One-Year Vaginal Ring
This product currently is in PIII with safety studies ongoing. Watson expects to submit the
NDA by early 2012 and launch upon approval by late 2012. Licensed from Population
Council, this contraceptive drug is a novel progestin and ethinyl estradiol ring and is
intended to be worn for 3 consecutive weeks with a week’s gap in between, resulting in 13
cycles per year. We estimate risk-adjusted peak sales of $44 million in year 7 from launch.
Crinone
Indicated for infertility, Crinone is being investigated in prevention of pre-term birth in
women with short cervix. On December 6, 2010, Watson reported positive top-line results
from the Phase III trial and expects to file the NDA in 2Q 2011. Full data will likely be
published in a scientific journal soon. Acquired from Columbia Laboratories, currently
markets this drug for treatment of infertility. We assume a mid-2012 launch with a potential
priority review granted based on an unmet need. We model risk-adjusted peak sales of
$145 million in 2017, year 7 from launch.
Androderm 2nd Generation
A testosterone replacement therapy, Watson is developing the 2nd generation of currently
marketed Androderm, which has about 5% TRx market share per IMS. In PIII stage of
clinical development, Watson expects to file in late 2012 and launch by 2013 into this
growing therapeutic category.
Gelnique 2nd generation
Watson currently is developing the 2nd generation of Gelnique, a gel for the treatment of
Overactive Bladder. A life cycle management program, Watson aims to file the NDA by
late 2011 and launch in 2012.




Specialty Pharmaceuticals                                                                                 110
                                                                                                                  13 December 2010




Management
Management Team
Paul M. Bisaro, President, CEO and Director on the Board, has been CEO of Watson
since joining Watson in September 2007. Paul and his team have collectively over 100
years in pharmaceuticals and are working towards extending Watson’s leadership in the
women’s health arena, extended release product manufacturing, and expanding its global
footprint.

Exhibit 140: Watson’s Management Team—Collectively over 100 Years in Pharmaceuticals
         Name            Principal Position                                          Comments
                                                 ■ CEO and President and on Board of Directors since joining in September 2007
                                                 ■ Over 20 years experience in senior legal and executive positions
                           President, Chief      ■ Tenures with Barr Pharmaceuticals and the law firm Winston & Strawn and a
     Paul M. Bisaro       Executive Officer,
                                                 predecessor firm, Bishop, Cook, Purcell
                        Director on the Board
                                                 ■ Served as President and COO and in various additional capacities including
                                                 Senior Vice President - Strategic Business Development at Barr
                                                 ■ Recently appointed CFO in October 2009, he was been at Watson since 1997 in
                                                 various roles, including Corporate Controller and Treasurer
                        Chief Financial Officer,
     R.Todd Joyce                                ■ Over 18 years experience in accounting and finance
                        Senior Vice President
                                                 ■ Tenures with Watson, ICN Pharmaceuticals, and Coopers & Lybrand and Price
                                                 Waterhouse
                                                 ■ Joined Watson in September 2009 as Global Brands EVP
                            Executive Vice
                                                 ■ Over 29 years experience in the pharmaceutical industry
 G. Frederick Wilkinson   President - Global
                                                 ■ Tenures at Sandoz (Novartis' generic business unit), Duramed Pharmaceuticals
                                Brands
                                                 and Columbia Laboratories
                            Executive Vice       ■ Joined Watson in September 2010 as Global Generics, EVP
  Sigurdur Oli Olafsson   President - Global     ■ Tenures at Actavis, Pfizer, and Omega Farma
                               Generics          ■ Board member of Generic Pharmaceutical Association
                                                 ■ Serving as Watson's SVP, Research and Development, he has been with
                                                 Watson for more than 10 years since June 1999
                         Senior Vice President -
 Charles D. Ebert, Ph.D.     Research and        ■ Over 20 years as an executive in pharmaceutical research and development
                             Development
                                                 ■ Tenures at Watson and TheraTech, Inc
                                                 ■ Received his Ph.D. in Pharmaceutics from the University of Utah in 1981
Source: Company Data, Credit Suisse estimates.

Watson’s compensation policy allows for a balanced mix of annual and longer-term
incentives. The philosophy is to align executive cash and equity incentives with company
performance and focus employee efforts on shareholder value creation by providing equity
incentives. Furthermore, the incentive award program is designed to avoid steep payout
cliffs that encourage short-term business decisions to meet payout thresholds and
significant long-term incentive compensation is awarded in restricted stock to discourage
short-term risk taking.
We consider Watson a potential acquisition target and in the event that the company is
bought, we highlight the management termination agreements below in Exhibit 141.
Notably, the CEO would receive about $20 million in the event of termination without
cause or for good reason after a change in control.




Specialty Pharmaceuticals                                                                                                     111
                                                                                                  13 December 2010



Exhibit 141: Management Termination Agreements
            Name & Designation                   Compensation Component    Termination / Change in Control
                Paul M. Bisaro                             Salary                   $6,000,000
                President, CEO                             Bonus                         0
                                                    Benefit Continuation             4,147,180
                                                      Outplacement                       0
                                                     Restricted Stock                5,216,756
                                                      Stock options                  4,149,220
                                                       Total Value                  $19,513,156
                 R.Todd Joyce                              Salary                    $1,275,000
                  SVP, CFO                                 Bonus                      212,500
                                                    Benefit Continuation              852,955
                                                      Outplacement                      9,000
                                                     Restricted Stock                 905,207
                                                      Stock options                    13,970
                                                       Total Value                   $3,268,632
           David A. Buchen                                 Salary                    $1,527,102
   SVP, General Counsel and Secretary                      Bonus                      254,517
                                                    Benefit Continuation              994,916
                                                      Outplacement                      9,000
                                                     Restricted Stock                1,368,684
                                                      Stock options                    17,463
                                                         Total Value                 $4,171,682
             Thomas R. Russillo                             Salary                   $1,384,354
                 Executive VP                              Bonus                      570,028
                                                    Benefit Continuation                 0
                                                      Outplacement                       0
                                                     Restricted Stock                1,781,262
                                                      Stock options                      0
                                                         Total Value                 $3,735,644
           G. Frederick Wilkinson                          Salary                    $1,920,000
               Executive VP                                Bonus                          0
                                                    Benefit Continuation                  0
                                                      Outplacement                      9,000
                                                     Restricted Stock                 495,125
                                                      Stock options                       0
                                                       Total Value                   $2,424,125
                             Total, 5 named executives                              $33,113,239
Source: Company Data, Credit Suisse estimates.

Board of Directors
Andrew L. Turner chairs the 11 person board of directors.




Specialty Pharmaceuticals                                                                                    112
                                                                                                                                13 December 2010



Exhibit 142: Watson Board of Directors
                                                              Number of Issued
                                                                                  % Share
                                                                  Shares-
            Name                      Afflitiation                               Benificial                  Position                Independent
                                                                 Beneficial
                                                                                 Ownership
                                                                Ownership

      Andrew L. Turner           Trinity Health Systems            70,000        less than 1%         Chairman of the Board             Yes


        Paul M. Bisaro         President and CEO, WPI             284,895        less than 1%            Member of Board                 No
                                                                                                    Compensation Committee,
    Christopher W. Bodine             MinuteClinic                 4,288         less than 1%   Nominating & Corporate Governance       Yes
                                                                                                            Committee
                             J&J State Street Pharmacy; J&J
                                                                                                Compensation Committee, Regulatory
      Michael J. Fedida      Saint Michael’s Pharmacy; J&J         56,668        less than 1%                                           Yes
                                                                                                     Compliance Committee
                            Pharmacy and Classic Pharmacy
                                                                                                   Audit Committee, Regulatory
      Michel J. Feldman             Seyfarth Shaw                  73,334        less than 1%                                           Yes
                                                                                                      Compliance Committee
                                                                                                   Audit Committee, Regulatory
      Albert F. Hummel         Pentech Pharmaceuticals            204,514        less than 1%                                           Yes
                                                                                                      Compliance Committee
                                                                                                    Chairperson of Nominating &
     Catherine M. Klema            Nettleton Advisors              38,368        less than 1%    Corporate Governance Committee,        Yes
                                                                                                     Compensation Committee
                                                                                                Chairman of Regulatory Compliance
       Jack Michelson        Healthcare Industry Specialist        62,001        less than 1%   Committee, Nominating & Corporate       Yes
                                                                                                      Governance Committee

      Anthony Tabatznik       Robin Hood Holdings Limited            0           less than 1%                Director                    No
                                                                                                   Chairman of Compensation
       Ronald R. Taylor             Tamarack Bay                   65,001        less than 1%                                           Yes
                                                                                                   Committee, Audit Committee
                                                                                                  Chairman of Audit Committee,
        Fred G. Weiss              FGW Associates                  84,334        less than 1%   Nominating & Corporate Governance       Yes
                                                                                                            Committee
Source: Company Data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                                                     113
                                                           13 December 2010




Financial Models
Please find our financial models on the following pages.




Specialty Pharmaceuticals                                             114
                                                                                                                           13 December 2010



Exhibit 143: Watson Global Revenue Forecast Summary
USD in millions, unless otherwise stated
                                           FY 2008        FY 2009     FY 2010     FY 2011     FY 2012     FY 2013     FY 2014     FY 2015
Generics
     Women's Health                           $325.0         $362.0      $392.8      $424.2      $441.2      $458.8      $477.2      $496.3
     Other US generics (est.)                1,079.0        1,249.8     1,417.8     1,674.0     2,602.3     2,098.3     2,165.1     2,208.0
  Total US Generic (est.)                    1,404.0        1,611.8     1,810.6     2,098.3     3,043.5     2,557.2     2,642.3     2,704.3
  International Generic (est.)                   0.0           30.0       444.2       488.6       527.7       569.9       609.8       640.3
Total Product Sales                          1,404.0        1,641.8     2,254.8     2,586.9     3,571.2     3,127.1     3,252.1     3,344.6
Other Generic                                   70.4           26.4        37.9        30.3        24.3        19.4        15.5        12.4
Total Generics                              $1,474.3       $1,668.2    $2,292.7    $2,617.2    $3,595.5    $3,146.5    $3,267.6    $3,357.0
Branded
  Nephrology (est.)                          $166.0         $133.9       $28.0       $65.2       $58.7       $52.8       $47.5       $42.8
  Urology (est.)                               78.0           96.4       116.6       138.4       155.6       173.6       194.3       187.3
  Other Specialty (est.)                      153.0          163.4       173.5       217.9       243.9       258.6       275.6       295.0
  Pipeline                                      0.0            0.0         0.0        22.8        66.3       123.6       169.6       216.1
Total Product Sales                           397.0          393.7       318.1       444.2       524.4       608.7       687.0       741.1
Other Branded                                  58.0           67.3        80.0        80.0        80.0        80.0        80.0        80.0
Total Branded                                $455.0         $461.0      $398.1      $524.2      $604.4      $688.7      $767.0      $821.1

Distribution                                 $606.2         $663.8      $830.6      $972.9     $1,167.5    $1,202.5    $1,238.6    $1,275.7

Total Revenues                              $2,535.5       $2,793.0    $3,521.4    $4,114.3    $5,367.4    $5,037.7    $5,273.2    $5,453.9


Growth Rates
Generics
     Women's Health                                          11.4%        8.5%        8.0%        4.0%        4.0%        4.0%        4.0%
     Other US generics (est.)                                15.8%       13.4%       18.1%       55.5%      (19.4%)       3.2%        2.0%
  Total US Generic (est.)                                    14.8%       12.3%       15.9%       45.0%      (16.0%)       3.3%        2.3%
  International Generic (est.)                                        1,380.7%       10.0%        8.0%        8.0%        7.0%        5.0%
Total Product Sales                                          16.9%       37.3%       14.7%       38.1%      (12.4%)       4.0%        2.8%
Other Generic                                               (62.5%)      43.6%      (20.0%)     (20.0%)     (20.0%)     (20.0%)     (20.0%)
Total Generics                                   (1.8%)      13.1%       37.4%       14.2%       37.4%      (12.5%)       3.9%        2.7%
Branded
  Nephrology (est.)                               2.5%      (19.3%)     (79.1%)    132.9%       (10.0%)     (10.0%)     (10.0%)     (10.0%)
  Urology (est.)                                 16.4%       23.6%       21.0%      18.6%        12.4%       11.6%       11.9%       (3.6%)
  Other Specialty (est.)                          4.7%        6.8%        6.2%      25.6%        11.9%        6.0%        6.5%        7.0%
  Pipeline                                                                                      191.1%       86.4%       37.3%       27.4%
Total Product Sales                                          (0.8%)     (19.2%)      39.6%       18.1%       16.1%       12.9%        7.9%
Other Branded                                                16.1%       18.9%        0.0%        0.0%        0.0%        0.0%        0.0%
Total Branded                                     6.1%        1.3%      (13.6%)      31.7%       15.3%       13.9%       11.4%        7.1%

Distribution                                      7.1%        9.5%       25.1%       17.1%       20.0%        3.0%        3.0%        3.0%

Total Revenues                                    1.6%       10.2%       26.1%       16.8%       30.5%       (6.1%)       4.7%        3.4%

Revenue Contribution
Generics
     Women's Health                              12.8%       13.0%       11.2%       10.3%        8.2%        9.1%        9.0%        9.1%
     Other US generics (est.)                    42.6%       44.7%       40.3%       40.7%       48.5%       41.7%       41.1%       40.5%
  Total US Generic (est.)                        55.4%       57.7%       51.4%       51.0%       56.7%       50.8%       50.1%       49.6%
  International Generic (est.)                    0.0%        1.1%       12.6%       11.9%        9.8%       11.3%       11.6%       11.7%
Total Product Sales                              55.4%       58.8%       64.0%       62.9%       66.5%       62.1%       61.7%       61.3%
Other Generic                                     2.8%        0.9%        1.1%        0.7%        0.5%        0.4%        0.3%        0.2%
Total Generics                                   58.1%       59.7%       65.1%       63.6%       67.0%       62.5%       62.0%       61.6%
Branded
  Nephrology (est.)                               6.5%        4.8%        0.8%        1.6%        1.1%        1.0%        0.9%        0.8%
  Urology (est.)                                  3.1%        3.5%        3.3%        3.4%        2.9%        3.4%        3.7%        3.4%
  Other Specialty (est.)                          6.0%        5.9%        4.9%        5.3%        4.5%        5.1%        5.2%        5.4%
  Pipeline                                        0.0%        0.0%        0.0%        0.6%        1.2%        2.5%        3.2%        4.0%
Total Product Sales                              15.7%       14.1%        9.0%       10.8%        9.8%       12.1%       13.0%       13.6%
Other Branded                                     2.3%        2.4%        2.3%        1.9%        1.5%        1.6%        1.5%        1.5%
Total Branded                                    17.9%       16.5%       11.3%       12.7%       11.3%       13.7%       14.5%       15.1%

Distribution                                     23.9%       23.8%       23.6%       23.6%       21.8%       23.9%       23.5%       23.4%

Total Revenues                               100.0%         100.0%      100.0%      100.0%      100.0%      100.0%      100.0%      100.0%

Source: Company data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                                              115
                                                                                                                                                                                                                  13 December 2010



Exhibit 144: WPI New Product Revenue Model
USD in millions, unless otherwise stated
                          FY2010E       FY2011E      FY2012E      FY2013E      FY2014E       FY2015E      FY2016E      FY2017E       FY2018E      FY2019E      FY2020E Comments
Novel OC
 Potential Sales                   $0         $28          $67          $77          $88           $98          $99         $100           $96          $92          $87 Oral Contraceptive Ring, Licensed from WCRX
 Risk Adjustment               80.0%        80.0%        80.0%        80.0%        80.0%         80.0%        80.0%        80.0%         80.0%        80.0%        80.0% NDA filed
 Sales in Model                     0           23           54           62           70            79           79           80            77           73           70 FDA approval end of December, Launch January 2010

One-year Vaginal Ring
 Potential Sales                                             $0         $16          $27           $39          $51          $64           $72          $73          $62 Vaginal Contraceptive Ring, Licensed from Population Council
 Risk Adjustment                                         60.0%        60.0%        60.0%         60.0%        60.0%        60.0%         60.0%        60.0%        60.0% PIII currently
 Sales in Model                                               0           10           16            23           31           39            43           44           37 NDA submission early 2012, launch late 2012

Androderm 2nd Gen
 Potential Sales                                                                       revenues included in other specialty forecast                                     2nd generation , Testosterone Replacement Therapy
 Risk Adjustment                                                      20.0%        20.0%       20.0%        20.0%         20.0%          20.0%        20.0%        20.0% Currently in PIII
 Sales in Model                                                           0             0            0            0            0             0            0            0 NDA submission late 2012, launch 2013

Crinone
 Potential Sales                                             18           74         115           157          182          207           177          153          135 Pre-term Birth, Licensed from Columbia
 Risk Adjustment                                         70.0%        70.0%        70.0%         70.0%        70.0%        70.0%         70.0%        70.0%        70.0% Positive top line PIII data Dec 2010
 Sales in Model                                              13           52           80          110          127          145           124          107            94 File NDA 2Q11, potential priority review; assume mid 2012 launch

Gelnique 2nd Gen
 Potential Sales                                                                            revenues included in Gelnique forecast                                       Overactive Bladder, 2nd generation
 Risk Adjustment                                         80.0%        80.0%        80.0%         80.0%        80.0%        80.0%         80.0%        80.0%        80.0% Currently in PIII
 Sales in Model                                                           0            0               0           0            0            0            0            0 File NDA late 2011; Launch 2012

Estrogen Free contraceptive Patch
 Potential Sales                                                          0            14            20           23           26            30           30           25 Long-Acting Progestin only patch
 Risk Adjustment                                                      20.0%        20.0%         20.0%        20.0%        20.0%         20.0%        20.0%        20.0% Currently in PII
 Sales in Model                                                           0             3             4            5            5             6            6            5 File NDA 2H 2012, Launch 2013

Rapaflo - Prostate Disorders
 Potential Sales                                                                            revenues included in Rapaflo forecast                                        Prostate Disorders
 Risk Adjustment                                                                   60.0%         60.0%       60.0%         60.0%         60.0%        60.0%        60.0% Moving into PIII shortly
 Sales in Model                                                                        0              0           0            0             0            0            0 File NDA mid 2013, Launch 1H 2014

rFSH
 Potential Sales                                                                                                                                                         Follicle Stimulating Hormone, Partnership with Itero Pharma
 Risk Adjustment                                                                                               0.0%         0.0%          0.0%         0.0%         0.0% Currently in PI
 Sales in Model                                                                                                   0            0             0            0            0 File late 2014, Launch 2015

Total Sales              $       -      $    22.8    $    66.3    $   123.6    $   169.6     $   216.1    $   242.0    $   269.0     $   249.8    $   230.6    $   206.7

Source: Company data, Credit Suisse estimates




Specialty Pharmaceuticals                                                                                                                                                                                                               116
Specialty Pharmaceuticals




                            Exhibit 145: : Watson Income Statement Forecast
                            USD in millions, except for per share unless otherwise stated
                                                                                                                                      2010                                                      2011
                                                                                                                    Mar-10     Jun-10      Sep-10     Dec-10                  Mar-11     Jun-11      Sep-11      Dec-11
                                                                                FY 2007     FY 2008     FY 2009      1QA        2QA         3QA        4QE        FY 2010      1QE        2QE         3QE         4QE        FY 2011     FY 2012     FY 2013     FY 2014     FY 2015
                                               Total Sales                      $2,496.7    $2,535.5    $2,793.0     $856.5      $875.3     $879.9     $909.7     $3,521.4     $910.4      $971.6    $1,024.3    $1,208.0    $4,114.3    $5,367.4    $5,037.7    $5,273.2    $5,453.9
                                                 COGS                            1,504.8     1,472.9     1,553.0      487.9      485.8       480.0      488.9      1,942.6      501.8      540.1       572.0       669.3      2,283.2     3,050.0     2,783.4     2,902.1     2,977.4
                                               Gross Profit                       $991.9    $1,062.6    $1,240.0     $368.6     $389.5      $399.9     $420.8     $1,578.8     $408.6     $431.5      $452.3      $538.7     $1,831.0    $2,317.4    $2,254.2    $2,371.2    $2,476.4

                                                 Branded S&M                       108.1       118.2       144.5       32.5       35.4        34.3       36.0        138.2       35.8        38.9       37.7         39.6       152.0       159.6       164.4       169.3       174.4
                                                 Generics S&M                       55.4        55.9        55.5       27.1       27.2        26.5       27.9        108.7       29.8        29.9       29.2         30.7       119.6       131.5       135.5       139.5       143.7
                                                 Distribution S&M                   52.0        59.5        64.8       18.2       17.8        17.3       18.4         71.7       20.0        19.6       19.0         20.2        78.9        82.8        85.3        87.9        90.5
                                                 G&A                               184.9       210.6       228.4       94.8       77.3        74.1       73.1        319.3       85.3       79.6        76.3        75.3        316.6       326.1       335.9       346.0       356.3
                                               SG&A                               $400.4      $444.2      $493.2     $172.6     $157.7      $152.2     $155.4       $637.9     $170.9     $168.1      $162.2      $165.9       $667.1      $700.1      $721.1      $742.7      $765.0
                                                 Branded R&D                        42.4        45.4        39.7        9.7       15.1        15.7       14.2         54.7       15.5        16.6       17.3         17.0        66.4        69.7        71.8        74.0        76.2
                                                 Generics R&D                      102.4       119.6       141.1       43.2       44.4        50.3       50.6        188.5       47.5        48.8       55.3         55.7       207.4       228.1       234.9       242.0       249.2
                                               R&D                                $144.8      $165.0      $180.8      $52.9      $59.5       $66.0      $64.8       $243.2      $63.0      $65.5       $72.6       $72.7       $273.7      $297.8      $306.7      $315.9      $325.4
                                               EBITDA                             $523.9      $543.5      $662.4     $167.8     $198.9      $206.8     $226.7       $800.2     $201.1     $224.9      $244.8      $327.9       $998.6    $1,425.8    $1,341.4    $1,435.5    $1,517.4
                                                 Stock-based compensation           14.2        18.5        19.0        5.0         6.0        6.4         6.0        23.4        6.0         6.0         6.0         6.0        24.0        26.0        28.0        30.0        32.0
                                               Adjusted EBITDA                    $545.4      $569.8      $689.3     $198.9     $207.4      $211.1     $232.7       $850.1     $207.1     $230.9      $250.8      $333.9     $1,022.6    $1,451.8    $1,369.4    $1,465.5    $1,549.4
                                                 Depreciation (incl. above)         77.2        90.0         96.4      24.7       26.6        25.1       26.1        102.5       26.5        26.9       27.3         27.7       108.4       106.3       114.9       123.0       131.4
                                                 Amortization                      176.4        80.7        92.6       39.0       43.1        45.9       47.0        175.0       42.5        42.5       42.5         42.5       170.0       165.0       155.0       145.0       145.0

                                               Operating Income (Combined)        $270.3      $372.8      $473.4     $104.1     $129.2      $135.8     $153.6       $522.7     $132.1     $155.5      $175.0      $257.7       $720.2    $1,154.5    $1,071.5    $1,167.5    $1,241.0

                                                 Interest Income                     8.9         9.1         5.0        0.4         0.3        0.3         0.3         1.3        0.3         0.6         0.7         0.8         2.5         2.7        10.0        18.4        22.1
                                                 Interest Expense                  (44.5)      (28.2)      (34.2)     (20.3)      (20.0)     (13.2)      (15.0)      (68.5)     (11.6)      (11.7)      (11.7)      (11.8)      (46.8)      (37.5)      (33.9)      (24.9)      (15.9)
                                                 Other                               7.3        12.4        17.5       34.1        12.0        0.2         0.0        46.3        0.0         0.0         0.0         0.0         0.0         0.0         0.0         0.0         0.0
                                               Total Non-Operating Items          ($28.3)      ($6.8)     ($11.7)     $14.2       ($7.7)    ($12.7)     ($14.6)     ($20.8)    ($11.3)     ($11.1)     ($11.0)     ($10.9)     ($44.3)     ($34.9)     ($23.9)      ($6.5)       $6.2

                                               Pretax Income                      $242.0      $366.0      $461.7     $118.3     $121.5      $123.1     $139.0       $501.9     $120.8     $144.4      $164.0      $246.8       $675.9    $1,119.6    $1,047.5    $1,161.0    $1,247.3
                                               Tax                                  90.0       134.9       180.8       57.0       61.8        63.2       68.4        250.4       60.4        69.1       76.4       107.0        313.0       475.3       444.9       483.2       515.1
                                               Add Back                              7.8         7.9         5.5        0.0         0.0        0.0         0.0         0.0        0.0         0.0         0.0         0.0         0.0         0.0         0.0         0.0         0.0

                                               Adjusted Net Income                $159.8      $239.1      $286.4      $61.3      $59.7       $59.9      $70.5       $251.4      $60.4      $75.2       $87.6      $139.7       $362.9      $644.3      $602.6      $677.8      $732.1
                                               Avg. Shares                         117.0       117.8       116.4      123.4      124.0       124.3      124.3        124.0      124.0      124.0       124.0       124.0        124.0       124.0       124.0       124.0       124.0
                                               Adjusted EPS                        $1.37       $2.03       $2.46      $0.50      $0.48       $0.48      $0.57        $2.03      $0.49      $0.61       $0.71       $1.13        $2.93       $5.20       $4.86       $5.47       $5.90
                                               Amortization                        176.4        80.7        92.6       39.0       43.1        45.9       47.0        175.0       42.5        42.5       42.5         42.5       170.0       165.0       155.0       145.0       145.0
                                               Payments to Arrow Shareholders                                                                                                                                       (10.2)      (10.2)     (105.5)      (18.0)        0.0         0.0
                                               Tax benefit of amortization          65.6        29.7        24.7
                                               Adjusted cash net income           $270.7      $290.0      $354.3     $100.3     $102.8      $105.8     $117.5       $426.4     $102.9     $117.7      $130.1      $172.0       $522.7      $703.9      $739.6      $822.8      $877.1
                                               Cash EPS                            $2.31       $2.47       $3.04      $0.81      $0.83       $0.85      $0.95        $3.44      $0.83      $0.95       $1.05       $1.39        $4.22       $5.68       $5.96       $6.64       $7.07
                                                                                                                      $0.81      $0.83       $0.85      $0.95        $3.44      $0.86      $0.97       $1.08       $1.34        $4.25       $5.43       $5.79       $6.64       $7.02


                                               Margin Anaysis
                                               Gross Margin                       39.7%       41.9%       44.4%      43.0%       44.5%      45.4%       46.3%       44.8%      44.9%       44.4%       44.2%       44.6%       44.5%       43.2%       44.7%       45.0%       45.4%
                                               SG&A                               16.0%       17.5%       17.7%      20.2%       18.0%      17.3%       17.1%       18.1%      18.8%       17.3%       15.8%       13.7%       16.2%       13.0%       14.3%       14.1%       14.0%
                                               Amortization                        7.1%        3.2%        3.3%       4.6%        4.9%       5.2%        5.2%        5.0%       4.7%        4.4%        4.1%        3.5%        4.1%        3.1%        3.1%        2.7%        2.7%
                                               R&D                                 5.8%        6.5%        6.5%       6.2%        6.8%       7.5%        7.1%        6.9%       6.9%        6.7%        7.1%        6.0%        6.7%        5.5%        6.1%        6.0%        6.0%
                                               Operating Margin                   10.8%       14.7%       16.9%      12.2%       14.8%      15.4%       16.9%       14.8%      14.5%       16.0%       17.1%       21.3%       17.5%       21.5%       21.3%       22.1%       22.8%
                                               Total Non-Operating Items          (1.1%)      (0.3%)      (0.4%)      1.7%       (0.9%)     (1.4%)      (1.6%)      (0.6%)      (1.2%)     (1.1%)      (1.1%)      (0.9%)      (1.1%)      (0.7%)      (0.5%)      (0.1%)       0.1%
                                               Tax Rate Effective                 37.2%       36.9%       39.2%      36.2%       37.5%      37.4%       36.8%       37.0%      37.0%       37.0%       37.0%       37.0%       37.0%       37.0%       37.0%       37.0%       37.0%
                                               Pretax Income                       9.7%       14.4%       16.5%      13.8%       13.9%      14.0%       15.3%       14.3%      13.3%       14.9%       16.0%       20.4%       16.4%       20.9%       20.8%       22.0%       22.9%
                                               Net Income                          6.4%        9.4%       10.3%       7.2%        6.8%       6.8%        7.8%        7.1%       6.6%        7.7%        8.6%       11.6%        8.8%       12.0%       12.0%       12.9%       13.4%


                                               % Change
                                               Sales                                           1.6%       10.2%      28.3%       29.1%      32.9%       15.8%       26.1%       6.3%       11.0%       16.4%       32.8%       16.8%       30.5%       (6.1%)       4.7%        3.4%
                                               COGS                                           (2.1%)       5.4%      27.9%       26.2%      38.4%       11.2%       25.1%       2.9%       11.2%       19.2%       36.9%       17.5%       33.6%       (8.7%)       4.3%        2.6%
                                               Gross Profit                                    7.1%       16.7%      28.9%       33.0%      26.8%       21.7%       27.3%      10.8%       10.8%       13.1%       28.0%       16.0%       26.6%       (2.7%)       5.2%        4.4%
                                               G&A                                            13.8%        8.5%      93.5%       24.5%      38.0%       15.0%       39.8%      (10.0%)      3.0%        3.0%        3.0%       (0.9%)       3.0%        3.0%        3.0%        3.0%
                                               SG&A                                           10.9%       11.0%      50.5%       21.9%      33.9%       14.8%       29.3%       (1.0%)      6.6%        6.6%        6.7%        4.6%        4.9%        3.0%        3.0%        3.0%
                                               Amortization                                  (54.3%)      14.8%      78.9%       95.0%     106.8%       77.4%       89.0%       9.0%       (1.4%)      (7.4%)      (9.6%)      (2.9%)      (2.9%)      (6.1%)      (6.5%)       0.0%
                                               R&D                                            13.9%        9.6%      25.4%       92.6%      27.2%       16.1%       34.5%      19.2%       10.0%       10.0%       12.2%       12.6%        8.8%        3.0%        3.0%        3.0%
                                               Operating Income                               37.9%       27.0%       (3.0%)     17.0%       6.4%       19.9%       10.4%      26.9%       20.3%       28.8%       67.8%       37.8%       60.3%       (7.2%)       9.0%        6.3%
                                               Pretax Income                                  51.2%       26.1%       9.8%        9.2%       1.6%       14.4%        8.7%       2.1%       18.8%       33.2%       77.6%       34.7%       65.6%       (6.4%)      10.8%        7.4%




                                                                                                                                                                                                                                                                                         13 December 2010
                                               Net Income                                     49.6%       19.8%      (10.4%)    (17.5%)    (22.9%)       3.9%      (12.2%)      (1.5%)     26.0%       46.2%       98.1%       44.3%       77.5%       (6.5%)      12.5%        8.0%
                                               Adjusted EPS                                   48.7%       21.2%      (14.2%)    (21.0%)    (27.4%)      (7.0%)     (17.6%)      (2.0%)     26.0%       46.6%       98.6%       44.4%       77.5%       (6.5%)      12.5%        8.0%
                                               Cash EPS                                        6.7%       23.3%      17.0%       14.3%       8.8%       11.5%       13.0%       2.1%       14.5%       23.2%       46.7%       22.6%       34.6%        5.1%       11.2%        6.6%

                            Source: Company data, Credit Suisse estimates.
117
Specialty Pharmaceuticals




                            Exhibit 146: Watson Balance Sheet Forecast
                            USD in millions, unless otherwise stated
                                                                                                                                                      2010
                                                                                                                                Mar-10       Jun-10          Sep-10       Dec-10
                                                                                          FY 2007      FY 2008      FY 2009      1QA          2QA             3QA          4QE         FY 2010      FY 2011      FY 2012      FY 2013      FY 2014      FY 2015
                                         Current Assets
                                         Cash and Cash Equivalents                            204.6        507.6        201.4       169.2        224.8           255.6        263.8        263.8        519.9        988.0      1,828.6      2,204.4     3,018.6
                                         Marketable Securities                                 11.8         13.2         13.6        13.1         11.3            10.3         10.3         10.3         10.3         10.3         10.3         10.3        10.3
                                         Accounts Receivable, net                             267.1        305.0        519.5       543.8        502.1           523.1        548.3        548.3        728.1        808.8        759.1        794.6       821.8
                                         Inventories, net                                     490.6        473.1        692.3       710.7        699.3           673.1        723.4        723.4        916.9      1,002.7        892.2        914.3       938.1
                                         Prepaid expenses and other current assets             86.1         48.5        213.3       204.4        183.8           159.9        152.8        152.8        159.5        150.3        136.0        131.8       136.3
                                         Deferred Tax assets                                  113.6        111.0        130.9       128.5        135.8           142.2        142.2        142.2        142.2        142.2        142.2        142.2       142.2
                                           Total Current Assets                            $1,173.8     $1,458.4      1,771.0    $1,769.7     $1,757.1        $1,764.2     $1,840.8     $1,840.8     $2,476.9     $3,102.3     $3,768.4     $4,197.7    $5,067.4

                                         Long-term assets
                                         Property plant and equipment, net                    688.2        658.5        695.5       678.1        652.2           648.9        641.0        641.0        614.9        615.9        601.8        584.3       616.5
                                         Investments and other assets                          68.0         80.6        114.5        36.1         54.9            47.9         77.9         77.9         77.9         77.9         77.9         77.9        77.9
                                         Deferred tax assets                                   61.9         52.3         41.2        50.9        124.6           168.3        168.3        168.3        168.3        168.3        168.3        168.3       168.3
                                         Product rights and other intangibles, net            603.7        560.0      1,721.9     1,684.5      1,599.6         1,690.3      1,643.3      1,643.3      1,473.3      1,308.3      1,153.3      1,008.3       863.3
                                         Goodwill                                             876.4        868.1      1,648.1     1,670.9      1,524.4         1,528.1      1,528.1      1,528.1      1,528.1      1,528.1      1,528.1      1,528.1     1,528.1
                                         Total Assets                                      $3,472.0     $3,677.9      5,992.2    $5,890.2     $5,712.8        $5,847.7     $5,899.4     $5,899.4     $6,339.4     $6,800.8     $7,297.7     $7,564.5    $8,321.5
                                         LIABILITIES AND SHAREHOLDERS' EQUITY
                                         Current liabilities
                                         Accounts payable and accrued expenses               398.2        381.3         615.2       621.1        592.7          625.0         643.0       643.0        880.2       1,002.7        915.1        954.1       978.9
                                         Income tax payable                                                15.5          78.4       110.0         20.9           45.1          45.1        45.1         45.1          45.1         45.1         45.1        45.1
                                         Short term debt and current portion of LT debt        6.2         53.2         307.6        85.0         85.0           35.0           0.0         0.0          0.0           0.0          0.0          0.0         0.0
                                         Deferred tax liabilities                             18.8         15.8          34.9        39.5         20.0           20.9          20.9        20.9         20.9          20.9         20.9         20.9        20.9
                                         Deferred revenue                                     21.8         16.1          16.3        24.9         35.6           27.7          27.7        27.7         27.7          27.7         27.7         27.7        27.7
                                           Total Current Liabilities                        $444.9       $482.0       1,052.4      $880.5       $754.2         $753.7        $736.7      $736.7       $973.9      $1,096.4     $1,008.8     $1,047.8    $1,072.6

                                         Long-term liabilities
                                         Long term debt                                       899.4        824.7      1,150.2     1,155.5      1,158.5         1,162.1      1,164.1      1,164.1      1,029.3        847.8        847.8       397.8        397.8
                                         Deferred revenue                                      39.5         30.1         31.9        28.1         25.7            23.0         23.0         23.0         23.0         23.0         23.0        23.0         23.0
                                         Other long term obligations                            7.3          5.0        118.7       119.2        122.1           175.9        175.9        175.9        165.7         60.3         42.3        42.3         42.3
                                         Other taxes payable                                   52.6         53.3         61.7        71.4         85.7            59.4         59.4         59.4         59.4         59.4         59.4        59.4         59.4
                                         Deferred tax liabilities                             178.7        174.3        554.2       542.1        431.4           454.0        454.0        454.0        454.0        454.0        454.0       454.0        454.0
                                           Total Long-Term Liabilities                     $1,177.6     $1,087.3      1,916.7    $1,916.3     $1,823.4        $1,874.4     $1,876.4     $1,876.4     $1,731.4     $1,444.5     $1,426.5      $976.5       $976.5

                                         Shareholders' equity
                                         Preferred Stock                                        0.0          0.0          0.0         0.0           0.0            0.0          0.0          0.0          0.0          0.0          0.0          0.0         0.0
                                         Common Stock                                           0.4          0.4          0.4         0.4           0.4            0.4          0.4          0.4          0.4          0.4          0.4          0.4         0.4
                                         Additional paid-in capital                           968.7        995.9      1,686.9     1,707.2      1,725.0         1,739.4      1,739.4      1,739.4      1,739.4      1,739.4      1,739.4      1,739.4     1,739.4
                                         Retained Earnings                                  1,179.7      1,418.1      1,640.1     1,709.9      1,780.6         1,806.2      1,872.9      1,872.9      2,220.6      2,846.5      3,449.1      4,126.8     4,859.0
                                         Accumulated other comprehensive income                 2.4         (3.2)         1.9       (13.5)        (60.0)         (16.1)       (16.1)       (16.1)       (16.1)       (16.1)       (16.1)       (16.1)      (16.1)
                                         Tresury Stock (at cost)                             (301.8)      (302.7)      -306.2      (310.6)      (310.8)         (311.9)      (311.9)      (311.9)      (311.9)      (311.9)      (311.9)      (311.9)     (311.9)
                                           Total stockholders' equity                      $1,849.5     $2,108.6      3,023.1    $3,093.4     $3,135.2        $3,218.0     $3,284.7     $3,284.7     $3,632.4     $4,258.3     $4,860.9     $5,538.6    $6,270.8
                                         Noncontrolling Interest                                                                                                   1.6          1.6         $1.6         $1.6         $1.6         $1.6         $1.6        $1.6
                                           Total Equity                                                                                                       $3,219.6     $3,286.3     $3,286.3     $3,634.0     $4,259.9     $4,862.5     $5,540.2    $6,272.4
                                           Total Liabilities and Shareholders' Equity      $3,472.0     $3,677.9      5,992.2    $5,890.2     $5,712.8        $5,847.7     $5,899.4     $5,899.4     $6,339.4     $6,800.8     $7,297.7     $7,564.5    $8,321.5

                            Source: Company data, Credit Suisse estimates.




                                                                                                                                                                                                                                                                    13 December 2010
118
Specialty Pharmaceuticals




                            Exhibit 147: Watson Cash Flow Statement Forecast
                            USD in millions, unless otherwise stated
                                                                                                                                                 2010
                                                                                                                         Mar-10         Jun-10          Sep-10       Dec-10
                                                                                 FY 2007      FY 2008      FY 2009        1QA            2QA             3QA          4QE           FY 2010       FY 2011      FY 2012     FY 2013      FY 2014      FY 2015
                            Statement of Cash Flows
                            Cash From Operating Activities
                            Net Income (Loss)                                      $141.0       $230.3         222.0         $69.8          $70.6           $25.7        $66.7        $232.8        $347.7       $625.8      $602.6       $677.8       $732.1
                            Adjustments to Net Income
                              Depreciation                                           77.2          90.0          96.4         24.7           26.6            25.1         26.1          102.5        108.4        106.3       114.9        123.0        131.4
                              Amortization                                          176.4          80.7          92.6         39.0           43.1            45.9         50.8          178.8        185.2        183.5       155.0        145.0        145.0
                              Deferred income tax provision                           (6.3)         3.5         -19.0        (14.8)         (12.1)          (48.8)         0.0          (75.7)         0.0          0.0         0.0          0.0          0.0
                              Provision for inventory reserve                        46.9          45.7          51.0         11.9            9.2             9.6          0.0           30.7          0.0          0.0         0.0          0.0          0.0
                              Payments to Arrow shareholders (Lipitor)                                                                                                                               (10.2)      (105.5)      (18.0)         0.0          0.0
                              Other items                                             9.7         (4.5)           17.4       (14.9)          13.3           12.2           0.0          10.6           0.0          0.0         0.0          0.0          0.0
                                 Accounts receivable                                120.6        (37.9)        -104.8        (32.3)          35.4          (15.3)        (25.2)        (37.4)       (179.8)       (80.7)       49.7        (35.5)       (27.2)
                                 Inventories                                        (25.1)       (28.2)          -82.2       (44.1)          (1.4)          29.2         (50.3)        (66.6)       (193.5)       (85.8)      110.5        (22.1)       (23.8)
                                 Prepaid expenses and other current assets            4.3         33.3             9.1         4.8          (11.6)          34.9           7.1           35.2         (6.6)         9.2        14.3          4.2         (4.5)
                                 Accounts payable and accured expenses             (117.8)       (17.7)           72.0        11.7          (16.2)          16.2          18.0          29.7         237.2        122.5       (87.6)        39.0         24.8
                                 Deferred revenue                                   (12.3)       (14.6)            2.0         4.8           (7.4)          (1.7)          0.0          (4.3)          0.0          0.0         0.0          0.0          0.0
                                 Income taxes payable                                 7.7         24.4            16.9        46.5          (70.1)          (1.6)          0.0         (25.2)          0.0          0.0         0.0          0.0          0.0
                                 Other assets                                         4.9          3.3             3.4         5.2           (5.6)           5.1          $0.0           4.7           0.0          0.0         0.0          0.0          0.0
                            Net Cash From Operations                               $427.2       $408.5          376.8       $112.3          $73.8         $136.5         $93.2        $415.8        $488.4       $775.4      $941.4       $931.3       $977.8

                            Cash From Investing Activities
                              Purchase of PPE                                       (75.0)       (63.5)          -55.4        (7.3)          (9.2)          (17.1)       (18.2)         (51.8)       (82.3)      (107.3)      (100.8)      (105.5)     (163.6)
                              Proceeds from sales of PPE/divesture of assets         14.4          0.8             3.0         0.0            2.3             0.0          0.0            2.3          0.0          0.0          0.0          0.0         0.0
                              Proceeds/Additions to Marketable securities             (3.2)       (1.5)            1.0         1.0            2.0             1.0          0.0            4.0          0.0          0.0          0.0          0.0         0.0
                              Proceeds/Additions to LT investments                    (1.1)        8.3             0.0        94.1          (16.6)            3.5        (30.0)          51.0          0.0          0.0          0.0          0.0         0.0
                              Proceeds/Additions to intangibles                       (0.8)      (37.0)          -16.5        (0.6)          (6.5)           (0.3)         0.0           (7.4)         0.0          0.0          0.0          0.0         0.0
                              Acquisition of business, net of cash acquired            0.0        (1.4)        -968.2        (16.8)           0.0           (50.6)         0.0          (67.4)         0.0          0.0          0.0          0.0         0.0
                              Other investing activities, net                          1.5         1.1             0.0        (2.0)           3.0             0.0          0.0            1.0          0.0          0.0          0.0          0.0         0.0
                            Cash From Investing Activities                         ($64.3)      ($93.4)    ($1,036.1)        $68.4          (25.0)         ($63.5)      ($48.2)        ($68.3)      ($82.3)     ($107.3)     ($100.8)     ($105.5)    ($163.6)
                            Cash from Operating and Investing Activities           $362.9       $315.1       ($659.3)       $180.7          $48.8           $73.0        $45.0        $347.5        $406.1       $668.0       $840.6       $825.9      $814.2

                            Cash From Financing Activities
                              Proceeds/Repayment of ST Debt                            0.0          0.0          0.0        (220.0)           0.0             0.0        (35.0)         (255.0)         0.0         0.0          0.0          0.0         0.0
                              Proceeds/Repayment of LT Debt                        (326.9)        (27.7)      323.3           (3.4)          (0.9)          (50.3)         (1.8)         (56.4)      (150.0)     (200.0)         0.0       (450.0)        0.0
                              Proceeds from stock plans                              16.2           8.4         33.4          14.9           10.6             7.0           0.0           32.5          0.0         0.0          0.0          0.0         0.0
                              Issue/Repurchase of common stock                        (1.8)        (0.9)        -3.6          (4.4)          (0.2)           (1.1)          0.0           (5.7)         0.0         0.0          0.0          0.0         0.0
                            Net Cash From Financing Activities                    ($312.5)       ($20.2)     $353.1        ($212.9)          $9.5          ($44.4)      ($36.8)       ($284.6)      ($150.0)    ($200.0)        $0.0      ($450.0)       $0.0

                            Effect of exchange rate                                   0.0           0.0           0.0             0.0        (2.7)            2.2             0.0        (0.5)          0.0         0.0          0.0          0.0         0.0

                              Increase/(decrease) in cash and cash equivalents       50.4        295.0        -306.2         (32.2)          55.6           30.8           8.2          62.4         256.1        468.0        840.6        375.9       814.2
                              Beginning cash balance                                154.2        204.6         507.6         201.4          169.2          224.8         255.6         201.4         263.8        519.9        988.0      1,828.6     2,204.4
                            Ending cash balance                                    $204.6       $499.5       $201.4         $169.2          224.8         $255.6        $263.8        $263.8        $519.9       $988.0     $1,828.6     $2,204.4    $3,018.6
                              Average cash balance                                  179.4        352.0         354.5         185.3          197.0          240.2         259.7         232.6         391.9        753.9      1,408.3      2,016.5     2,611.5


                            Source: Company data, Credit Suisse estimates.




                                                                                                                                                                                                                                                                 13 December 2010
119
                                                                                                                                                                    13 December 2010




                                                                                                                                                        Americas / United States




                                                                             Mylan Inc. (MYL)
Rating                                               OUTPERFORM*
Price (10 Dec 10, US$)                                        20.14
Target price (US$)                                           25.00¹
52-week price range                                   23.25 - 16.86          Initiating with Outperform Rating and $25 TP
Market cap. (US$ m)                                       8,765.31
Enterprise value (US$ m)                                 13,510.51           ■   Initiating coverage with an Outperform rating and $25 target price.
*Stock ratings are relative to the relevant country benchmark.
¹Target price is for 12 months.                                              ■   Investment Case: We are Outperform rated on MYL because: (1) MYL is a
                                                 Research Analysts               primary beneficiary of the major pharma patent cliff and has a robust pipeline
                                           Michael Faerm                         of U.S. generic launches in 2011-2013, driving EPS CAGR of approximately
                                            212 538 1771                         20% from 2010 to 2012; (2) MYL’s international business has several
                           michael.faerm@credit-suisse.com
                                                                                 leadership positions in established EU and Asian markets, though lacks
                                                                                 emerging markets presence; and (3) MYL’s financial leverage is reasonable,
                                                                                 and is not likely to restrict the strategy of pursuing emerging market growth
                                                                                 through smaller investments and collaborations with local players.
                                                                             ■   Key Risks for MYL: (1) high dependence on successful Paragraph IV
                                                                                 challenges and ANDA approvals; (2) global drug pricing pressures, which
                                                                                 could hamper revenue growth more than expected; (3) foreign exchange
                                                                                 effects that can add volatility and risk to MYL revenue and earnings since
                                                                                 50% of revenues are international.
                                                                             ■   Catalysts: MYL’s stock price could be sensitive to at-risk generic launches,
                                                                                 which would be upside to our model. One such noteworthy product and its
                                                                                 30-month stay expiration date Kaletra (July 2011). In addition, MYL’s claims
                                                                                 construction hearing regarding generic Copaxone is 1/12/2011.
                                                                             ■   Valuation: Our $25 target price is a 50/50 blend of discounted cash flow
                                                                                 (DCF) analysis and relative P/E multiple valuation. Our DCF value is $25
                                                                                 based on a 9% discount rate and 0.5% perpetuity growth rate. Our relative
                                                                                 valuation is $25 based on a 12.7x 2011 P/E ratio, which assumes MYL will
                                                                                 trade at a 5% premium to the group, which will trade at a 10% discount to
                                                                                 the S&P.


Share price performance                                                      Financial and valuation metrics
           Daily De c 14, 2 009 - Dec 10, 2010, 12/14/09 = US$18.77          Year                                               12/09A          12/10E         12/11E        12/12E
 24                                                                          EPS (CS adj.) (US$)                                   1.30           1.61            1.99         2.30
 22                                                                          Prev. EPS (US$)                                         —               —              —             —
 20                                                                          P/E (x)                                               15.5           12.5            10.1           8.8
 18
 16
                                                                             P/E rel. (%)                                          88.1           87.1            81.0         79.3
                                                                             Revenue (US$ m)                                    5,062.0        5,497.7         6,173.0      6,766.5
  Dec-09          Mar-10            Jun-10          Sep-10
                                                                             EBITDA (US$ m)                                     1,231.0        1,409.4         1,646.8      1,842.1
                 Price                          Indexed S&P 500
                                                                             OCFPS (US$)                                           1.35           2.04            2.13         2.85
On 12/10/10 the S&P 500 index closed at 1240.4                               P/OCF (x)                                             13.7             9.9            9.5           7.1
                                                                             EV/EBITDA (current)                                   11.0             9.6            7.8           6.4
                                                                             Net debt (US$ m)                                     4,750          4,745           4,093        3,109
                                                                             ROIC (%)                                              9.81          10.77           12.37        13.99
Quarterly EPS                    Q1           Q2            Q3         Q4    Number of shares (m)                              435.22     IC (12/10E, US$ m)              10,345.20
2009A                           0.33         0.32          0.32       0.33   BV/share (current, US$)                              8.4     EV/IC (x)                              1.3
2010E                           0.36         0.37          0.43       0.45   Net debt (current, US$ m)                        4,745.2     Dividend (current, US$)              0.44
2011E                           0.43         0.54          0.54       0.49   Net debt/tot. cap. (current, %)                     54.1     Dividend yield (%)                     2.2
                                                                             Source: Company data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                                                                                      120
                                                                                                  13 December 2010




Investment Highlights
We are initiating coverage of Mylan, Inc., (MYL) with an Outperform rating and a 12-
month target price of $25 per share.
We believe that Mylan has several positives as an investment story, leading us to an
Outperform rating. Our investment thesis is threefold.

■    MYL is a primary beneficiary of the major pharma patent cliff and has a robust pipeline
     of U.S. generic launches in 2011-2013, driving 20% EPS CAGR from 2010 to 2012.

■    MYL’s international business has several leadership positions in established EU and
     Asian markets, though lacks emerging markets presence.

■    MYL’s financial leverage is reasonable, and is not likely to restrict the company’s
     strategy of pursuing emerging market growth through smaller investments and
     collaborations with local players. MYL’s leverage is substantial enough, however, to
     increase the difficulty of borrowing billions of dollars to fund a large acquisition. This
     can be also be viewed as enforcing a degree of financial discipline to remain
     consistent with the strategy.

Mylan Is Poised to Reap the Benefits of the
Impending Big Pharma Patent Cliff
Mylan is well positioned to capitalize on the well-known patent cliff faced by the major
pharmaceuticals group. Mylan has a substantial number of potential upcoming generic
launches, particularly in 2012. (See Exhibit 110.) Our general rules of thumb for assuming
launch dates are as follows.

■    Launch on dates provided by settlements, for settled cases

■    Launch upon expiration of last litigated patent

■    No at-risk launches assumed: we believe this is a more conservative approach than
     assuming at risk launches (i.e., launches upon expiration the 30-month stay provided
     by the Hatch/Waxman Act). We would prefer not to give our forecasts credit for these
     launches, which are uncertain to occur, difficult to predict case-by-case, and in the
     aggregate occur relatively infrequently. Our preference is to view them as upside to a
     generic company stock.




Specialty Pharmaceuticals                                                                                    121
                                                                                                                             13 December 2010


Exhibit 148: Mylan Upcoming Launches
USD in millions, unless otherwise noted
                                                                                                 Expected Launch
   Brand Name                       Generic Name                FTF Status   2009 Sales   2010        2011         2012
Valtrex           valacyclovir                                      N         $2,078      May
Catapres TTS      clonidine patch                                   N           277       Jul
Mirapex               pramipexole                                   N           535       Dec
Femara            letrozole                                         Y           586                 Early 2011
Vfend             voriconazole                                      Y           181                   1Q11
Atacand           candesartan cilexetil tablet                      N           199                    Apr
Effexor XR        venlafaxine HCL                                   N          2,789                   Jun
Levaquin          levofloxacin                                      N          1,578                   Jun
Uroxatral         Alfuzosin                                         S           244                    Jul
Zyprexa           olanzapine                                        N          2,681                   Oct
Solodyn               minocycline ER                                N           539                    Nov
Avalide           irbesartan / hydrochlorothiazide                  S           420                                Mar
Lexapro           ibandronate                                       S           737                                Mar
Provigil          modafinil                                         S          1,004                               Apr
Caduet            amlodipine-atorvastatin                           N           445                                May
Maxalt            desloratidine                                     N           263                                Jun
Clarinex          desloratidine                                     S           248                                Jul
Actos             risedronate                                       S          3,418                               Aug
Singulair         Montelukast                                       N          2,787                               Aug
Entocort EC       budesonide                                        N           234                                Aug
Detrol LA         tolterodine                                       N           917                                Sep
Diovan HCT        valsartan/hydrochlorothiazide                     Y          1,556                               Sep
Allegra D         fexofenadine/ pseudophedrine                      N           439                                Nov
Actoplus MET      Pioglitazone / metformin                          Y           459                                Dec
Atacand HCT       candesartan cilexetil / hydrochlorothiazide       S             99                               Dec


Total branded sales                                                                        $2,890      $8,797      $13,025

Source: IMS Health, Paragraphfour.com, Company data, Credit Suisse estimates.




Exhibit 111 shows our summary forecast of selected Paragraph IV challenges and our
estimates of the revenues they will provide to MYL. As previously mentioned, these
opportunities accelerate in 2012, with $887 MM of potential revenue.




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                                                                                                                                                                                                                13 December 2010


Exhibit 149: MYL PIV Challenges—Key in 2010E–2015E
in millions, unless otherwise stated; FTF is First to File, Y=Yes, N=No, S=Shared
                                                        2009 IMS    Estimated
   Brand Name                  Generic Name                                       FTF     2010E         2011E      2012E   2013E    2014E    2015E                                       CS Comments
                                                          Sales      Launch
Aciphex            rabeprazole                           $1,223.2    May-13       N                                         26.0     24.9     14.6 MYL to launch in May 2013 post patent expiry
Actoplus MET       Pioglitazone / metformin                 459.2    Dec-12       Y                                 29.0    81.3     66.2     34.2 MYL to launch in December 2012 per settlement; MYL has sole exclusivity
Actos              risedronate                            3,417.6    Aug-12       S                                112.5    95.6     59.4     44.5 MYL to enter Aug 2012 per settlement; Exclusivity shared - WPI and Ranbaxy
Actonel            pioglitazone                             918.7    Jun-14       N                                                  22.7     20.1 Generics lost case. To launch post patent expiry after June 2014
Allegra-D          fexofenadine / pseudoephedrine           438.6    Nov-12                                                                        Teva is FTF. Teva settled, launched 11/2009. Other P4 filers are MYL, Reddys,
                                                                                                                    21.1    15.6       8.6     8.6
                                                                                  N                                                                Sandoz, Ranbaxy, Mylan Wockhardt, Sun
Amrix              cyclobenzaprine hydrochloride ER         119.3    Feb-25       S                                                                Bench trial set for Sept 27, 2010; 30 month stay expires on April 17, 2011
Atacand            candesartan cilexetil tablet             199.2    Apr-11                                                                        Sandoz is FTF; no lawsuit against Sandoz or MYL. Should launch in April 2011 post
                                                                                                             8.8     7.1     4.0       4.0     4.0
                                                                                  N                                                                patent expiry
Atacand HCT        hydrochlorothiazide                       98.7    Dec-12       S                                  2.9    15.7     11.4      6.6 Shared with Sandoz; no lawsuit, launch in Dec 2012 post patent expiry.
Avalide            irbesartan / hydrochlorothiazide         420.3    Mar-12
                                                                                  S                                 46.4    37.5     25.2     19.5 MYL to launch generic in March 2012; Exclusivity shared with Sandoz, Teva
Azilect            rasagiline                                92.3    Feb-17       S                                                                  WPI, MYL & Orchid share exclusivity.30 months stay expires Feb 2013.
Azor               amlodipine/olmesartan medoxomil          157.4    Oct-16                                                                          MYL was sole FTF and P-IV filer.Sept 2010 - Court of Appeals affirmed patent
                                                                                  Y                                                                  validity. Entry post patent expiry Oct 16
Benicar            olmesartan medoxomil                     642.2    Oct-16                                                                          Sept 2010 - Court of Appelas affirmed patent validity; this ends all litigation in favor
                                                                                  Y                                                                  of Daiichi. Entry post patent expiry Oct 16
Benicar HCT        olmesartan medoxomil, HCT                657.0    Oct-16                                                                          Sept 2010 - Court of Appeals affirmed patent validity; this ends all litigation in favor
                                                                                  Y                                                                  of Daiichi. Entry post patent expiry in Oct 16
                                                                                                                                                     Multiple filters all sued 09/2007; 30 mnths expire Nov. 2010. WPI is blocked from
Boniva Tablets     Ibandronate Sodium                      736.8                                                                                     launching by a PI granted to Roche on Nov. 2010. Litigation pending for other
                                                                                  N                                                                  patents in 2019 and 2023 and other companies
Caduet             amlodipine-atrovastatin                  445.4    May-12       N                                 12.2     9.8      5.5      5.5   Bench trial scheduled for Jan 9, 2012. 30 mnths expires June 2012.
Catapres TTS       clonidine patch                          276.8    Jul-10       N          15.5         11.8       6.8     5.4      5.4      5.4   Generic launched in Aug 09 by Par (FTF). MYL launched July 2010.
Clarinex           desloratidine                            247.7    Jul-12       S                                  0.6     0.5      0.3      0.2   MYL to launch on July 1, 2012 ; at least 10 other players FTF
Copaxone           glatiramer                             1,698.1    May-14       N                                                  38.8     44.3   30 month stay expires March 2012; Litigation ongoing
                                                          3,040.2    Jul-16                                                                          Patent is valid; MYL potential launch in July 2016; Exclusivty shared with Teva, WPI,
Crestor            rosuvastatin                                                   S                                                                  Sandoz, Par, Apotex, Aurobindo. Sun and Glenmark
                                                            917.2                                                                                    Litigation ongoing; Teva has exclusivity; other generic filers include Sandoz, and
                                                                                                                    22.2    34.7     18.9     10.0
Detrol LA          tolterodine                                       Sep-12       N                                                                  Impax. 30 mnths expire Nov. 2012
Diovan HCT         valsartan/hydrochlorothiazide          1,555.9    Sep-12       Y                                 30.3    35.8     16.5     16.5   It appears that MYL filed a split ANDA with P3 and P4. No litigation pending
Doryx 150mg        doxycycline                              256.0    Dec-22       N                                                                  Impax is FTF; no trial date set as yet.
Doryx 75/100mg     doxycycline                               63.0    Dec-22       S                                                                Shared FTF between MYL and Impax. No trial date set as yet.
                                                          2,789.3                                                                                  MYL to launch in June 2011 per settlement; Teva has exclusivity and launched in
                                                                                                          45.9      23.7    23.7     23.7     23.7
Effexor XR         venlafaxine HCL                                   Jun-11       N                                                                July 2010.
                                                            234.0                                                                                  Teva is FTF and settled for Feb 2012. For MYL trial completed 5/20/2010, no
                                                                                                                     3.6     2.9       1.6     1.6
Entocort EC         budesonide                                      Aug-12        N                                                                update yet on judgement. MTL 30 mnths expire Dec. 2010.
Femara             letrozole                                585.5    Before
                                                                                                         138.2      71.1    37.5     19.3      6.4 MYL settlement permits launch prior to June 2011; NVS expects 2Q11 launch
                                                                  patent expiry   Y
Fosrenol           lanthanum                                127.7   Aug-24                                                                           Sued on 03/2009.30-month stay will expires April 2012. Litigation pending and in
                                                                                  S                                                                  discovery phase
Kaletra            lopinavir and ritonavir                  506.6    Jun-16                                                                          Litigation ongoing; 30 month stay expires July 2011. On 11/5/09, this case was
                                                                                  Y                                                                  stayed until 7/1/2014.
Lescol             fluvastatin                               39.1    Apr-12                                                                          Litigation ongoing; NVS filed a lawsuit against MYL on Oct 10, 2008;30 mnths expire
                                                                                  Y     small product                                                Feb 2011.
Lexapro                                                   2,761.1    Mar-12
                                                                                                                                                   Myl launches 2 wks early of patent expiry per settlement with FRX (and FRX
                                                                                                                                                   receives profit share), then everyone launches on patent date expiry on 3/19/2012.
                                                                                  N                                129.9    83.5     78.4     68.6
Levaquin           levofloxacin                           1,578.2    Jun-11       N                       48.2      32.1    16.4     11.6      6.1 MYL to launch post patent expiry in June 2011
Lipitor            Atorvaststin                           7,552.6    Jan-13
                                                                                                                                                     MYL is in litigation on '156 patent (2017), No trial date set. Assume settlement.
                                                                                  N                                         50.0     40.0     30.0
Lotrel             amlodipine/                              375.0 Sometime in                                                                      Teva launched at-risk. MYL has been sued.many others have launch since then.
                                                                     2011         N                                                                MYL is yet to launch.
LoSeasonique       eszopiclone                                5.0   Dec-11        N                                                                30 month stay expires in Aug 2012; Watson's exclusivity could end late 2012, Lupin
                                                                                        very small product                                         other FTFer; Litigation in discovery, no trial date set.
Lunesta            eszopiclone                              761.9    Feb-14       S                                                  19.9     14.1 30 month stay expires in June 2012; 10 FTF applicants. Litigation pending
Lyrica             pregabalin                             1,602.4    Dec-18
                                                                                                                                                     30 month stay expires in July 2012; Litigation ongoing; Exclusivity shared with 7
                                                                                                                                                     others Teva, Sandoz, Lupin, Wockhardt, Sun, Actavis, Cobalt and Alphapharm
                                                                                  S
Maxalt             Rizatriptan                              398.0    Feb-14                                                                        Launch post patent expiration in February 2014. PIII filing on 2012 patent, PIV on
                                                                                  S                                                  33.4     21.1 2014. Shared with Teva and Sandoz
Mirapex            pramipexole                              534.9    Dec-10                                                                        MYL to launch post patent expiry in October 2010; Teva launched generic in Jan
                                                                                  N                       24.1      15.2    10.5     10.5     10.5 2010
Myfortic            mycophenolic acid                       146.3    Nov-18                                                                          MYL is FTF;30 mnths is Aug.2011. Litigation in discovery; no trial date as yet.
                                                                                  Y
Namenda            memantine                              1,180.2    Jan-15                                                                        MYL to launch in January 2015 per settlement; Amneal. Watson, Dr. Reddy's. Lupin,
                                                                                  S                                                           79.7 Teva, Orchid, Sun, Upsher-Smith, & Wockhardt enter along with MYL
Nuvigil             amrodafinil                              82.2    Jun-24       Y                                                                Litigation ongoing; FTF on 50, 150 and 250
Oracea             doxycycline                              155.4    Apr-22                                                                        Trial scheduled for Dec 2010; MYL sued on March 19, 2009 by Galderma, 30
                                                                                  Y                                                                months expire Aug. 2012
Prevacid           Lansoprazole tablets                  2,487.5    Launched      S                                                                All entered Nov. 2009
Provigil           modafinil                              1,003.5    Apr-12                                                                        MYL settled for April 2012 launch; Teva, MYL and Ranbaxy share exclusivity; WPI
                                                                                  S                                 81.4    58.7     33.3     21.1 suit against FTC ongoing
Seasonique         eszopiclone                               82.7    Jan-24       N                                                                30 month stay expires in July 2012; FTF Watson lost case - patent upheld
Simcor             niacin extended-release                   88.4    Sep-13                                                                        Teva is FTF; Litigation pending with bench trial scheduled 1/23/2012. 30 mnths
                                                                                  N                                          0.0       3.0     2.4 expire Nov. 2012
Singulair          Montelukast                            2,787.0    Aug-12
                                                                                  N                                 33.4    47.4     26.5     27.3 Lost case, may enter post patent expiry in August 2012 with TEVA and others.
Solodyn            minocycline ER                           538.6    Nov-11                                                                        MYL to launch in Nov 2011 per settlement; Teva and Sandoz are other filers who too
                                                                                  S                          8.5    27.7    17.5       8.8     7.8 have settlled for Nov. 2011 launch.
Strattera          atomoxetine                              527.0 sometime in                                                                      Lilly was granted on injunction allowing time to appeal patent validity. Shared
                                                                     2011         S                                                                exclusivity among 10 players
Sustiva            efavirenz                                228.9   Sep-14        Y                                                    1.6     3.7 30 month stay expires Jan 2012; Bench trial date scheduled in early 2013
Sutent             sunitinib                                269.2    Feb-21                                                                        MYL is FTF and currently sole P4 filer. PFE sued MYL on 16th June, 2010. The
                                                                                  Y                                                                challenged patents expire in 2020-2021. 30 mnths expire July 2013
Tarceva            erlotinib                                490.4    Nov-20                                                                        Bench trial on March 14, 2011; Exclusivity shared with Teva; 30 month stay expires
                                                                                  S                                                                May 2012
Treximet           sumatriptan / naproxen                   115.8    May-17       N                                                                5-day bench trial set for Oct 12, 2010; 30 month stay expires May 2011
Trilipix           choline fenofibrate delayedrelease      244.2     Jan-25       N                                                                30 months expire Sept. 2012. Impax is FTF. Litigation in discovery.
Uroxatral           alfuzosin                               228.9    Jul-11       S                          4.8     7.8     4.1       2.7     2.7 Shared FTF among many files. Judgement in favor of the brand company
Vfend              voriconazole                             181.3     1Q11        Y                       38.8      18.4     8.4       4.2     4.2 MYL to launch in 1Q 2011 per settlement
Vytorin            ezetimibe / simvastatin                1,507.3    Apr-17       Y                                                                  30 month stay expires in May 2012; Litigation in discovery phase
Xopenex            Levalbuterol                             544.9    Feb-13       N                                         12.9      9.2      5.1 Teva to launch in Feb 2013 per settlemenl; WPI is FTF with exclusivity
Xeloda             capecitabine                             481.7    Dec-13       Y                                         12.0     33.3     13.2 Litigation ongoing; 30 month stay expires Sept. 2011
Zetia              ezetimibe                              1,422.1    Apr-17       N                                                                30 mnths expire Nov. 2012.Glenmark settled for Dec 16 (April 17 patent expiry)
Zyprexa            olanzapine                             2,680.7    Oct-11                                                                        All players to enter post 2011 patent expiry. MYL, Teva, Sandoz and Roxane have
                                                                                  N                       25.6      51.7    43.8     34.7     34.7 tentative approval.
Zyvox              linezolid                                694.7    May-15       S                                                           19.0 Split ANDA; Shared between Teva, MYL and Glenmark, all enter in 2015
Unidentified Paragraph IV Generics                                                            0.0        100.0     100.0   100.0    300.0    200.0
Total P-IV sales                                                                             15.5        454.6     887.1   891.1   1,003.2   837.1

Source: IMS Health, Paragraphfour.com, Company data, Credit Suisse estimates.




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Mylan’s International Business Has Leaders but Also
Gaps
Mylan’s generics business has a broad geographic footprint, in large part stemming from
the Merck KGaA acquisition. We have shown the countries of major presence for MYL in
Exhibit 150, grouped into four categories: U.S., EU countries with low generic utilization
(mainly southern Europe), EU countries with high generic utilization (mainly northern
Europe), and Japan.
These groups, and in some cases the countries within each group, present opportunities
of differing attractiveness for MYL.
The countries with low generic utilization, primarily in southern Europe and Japan, are
particularly attractive, and MYL occupies a top five rank in seven of them, and number one
in two of them.
Although MYL has a strong presence in multiple nations, the company’s international
business is also noteworthy for the areas it lacks a significant (or any) presence: no
emerging markets, no Latin America, and no presence in three of the four BRIC countries
(Brazil, Russia, and China; MYL has operations in India). Mylan has stated it has plans to
develop an emerging markets presence, but currently it lags some of its rivals in this
regard (notably Teva). These areas are important for long-term growth, not only for their
higher growth potential with under utilization, but also because they provide diversification
against the headwinds that can blow in the established European markets, such as
government drug price cuts.

Exhibit 150: MYLAN—Geographic Markets
MYLAN                  MYL          MYL         Generic       Generic         Total Pharma Mkt
                      Share        Rank        Utilization   Market, $      Sales, $      CAGR
                    (by value)   (by value)   (by volume)    in billions   in billions   2009-14

USA                   11.3%          2           72%              $31.9      $286.7       0.3%

EU - Low Generic Utilization
France            31%               1            23%               $4.1       $37.9       1.4%
Spain                               5            20%               $2.0       $19.9       7.1%
Italy                               2            10%               $2.3       $23.8       2.0%
Portugal                          Top 3          10%                           $5.7       2.7%
Belgium                             3            13%                           $6.5       5.9%
Ireland                           Top 5          5%                            $2.7       7.2%

EU - High Generic Utilization
UK                 11%              3            57%               $2.9       $19.2       1.6%
Germany                             7            57%               $6.1       $38.4       4.4%
Netherlands                       Top 5          50%                           $7.3       5.4%
Sweden                              3            44%                           $4.7       4.3%

Asia
Japan                               4            17%               $3.7       $76.8       2.0%
Australia              60%*         1*           30%               $0.8        $9.7       4.4%
*by volume

Source: IMS Health, Company data, Credit Suisse estimates.

MYL has executed a concerted effort in Europe to increase the proportion of its products
that are produced in-house, by repatriating products initially licensed from a multitude of
manufacturers by Merck KGaA. This effort has produced substantial cost savings for MYL
(ranging to $350 MM by 2010) and has driven gross margin improvement in Europe.




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Mylan’s Leverage Is Manageable, and Should Not
Restrict Execution of Stated Strategy
Mylan is the most levered of the three largest US generics companies, in large part a
legacy of the Merck KGaA generics business acquisition.

Exhibit 151: MYL has the Highest Total Debt to EBITDA Among the 3 Leading US
Generics
in millions, unless otherwise stated

                                              Leverage Comparison across Generic Companies

                      4.0x            3.7x                                 TEVA                          MYL                WPI
                                                                 3.0x
   Debt/LTM EBITDA




                      3.0x
                                                                                           2.3x                   2.2x
                      2.0x
                                              1.5x                                                                                    1.5x
                                  1.4x
                                                                          1.0x                                                                             1.0x
                      1.0x                                0.8x
                                                                                    0.6x           0.6x     0.6x         0.6x    0.6x
                                                                                                                                             0.3x       0.4x       0.3x

                      0.0x
                                      3Q10                       2011                      2012                   2013                2014                 2015


Source: Company data, Credit Suisse estimates

Mylan generates strong cash flows, and we project that Mylan’s current $5 bn in net debt
will turn to net cash in 2015 (Exhibit 152), assuming no new debt is issued and
repayments are made only as required. The company should have substantial cash flow
margin to meet its debt repayment obligations in 2011-2015, with over $4.7 bn in cash flow
after operations and investing.

Exhibit 152: Net Debt Will Turn to Net Cash in 2015                                                                             Exhibit 153: MYL Should Generate More than Adequate
in millions, unless otherwise stated
                                                                                                                                Cash to Repay its Existing Debt
                                                                                                                                in millions, unless otherwise stated
                                                            Net Debt                                                                                            Debt Repayment Analysis
                                                    Total Debt     Liquid Assets      Net Debt                                                           Cashflow after Operations and Investing   Debt Repayment
  $6,000                                                                                                                          $6,000
                          4,995           5,057
  $5,000                                                                                                                          $5,000                                                                        4,724
                                  4,353                   4,316            4,214
  $4,000                                          3,710                                                                           $4,000
                                                                                           3,056
  $3,000                                                          2,685                                                           $3,000                                                                                2,613
                                                                                                          1,931
  $2,000                                                                           1,488                                          $2,000
                                                                                                                                                           1,010          1,220       1,161
                                                                                                                                                                                          1,184
  $1,000                                                                                                                          $1,000     701                 727                                 632 575
                                                                                                   352
                                                                                                                    (831)                           0                         127
                     $0                                                                                                               $0
                             3Q10            2011            2012             2013            2014           2015                             2011             2012         2013         2014         2015      2011-2015
  ($1,000)                                                                                                                        ($1,000)


Source: Company data, Credit Suisse estimates.                                                                                  Source: Company data, Credit Suisse estimates.

If Mylan pays down debt per mandatory payments (without additional voluntary paydown),
and takes on no new debt, the company’s debt to LTM EBITDA ratio will decline from 3.5x
to 1.0x by 2015 and its debt to book cap will drop from 58% to 19%. (See Exhibit 154.)
The company’s ability to take on new debt, and remain within its stated target of 3.0x
debt/EBITDA will place limitations on its borrowing flexibility. We estimate that Mylan could
borrow, for example $1.3 bn in 2012, or $3.0 bn in 2014, and remain at 3.0x leverage or
less. (See Exhibit 155.) These borrowing levels should be adequate for Mylan to execute
its stated strategy of pursuing emerging markets via partnerships and equity stakes in
local players – each of which generally require modest investment sizes. To the extent



Specialty Pharmaceuticals                                                                                                                                                                                                 125
                                                                                                                                                          13 December 2010


that these borrowing levels place any limits on MYL’s ability to issue several billion dollars
of debt for a large acquisition, they impose some degree of financial discipline to remain
consistent with the strategy.

Exhibit 154: Leverage Ratios Will Fall without New Debt                                   Exhibit 155: Debt Issuance within Target 3.0x
                                                                                          Debt/EBITDA
                            Leverage Ratio Analysis                                                        Debt Issuable within Target 3.0x Debt/EBITDA
                              Debt/EBITDA          Debt/Book Cap
  4.0                                                                           70%            $4,500                                                        4,015
  3.5     58%                                                                                  $4,000
                    53%                                                         60%
  3.0                                                                                          $3,500
                                  44%                                           50%                                                             2,984
                                            39%                                                $3,000
  2.5
                                                                                40%            $2,500
  2.0                                                    29%
          3.5x                                                                  30%            $2,000                             1,546
  1.5               3.0x                                              19%                                            1,303
                                                                                               $1,500
                                  2.3x      2.2x                                20%
  1.0                                                                                          $1,000
                                                         1.5x
  0.5                                                                 1.0x      10%             $500    (24)
  0.0                                                                           0%                $0
          2010      2011          2012      2013         2014         2015                     ($500)   2011         2012          2013         2014          2015


Source: Company data, Credit Suisse estimates.                                            Source: Company data, Credit Suisse estimates.

Mylan Has a Minimal Presence in Branded
Pharmaceuticals
Mylan has a small branded business, and appears to not have a strategic desire to
substantially grow this area of the company. We note the contrast between this profile and
that of Teva and Watson, both of which are actively cultivating their branded arms. We
believe that such diversification can be beneficial, in balancing the risks and volatility of the
generic pharmaceutical business with the longer life cycles characteristic of branded
pharma. Branded drugs, to be sure, bring their own litany of risks, but can add
diversification benefits as a portion of a larger portfolio of generic drugs.

Forecast Summary
Mylan’s financial and operating guidance for 2010 and beyond is stated in Exhibit 70. A
summary of our 2010-2014 MYL estimates is shown in Exhibit 69. We are above
consensus on 2012 revenues, as the patent cliff accelerates. We are above EPS in every
year through 2014. We have projected gross margins separately for each of MYL’s major
geographical revenue groupings (NA, EMEA, and Asia) to estimate the mix effect of
revenue streams with different margins and growth rates. Our revenue and margin
estimates are further highlighted in Exhibit 122 and Exhibit 113.

Exhibit 156: MYL – Financial and Operating Guidance
Company          Sales Guidance                                 EPS Guidance                            Other Variables

Mylan            2010:                                          2010 EPS: $1.55 - $1.65                 2010:
                 $5.4 Bn to $5.6 Bn                             2011 EPS: at least $2                   Gross Margin: 47% to 49% (near lower end)
                 2013: Excess of $8.5 Bn                        2013 EPS: greater than $2.75            R&D: 5% to 6% (4Q will be higher than 3Q)
                                                                                                        SG&A Expense: 18% to 20% of revenues
                                                                                                        Adjusted EBITDA Guidance: $1.45 to $1.55 Bn
                                                                                                        Adjusted Interest Expense: $280 MM to $300 MM (near lower end)
                                                                                                        Tax Rate: 28% to 29% (near lower end)
                                                                                                        Capital Spending: $200 - $250 MM (3Q 10Q)
                                                                                                        4Q EMEA generics revenue ~$435 MM (YoY growth, const. Fx basis)



Source: Company data, Credit Suisse estimates




Specialty Pharmaceuticals                                                                                                                                                 126
                                                                                                                                        13 December 2010


Exhibit 157: Mylan Estimates, Credit Suisse versus Consensus
USD in millions except EPS, unless otherwise noted

                                            MYL                          2009       2010E         2011E          2012E      2013E      2014E
                                             Total Revenue - CS          $5,062.0   $5,497.7      $6,173.0       $6,766.5   $6,977.6   $7,351.0
                                     Total Revenue - consensus           $5,090.5   $5,494.1      $6,073.9       $6,537.8   $6,896.2   $7,282.2
                                                      Difference          ($28.5)       $3.5        $99.1         $228.7      $81.4      $68.8
                                           Revenue Growth - CS                        8.6%         12.3%           9.6%       3.1%       5.4%
                                            Gross Margin % - CS           46.4%      46.8%         47.2%          48.2%      48.5%      48.4%
                                    Gross Margin % - consensus            46.9%      46.8%         47.8%          48.3%      48.1%      48.3%
                                                      Difference           (0.5%)     (0.0%)        (0.6%)         (0.1%)      0.4%       0.2%
                                        Operating Margin % - CS           21.9%      23.2%         24.3%          25.1%      25.0%      25.0%
                                 Operating Margin % - consensus           21.9%      23.0%         24.3%          24.8%      25.4%      24.6%
                                                      Difference           (0.0%)      0.2%         (0.1%)          0.3%      (0.5%)      0.4%
                                                       EPS - CS            $1.30      $1.61         $1.99          $2.30      $2.45      $2.56
                                               EPS - consensus             $1.30      $1.61         $1.98          $2.24      $2.38      $2.63
                                                      Difference          ($0.00)     $0.00         $0.01          $0.06      $0.07     ($0.07)
                                               EPS Growth - CS                       24.5%         23.1%          15.7%       6.5%       4.8%
Source: Company data, FACTSET, Credit Suisse estimates.




Exhibit 158: Mylan Annual Revenues, 2009A–2015E growing at a CAGR of 6.7%
USD in millions except EPS, unless otherwise noted


                                                   MYL - Annual Sales Trends

                                  $8,000                      6 year sales                                $7,474
                                                                                               $7,351
                                                              CAGR of 6.7%          $6,978
                                  $7,000                                   $6,766
                                                                $6,173
                                  $6,000
           Annual Sales ($ MM)




                                                     $5,498
                                           $5,062
                                  $5,000


                                  $4,000


                                  $3,000


                                  $2,000


                                  $1,000
                                            2009      2010       2011       2012    2013       2014       2015


Source: Company data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                                                          127
                                                                                                                                                13 December 2010


Exhibit 159: Mylan Annual Operating Income and Margins, 2009A–2015E

                                                            MYL - Annual Operating Income and Margins
                                                                  Operating Income    Operating Margin        Gross Margin
                                       $2,000                                                                                           60.0%

                                       $1,800
                                                                                      48.2%       48.5%       48.4%         48.2%
                                                      46.4%       46.8%     47.2%
                                       $1,600
     Annual Operating Income ($ MM)




                                       $1,400
                                                                                                                                        40.0%
                                       $1,200

                                       $1,000

                                           $800
                                                                            24.3%     25.1%       25.0%       25.0%         24.0%
                                                                  23.2%                                                                 20.0%
                                           $600       21.9%

                                           $400

                                           $200

                                             $0                                                                                         0.0%
                                                      2009         2010      2011     2012        2013         2014          2015

Source: Company data, Credit Suisse estimates.



Mylan’s revenues are dominated by generics (Exhibit 123), with a small branded specialty
segment that is headlined by Epipen, which MYL obtained when it took ownership of Dey
Laboratories as part of the Merck KGaA acquisition in 2007.

Exhibit 160: Mylan Revenue Mix
USD in millions, unless otherwise stated

                                                                           MYLAN Revenue Mix
    in $ M
   $8,000                                                    NA Generics    EMEA Generics     Asia Generics     Specialty Segment

   $7,000

   $6,000

   $5,000

   $4,000

   $3,000

   $2,000

   $1,000

                                      $0
                                                  FY 2009       FY 2010     FY 2011    FY 2012      FY 2013       FY 2014           FY 2015

Source: Company data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                                                                  128
                                                                                                  13 December 2010




Investment Risks
Dependence on Successful Paragraph IV Challenges Involving Costly and
Potentially Prolonged Litigation
Paragraph IV challenges present significant windfall profit opportunities and are a major
contributor to Mylan’s success story. However, Paragraph IV challenges involve costly and
potentially prolonged litigation. The pendulum can swing either way and unfavorable
rulings present significant downside to earnings.
FDA Approval Delays in ANDA Applications
Failure to obtain timely approval or unexpected delays in FDA approval of Mylan’s generic
drugs.
Intense Competitive Pressures that Accompany the Generic Industry with Regard to
Players, Pricing, and Share
An increasing number of generic players due to low barriers to entry are making it a
difficult playing field. More companies are competing for a piece of the post-patent pie,
driving down pricing and compressing margins. In addition, maintaining sizeable share is
becoming challenging.
Global Pricing Pressures Could Affect Top-Line Growth
With the recent economic crisis and fiscal pressures facing governments, especially in
Europe, there have significant drug legislation amendments leading to price cuts in some
countries. While volumes have offset price decline in certain geographies, further pricing
pressures present significant headwinds to the business. In the event that Mylan is not
able to adapt nimbly to this changing pricing environment, the company’s top-line revenue
and global growth are at risk.
Foreign Exchange Risk Due to Global Revenue Exposure
Mylan does business in 140 countries and territories its financials are exposed to a
number of currencies, exposing about 50% of revenue. In the current environment of
currency volatility, it is difficult to predict what turn the exchange rates will take and what
impact that will have on Mylan’s profitability.
Significant Leverage Creating Balance Sheet Risk with Highest Leverage Ratio and
Lowest Coverage Ratio
Mylan has the highest leverage ratio among its peers. After issuing debt to finance the
Merck KGaA acquisition in October 2009 and Bioniche in July 2010, according to our
estimates Mylan’s debt to EBITDA ratio is 3.5x and coverage ratio is 4.5x. This creates
significant balance sheet risk as well as constrains Mylan’s ability to finance future
significant sized deals with debt. Management has stated its goal of bringing the debt to
EBITDA level to below 3, and we cautiously monitor how the deleveraging process
progresses.
Epipen Faces Generic Challenges
Epipen, MYL’s main branded drug, has PIV challenges from Teva and Sandoz, with Teva
holding FTF status. Patent litigation is in discovery stage for both cases, but it is possible
that there will be a generic Epipen on the market as soon as February 2012, when Teva’s
30-month stay expires. King filed a Citizen’s Petition and FDA primarily agreed with four
out of the six points, basically saying it would review each ANDA on a case-by-case basis.
We estimate Epipen to account for 5.1%, 5.0%, 5.2% of revenues in 2011, 2012, and 2013,
respectively.




Specialty Pharmaceuticals                                                                                    129
                                                                                                13 December 2010


Integration Risk Associated with Merck KGaA and Bioniche
A key source of revenues for Mylan is the vertical integration of Merck KGaA generic’s
business into Mylan’s legacy business and achieving optimal operational efficiencies in the
relatively new geographies acquired with the acquisition. Bioniche adds injectable
products to Mylan’s portfolio, but Mylan has little prior experience in marketing and selling
drugs to the hospital consumer base and may take time fully to integrate and realize
synergies
The Biosimilars Opportunity Proves Elusive Due to Regulatory, Clinical, and
Competitive Reasons
MYL partnered with Biocon to harness the biosimilars opportunity. Biosimilars present a
potentially large market opportunity for many years. However, the clinical, regulatory, and
competitive and competitive landscape remain undefined and depending on how they
evolve, could prove to be less lucrative than they hoped for.




Specialty Pharmaceuticals                                                                                  130
                                                                                                                                                                 13 December 2010




Valuation
Historical Perspective and Stock Drivers
MYL’s stock price is most sensitive to earnings expectations. The stock rallied when
management guided to a 20% CAGR in 2010-2013 on the 4Q09 conference call. The
economic macro environment started deteriorating in Europe beginning March and
concerns regarding European sovereign debt took center stage. Investors started worrying
about the read-through pricing pressures in the main growth market for Mylan, Europe.
This hurt sentiment around MYL’s ability to achieve the guided targets and the stock gave
back all the gains, with the stock price returning to pre-rally levels. The recent Paxil CR
litigation has also added additional risk to MYL earnings. We estimate that news flow
related to paragraph IV challenges, EU pricing and Epipen generic will be key drivers of
stock going forward.

Exhibit 161: Stock Price Chart with Key Events—MYL

                                                                                       MYL

               $24.00
                                                                                      Investors increasingly
                                                                                       concerned about EU
                                                                                        pricing pressures


               $22.00                                                                                                                   MYL reports 3Q10
                                                                                                                                      results, reaffirms 2010
                                               MYL names                                                                                  EPS guidance
                                                 John D.
                                               Sheehan as
                                               EVP & CFO                                                        MYL announces acquisition
               $20.00                                                                                             of Bioniche - a Global
                                                                                                                   Injectable Business



                                                                    MYL gives long term
               $18.00
 Stock Price




                                                                 guidance - reaffirms 2010
                                                                  EPS guidance of $1.50-
                                                                $1.70 and projects 15% top                                                                      Appeals court
                                                                   line CAGR until 2013                                                                        denied interim
                                                                                                                                GSK and Apotex are           injunction pending
               $16.00                                                                                  2010 EPS guidance       prohibited from selling
                         MYL reports solid 3Q09                                                             reduction                                         an appeal related
                                                                                                                               Paxil CR's AG; MYL is        to Apotex's generic
                         results and raises FY09                                                                                 granted temporary
                              EPS guidance                                                                                                                        Paxil CR
                                                                                                                                  restraining order

               $14.00




               $12.00




               $10.00
                    Nov-09     Dec-09      Jan-10     Feb-10   Mar-10     Apr-10     May-10       Jun-10       Jul-10      Aug-10     Sep-10       Oct-10       Nov-10



Source: Company data, Credit Suisse estimates.

Short Interest ratio in MYL has dropped upon the conversion of the preferred to
125,234,172 ordinary shares. Historically, the short-interest ratio has tracked within the
range of 8 – 16. Along with the conversion resulting in an increased average daily volume,
the actual number of short positions has also reduced to about 34 MM on 11/30/2010 as
compared to 87 MM on 11/15/2010.




Specialty Pharmaceuticals                                                                                                                                                         131
                                                                                                                                    13 December 2010



Exhibit 162: MYL Short Interest Tracked Higher in Recent Months

                                                              MYL Short Interest Ratio
                               18.0


                               16.0


                               14.0
   Short Interest Ratio




                               12.0


                               10.0


                                8.0


                                6.0


                                4.0


                                2.0


                                0.0
                                 11/30/2009    01/29/2010    03/31/2010    05/28/2010    07/30/2010    9/30/2010     11/30/2010


Source: Bloomberg, Company data, Credit Suisse estimates. Short interest ratio is calculated by dividing
the short interest by average 30-day daily volume. The ratio implies the number of days it takes to cover the
outstanding short interest.

Exhibit 163: MYL Short Interest Has Remained at the Mid-20s Level as % of Outstanding
Shares

                                         MYL Short Interest Expressed as % of Outstanding Shares
                               30%



                               25%
        Short Interest Ratio




                               20%



                               15%



                               10%



                                 5%



                                 0%
                                  11/30/2009    01/29/2010    03/31/2010    05/28/2010    07/30/2010     9/30/2010     11/30/2010


Source: Bloomberg, Company data, Credit Suisse estimates. Short Interest Ratio is calculated by dividing
the short interest by number of outstanding shares. The ratio implies what percentage of outstanding shares
are currently held as short positions.




Specialty Pharmaceuticals                                                                                                                      132
                                                                                                                                                              13 December 2010



Our Mylan Target Price of $25 Is a Blend of P/E and
DCF Methodologies
We have valued Mylan using a 50/50 blend of discounted cash flow (DCF) analysis
and relative multiples of 2011 EPS, in order to capture the merits of each method.
Our target price derivation is summarized in Exhibit 164

Exhibit 164: Our Blended Target Price Is $25 per Share
                                                                      CS Price Target (1)                  DCF                              Relative Valuation
                                Current        Rating         Price        Upside/          2011 PT        DCF           Premium/      Relative   Target      2011      Rel. Val.
                                 Price                       Target      (Downside)     Implied P/E       Price         Discount (2)   Multiple   Multiple   EPS Est.    Price
S&P 500, Current                  $1,240
S&P 500, as of 12/3/2010          $1,225                                                                                                           13.5x     $91.00

Weighting                                                                                                  50%                                                           50%
Generic Specialty Pharma Group                                  ---           ---             ---           ---            (10%)        0.90x      12.1x        ---       ---
MYL                         $20.14          Outperform         $25          24.1%            12.6x         $25              5%          1.05x      12.7x      $1.99      $25
TEVA                        $53.80           Neutral           $58          7.8%             11.1x         $59             (10%)        0.90x      10.9x      $5.20      $57
WPI                         $49.40          Outperform         $60          21.5%            14.2x         $64              10%         1.10x      13.3x      $4.22      $56



(1) Average of DCF and relative valuation, weighted as shown.
(2) Each group's valuation is relative to S&P 500, while each stock is relative to its group (parity to group = 1.0).
Source: Company data, Credit Suisse estimates.

We believe that DCF is an appropriate method for valuing generic specialty pharma
companies, as it avoids overweighting short-lived 180 day exclusivity periods for
successful first-to-file generic challenges. DCF is particularly relevant at the present time,
in that it allows us to look beyond the impending “patent cliff” – peaking for the industry in
2011-2012 and Mylan having a robust pipeline of generic launches in the upcoming years
– and value the cash flows before and after the cliff opportunity.
We model cash flows to 2020 and calculate a terminal value. We use a 9% discount rate
and a 0.5% perpetuity growth rate in the terminal value. Although we calculate a weighted
average cost of capital of 7.26% using CAPM, we have elected to use a 9% discount rate
for a more conservative estimate of a return expected by an investor commensurate with
Mylan’s risks. Our assumptions and valuation are detailed below in Exhibit 165, and a
sensitivity analysis assuming a range of discount rates and terminal growth rates is shown
in Exhibit 166.

Exhibit 165: MYL DCF: Assumptions and Valuation Exhibit
$ in millions, except for stock price and unless otherwise stated
Assumptions:                                                              Valuation:
Risk-Free Rate (10 yr UST)                       3.3%                     PV Cash Flow 2010-2020                             $8,511
Market Risk Premium                              8.0%                     PV Terminal Value                                  $7,226
Beta                                             0.71                     Enterprise Value                                  $15,736
Cost of Equity                                   9.0%
MV Equity to Capital                            68.2%                     Less: Net Debt/(Cash)                             $4,509
Debt Rate                                        7.5%                     Equity Value                                      $11,227
Tax Rate                                        35.0%
Cost of Debt                                     3.6%                     Diluted shares (MM)                                 441.4
MV Debt to Capital                              31.9%                     Current Stock Price*                               $20.14
WACC                                             7.3%                     Equity value per share                                $25
Terminal Growth Rate                             0.5%                     Upside                                               26%
* closing price as of 12/10/2010
Source: Company data, Credit Suisse estimates.


.




Specialty Pharmaceuticals                                                                                                                                                    133
                                                                                                             13 December 2010



Exhibit 166: Our DCF Analysis Values MYL at $25 per Share
                                Discount Rate        Equity Value per Share (b)
                                       (WACC)    -0.5%         0.5%         1.5%
                                        7.0%    $33.07        $36.73       $41.72
                                        8.0%    $27.76        $30.33       $33.69
                                        9.0%    $23.57        $25.44       $27.80
                                        10.0%   $20.19        $21.58       $23.30
                                        11.0%   $17.40        $18.46       $19.74
Source: Company data, FactSet, Credit Suisse estimates.

In addition, we include a relative P/E component in our valuation due to the common
use of this metric among investors, and also due to the tendency of the specialty pharma
stocks to respond to near-term earnings performance. For our P/E based valuation, we
start by assuming that the generic specialty pharma group will trade at a 10% discount to
the S&P 500, as discussed in our industry note, and then apply a 5% premium for MYL.
This 5% premium is slightly higher than Mylan’s current 1% discount to the group, based
on next twelve months’ earnings (Exhibit 167 and Exhibit 168). We base this premium on
MYL’s strong earnings growth driven in large part by its robust US generics pipeline.
Current 2011 and 2012 multiples for MYL and comparable companies are shown in Exhibit
169.

Exhibit 167: MYL Has Historically Traded Below the Generic Spec Pharma Sector
U.S Generic Spec Pharma Sector comprises of MYL, TEVA and WPI
                         45.0
                                                                 US Generic Spec Pharma Sector
                         40.0                                    MYL

                                                                 S&P
                         35.0


                         30.0
    NTM Price/Earnings




                                                       Average: 17.9x
                         25.0                                                                    Average: 15.8x


                         20.0


                         15.0
                                                                  Average: 16.1x

                         10.0                                                                                         10.3


                          5.0


                          0.0
                                01

                                01

                                02

                                02

                                03

                                03

                                04

                                04

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                                08

                                09

                                09

                                10

                                 10
                              20

                              20

                              20

                              20

                              20

                              20

                              20

                              20

                              20

                              20

                              20

                              20

                              20

                              20

                              20

                              20

                              20

                              20

                              20

                              20
                           1/

                           1/

                           1/

                           1/

                           1/

                           1/

                            1/

                            1/

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                            1/

                           1/

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                         7/

                         1/

                         7/

                         1/

                         7/

                         1/

                         7/

                         1/

                         7/

                         1/

                         7/




Source: FactSet, Company data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                               134
                                                                                                                                                                                                                                                                  13 December 2010



Exhibit 168: MYL currently Trades at a 1% Discount to the Group
*Generic Spec Pharma comprises of MYL, TEVA and WPI
                                                     1.50


                                                     1.40

                                                                                                                                                             MYL Relative to Generic Spec Pharma
  MYL Generic Spec Pharma Weighted Relative P/FE




                                                     1.30


                                                     1.20


                                                     1.10
                                                                                                                                                                                                                                                                                 0.99
                                                     1.00


                                                     0.90

                                                                                                                                                    Average: 0.9x
                                                     0.80


                                                     0.70


                                                     0.60


                                                     0.50




                                                                                                                                                                                                                                                                       0


                                                                                                                                                                                                                                                                                    0
                                                          1


                                                                     1


                                                                                2


                                                                                             2


                                                                                                        3


                                                                                                                   3


                                                                                                                              4


                                                                                                                                         4


                                                                                                                                                      5


                                                                                                                                                                 5


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                                                                                                                                                                                                   7


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                                                                                                                                                                                                                          8


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                                                                                                                                                                                                                                                 9


                                                                                                                                                                                                                                                            9

                                                                                                                                                                                                                                                                    01


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                                                                                                                                                                                                            00


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                                                     1/




                                                                                                   1/


                                                                                                              1/


                                                                                                                         1/


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                                                                                                                                                                                            1/


                                                                                                                                                                                                       7/


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                                                                                                                                                                                                                                         1/


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                                                              7/


                                                                         1/




Source: FactSet, Company data, Credit Suisse estimates.



Exhibit 169: Generic Specialty Pharmaceutical Valuation Comparables
*rows highlighted in grey i.e. MYL, TEVA and WPI are CS covered stocks and use CS estimates
                                                                                  Price                   Market       Enterprise          Relative Valuation                            Relative Valuation          Relative Valuation               Relative Valuation
                                                                                     52 week               Cap           Value             2011              2012             EPS        2011        2012            2011              2012           2011               2012
 Ticker Company                                                    Current        High       Low          ($ MM)        ($ MM)             P/E                P/E        CAGR % PEG                  PEG           EV/Sales       EV/Sales        EV/EBITDA EV/EBITDA                   YTD
                                                                                                                                   CS Generic SpecPharma Index (Equal Weighted)
HSP                                                Hospira             $56.27     $60.49     $47.36         $9,566        $10,660          13.0x             11.7x            12.4       1.0x        0.9x            2.5x              2.3x            8.4x               7.7x      10.3%
IPXL                                               Impax                19.11      22.39       7.20          1,251            893          15.2x             13.2x            10.5       1.5x        1.3x            1.8x              1.6x           6.4x               6.2x       40.4%
MYL                                                Mylan                20.14      23.63      16.55          9,791         13,725          10.1x              8.8x            13.4       0.8x        0.7x            2.2x              2.0x            8.2x               7.3x       9.3%
PRGO                                               Perrigo              66.06      68.38      37.46          6,161          7,009          17.2x             15.8x            13.6       1.3x        1.2x            2.5x              2.3x           11.2x              10.4x      65.9%
PRX                                                Par                  38.00      38.78      23.09          1,356          1,136          11.0x             11.1x             2.6       4.2x        4.3x            1.3x              1.4x            5.5x               5.7x      40.4%
TEVA                                               Teva                 53.80      64.95      46.99         51,506         55,672          10.3x              9.4x            14.7       0.7x        0.6x            3.0x              2.7x            8.8x               8.0x      (4.2%)
WPI                                                Watson               49.40      52.20      37.26          6,190          7,159          11.7x              8.7x            14.5       0.8x        0.6x            1.7x              1.3x            7.0x               4.9x      24.7%
CS Generics SpecPharma Index (Equal Weighted)                                                                                              12.7x             11.2x                       1.5x        1.4x            2.1x              2.0x            7.9x              7.2x           27%
CS Branded SpecPharma Index Median (Equal Weighted)                                                                                        11.7x             11.1x                       1.0x        0.9x            2.2x              2.0x            8.2x              7.3x           25%
*rows highlighted in grey are CS covered stocks and use CS estimates

Source: FactSet, Company data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                                                                                                                                                                                               135
                                                                                                13 December 2010




Takeout Analysis
We have analyzed the potential takeout value of Mylan using the following two
methodologies, and the results are shown below in Exhibit 170.
(12)Breakeven acquirer EPS; and
(13)Comparable transactions, focusing on average premiums paid to target stock prices,
    and a multiples-based comparables approach, including LTM mean and median
    multiples for revenue and EBITDA.
With breakeven acquirer EPS, we analyze the maximum price per share that a variety of
potential acquirers could pay for Mylan and maintain breakeven 2012 EPS with no
synergies (excluding amortization of transaction-related intangible assets). Some of our
key assumptions in this analysis are as follows:

■   Our analysis is purely financial: We are not opining on the strategic fit of potential
    buyers in the scope of this analysis, and are simply posing a few theoretical buyers as
    illustrative examples.

■   High proportion of cash consideration: We believe that most potential acquirers would
    aim to maximize the extent of cash consideration (and minimize stock) used in the
    deal. Most potential buyers have large cash balances and substantial access to
    inexpensive debt, both of which would be cheaper capital than their relatively low-
    multiple stock. Our model assumes use of cash up to the following caps:
               o    all of the target’s cash and 10% of an acquirer’s cash; then
               o    new debt up to the lesser of 1.5 times pro forma total debt/EBITDA, at an
                    interest rate of 5.0% (which is conservative for many major pharma
                    companies in light of recent debt raises such as MRK’s 10 year bonds at
                    3.875%); or
               o    $10 billion maximum new debt issuance.

■   No synergies: We believe that an acquirer of Mylan could potentially realize
    meaningful synergies. However, because synergies could be variable among
    potential buyers, and in order to take a conservative approach to this analysis of
    maximum purchase price, we have not included any potential synergies.
With comparable transaction analysis, we have used a basket of historical specialty
pharmaceutical acquisitions (Exhibit 171), and applied the average and median premiums
and multiples paid in these deals to estimate a potential takeout price for Mylan.
As a result of these analyses, we estimate that Mylan could be valued at $26 - $33 per
share based on comparable deals and $23 - $25 based on acquirer’s breakeven EPS in
2012 assuming no synergies. However, in part due to access to very cheap capital, many
potential buyers could afford to pay substantially more than that, and this ability to pay
could drive bidding higher. Of course, other considerations such as strategic fit and
available alternatives would be important for any acquirer and could limit a purchase price
to levels below these EPS dilution-driven takeout values.




Specialty Pharmaceuticals                                                                                  136
                                                                                                                     13 December 2010



Exhibit 170: Potential Maximum Price Assuming No Synergies and Based on Comparable Acquisition Multiples

  $40
                                                        TakeOut Analysis
                                                              $31.83               $33.33
                                                                        $28.50               $31.12
  $30      $25.41                                                                                               $27.00
                                                                                                       $26.01
                       $23.10
                                        Current stock price
  $20

                                                   $20.14

  $10




    $0
          Pfizer       Teva                                    Mean      Median      Mean    Median    1 mo.    1 mo.
                                                              LTM rev    LTM rev    EBITDA   EBITDA   Premium Premium
                                                                                                       mean    median

                   Based on Potential Acquirer's                                   Based on Comparable Acquisition Multiples
                      Breakeven EPS in 2012

Source: Company data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                                       137
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Exhibit 171: Comparable Acquisitions in Generic Specialty Pharmaceuticals
in millions, unless otherwise stated
     DATE                                                                                                                  EQUITY         ENTERPRISE                       LTM                Premium
  ANNOUNCED           ACQUIRER                                TARGET                                                       VALUE            VALUE               REVENUES          EBITDA       1 Month


     03/18/10         Hospira                                 Baxter's Injectable Business                                      112                     $112       0.7x            7.7x
     10/28/10         Teva                                    Theramex - Merck KGaA Women's Health                           $368                       $368       2.7x           30.7x
     09/28/10         Endo                                    Qualitest                                                      $800                      $1,200      3.8x           16.7x
     05/21/10         Abbott                                  Piramal Heathcare Solutions Business(5)                                                  $3,190      6.4x           31.9x
     03/18/10         TEVA                                    Ratiopharm                                                                               $4,933      2.3x           11.8x
     02/01/10         Cephalon                                Mepha                                                                                     $590       1.6x            NA           NA
     06/17/09         Watson Pharmaceuticals                  Arrow Group                                                                              $1,750      2.7x           11.1x         NA
     05/20/09         Novartis                                EBEWE                                                                                    $1,200      4.4x            NA           NA
     04/09/09         Sanofi-Aventis                          Medley                                                                             € 500
                                                                                                                                                   €               3.5x            NA           NA
     01/23/09         GSK                                     UCB (Generics divison)                                                             € 515
                                                                                                                                                 €                 5.0x            NA           NA
     09/22/08         Sanofi-Aventis                          Zentiva (Czech Republic)                                                         €€ 1,800            2.9x           12.4x
     07/18/08         Teva                                    Barr                                                          7,460                      $8,960      3.2x           13.1x        60.9%
     07/07/08         APP Pharmaceuticals                     Fresenius SE(1)                                               4,150                      $5,090      6.2x           13.7x
     06/11/08         Daiichi Sankyo                          Ranbaxy                                                                                  $8,500      5.4x            NM          49.1%
     03/31/08         Teva                                    Bentley                                                                                   $360       2.9x          38.5x
     11/15/07         Gedeon Richter                          Polpharma (Poland)                                                                       $1,400      3.9x           13.9x
     05/13/07         Mylan Laboratories                      Merck KGaA generic business                                  $6,626                      $6,626      2.7x           14.7x         NA
     03/05/07         Zentiva (Czech Republic)                Eczacibasi                                                                         € 460
                                                                                                                                                     €             3.1x           13.7x
     01/22/07         Hikma (International)                   Ribosepharm (German Oncogenerics)                                                           $45      1.8x            8.0x
     11/30/06         Actavis (Iceland)                       Abrika (US)                                                                      110-125             4.2x            8.9x
     11/21/06         Actavis (Iceland)                       Zio Zdorovje (Russia)                                                                       $30      1.5x            6.4x
     09/21/06         Hospira (International)                 Mayne Pharma (International)                                                             $1,980      3.2x           15.2x
     08/28/06         Mylan Laboratories                      Matrix Laboratories                                           1,011                       1,241      3.9x            NM          21.2%
     06/26/06         Barr Pharmaceuticals                    Pliva                                                         2,200                       2,412      2.4x           18.7x         2.2%
     03/29/06         Ranbaxy                                 Terapia (Romania)                                                                           324      4.3x           12.4x
     03/28/06         Actavis                                 Sindan                                                           177                      $160       2.0x            8.0x         NA
     03/27/06         Sanofi-Aventis                          Zentiva (Czech Republic)                                                                  $430       4.2x           15.1x
     03/13/06         Watson Pharmaceuticals                  Andrx Corporation                                             1,856                      $1,451      1.4x           20.3x        40.1%
     02/15/06         Dr. Reddy's                             betapharm Group                                                 571                       $571       2.9x          11.7x          NA
     10/17/05         Actavis                                 Alpharma(2)                                                     810                         810      0.9x            8.9x         NA
     07/25/05         Teva                                    IVAX                                                          7,420                       8,530      4.2x           25.9x        23.8%
     05/20/05         Actavis                                 Amide Pharmaceutical                                            500                         460      4.3x            8.6x         NA
     02/21/05         Novartis                                Eon Labs                                                      2,687                       2,492      5.8x           13.6x        23.5%
     02/21/05         Novartis                                Hexal AG                                                      5,684                       5,684      3.4x            NA           NA
     06/07/04         Novartis                                Sabex                                                           565                         565      6.3x            NA           NA
     10/31/03         Teva                                    Sicor                                                         3,386                       3,069      5.8x           14.4x        38.5%
     10/18/02         Novartis                                Lek                                                             866                         755      2.1x            9.9x         NA
     07/12/01         Teva                                    FH Faulding (Injectable)(3)                                     365                         365      2.2x           12.7x         NA
     07/12/01         Alpharma                                FH Faulding (Oral)                                              660                         660      3.2x           19.8x         NA
     05/25/00         Watson Pharmaceuticals                  Schein Pharmaceuticals                                          717                         919      2.1x           22.7x        41.2%

                                                                                                                                         Mean                      3.5x           14.4x        33.4%
                                                                                                                                         Median                    3.2x           13.7x        38.5%



Source: Company filings and press releases.
(1) APP Pharmaceuticals - Fresenius SE deal: Enterprise value and revenue multiple based on average, factoring in the contingent value right
(2) 50% of 2004 financials and 1H05 financials.
(3) Withdrawn.
(4) 9 months ending 9/30/04 annualized.
(5) EBITDA of the healthcare solutions business is based on a 20% company wide margin published by Piramal and next years revenues of $500m based on Abbott estimates. The Enterprise Value
is an NPV adjusted value based on Abbott's costs of capital.

Source: Company data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                                                                                                        138
                                                                                                                     13 December 2010




Catalysts
We conservatively model generic launches on patent expiration date, but if Mylan chooses
to launch at risk, they could present upside to our numbers.
The key catalysts for MYL, in our view, will be such meaningful at-risk launch opportunities
and Copaxone claims construction hearing on January 12, 2011.

Exhibit 172: Upcoming Catalysts for MYLAN
        Timing                  Catalyst/Event    Sensitivity                               Fundamentals
                            Copaxone Patent Case:     **      Claims construction hearing regarding Copaxone between Mylan and Teva
   January 12, 2011         Mylan claims
                            construction hearing
Source: Company data, Credit Suisse estimates

Kaletra’s patent expires in June 2016, but MYL could potentially launch generic lopinvavir
and ritonavir on July 2011 upon expiration of a 30-month stay. Sole 180 day marketing
exclusivity on Abbott’s Kaletra, which generated about $500 MM in 2009, per IMS, could
be a lucrative opportunity.
Another potential at-risk launch in 2010 is Urotraxal; however, we highlight that exclusivity
is shared among more than five players dividing the windfall profit opportunity. We also
note that at about $100 MM 2009 sales each, Amrix and Treximet in our opinion are not
attractive enough opportunities to take on the risk of litigation costs, which could potentially
be associated with at-risk launches.

Exhibit 173: : MYL Potential Meaningful 30-Month At-Risk Launches in 2010 and 2011
                 30 month stay                   Drug
                     Expiry                                         2009 IMS Sales
                  December, 2010                    Uroxatral           $228.9
                       April, 2011                     Amrix            $119.3
                        May, 2011                   Treximet            $115.8
                        July, 2011                    Kaletra           $506.6
Source: Paragraphfour.com, Company data, Credit Suisse estimates.




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                                                                                                                                             13 December 2010




Company Description
Mylan is one of the largest global generic and specialty pharmaceutical companies
marketing drugs in over 140 countries and territories. The company has two major
business segments, generics, and specialty.
Mylan maintains one of the industry’s broadest and highest-quality generic product
portfolios supported by a robust product pipeline, which was further bolstered by the
acquisition of Merck KGaA’s generic business in EMEA and Asia Pacific. Through Matrix
Laboratories, a subsidiary of Mylan, it has gained exposure not only to key emerging
markets, but has also become one of the world’s largest active pharmaceutical ingredient
manufacturers.
Dey Pharma constitutes Mylan’s specialty business focused on respiratory, allergy, and
psychiatric therapies, including EpiPen Auto-Injector.

Exhibit 174: MYL—2010E Sales by Products                                        Exhibit 175: MYL—2015E Sales by Products
                       MYL 2010E Net Revenue Breakdown                                                 MYL Net 2015E Revenue Breakdown



                      Specialty Segment                                                               Specialty Segment
                              8%                                                                              8%


             Asia Generics
                                                                                             Asia Generics
                  20%
                                                          NA Generics                             22%                                     NA Generics
                                                             43%                                                                             43%




                    EMEA Generics                                                                     EMEA Generics
                        29%                                                                               27%

     NA Generics      EMEA Generics       Asia Generics     Specialty Segment        NA Generics       EMEA Generics      Asia Generics     Specialty Segment


Source: Company data, Credit Suisse estimates.                                  Source: Company data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                                                                       140
                                                                                                                 13 December 2010




Management
Management Team
Robert J. Coury, CEO and chairman of the board, has led MYL to become the third-largest
generics player in the world. Robert and his team have collectively over 100 years in
pharmaceuticals and are working toward making MYL a fully vertically integrated generics
company with a global revenue base.

Exhibit 176: Mylan’s Management Team—Collectively Over 100 Years in Pharmaceuticals
          Name            Principal Position                                    Comments
                                                 ■ Mylan became third largest generics player in the world under his
                                                 leadership
                                                 ■ Both organic gowth and acquisitions of Merck KGaA's global generic
                         Chairman of the Board, business and Matrix Labs
     Robert J. Coury
                         Chief Executive Officer ■ Over 8 years at Mylan serving in various capacities including CEO, Vice
                                                 Chairman and Chairman of the board
                                                 ■ Previously CEO and principal owner of Coury Consulting, L.P., a
                                                 Pittsburgh, Pennsylvania corporate advisory firm that he founded in 1989
                                                     ■ Approximately 18 years at Mylan serving in various capacities including
                                                     Executive Vice President and COO, Head of North American Operations,
                                                     and Senior Vice President, Strategic Corporate Development
                                                     ■ Accountable for day-to-day operations of the company
      Heather Bresch               President
                                                     ■ Chairman of Generic Pharmaceutical Association for two consecutive
                                                     terms
                                                     ■ Named one of the top women in global pharmaceutical industry by
                                                     Fierce Pharma in 2009
                                                     ■ Nearly 30 years of professional experience in global corporate finance,
                                                     accounting, auditing and management
                                                     ■ Responsible for global finance functions including accounting and contol,
                            Chief Financial Officer, financial planning and analysis, treasury and tax
      John Sheehan              Executive Vice       ■ Previously CFO for Detroit-based Delphi Automotive LLP
                                   President         ■ 20 years at KPMG in roles with increasing responsibility including
                                                     Partner
                                                     ■ President of the Board of Directors for the International School of
                                                     Stuttgart, Germany, from 1999-2001
                                                     ■ Over 24 years in the global generic pharmaceutical industry
                                                     ■ Heads two key initiatives - generic biologics effort and emerging markets
                            Chief Operating Officer,
                                                     ■ Tenures as Head of Global Development and Regulatory at Sandoz
         Rajiv Malik            Executive Vice
                                                     ■ Head of Generics R&D at Ranbaxy Laboratories
                                   President
                                                     ■ Owns more than 60 process patents

                                                    ■ Held several positions of increasing responsibility since joining Mylan
                                                    through its acquisition of UDL Laboratories in 1996
                                President, North
     Harry A. Korman                                ■ Sales Representative for Berlex Laboratories Inc. for about 8 years
                                   America
                                                    ■ Received a Bachelor's degree in marketing/distributive education from
                                                    the University of Wisconsin
Source: Company Data, Credit Suisse estimates.

Mylan operates on the philosophy that long-term incentive compensation for employees
should be directly related to common stock performance, as well as other operations and
financial measures. The company grants various types of awards, including nonqualified
and incentive stock options, restricted stock, stock grants, performance shares,
performance units, and stock appreciation rights.
We consider Mylan a potential acquisition target and in the event that the company is
bought, we highlight the management termination agreements below Exhibit 177.




Specialty Pharmaceuticals                                                                                                   141
                                                                                                                                         13 December 2010


Notably, the CEO would receive $61.0 MM in the event of termination without cause or for
good reason after change in control.

Exhibit 177: Management Termination Agreements
            Name & Designation                               Compensation Component                        Termination / Change in Control
                Robert J. Coury                                   Cash Payment*                                         $45,853,143
               Chairman & CEO                             Excise Taxes Gross-Up Payment                                  16,092,056
                                                                    Total Value                                         $61,945,199
                Heather Bresch                                    Cash Payment                                          $11,466,890
                  President                               Excise Taxes Gross-Up Payment                                  4,320,594
                                                                        Total Value                                     $15,787,484
                   Rajiv Malik                                        Cash Payment                                      $10,139,528
                   EVP & COO                              Excise Taxes Gross-Up Payment                                      0
                                                                    Total Value                                         $10,139,528
              Harry A. Korman                                     Cash Payment                                          $5,717,845
          President, North America                        Excise Taxes Gross-Up Payment                                 1,972,367
                                                                    Total Value                                         $7,690,212
        Daniel C. Rizzo, Jr., C.P.A                                   Cash Payment                                      $3,865,138
     SVP, CAP, Corporate Controller &
                                                          Excise Taxes Gross-Up Payment                                  1,376,511
        Principal Financial Officer
                                                                        Total Value                                     $5,241,649
                                 Total, 5 named executives                                                             $100,804,072
*Cash payment includes cash severance, benefits, vesting of equity awards, and valuation of other perquisites
Source: Company Data, Credit Suisse estimates.

Board of Directors
Roger J. Coury chairs the nine people board of directors and is chief executive officer of
the company.

Exhibit 178: Mylan Board of Directors
                                                                    Number of Issued
                                                                                        % Share
                                                                        Shares-
            Name                          Afflitiation                                 Benificial                  Position                 Independent
                                                                       Beneficial
                                                                                       Ownership
                                                                      Ownership
       Robert J. Coury                Chairman and CEO                  557,508        less than 1%       Chairman of the Board, CEO            No
                                 Horizon Properties, Community
                                                                                                          Chairman of Compensation
                                 Bank N.A. Accutrex Products,
       Rodney L. Piatt                                                   42,321        less than 1%      Committee, Audit Committee,            Yes
                                Lincoln Manufacturing, Universal
                                                                                                      Governance & Nominating Committee
                                        Smart Company
                                                                                                          Compensation Committee,
       Wendy Cameron                    Cam Land LLC                     31,021        less than 1%                                             Yes
                                                                                                      Governance & Nominating Committee

                                 Alliance Imaging, Resources
                               Connection, Thoratec Corporation,
         Neil Dimick                                                     17,021        less than 1%             Audit Committee                 Yes
                                      WebMD Corporation


                                                                                                          Chairman of Audit Committee,
    Douglas J. Leech CPA                  Centra Bank                    25,821        less than 1%        Chairman of Governance &             Yes
                                                                                                             Nominating Committee
                                University of Pittsburgh Medical
    Joseph C. Maroon M.D.                                                18,321        less than 1%        Compensation Committee               Yes
                                              Center
                                 Trident USA Health Services,
       Mark W. Parrish                                                    500          less than 1%              Board Member                   Yes
                                      Biovail Corporation
         C.B. Todd                Healthcare Industry Expert            516,184        less than 1%              Board Member                   Yes
    Randall L. Vanderveen       University of Southern California       12,321         less than 1%              Board Member                   Yes
Source: Company Data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                                                             142
                                                           13 December 2010




Financial Model
Please find our financial models on the following pages.




Specialty Pharmaceuticals                                             143
Specialty Pharmaceuticals




                            Exhibit 179: Mylan Summary Revenue Model
                            USD in millions, unless otherwise stated

                                                    Revenue Summary
                                                                                       FY 2008      FY 2009      FY 2010     FY 2011     FY 2012     FY 2013     FY 2014     FY 2015
                                                    Generics
                                                    NA Generics                         $1,865.9     $2,083.0     $2,314.7    $2,787.6    $3,167.1    $3,152.4    $3,289.8    $3,160.0
                                                    EMEA Generics                        1,518.9      1,594.5      1,595.2     1,624.9     1,717.6     1,819.4     1,923.4     2,036.7
                                                    Asia Generics                          537.6        933.7      1,111.7     1,263.4     1,348.5     1,441.0     1,541.5     1,647.5
                                                    Total Generics                      $4,298.4     $4,611.2     $5,021.5    $5,675.9    $6,233.2    $6,412.8    $6,754.7    $6,844.2

                                                    Specialty Segment                    $396.0       $410.9       $424.7      $469.1      $503.3      $532.8      $562.3      $593.6

                                                    Total Inter Company Eliminations      ($62.9)       ($6.7)       $0.0         $0.0       $0.0         $0.0       $0.0        $0.0

                                                    Net Revenues                        $4,631.5     $5,015.4     $5,446.2    $6,145.0    $6,736.5    $6,945.6    $7,317.0    $7,437.9
                                                    Other Revenues                         $38.3        $46.6        $51.4       $28.0       $30.0       $32.0       $34.0       $36.0
                                                    Total Revenues                      $4,669.8     $5,062.0     $5,497.6    $6,173.0    $6,766.5    $6,977.6    $7,351.0    $7,473.9

                                                    Growth Rates
                                                    Generics
                                                    NA Generics                                        11.6%        11.1%       20.4%       13.6%       (0.5%)       4.4%       (3.9%)
                                                    EMEA Generics                                       5.0%         0.0%        1.9%        5.7%        5.9%        5.7%        5.9%
                                                    Asia Generics                                      73.7%        19.1%       13.6%        6.7%        6.9%        7.0%        6.9%
                                                    Total Generics                                      7.3%         8.9%       13.0%        9.8%        2.9%        5.3%        1.3%

                                                    Specialty Segment                                   3.8%         3.4%       10.4%        7.3%        5.9%        5.5%        5.6%

                                                    Total Inter Company Eliminations                  (89.4%)     (100.0%)

                                                    Net Revenues                                        8.3%         8.6%       12.8%        9.6%        3.1%        5.3%        1.7%
                                                    Other Revenues                                     21.7%        10.3%      (45.5%)       7.1%        6.7%        6.3%        5.9%
                                                    Total Revenues                                      8.4%         8.6%       12.3%        9.6%        3.1%        5.4%        1.7%

                                                    Revenue Contribution
                                                    Generics
                                                    NA Generics                           40.0%        41.1%        42.1%       45.2%       46.8%       45.2%       44.8%       42.3%
                                                    EMEA Generics                         32.5%        31.5%        29.0%       26.3%       25.4%       26.1%       26.2%       27.3%
                                                    Asia Generics                         11.5%        18.4%        20.2%       20.5%       19.9%       20.7%       21.0%       22.0%
                                                    Total Generics                        92.0%        91.1%        91.3%       91.9%       92.1%       91.9%       91.9%       91.6%

                                                    Specialty Segment                      8.5%         8.1%         7.7%        7.6%        7.4%        7.6%        7.6%        7.9%

                                                    Total Inter Company Eliminations      (1.3%)       (0.1%)        0.0%        0.0%        0.0%        0.0%        0.0%        0.0%

                                                    Net Revenues                          99.2%        99.1%        99.1%       99.5%       99.6%       99.5%       99.5%       99.5%




                                                                                                                                                                                         13 December 2010
                                                    Other Revenues                         0.8%         0.9%         0.9%        0.5%        0.4%        0.5%        0.5%        0.5%
                                                    Total Revenues                       100.0%       100.0%       100.0%      100.0%      100.0%      100.0%      100.0%      100.0%

                            Source: Company data, Credit Suisse estimates.
144
Specialty Pharmaceuticals




                            Exhibit 180: Mylan Income Statement Forecast
                            USD in millions, except Earnings Per Share and unless otherwise stated
                                                                                                                                                           2010
                                                                                                                                        Mar-10      Jun-10      Sep-10     Dec-10
                                                                                                    FY 2007     FY 2008     FY 2009      1QA         2QA         3QA        4QE        FY 2010     FY 2011     FY 2012     FY 2013     FY 2014     FY 2015
                                                          Net Revenues                               $2,646.6    $4,631.5    $5,015.4   $1,278.1    $1,356.5    $1,345.0   $1,466.6     $5,446.3    $6,145.0    $6,736.5    $6,945.6    $7,317.0    $7,437.9
                                                          Other Revenues                                 19.4        38.3        46.6       14.3        12.0        10.1       15.0         51.4        28.0        30.0        32.0        34.0        36.0
                                                      Total Revenue                                  $2,666.0    $4,669.8    $5,062.0    1,292.4    $1,368.5    $1,355.1   $1,481.6     $5,497.7    $6,173.0    $6,766.5    $6,977.6    $7,351.0    $7,473.9
                                                          Cost of sales                               1,374.2     2,540.6     2,712.8      701.7       753.8       698.4      773.5      2,927.3     3,232.6     3,508.0     3,595.0     3,791.7     3,872.3
                                                      Gross Profit                                   $1,291.8    $2,129.2    $2,349.2      590.7      $614.8      $656.8     $708.2     $2,570.4    $2,940.4    $3,258.5    $3,382.6    $3,559.3    $3,601.5
                                                          SG&A                                         471.1       947.5       990.8       245.6       252.0       256.8      268.3     1,022.6      1,124.9     1,214.8     1,275.6     1,339.4     1,406.3
                                                          R&D                                          182.9       305.8       251.7        60.6        66.4        69.2       78.6       274.8        316.0       347.6       365.0       383.3       402.4
                                                      EBITDA                                           707.0        998.7     1,231.0      316.7       328.6      366.4       397.8     1,409.4      1,646.8     1,842.1     1,889.1     1,982.7     1,951.3
                                                          Share based Compensation                      30.8         30.5        31.1        7.3         8.3        8.5         7.7        31.8         30.8        30.8        30.8        30.8        30.8
                                                      Adjusted EBITDA                                  737.8      1,029.2     1,262.1      324.0       336.9      374.9       405.5     1,441.2      1,677.6     1,872.9     1,919.9     2,013.5     1,982.1
                                                          Depreciation (incl. above)                    69.2        122.8       124.4       32.2        32.2       35.6        36.5       136.5        147.3       146.1       147.1       146.0       158.5
                                                                                                                                           323.0       334.7      368.1
                                                      Operating Profit (Loss)                         $637.8      $875.9    $1,106.7       284.5      $296.4     $330.8      $361.2    $1,273.0    $1,499.5    $1,696.0    $1,742.0    $1,836.7    $1,792.8
                                                           Interest expense                           (137.7)     (351.2)     (275.6)      (63.0)      (64.9)     (69.9)      (83.6)     (281.5)     (290.7)     (284.4)     (239.6)     (268.0)     (197.0)
                                                           Other income                                 64.4        18.7         8.1         1.1        (0.2)      (3.9)        3.2         0.2        17.5         6.7         8.2        13.6        13.5
                                                      Pretax Income                                   $564.5      $543.4      $839.2      $222.6      $231.2     $257.0      $280.9      $991.6    $1,226.3    $1,418.4    $1,510.5    $1,582.3    $1,609.3
                                                           Provision for Income taxes                  214.8       164.1       251.9        64.4        67.1       67.7        84.3       283.4       355.6       411.3       438.0       458.9       466.7
                                                           Minority Interests, net                      (2.9)       (4.0)        5.4         0.1         0.7        0.4         0.4         1.5         1.4         1.4         1.4         1.4         1.4
                                                      Net Income                                      $352.5      $383.4      $581.9      $158.1      $163.4     $188.9      $196.2      $706.8     $869.2     $1,005.6    $1,071.0    $1,122.0    $1,141.2
                                                           Preferred dividends                          16.0       139.0       139.0        34.8        34.8       34.8        34.8       139.0         0.0         0.0         0.0         0.0         0.0
                                                      Net Income (Loss) to Common Shareholders        $336.5      $244.3      $442.9      $123.4      $128.7     $154.2      $161.5      $567.7     $869.2     $1,005.6    $1,071.0    $1,122.0    $1,141.2

                                                      Average Shares (if converted method)                         364.9       449.2       437.1       439.6       437.9      437.9       438.1
                                                      Conversion of the company's preferred stock                   60.5                   125.2       125.2       125.2      125.2       125.2
                                                      Average Shares                                   250.9       304.4       306.5       311.9       314.4       312.7      312.7       312.9       437.9       437.9       437.9       437.9       437.9

                                                      Earnings Per Share(if Converted)                             $1.05       $1.30      $0.36       $0.37       $0.43      $0.45        $1.61
                                                      Earnings Per Share                               $1.34       $0.80       $1.44      $0.40       $0.41       $0.49      $0.52        $1.81       $1.99       $2.30       $2.45       $2.56       $2.61
                                                      Diluted Earnings per share                       $1.34       $0.80       $1.30      $0.36       $0.37       $0.43      $0.45        $1.61       $1.99       $2.30       $2.45       $2.56       $2.61

                                                      Margin Analysis
                                                      Gross margin                                     48.5%       45.6%       46.4%      45.7%       44.9%       48.5%      47.8%        46.8%       47.2%       48.2%       48.5%       48.4%       48.2%
                                                      Total SG&A as % of sales                         17.7%       20.3%       19.6%      19.0%       18.4%       18.9%      18.1%        18.6%       18.2%       18.0%       18.3%       18.2%       18.8%
                                                      R&D % sales                                       6.9%        6.5%        5.0%       4.7%        4.9%        5.1%       5.3%         5.0%        5.1%        5.1%        5.2%        5.2%        5.4%
                                                      Operating margin                                 23.9%       18.8%       21.9%      22.0%       21.7%       24.4%      24.4%        23.2%       24.3%       25.1%       25.0%       25.0%       24.0%
                                                      Pre-tax margin                                   21.2%       11.6%       16.6%      17.2%       16.9%       19.0%      19.0%        18.0%       19.9%       21.0%       21.6%       21.5%       21.5%
                                                      Tax rate, effective                              38.1%       30.2%       30.0%      28.9%       29.0%       26.3%      30.0%        28.6%       29.0%       29.0%       29.0%       29.0%       29.0%
                                                      Net margin                                       12.6%        5.2%        8.7%       9.5%        9.4%       11.4%      10.9%        10.3%       14.1%       14.9%       15.3%       15.3%       15.3%

                                                      Year/Year Changes
                                                      Sales                                                       75.2%         8.4%       9.4%        8.2%        7.2%       9.6%         8.6%       12.3%        9.6%        3.1%        5.4%        1.7%
                                                      Gross profit                                                64.8%        10.3%       3.1%        2.8%       12.3%      19.3%         9.4%       14.4%       10.8%        3.8%        5.2%        1.2%
                                                      SG&A                                                       101.1%         4.6%       7.4%       (2.8%)       2.8%       6.0%         3.2%       10.0%        8.0%        5.0%        5.0%        5.0%
                                                      R&D                                                         67.2%       (17.7%)      9.7%       19.8%       (0.5%)     10.0%         9.2%       15.0%       10.0%        5.0%        5.0%        5.0%
                                                      Operating profit                                            37.3%        26.3%      (1.6%)       4.5%       24.7%      34.3%        15.0%       17.8%       13.1%        2.7%        5.4%       (2.4%)
                                                      Net income                                                 (27.4%)       81.3%       7.3%       14.2%       43.5%      49.9%        28.2%       53.1%       15.7%        6.5%        4.8%        1.7%
                                                      Earnings per share                                         (40.2%)       61.4%      10.6%       15.8%       35.1%      36.7%        24.5%       23.1%       15.7%        6.5%        4.8%        1.7%


                            Source: Company data, Credit Suisse estimates.




                                                                                                                                                                                                                                                               13 December 2010
145
Specialty Pharmaceuticals




                            Exhibit 181: Mylan Balance Sheet Forecast
                            USD in millions, unless otherwise stated
                                                                                                                                                                     2010
                                                                                                                                               Mar-10       Jun-10          Sep-10      Dec-10
                                                                                                          FY 2007     FY 2008      FY 2009      1QA          2QA             3QA         4QE        FY 2010     FY 2011     FY 2012     FY 2013     FY 2014     FY 2015
                                           Current Assets
                                           Cash and Cash Equivalents                                          484.2       557.1       380.52       522.4        809.4           610.9       613.8       613.8     1,316.5     1,600.8     2,695.4     2,674.0     2,732.3
                                           Restricted Cash                                                      0.0        40.3         48.0        47.8         48.1            23.8        23.8        23.8        23.8        23.8        23.8        23.8        23.8
                                           Available-for-sale securities                                       91.4        42.3         27.6        29.0         23.8            30.1        30.1        30.1        30.1        30.1        30.1        30.1        30.1
                                           Accounts Receivable, net                                         1,132.1     1,164.6      1,234.6     1,197.5      1,249.0         1,251.9     1,299.0     1,299.0     1,503.7     1,668.5     1,720.5     1,812.6     1,842.9
                                           Inventories, net                                                 1,063.8     1,066.0      1,114.2     1,158.4      1,096.4         1,221.8     1,271.5     1,271.5     1,322.7     1,441.6     1,477.4     1,558.2     1,591.4
                                           Deferred income tax benefit                                        192.1       199.3        248.9       247.7        260.7           247.9       247.9       247.9       247.9       247.9       247.9       247.9       247.9
                                           Prepaid expenses and other current assets                           95.7       105.1        231.6       151.7        141.9            76.9       118.5       118.5       129.1       135.3       139.6       147.0       149.5
                                             Total Current Assets                                          $3,059.3    $3,174.7     $3,285.4    $3,354.6     $3,629.3        $3,463.3    $3,604.6    $3,604.6    $4,573.9    $5,148.0    $6,334.7    $6,493.6    $6,617.9

                                           Long-term assets
                                           Property plant and equipment, net                                1,102.9     1,064.0      1,122.6     1,111.0      1,091.7         1,150.8     1,232.8     1,232.8     1,315.5     1,409.4     1,507.2     1,611.2     1,702.7
                                           Intangible assets, net                                           2,978.7     2,453.2      2,384.8     2,286.6      2,132.3         2,562.4     2,486.3     2,486.3     2,194.2     1,908.8     1,629.1     1,357.0     1,084.9
                                           Goodwill                                                         3,856.0     3,161.6      3,331.2     3,289.0      3,131.1         3,568.5     3,568.5     3,568.5     3,568.5     3,568.5     3,568.5     3,568.5     3,568.5
                                           Deferred income tax benefit                                         18.7        16.5         36.6        37.6         42.9            44.2        44.2        44.2        44.2        44.2        44.2        44.2        44.2
                                           Other Assets                                                       337.6       540.0        641.0       743.6        570.5           617.9       651.9       651.9       774.9       812.0       837.3       882.1       896.9
                                           Total Assets                                                   $11,353.2   $10,409.9    $10,801.7   $10,822.5    $10,597.8       $11,407.0   $11,588.3   $11,588.3   $12,471.2   $12,890.9   $13,921.1   $13,956.7   $13,915.0
                                           LIABILITIES AND SHAREHOLDERS' EQUITY
                                           Current liabilities
                                           Trade accounts payable                                             608.1       585.7        518.3       549.0        527.8           551.3       576.4       576.4       566.9       624.7       640.2       675.2       689.6
                                           Short term borrowings                                              144.4       151.1        184.4       144.8        161.6           150.8       150.8       150.8       150.8       150.8       150.8       150.8       150.8
                                           Income tax payable                                                 169.5        92.2         69.1       101.3        100.4            56.9        56.9        56.9        56.9        56.9        56.9        56.9        56.9
                                           Current portion of long term debt and other long term obliga       410.9         5.1          9.5         9.1         10.1             7.7         7.7         7.7         7.7         7.7         7.7         7.7         7.7
                                           Deferred income tax liability                                       24.3         1.9          2.0         1.3          1.3             1.3         1.3         1.3         1.3         1.3         1.3         1.3         1.3
                                           Other current liabilities                                          645.1       708.6        934.9       834.3        828.3           954.3       948.2       948.2       968.6     1,048.8     1,116.4     1,176.2     1,195.8
                                             Total Current Liabilities                                     $2,002.4    $1,544.7     $1,718.1    $1,639.9     $1,629.5        $1,722.3    $1,741.4    $1,741.4    $1,752.2    $1,890.3    $1,973.4    $2,068.1    $2,102.1

                                           Long-term liabilities
                                           Long term debt                                                   4,706.7     5,165.4      4,985.0     5,058.2      5,047.4         5,212.2     5,224.3     5,224.3     5,274.8     4,575.2     4,472.8     3,315.4     2,765.2
                                           Other long term obligations                                        206.7       404.0        485.9       480.7        465.7           460.1       460.1       460.1       460.1       460.1       460.1       460.1       460.1
                                           Deferred income tax liability                                      999.7       563.1        467.5       465.2        476.2           469.4       469.4       469.4       469.4       469.4       469.4       469.4       469.4
                                             Total Long-Term Liabilities                                   $5,913.1    $6,132.6     $5,938.4    $6,004.1     $5,989.3        $6,141.8    $6,153.8    $6,153.8    $6,204.3    $5,504.7    $5,402.3    $4,244.9    $3,694.8

                                           Shareholders' equity
                                           Preferred Stock                                                      1.1         1.1          1.1         1.1          1.1             1.1         1.1         1.1         1.1         1.1         1.1         1.1         1.1
                                           Common Stock                                                       197.6       197.7        198.3       199.2        199.6           199.7       199.7       199.7       199.7       199.7       199.7       199.7       199.7
                                           Additional paid-in capital                                       3,785.7     3,873.7      3,834.7     3,858.9      3,880.3         3,890.3     3,890.3     3,890.3     3,890.3     3,890.3     3,890.3     3,890.3     3,890.3
                                           Retained Earnings                                                  922.9       594.4        660.1       721.2        772.7           881.1     1,030.9     1,030.9     1,851.1     2,830.9     3,879.0     4,975.8     5,448.8
                                           Accumulated other comprehensive income                              83.0      (380.8)        11.8       (43.2)      (317.4)          124.3       124.3       124.3       124.3       124.3       124.3       124.3       124.3
                                             Total Shareholders' Equity                                    $4,990.3    $4,286.0     $4,706.0    $4,737.2     $4,536.3        $5,096.5    $5,246.3    $5,246.3    $6,066.4    $7,046.2    $8,094.3    $9,191.1    $9,664.2
                                           Non Controlling Interest                                            34.3        29.1         14.1        11.7         12.3            12.8        13.2        13.2        14.6        16.0        17.4        18.9        20.3
                                           Less Tresury Stock (at cost)                                     1,586.9     1,582.5      1,574.9     1,570.5      1,569.6         1,566.3     1,566.3     1,566.3     1,566.3     1,566.3     1,566.3     1,566.3     1,566.3
                                             Total equity                                                  $3,437.8    $2,732.6     $3,145.2    $3,178.5     $2,979.0        $3,542.9    $3,693.1    $3,693.1    $4,514.7    $5,495.9    $6,545.4    $7,643.6    $8,118.1
                                             Total Liabilities and Shareholders' Equity                   $11,353.2   $10,409.9    $10,801.7   $10,822.5    $10,597.8       $11,407.0   $11,588.3   $11,588.3   $12,471.2   $12,890.9   $13,921.1   $13,956.7   $13,915.0

                            Source: Company data, Credit Suisse estimates.




                                                                                                                                                                                                                                                                            13 December 2010
146
Specialty Pharmaceuticals




                            Exhibit 182: Mylan Cash Flow Statement Forecast
                            USD in millions, unless otherwise stated
                                                                                                                                                   2010
                                                                                                                              Mar-10      Jun-10          Sep-10       Dec-10
                                                                                      FY 2007       FY 2008      FY 2009       1QA         2QA             3QA          4QE         FY 2010      FY 2011      FY 2012      FY 2013     FY 2014       FY 2015
                            Statement of Cash Flows
                            Cash From Operating Activities
                            Net Income (Loss)                                         ($1,209.3)      ($167.9)     $247.7      $94.270     $86.933          $143.5       $184.6       $509.3       $820.2       $979.8     $1,048.1     $1,096.8       $473.1
                            Adjustments to Net Income
                              Depreciation and ammortization                              182.3        425.3        401.2        102.5       102.5            104.9       112.6        422.5         439.4       431.5        426.8        418.1        430.6
                              Stock based compensation                                     22.3         30.6         31.2          7.3         8.4              8.5         0.0         24.2           0.0         0.0          0.0           0.0         0.0
                              Other non-cash items                                      1,343.3        314.0        189.5        (54.6)      129.7            (28.6)      (22.0)        24.4         (72.5)       (9.8)        (1.0)        (18.2)       10.1
                              Decrease (increase) in working capital items
                                 Accounts receivable                                    (151.9)       (172.4)      (175.8)         3.7      (110.6)          171.6        (47.1)        17.6       (204.8)       (164.7)      (52.0)        (92.1)      (30.3)
                                 Inventories                                              23.2         (83.3)        20.1        (57.4)       13.4           (25.3)       (49.7)      (119.0)       (51.2)       (119.0)      (35.7)        (80.8)      (33.1)
                                 Trade accounts payable                                   81.0          23.2          4.2         48.8         6.1           (46.5)        25.1         33.4         (9.5)         57.9        15.5          35.0        14.4
                                 Income taxes                                              6.3          74.0       (115.8)       195.9       (75.1)          (39.9)         0.0         80.9          0.0           0.0         0.0           0.0         0.0
                                 Deferred revenue                                         32.2        (114.0)       (29.6)        (1.8)        1.8            20.6          0.0         20.6          0.0           0.0         0.0           0.0         0.0
                                 Other operating assets and liabilities, net             (22.5)         68.3         32.4        (97.9)      (44.5)           69.0        (47.7)      (121.1)         9.7          74.0        63.4          52.3        17.2
                            Net Cash From Operations                                    $306.9        $397.8       $605.1       $240.7      $118.5          $377.8       $155.8       $892.7       $931.3      $1,249.7    $1,465.1     $1,411.1       $881.9

                            Cash From Investing Activities
                              Purchase of PPE                                            (190.6)       (165.1)      (154.4)      (20.2)      (33.1)           (43.0)      (118.5)     (214.8)       (230.0)      (240.0)     (245.0)      (250.0)       (250.0)
                              Acquisitions, net of cash acquired                       (7,552.4)          0.0       (236.7)        0.0        (5.0)          (551.1)         0.0      (556.1)          0.0          0.0         0.0          0.0           0.0
                              Increase in restricted cash                                    0.0        (38.2)        (7.5)       (0.1)        0.1             24.9          0.0        24.9           0.0          0.0         0.0          0.0           0.0
                              Purchase/Proceeds from available-for-sale securities         87.2          47.7         15.7        (2.0)        6.6             (7.7)         0.0        (3.1)          0.0          0.0         0.0          0.0           0.0
                              Other items, net                                              (3.8)         2.8         47.8        (5.5)        4.8             10.6          0.0         9.9           0.0          0.0         0.0          0.0           0.0
                            Cash From Investing Activities                            ($7,659.6)      ($152.8)     ($335.0)     ($27.8)     ($26.6)         ($566.3)     ($118.5)    ($739.2)      ($230.0)     ($240.0)    ($245.0)     ($250.0)      ($250.0)
                            Cash from Operating and Investing Activities              ($7,352.6)       $244.9       $270.1      $212.9       $91.8          ($188.5)       $37.3      $153.5        $701.3     $1,009.7    $1,220.1     $1,161.1        $631.9

                            Cash From Financing Activities
                              Proceeds/Repayment of ST Debt                                26.2          26.2          8.6       (46.2)       23.9            (22.7)         0.0        (45.0)         0.0          0.0         0.0          0.0           0.0
                              Proceeds/Repayment of LT Debt                             4,179.3          56.8       (343.6)       (0.8)      249.3             15.6         (0.0)       264.1         (0.0)      (726.8)     (126.8)    (1,184.0)       (575.0)
                              Cash dividends paid                                         (42.6)       (137.5)      (139.0)      (34.8)      (34.8)           (34.8)       (34.8)      (139.0)         0.0          0.0         0.0          0.0           0.0
                              Proceeds from the issuance of preferred stock, net        2,073.9           0.0          0.0         0.0         0.0              0.0          0.0          0.0          0.0          0.0         0.0          0.0           0.0
                              Proceeds from issuance of warrants/stock options, net       724.2          63.8         19.6        25.0        11.0              1.2          0.0         37.2          0.0          0.0         0.0          0.0           0.0
                              Proceeds/Repurchase of common stock                         748.1           0.0          0.0         0.0         0.0              0.0          0.0          0.0          0.0          0.0         0.0          0.0           0.0
                              Other financing items, net                                 (189.7)       (176.2)         0.0         0.0       (20.4)            (3.3)         0.4        (23.3)         1.4          1.4         1.4          1.4           1.4
                            Net Cash From Financing Activities                         $7,519.3       ($166.9)     ($454.4)     ($56.8)     $229.0           ($43.9)      ($34.4)       $93.9         $1.4      ($725.4)    ($125.4)   ($1,182.6)      ($573.6)

                            Effect of exchange rate                                        30.7           8.3          7.7       (14.2)      (33.9)            33.9          0.0        (14.1)         0.0          0.0         0.0          0.0           0.0

                              Increase/(decrease) in cash and cash equivalents           197.3          86.3       (176.6)       141.9       287.0           (198.5)        2.9        233.3         702.7        284.3     1,094.7         (21.4)        58.3
                              Beginning cash balance                                     286.9         484.2        557.1        380.5       522.4            809.4       610.9        380.5         613.8      1,316.5     1,600.8      2,695.4       2,674.0
                            Ending cash balance                                         $484.2        $570.5       $380.5       $522.4      $809.4          $610.9       $613.8       $613.8      $1,316.5     $1,600.8    $2,695.4     $2,674.0      $2,732.3
                              Average cash balance                                       385.5         527.3        468.8        451.5       665.9            710.2       612.4        497.2         965.1      1,458.6     2,148.1      2,684.7       2,703.1



                            Source: Company data, Credit Suisse estimates.




                                                                                                                                                                                                                                                                  13 December 2010
147
                                                                                                                                                                    13 December 2010




                                                                                                                                                       Americas / United States
                                                                                                                                                      Specialty Pharmaceuticals




                                                                             Teva Pharmaceutical Industries
                                                                             (TEVA)
Rating                                                     NEUTRAL*
Price (10 Dec 10, US$)                                          53.80
Target price (US$)                                             58.00¹
52-week price range                                     64.54 - 47.17        Initiating with a Neutral Rating and $58 TP
Market cap. (US$ m)                                        50,360.03
Enterprise value (US$ m)                                   56,168.52         ■   Initiating coverage with a Neutral rating and $58 price target.
*Stock ratings are relative to the relevant country benchmark.
¹Target price is for 12 months.                                              ■   Investment Case: Teva is the bellwether generics company, but we are
                                                 Research Analysts               Neutral for three main reasons: (1) growth is not as robust as with some
                                           Michael Faerm                         smaller generics companies, (2) concerns about generic Copaxone
                                            212 538 1771                         negatively impact our forecasts beyond the May 2014 patent expiry, and will
                           michael.faerm@credit-suisse.com
                                                                                 likely remain an overhang on the stock price as investors continue to wrestle
                                                                                 with this issue, and (3) acquisition risk will increase as organic growth
                                                                                 becomes more difficult off the company’s large ($14 Bn) revenue base.
                                                                             ■   Key risks for Teva include, to the upside, (1) resolution of Copaxone
                                                                                 generic challenges and/or Laquinimod approval; (2) international upside,
                                                                                 especially in emerging markets (about 10% of revenues); (3) development
                                                                                 progress and revenue upside from the branded pipeline. To the downside,
                                                                                 (1) high dependence on successful Paragraph IV challenges and ANDA
                                                                                 approvals; (2) global drug pricing pressures, which could hamper revenue
                                                                                 growth more than expected; (3) foreign exchange effects that can add
                                                                                 volatility and risk to revenue and earnings since 38% of revenues are
                                                                                 international.
                                                                             ■   Catalysts: Jan. 1, 2011 PDUFA date on low volume Copaxone, likely to be
                                                                                 delayed; 2Q:2011, first full PIII dataset on Laquinimod.
                                                                             ■   Valuation: Our $58 price target is a 50/50 blend of discounted cash flow
                                                                                 (DCF) analysis and relative P/E multiple valuation. Our DCF value is $59
                                                                                 based on a 9% discount rate and 0.5% perpetuity growth rate. Our relative
                                                                                 valuation is $57 based on an 10.9x 2011 P/E ratio, which assumes TEVA will
                                                                                 trade at a 10% discount to the group, which will trade at a 10% discount to
                                                                                 the S&P.


Share price performance                                                      Financial and valuation metrics
           Daily De c 14, 2 009 - Dec 10, 2010, 12/14/09 = US$53.49          Year                                               12/09A          12/10E         12/11E        12/12E
                                                                             EPS (CS adj.) (US$)                                   3.36           4.53            5.20         5.71
 62
                                                                             Prev. EPS (US$)                                         —              —               —             —
 57
                                                                             P/E (x)                                               16.0           11.9            10.3           9.4
 52
 47
                                                                             P/E rel. (%)                                          90.6           82.9            82.6         85.2
                                                                             Revenue (US$ m)                                   13,899.0       16,384.8        18,817.7     20,677.0
  Dec-09          Mar-10            Jun-10          Sep-10
                                                                             EBITDA (US$ m)                                     4,276.0        5,472.6         6,301.1      6,979.5
                 Price                          Indexed S&P 500
                                                                             OCFPS (US$)                                           3.69           4.59            5.03         5.34
On 12/10/10 the S&P 500 index closed at 1240.4                               P/OCF (x)                                             15.2           11.7            10.7         10.1
                                                                             EV/EBITDA (current)                                   12.6           10.3             8.6           7.3
                                                                             Net debt (US$ m)                                     3,617          5,808           3,943          913
                                                                             ROIC (%)                                             14.18          15.07           16.71        17.71
Quarterly EPS                    Q1           Q2            Q3         Q4    Number of shares (m)                              936.06     IC (12/10E, US$ m)              27,546.92
2009A                           0.71         0.83          0.89       0.94   BV/share (current, US$)                             24.5     EV/IC (x)                              2.0
2010E                           0.91         1.08          1.30       1.24   Net debt (current, US$ m)                        5,808.5     Dividend (current, US$)              0.76
2011E                           1.20         1.41          1.26       1.33   Net debt/tot. cap. (current, %)                     11.5     Dividend yield (%)                     1.4
                                                                             Source: Company data, Credit Suisse estimates.




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Investment Highlights
We are initiating coverage of Teva Pharmaceuticals (TEVA) with a Neutral rating and
a 12 month price target of $58 per share.
We believe that Teva has several positives as an investment story, but we also have
several concerns, which lead us to a Neutral rating. Our investment thesis is threefold.

■   Growth is not as robust as with some smaller generics companies,

■   Concerns about generic Copaxone negatively impact our forecasts post the May 2014
    patent expiry, and will likely remain an overhang on the stock price as investors
    continue to wrestle with this issue, and

■   Acquisition risk will increase as organic growth becomes more difficult off the
    company’s large ($14 Bn) revenue base.

Growth Is Not As Robust as with Some Smaller
Generics Players
We forecast Teva to have the lowest EPS growth through 2015 of the three major US
generics companies (compared to Mylan and Watson) (Exhibit 183).

Exhibit 183: Teva’s EPS Growth Trails Mylan and Watson

     40.0%

     35.0%

     30.0%

     25.0%

     20.0%

     15.0%

     10.0%

       5.0%

       0.0%
                     2011           2012        2013         2014           2015
     (5.0%)

    (10.0%)

                                       Teva      Mylan         Watson

Source: Company data, Credit Suisse estimates

Our declining EPS in 2014-2015 is driven by our flattening revenue in 2014 (Exhibit 184),
as well as declining margins (Exhibit 185), as product mix worsens from a margin
perspective, after assumed Copaxone generic entry after the May 2014 patent expiry.




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Exhibit 184: TEVA Annual Revenues 2009A–2015E

                                                                             TEVA - Annual Sales Trends
                                                                              6 year sales CAGR of 8.2% from
                                                             $24,000
                                                                              2009-2015
                                                                                                                                              $22,326
                                                                                                                       $21,778     $21,737
                                                             $22,000                                     $20,677


                                                             $20,000                         $18,818
                                      Annual Sales ($ MM)




                                                                                   $16,385
                                                             $18,000
                                                                         $13,899
                                                             $16,000


                                                             $14,000


                                                             $12,000


                                                             $10,000
                                                                          2009       2010       2011          2012       2013       2014       2015


Source: Company data, Credit Suisse estimates.



Exhibit 185: Teva Annual Operating Income and Margins, 2009A–2015E

                                                                       TEVA- Annual Operating Income and Margins
                                     $8,000                                                                                                             80.0%
                                                                         Operating Income          Operating Margin                 Gross Margin
                                     $7,000
                                                                             59.5%      58.9%      59.0%             59.0%
    Annual Operating Income ($ MM)




                                                                 58.4%                                                           57.7%       57.0%
                                     $6,000                                                                                                             60.0%


                                     $5,000


                                     $4,000                                                                                                             40.0%


                                     $3,000
                                                                             30.7%      30.7%      31.0%             31.2%
                                                                 27.7%                                                           29.3%       28.1%
                                     $2,000                                                                                                             20.0%


                                     $1,000


                                                            $0                                                                                          0.0%
                                                                  2009       2010       2011           2012          2013        2014        2015

Source: Company data, Credit Suisse estimates.

Below we further summarize our Teva income statement forecast and compare it to
consensus estimates (Exhibit 186). Our EPS is slightly below consensus through 2013,
which appears to be due to slightly lower operating margins. However in 2014, we are
significantly beneath consensus, likely due in part to our assumed generic erosion of
Copaxone after the patent expiry in May 2014 (further discussed below).




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Exhibit 186: Summary of Credit Suisse Estimates for TEVA
In millions except EPS, unless otherwise noted

                            TEVA                  2009        2010E       2011E       2012E       2013E       2014E
                         Total Revenue - CS      $13,899.0   $16,384.8   $18,817.7   $20,677.0   $21,777.9   $21,737.3
                 Total Revenue - consensus       $13,899.0   $16,353.7   $18,980.2   $20,659.5   $21,712.5   $22,669.2
                                  Difference         $0.0       $31.0     ($162.5)      $17.5       $65.4     ($931.9)
                       Revenue Growth - CS                     17.9%       14.8%        9.9%        5.3%       (0.2%)
                        Gross Margin % - CS        58.4%       59.5%       58.9%       59.0%       59.0%       57.7%
                Gross Margin % - consensus         56.2%       59.5%       58.7%       58.5%       58.5%       59.5%
                                  Difference         2.2%       (0.0%)       0.1%        0.5%        0.5%        (1.7%)
                    Operating Margin % - CS        27.7%       30.7%       30.7%       31.0%       31.2%       29.3%
             Operating Margin % - consensus        27.7%       30.9%       30.8%       31.9%       31.3%       30.8%
                                  Difference        (0.0%)      (0.2%)      (0.2%)      (1.0%)      (0.1%)      (1.6%)
                                   EPS - CS         $3.36       $4.53       $5.20       $5.71       $6.04        $5.59
                           EPS - consensus          $3.37       $4.57       $5.30       $5.90       $6.10        $6.42
                                  Difference       ($0.01)     ($0.04)     ($0.10)     ($0.19)     ($0.06)     ($0.83)
                           EPS Growth - CS                     34.6%       14.9%         9.8%        5.7%       (7.4%)
Source: Company data, FACTSET, Credit Suisse estimates.

Generic Copaxone Concerns Have Weighed On the
Stock, and Impact Our Forecast
Current Status of Generic Challenges
Copaxone, which we estimate to account for 18% of revenues and 34% of earnings
in 2010 (Exhibit 187), faces two generic challenges, one from Sandoz in partnership
with Momenta in July 2008 and the other from Mylan in October 2009.
Sustainability of Copaxone revenues has been a significant concern among
investors, and has weighed on the performance of Teva ’s stock. This has been
exacerbated since Sandoz/Momenta’s generic Lovenox received FDA approval on July
23, 2010. TEVA closed down 8.5% that day at $49.38, due to investor concern that
approval of generic Lovenox without clinical trials foreshadows a possible similar outcome
with Copaxone. Investor fears that the FDA is more willing to approve complex generic
molecules without extensive comparable human clinical trial data have contributed to the
stock’s trading range in the upper $40s to mid $50s. We expect Teva’s stock price to
continue to be extremely sensitive to Copaxone related news flow.




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Exhibit 187: Copaxone’s Contribution to Teva’s EPS Drops from 34% in 2010 to 9% in
2015

                                    Copaxone EPS Contribution

  $7
                        Ex-Copaxone              Copaxone        % Copaxone              40%
                                                     28.6%
           33.5%            33.2%
  $6                                     32.4%                                           35%
                                                                 $0.94         $0.51
                                                                                         30%
  $5
                                                     $1.72
                                         $1.85                                           25%
  $4                        $1.73
            $1.52                                                16.8%                   20%
  $3
                                                                               $4.96     15%
                                                                 $4.65
  $2                                                 $4.31
                                         $3.86                                           10%
                            $3.47
            $3.01
  $1                                                                           9.3%
                                                                                         5%

  $0                                                                                     0%
            2010            2011         2012        2013        2014          2015

Source: Company data, Credit Suisse estimates

A PIV filer faces two challenges with Copaxone: it must win a challenge against Teva’s
May 24, 2014 patent (or wait until expiration), and it must obtain ANDA approval, which
given the complexity of the Copaxone molecule may prove difficult to achieve based on
bioequivalence.
The patent litigation is in relatively early stages. The claims construction hearing in the
Sandoz case was held in January 2010 and the judge’s ruling is pending. Mylan’s claim
construction hearing is scheduled for January 12, 2011.
Both Sandoz and Mylan’s court cases have been consolidated for trial, and the combined
hearing will likely take place only after the judge rules on Mylan’s claim construction, which
is possibly several months away. Teva believes a trial may not occur until 2012.
Sandoz’s motion for summary judgment of invalidity based on indefiniteness was denied
by the court on September 7, 2010. Although Momenta has reiterated it will still argue its
case for both indefiniteness and inequitable conduct, the summary judgment to some
extent lessens the probability of winning based on indefiniteness claims.
Teva is pursuing approval of a low volume dose of Copaxone as a way to potentially
extend the commercial life of the franchise. The PDUFA date for this 20mg/0.5 mL
formulation Copaxone sNDA is January 1, 2011, although Teva has acknowledged that
FDA’s decision may not come by that date. The basis of the application was positive
results from the SONG study, investigating injection site pain in 148 patients receiving
either the higher 20mg/0.1 mL dose and lower 20mg/0.5 mL dose for a period of 2 weeks
each. It was announced on the 3Q10 earnings call, that the company had responded to
FDA’s request for additional clinical trial and submitted data from the FORTE study that
demonstrates comparable efficacy between 20mg/1.0 mL (lower concentration) vs. 40
mg/1.0 mL (higher concentration). Management has also indicated that they “will not be
surprised” if the PDUFA date gets delayed. Furthermore, we know that new patents were
granted to TEVA for this formulation.
On December 10, 2010, Teva filed a third Citizen’s Petition urging the FDA to require
clinical trials of any generic glatimer acetate before approval. It further requests the FDA to
call for a multidisciplinary advisory committee before approval of generic Copaxone to
decide the path for approval in interest of public health. In response to the past two CPs,
FDA has maintained that it will review each ANDA on a case by case basis.




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Our Assumptions Underlying Our Forecast
In our forecast we make a conservative, though not worst-case, set of assumptions
regarding generic Copaxone.
First, based on input from patent experts, we assume that the May 2014 patent will remain
in effect and prevent generics from entering the market before that time.
Second, we assume that a generic will ultimately be approved by the FDA, and we model
entry in 2014 after the May patent expiry.
It is difficult to predict if a generic will be able to obtain FDA approval, as well as the timing
of approval, due to complexity of the molecule. Although Copaxone is not a biologic, it is a
standardized, randomized mixture of synthetic polypeptides consisting of the four naturally
occurring amino acids L-alanine, L-glutamine, L-lysine, and L-tyrosine.
With an unknown mechanism of action and currently no available biomarker to directly
measure effect of the drug, we think there exists a fair possibility that the FDA could
require the generic company to conduct clinical trials in order to prove efficacy and safety.
Should trials be required and push a generic entry to 2015 or beyond, that would create
upside to our forecast. However, based on our interviews with technical and regulatory
experts, we believe that it is more likely than not that a generic filer will be able to achieve
an approval without clinical trials, and we model this occurring in time for a launch upon
the May 2014 patent expiry.
Laquinimod Success Could Help Offset Copaxone Generic Losses – But Not
Entirely
Laquinimod has recently captured newfound investor attention, with the reporting of
positive topline Phase III data from the ALLEGRO trial on December 9.

Exhibit 188: Laquinimod Only Partially Offsets Copaxone Erosion
in millions, unless otherwise stated

                   Laquinimod Only Partially Offsets Copaxone Erosion


   $4,000

   $3,500

   $3,000

   $2,500

   $2,000

   $1,500

   $1,000

      $500

         $0
           2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

                    Copaxone           Laquinimod (60% prob.)   Laquinimod (if approved)

Source: Company data, Credit Suisse estimates

If Laquinimod is able to more show more complete positive data in 2011, with the
ALLEGRO release in 2Q11 and the BRAVO release in 2H11, it has the potential to be a



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sizable contributor to Teva’s MS franchise. In our model (Exhibit 188) we assume that
Laquinimod could reach $1.3 Bn by 2020, and we model $790 MM in 2020, risk adjusted
at a 60% probability. Combined with our Copaxone forecast of $750 MM in 2020 (post
genericization), an approved Laquinimod could create a $2.1 Bn MS franchise for Teva.
While substantial, that amount would fall well short of our peak year Copaxone revenues
of $3.3 Bn in 2012.

Acquisition Risk Will Increase as Organic Growth
Becomes More Difficult Off Teva’s Large Base
As Teva’s revenue base becomes larger, we believe that driving additional growth will
become more challenging and will necessitate greater reliance on acquisitions.
Our model acknowledges many of Teva’s strengths (discussed below), but with over $21
Bn in revenue by 2013, we think that Teva’s revenue growth will start to flatten (Exhibit
184). We do not include in our model any credit for future, indeterminable acquisitions. A
substantial volume of acquisition activity would be needed for the company to close the
gap between its 2015 revenue goal of $31 bn (Exhibit 189) and our estimate of $22.3 Bn.
Although we have not seen a consensus estimate for 2015, we suspect that it is also well
below Teva’s target, since in 2014 consensus is $22.7 Bn, as compared to our $21.7 Bn.

Exhibit 189: $31 Bn Revenue Target Headlines Teva’s 2015 Financial Goals
in millions, unless otherwise stated
                                2009        2009        2010          2012          2015        2015
                               Actual     % branded   Guidance      Guidance      Guidance    % branded    2012-15
                               ($ Bn)        total     ($ Bn)        ($ Bn)        ($ Bn)       total       CAGR       Comments

Revenues, by business
    Copaxone                       $2.5         59%                                    $2.0          22%      (3.6%)   $3 bn peak in 2013
    Other Innovative                0.2          5%                                     2.4          26%       51.5%
        Total Innovative            2.7         64%                                     4.4          48%        8.6%
    Respiratory                     0.9         22%                                     2.4          26%      17.2%    $5 bn peak sales
    Women's Health                  0.5         12%                                     1.6          17%      20.8%
    Biosimilars                     0.1          2%                                     0.8           9%       46.4%
Branded Pharmaceuticals            $4.2        100%                                    $9.2         100%       14.0%   $4 billion risk-adjusted peak sales
    % of total                   30.2%                                               29.7%                             (beyond 2014)
Generic Pharmaceuticals            $9.7                                               $21.8                   14.4%     for 9 products currently in PIII
    % of total                   69.8%                                               70.3%
Total Teva Revenues               $13.9                    $16.4    $21.0-23.2        $31.0                   14.3%    $5-6 Bn will come from acquisitions
                                                                                                                       ($1.5-2 bn branded, $3-4.5 Bn
Revenues, by geography                                                                                                 generic, including Ratiopharm)
    NA                             $8.6         62%                                   $14.8                    9.5%
    Europe                          3.3         24%                                     9.2                   18.8%
    International                   2.0         15%                                     7.0                   22.8%
Total Teva Revenues               $13.9                                               $31.0                   14.3%

US Generic Market Share
    Teva TRx (Bn)                   0.6                                                 1.1
    Teva m arket share             22%                                                 35%
Expenses and Profitability
   R&D Expense                     $0.8                      $1.0    $1.7-1.9          $2.3                   19.2%    2015 range: $2.2-2.4 bn
   Operating Profit                 3.9                              $6.4-7.0           8.6                   14.3%    2015 range: $8.2-9.0 bn
   Net Income                       3.1                              $4.9-5.5           6.8                   14.2%    2015 range: $6.5-7.1 bn

    EPS                           $3.37               $4.50-4.60    $5.30-5.86       $7.16                    13.4%    2015 range: $6.80-7.52 bn
     CAGR from 2009                                    35.0%          18.3%          13.4%

    Gross Margin                  58.4%                   59-60%
    S&M, % of sales               19.0%                   16-18%
    G&A, % of sales                5.9%                    5-5.5%
    R&D, % of sales                5.8%                  6.0-6.5%         8.1%         7.4%
    Operating Margin              27.7%                                  30.3%        27.7%
    Net Margin                    22.1%                                  23.5%        21.9%

    Shares outstanding              915                                     940         955


Source: Company data, Credit Suisse estimates.

Teva has historically been acquisitive, with over $13 Bn of acquisitions in the last three
years (Error! Reference source not found.). We believe that Teva has the motive
(slowing growth), the inclination (demonstrated by past deals) and the means (see below)
to execute a substantial volume of acquisitions, and we believe that adds substantial risk
to the stock, in comparison with some of the smaller generic players who can rely more on
organic sources and collaborations and small acquisitions for growth.




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Exhibit 190: Teva’s Acquisitions in the past 3 years
                                             Announcement                                                                        Deal
                                                  Date                Acquirer                  Target                       Value ($ MM)
                                              22-Jan-2008              Teva            CoGenesys                                $400.0
                                              31-Mar-2008              Teva            Bentley Pharmaceuticals                  $337.2
                                              18-Jul-2008              Teva            Barr Pharmaceuticals                   $7,184.7
                                              18-Mar-2010              Teva            Ratiopharm GmbH                        $4,930.7
                                              28-Oct-2010              Teva            Theramex                                 $368.4
Source: Company data, Credit Suisse estimates

Ample Balance Sheet and Cash-Generating Capacity
to Fund Acquisitions
Teva has articulated its desire to use acquisitions and business development as one of its
means to reach its 2015 revenue guidance of $31 bn. Management has indicated that they
expect $5bn – $6bn to come from acquisitions.
Teva is the least levered of the 3 major U.S. generics companies, with an debt/EBITDA
ratio of 1.4x at the end of 3Q10 (Exhibit 191.) By 2015, according to our estimates, Teva
will have a debt/EBITDA ratio of 0.4x, giving it ample financial flexibility to pursue large
deals.

Exhibit 191: Teva has enough financial flexibility to do big deals

                                      Leverage Comparison across Generic Companies

                     4.0x      3.7x                      TEVA              MYL               WPI
                                                 3.0x
   Debt/LTM EBITDA




                     3.0x
                                                                  2.3x             2.2x
                     2.0x
                                      1.5x                                                          1.5x
                            1.4x
                                                        1.0x                                                         1.0x
                     1.0x                     0.8x
                                                               0.6x      0.6x   0.6x      0.6x   0.6x
                                                                                                           0.3x   0.4x      0.3x

                     0.0x
                               3Q10              2011             2012             2013             2014             2015


Source: Company data, Credit Suisse estimates

Teva generates strong cash flows, and we project that TEVA’s $6.2 billion in net debt will
be net cash by 2013, (Exhibit 192 and Exhibit 193) assuming no new debt is issued and
repayments are made only as required. The company should also have substantial cash
flow margin to meet its debt repayment obligations in 2010-15, with over $21 billion in cash
flow (Exhibit 192).




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Exhibit 192: Net Debt Will Turn to Net Cash in 2012                                                                  Exhibit 193: Teva Should Generate More than Adequate
in millions, unless otherwise stated
                                                                                                                     Cash to Repay its Existing Debt
                                                                                                                     in millions, unless otherwise stated
                                                Net Debt                                                                                            Debt Repayment Analysis
                                       Total Debt      Liquid Assets      Net Debt                                                            Cashflow after Operations and Investing       Debt Repayment
  $17,000                                                                                                              $24,000
                                                                                                                                                                                                              21,472

  $12,000                                                                                                              $19,000

             7,160
                     6,204                                                                                             $14,000
   $7,000                    5,160
                                     3,922 4,160             4,160             4,146
                                                                                                 2,713
                                                      892                                                               $9,000
   $2,000
                                                                                                                                                             4,960          4,722               4,395               4,447
                                                                                                                                  3,608         3,787
                   3Q10             2011            2012           2013               2014              2015            $4,000        2,000
  ($3,000)                                                                                                                                          1,000                                           1,433
                                                                                                                                                                     0              14
                                                                     (3,294)
                                                                                                                       ($1,000)
  ($8,000)                                                                                                                          2011          2012          2013          2014                2015         2011-2015
                                                                                       (7,222)           (10,806)


Source: Company data, Credit Suisse estimates.                                                                       Source: Company data, Credit Suisse estimates.

We forecast TEVA’s debt/EBITDA to drop from 1.3x to 0.4x by 2015, assuming mandatory
repayments are made and no new debt is issued (Exhibit 194).
Teva’s strong cash flows and manageable leverage position it well for taking on debt to
fund acquisitions. If the company is willing to raise its leverage to 3x EBITDA, then we
estimate it could borrow $13 billion in 2011 or $16 billion in 2012 (Exhibit 195.)This fits well
with the company’s stated desire to pursue deals for international generics businesses,
grow branded business in the US and internationally and US generics businesses.

Exhibit 194: Leverage Ratios Will Fall Without New Debt                                                              Exhibit 195: Debt Issuance within Target 3.0x
                                                                                                                     Debt/EBITDA
                                      Leverage Ratio Analysis                                                                             Debt Issuable within Target 3.0x Debt/EBITDA
                                           Debt/EBITDA              Debt/Book Cap
  1.4x                                                                                                         30%     $20,000                                     18,206                                18,568
                                                                                                                                                   16,778                            17,130
  1.2x       24%
                                                                                                               25%     $16,000      13,743
  1.0x
                             17%                                                                               20%
  0.8x                                                                                                                 $12,000
                                             13%                                                               15%
             1.3x                                           11%
  0.6x                                                                         10%                                      $8,000
                                                                                                 6%            10%
  0.4x                       0.8x
                                             0.6x           0.6x               0.6x                                     $4,000
  0.2x                                                                                           0.4x          5%

  0.0x                                                                                                         0%          $0
             2010            2011            2012           2013               2014              2015                                2011           2012             2013                2014               2015


Source: Company data, Credit Suisse estimates                                                                        Source: Company data, Credit Suisse estimates




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Exhibit 196: TEVA Guidance per 3Q 2010 Earnings
Company          Sales Guidance              EPS Guidance              Other Variables

TEVA             2010:                       2010 EPS: $4.50 - $4.60   2010:
                 2010 Revenue: $16.4 Bn      2012 EPS: $5.30 - $5.86   2H stronger than 1H
                 Revenue in 2015: $31.0 Bn   2015 EPS: $6.80 - $7.52   Gross Profit Margin: 59% to 60% (doesn't include $470 MM amortization)
                 CAGR 15% (2010-2013)        CAGR 20% (2010-2013)      R&D Margin: 6% - 6.5% of net sales
                                                                       Sales & Marketing Expenses: 16% - 18% (doesn't include $40 MM
                                                                       amortization)
                                                                       G&A Margin: 5% - 5.5%
                                                                       FInal Expenses: $150 MM - $170 MM
                                                                       Tax Rate on non-GAAP: 15%
                                                                       Losses (primarily JV with Lonza): $40 MM
                                                                       Share Count: 922 million
                                                                       Add-back for EPS: $45 MM for the year

                                                                       2012:
                                                                       Revenue - $21 - $23.2 Bn
                                                                       R&D - $1.7 - $1.9 Bn
                                                                       Operating Profit - $6.4 - $7.0 Bn
                                                                       Net Income - $4.9 - $5.5 Bn
                                                                       EPS - $5.30 - $5.86
                                                                       Shares Outstanding - 940

                                                                       2015:
                                                                       Revenue: $31.0 Bn
                                                                       Copaxone - $2 Bn
                                                                       R&D - $2.2 - $2.4 Bn
                                                                       Operating Profit - $8.2 - $9.0 Bn
                                                                       Net Income - $6.5 - $7.1 Bn
                                                                       EPS - $6.80 - $7.52
                                                                       Shares Outstanding - 955




Source: Company data, Credit Suisse estimates.



Teva’s US Generic Pipeline
Teva is well positioned to capitalize on the well-known patent cliff faced by the major
pharmaceuticals group. Watson has a substantial number of potential upcoming generic
launches, particularly in 2012. (See Exhibit 197.) Our general rules of thumb for assuming
launch dates are as follows.

■   Launch on dates provided by settlements, for settled cases

■   Launch upon expiration of last litigated patent

■   No at-risk launches assumed: we believe this is a more conservative approach than
    assuming at risk launches (i.e., launches upon expiration the 30-month stay provided
    by the Hatch/Waxman Act). We would prefer not to give our forecasts credit for these
    launches, which are uncertain to occur, difficult to predict case-by-case, and in the
    aggregate occur relatively infrequently. Our preference is to view them as upside to a
    generic company stock.




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Exhibit 197: Teva Upcoming Launches for 2011 - 2012
                                    Upcoming Certain Launches



              Brand Name           FTF Status   2009 IMS Sales        2011       2012
       Gemzar                           Y           788.0              Jan
       Uroxatral                        S           228.9              Jan
       Aricept                          N          2,274.5            May
       Levaquin                         N          1,578.2             Jun
       Nasacort AQ                      Y           284.3              Jun
       Carbatrol                        N           106.5              Jul
       Zyprexa                          S          2,680.7             Oct
       Solodyn                          S           538.6             Nov
       Entocort EC                      Y           234.0                         Feb
       Angiomax                         Y           382.9                         Feb
       Avandamet                        Y           228.0                         Mar
       Avandaryl                        Y            52.7                         Mar
       Avandia                          Y           521.9                         Mar
       Avalide                          S           420.3                         Mar
       Viagra                           Y           994.8                         Mar
       Lexapro                          N          2,761.0                        Mar
       Provigil                         S          1,003.5                        Apr
       Combivir                         Y           366.8                         May
       Plavix                           N          5,589.4                        May
       Lipitor                          N          7,552.6                        May
       Femcon FE                        Y            62.8                          Jul
       Tricor                           Y          1,625.0                         Jul
       Eloxatin                         S           993.0                         Aug
       Singulair                        Y           904.9                         Aug
       Singulair                        Y          2,787.0                        Aug
       Detrol LA                        Y           917.2                         Sep
       Opana ER*                        N           245.7                         Sep
       Seroquel tablets                 N          4,156.9                        Mar
       2009 IMS sales                                                 $8,479.6   $31,800.5
       *can launch on only certain strengths
Source: IMS Health, Paragraphfour.com, Company data, Credit Suisse estimates.

Exhibit 198 shows our summary forecast of selected Paragraph IV challenges and our
estimates of the revenues they will provide to Teva. These opportunities are consistently
close to the $2 billion mark through 2015.




Specialty Pharmaceuticals                                                                               158
                                                                                                                                                                                                                                                13 December 2010



Exhibit 198: TEVA PIV Challenges—Key from 2010E–2015E
in millions, unless otherwise stated; FTF is First to File, Y=Yes, N=No, S=Shared
                                            2009 IMS    Expected
               Brand Name                                           FTF     2010E    2011E      2012E      2013E      2014E      2015E
                                              Sales      Launch                                                                                                                  CS comments
                                                                                                                                       Share exclusivity between Sandoz, Teva, Apotex. BMY won trial, generic enter post patent expiry in April
               Abilify                      $4,002.7      Apr-15    S
                                                                                                                                $213.8 15
               Aciphex                       1,223.2     May-13     S                                        26.0       29.8      17.6 Teva and Reddy's are FTF. Generics lost case. Can launch after patent expiry of May 2013.
               Actonel                         918.7      Jun-14    Y                                                   35.4       49.6 Teva to launch post patent-expiry in June 2014
                                             3,418.0      Jun-16    N                                                                   Teva filed a PIII
               Advicor                         110.9     Sep-13     Y                                                                     Drug launch date Sept 2013
               Aggrenox                        404.4      Jul-15    Y                                                              82.6 Teva to launch in July 2015 per settlement
               Alimta                          848.0      Jul-16    Y                                                                   DC court upheld July 2016 patent. Teva may enter only after that.

                                                                                                                                          Actavis launched 6.25 mg at risk in Oct 2010. Launch of 12.5 mg (majority of use) could happen
               Ambien CR                       966.8      Jun-20    Y
                                                                                                                                          anytime; Actavis has tentative approval and Synthon has tentative approval on both doses.

                                               119.3      Feb-25
               Amrix                                                                                                                      Bench trial set for Sept 27, 2010; 30 month stay expires on April 17, 2011
                                                                    S
                                               347.4      Feb-12                                  13.5
               Angiomax                                                                                                                 Teva is FTF. 2012 patent not litigated; 2029 patents in litigation. 30 mnths stay exp March 2012.
                                                                    Y                                         9.0        4.9        3.0
               Aricept                       2,274.5     May-11     N                 125.3       85.3       48.0       32.0       32.0 Ranbaxy is sole FTF,launched in Nov. 2010 . Teva can enter after 6 months.
               Atripla                       1,850.6     Sep-21     Y                                                                   Teva is sole P-IV filer; litigation ongoing. 30 mnths expire Sept. 2011
               Avandamet                       228.0     Mar-12     Y                             23.5       19.8       12.4        8.1 Teva to launch in March 2012 per settlement; Teva is FTF
               Avandaryl                        52.7     Mar-12     Y                              7.6        6.4        4.0        2.6 Teva to launch in March 2012 per settlement
               Avandia                         521.9     Mar-12     Y                             20.5       20.9       15.6       16.1 Teva to lauch in March 2012 per settlement
                                                                                                  46.4       37.5       25.2       19.5
               Avalide                         420.3      Mar-12    S                                                                   Teva to lauch in March 2012 per settlement; Exclusivity shared with MYL and Sandoz

               Avelox                          424.7     3Q2014     N                                                    7.8       15.4 Teva to launch post patent expiry in 1Q 2014 ( or 3Q2014 if Bayer gets peds.)
               Axert                            51.6     May-15     Y                                                              6.4 Teva to launch in 2015 per settlement
               Baraclude                       153.4      Feb-15    Y                                                             30.1 BMY sued Teva on 9/22/2010. 30 mnths expire Sept. 2013.
                                                                                                                                       Multiple filters all sued 09/2007; 30 mnths expire Nov. 2010. In August 2010 WPI lost litigation and 2012
               Boniva                          736.8      Mar-12
                                                                    Y                              0.0        0.0        0.0       0.0 patent is upheld. 2019 and 2023 patents in litigation.
               Carbatrol                       106.5     Jul-11     N                   6.4        5.4        3.8        3.0       2.0 Teva to launch post patent expiry in 2011 per settlement.
               Celebrex                      1,848.4     May-14     Y                                                 234.2      138.2 Teva to enter after expiration of exclusivity on May 30, 2014

               Combivir                        366.8     May-12                                                                           Patent expires in May 2012. Teva was to launch in May 2010 but settled with terms not disclosed
                                                                    Y                             31.8       27.9       14.2        2.4
                                                                                                                                         Impax was FTF and their 180 days likely started when WPI won appeal in April 2010. Teva is a strategic
                                                                                                                                        partner of Impax on Genric Concerta.Once the Impax ANDA is approved by FDA, Teva will
               Concerta                      1,188.1      Jan-14                                                                        commercialize the products.Following a court decision of patent invalidity Impax amended its notice
                                                                                                                                        letter to the New Drug Application holder and patent owners to provide amended bases for its paragraph
                                                                                                              0.0       74.3       50.2 IV certification.
               Crestor                       3,040.2      Jul-16    S                                                                   Patent valid. Generics can enter post patent expiry in July 2016
               Cubicin                         456.2      Jun-16    Y                                                                     Teva sued on 3/23/2009.Discovery. Bench trial scheduled 4/25/2011. 30 mnths is Aug. 2012.
               Depakote ER                     305.9     Sep-09     L          9.1      5.5        4.4        2.9        2.9        2.9   Teva launched Sep 2009. MYL was FTF
               Detrol LA                       917.2     Sep-12     Y                             74.0       90.2       28.3       33.3   Litigation ongoing; other generic filers include MYL, Sandoz, and Impax
               Diastat/Diastat Accudial         99.9     Sep-10     S          3.4      7.6        4.0        2.8        2.8        2.8   FTF shared with Par. Sept 2010 launch as per settlement
               Eloxatin                        993.0     Aug-12     S                              7.3       11.8        6.3        3.3   Teva to resume shipping in August 2012;

                                                        March 2016                                                                      Teva, WPI and Anchen were FTF and all have settled. As per the settlement, all enter 3/15/2016 ( or
               Enablex                         245.3               S
                                                         (settled)                                                                      6/15/2016 if 6 month pediatric extension is granted).
                                                                                                                                    9.2
               Entocort EC                     234.0     Feb-12     Y                             14.6        8.6        5.4        3.2 Teva to launch in Feb 2012 per settlement
               Epipen                          243.6     Sep-25     Y                                                                   Teva is FTF, 30 mnths expires Jan 2012. Litigation ongoing and in discovery stage
               Evista                          686.1      Mar-14    Y                                                 130.1        79.0 Teva to launch post patent expiry on March 2, 2014 per court ruling
               Femcon FE                        62.8      Jul-12    Y                             10.1        5.3       3.0         1.8 Teva to launch in July 2012 per settlement
               Fentora                         172.5      Oct-18    N                                                                   WPI is FTF, WPI trial completed awaiting judgement; Teva settled for Oct 2018 launch.
               Focalin XR                      370.2     Dec-15     Y          0.0      0.0        0.0        0.0        0.0        0.0 Teva settled with Novartis in Feb 2010, terms undisclosed
               Fosrenol                        127.7     Aug-24     S                                                                   Shared FTF between MYL, TEVA and Natco. 30 mnths expire April 2012. Litigationin discovey
                                                                                                                                        Teva to launch with 6 months exclusivity in Nov 2010;Teva won July appeal. Teva's launch timing is
                                                                                                                                        dependent on whether and when LLY requests a rehearing en banc by the appellate court, or requests
               Gemzar                          788.0      Jan-11    Y
                                                                                                                                        the Supreme Court to hear the case.Teva has up to 75 days after Nov 12, 2010 (appellate court
                                                                                       17.9        8.8        5.3        5.3        5.3 decision) to launch without losing 180 day exclusivity
               Levaquin                      1,578.2      Jun-11    N                  48.2       32.1       16.4       11.6        6.1 All generics enter in June 2011

               Levitra                         268.2      Oct-18    Y                                                                     Teva is FTF and sole P-IV filer. Discovery, bench trial scheduled 10/31/2011. 30 mnths expire Nov. 2011

               Lexapro                       2,761.0      Mar-12    Y                           115.5      111.3        68.6       58.8 Patent upheld by DC and affirmed by Court of Appeals. Launch post patent expiry in Mar. 2012
                                                                                                                                        Ranbaxy plans to enter on Nov 30, 2011, facing AIP issue with its ANDA hence not sure about its launch
               Lipitor                       7,552.6     May-12     N                                                                   ; Watson has Authorized Generic, Others are Teva, MYL, Apotex, KUDCO, Dr. Reddy's, Actavis and
                                                                                                112.5        89.3       52.4       26.2 Lupin. May 12 launch is assumed
               Lovaza                          759.1      Jan-25    S                                        0.0        0.0        0.0 Bench trial on March 28, 2011; Exclusivity shared with Apotex and Par. 30 mnths is Sept.2011
               Lovenox                       2,758.8     Not Sure   S                 152.4     171.5      205.7      217.2      144.8 Teva, alongwith Watson, awaits FDA approval; MNTA and Sandoz have FDA approval.
               Lunesta                         761.9      Feb-14    S                                                   19.9      14.1 Shared with 10 others. 30 mnths expires Aug.2011. Litigation pending
               Lyrica                         1,602.4     Dec-18    S                                                                   30 month stay expires in June. 2012; Litigation ongoing; Exclusivity shared between 8 players
               Maxalt                          398.0      Feb-14                                                                        Launch post patent expiration in February 2014. PIII filing on 2012 patent, PIV on 2014. Shared with
                                                                        S                                               33.4       21.1 MYL and Sandoz
               Mirapex                         534.9      Jan-10    L        204.7    115.1       68.4       41.8       31.3       31.3 Teva is FTF; launched in Jan 2010
                                                                                                                                        Teva to launch in January 2015 per settlement; Amneal. Watson, Dr. Reddy's. Lupin, Mylan, Orchid,
               Namenda                       1,180.2      Jan-15    S
                                                                                                                                   79.7 Sun, Upsher-Smith, and Wockhardt enter along with Teva
               Nasacort AQ                     284.3      Jun-11    Y                  26.9       14.3        8.5        6.0        5.4 Teva to launch in June 2011 per settlement;
                                                                                                                                        Teva has license to enter on May 27, 2015 or 6 months after Ranbaxy's exclusivity expires in November
               Nexium                        6,306.5     May-15     N
                                                                                                                         0.0       77.9 2014.
               Niaspan                         990.5     Sep-13     Y                                        87.8     103.7        44.8 Teva to launch September 2013 per settlement
                                                                                                                                        MYL FTF on 50/150/250mg and WPI on 100/200mg. Actavis, Sandoz, Teva and Lupin are the other
               Nuvigil                          82.2      Jun-24    N
                                                                                                                                        filers. 30 mnths expire April 2012.
               Opana ER                        245.7      Jul-13    N                                        16.1       11.7        5.5 Teva settled for September 2012; but must wait for July 2013, post Impax's 180 days.
               Ortho-tri cyclen Lo             275.9     Dec-15     Y                                                              2.2 Teva launched at risk and settled later. To reenter in Dec 2015
               Pataday                         167.7      Jun-15    Y                                                                  Teva is FTF. Apotex and Sandoz are other filers. Discovery Stage. 30 mnths expire May 2012
                                                                                                                                       Generics lost case. All enter in May 2012 post patent expiry.Teva can launch by May 2012 at latest (if
               Plavix                        5,589.4     May-12     N
                                                                                                223.3      191.4      101.7       57.4 peds extension is granted). Teva expects 7-10 players
                                                                                                                                       Teva settled for April 2012 launch; Teva, MYL and Ranbaxy share exclusivity; FTC suit against WPI
               Provigil                      1,003.5      Apr-12    S
                                                                                                  81.4       58.7       33.3      21.1 ongoing
               Reclast                         328.4      Mar-13    Y                                        90.8       44.5       36.7 Teva to launch in March 2013 post patent expiry per settlement
                                                                                                                                        Teva sued on Dec 2009. Teva is the only filer. Bench trial scheduled 12/5/2011. 30 mnths expire April
               Reyataz                         857.4      Jun-17
                                                                                                                                        2012
               Rozerem                          87.7      Jul-19    Y                                                                   Bench trial scheduled for Nov 14, 2011; 30 month stay expires in July 2013
               Sensipar                        458.2     Mar-18     Y                                                                   Teva is the only P-IV ; Bench trial is Nov. 2010
               Seroquel tablets              4,156.9     Mar-12     N                             71.7     101.6        35.9       18.9 Teva/Sandoz, Lost case. To enter post patent expiry in March 2012
               Simcor                           88.4     Sep-13     Y                                         8.8        9.0        4.8 Discovery bench trial on Jan 23, 2012. 30 mnths expire June 2012
               Singulair chew.                 905.2     Aug-12     Y                             35.7       70.7       17.1       18.1 Teva to launch after August 2012; Court upheld patent '473's validity
               Singulair tablets             2,787.0     Aug-12     Y                             39.7       56.3       31.5       32.5 Lost case, may enter post patent expiry in August 2012 with MYL and others.
               Solodyn                         538.6     Nov-11     S                   8.5       27.7       17.5        8.8        7.8 Teva to launch in November 2011 per settlement; Exclusivity shared with Mylan and Sandoz
                                                                                                                                        Teva shares exclusivity with MYL, Actavis, Apotex, Aurobindo, Glenmark, Sandoz, Sun, Synthon, and
               Strattera                       527.0     Aug-17                                                                         Zydus. Court issued a ban on generics until patent case settlement. Lilly was granted on injunction
                                                                    S                                                                   allowing time to appeal patent validity.

               Tarceva                         490.4     Nov-20                                                                           Teva shares exclusivity with Mylan; 30 month stay expires Aug 2011; bench trial set for March 14, 2011
                                                                    S
                                                                                                                                        Appeals court reversed the DC opinion and found the patent valid. However there is AG agreement
               Temodar                         372.6     Aug-13
                                                                    Y                                        16.6       13.2        5.6 between Teva and Merck and teva can launch Aug 2013

               Travatan Z                      400.5     Dec-14     S                                                                   Jury trial scheduled for May 2, 2011. Shared between Teva and Par. 30 mnths expires Dec. 2011
                                                                                                                         9.8       73.2
                                                                                                                                        Teva can launch 145mg between March 2011 and July 2012 per settlement; likely to be closer to July
               Tricor                        1,625.0      Jul-12    Y
                                                                                        0.0     219.7      142.3        79.1       47.7 2012.
               Truvada                       1,393.0      Jan-21    Y                                                                   Teva was sued on Nov. 14 2008; Litigation ongoing. 30 mnths expire may 2011
                                                                                                                                        Teva to launch post '491 patent expiry in January 2011; Patent validated by court; Exclusivity shared with
               Uroxatral                       228.9      Jan-11    S
                                                                                        4.8        7.8        4.1        2.7        2.7 Actavis, Par, Ranbaxy, Torrent, Apotex, Sun and Aurobindo
               Viagra                          994.8      Mar-12                                  28.8       23.0       10.1       10.4 P-III on patent-2012, ANDA was filed way back in 2004. Pfizer initiated litigation only in 2010.
               Vytorin                        1,507.3     Oct-17    N                                                                     MYL is FTF, Litigation in discovery phase; Impax is other PIV filer
               Vigamox                         243.7      Oct-19    Y                                                                     Lost case, may enter post patent expiry in Oct 2019
               Xopenex                         544.9      Feb-13    N                                        12.9        9.2        5.1 Teva to launch in Feb 2013 per settlemenl; WPI is FTF with exclusivity
               Xeloda                           481.7     Jun-14    N                                                   29.5       19.5 MYL is FTF. Litigation pending. Teva 30 mnths expire April 2012

               Zetia                         1,422.1      Jun-17    N                                                                     Glenmark is FTF ( which settled for Dec 2016). Litigation ongoing for Teva. 30 mnths is Jan 2013

               Zometa                          747.3      Mar-13    Y                                      161.7        91.6       56.6 Teva to launch in March 2013 post patent expiry per settlement

               Zyprexa                       2,680.7      Oct-11    Y                                                                   All players to enter post 2011 patent expiry. MYL, Teva, Sandoz and Roxane have tentative approval.
                                                                                       25.6       51.7       43.8       34.7       34.7
               Zyvox Injection                 276.5     May-15     Y                                                              42.3 Teva is sole FTF; Litigation ongoing.

               Zyvox tablets                   403.6      Mar-15    S                                                                     Split ANDA; Shared between Teva, MYL and Glenmark, all enter in 2015
                                                                                                                                   19.0
               Unidentified Opportunities                                    100.0    300.0      300.0      300.0      350.0      350.0
               Total Risk Adjusted Sales                                    $317.2   $844.2   $1,958.7   $2,203.8   $2,144.3   $2,212.6


Source: IMS Health, Paragraphfour.com, Company data, Credit Suisse estimates.




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                                                                                                                         13 December 2010



Teva Has Leadership Positions in Multiple
Geographic Markets, and a Focus on Building Its
Emerging Markets Presence
Teva has the strongest emerging market footprint (Exhibit 199) among the three US
generic companies and is looking to further expand its presence. International
geographies accounted for 15% of total revenues in 2009 and management guides to
about $7 bn in international revenues in 2015, accounting for about 23% of the $31 bn
(Exhibit 200).

Exhibit 199: TEVA—Main Geographic Markets
                       TEVA         TEVA                  Generic         Generic          Total Pharma Mkt
TEVA                   Share        Rank                 Utilization     Market, $       Sales, $      CAGR
                     (by value)* (by value)**           (by volume)      in billions    in billions   2009-14
USA                     21.8%               1                72%              $31.9       $286.7           0.3%
Canada                                      1                                  $2.9        $17.3           4.3%
EU - Low Generic Utilization
France           10-11%                    3                 23%               $4.1        $37.9           1.4%
Spain             >10%                     1                 20%               $2.0        $19.9           7.1%
Italy                                     1***               10%               $2.3        $23.8           2.0%
Portugal                                                     10%                            $5.7           2.7%
Belgium                                                      13%                            $6.5           5.9%
Ireland                                                      5%                             $2.7           7.2%
EU - High Generic Utilization
UK                 29%                      1                57%               $2.9        $19.2           1.6%
Germany                                     2                57%               $6.1        $38.4           4.4%
Netherlands        34%                      1                50%                            $7.3           5.4%
Sweden                                                       44%                            $4.7           4.3%

Central and Eastern Europe
Hungary                                     1                40%                             $3.2          6.7%
Czech Republic                              2                62%                             $3.0         6.7%
Poland              7%                      3                77%               $1.9          $8.0          7.8%
Russia                                      2                70%                             $6.7         19.3%
Asia
Japan                                    top 3               17%               $3.7        $76.8           2.0%
Australia                                                    30%               $0.8         $9.7           4.4%
New Zealand                                                  0%                             $1.0           5.0%
Latin America
Brazil                                   small               17%                           $10.7           8.6%
Mexico                                                                                      $9.5           7.5%
* All shares are pre-Ratiopharm. Netherlands share is for 2008.
** All ranks are pro-forma Ratiopharm
*** Teva is ranked no.1 both by share and rank

Source: IMS Health, Company data, Credit Suisse estimates.



Exhibit 200: Teva has the largest international revenue base among the big three
generics
                         20 1 0           2 0 15             2 0 10         2 0 15          I ntl          T ota l
                          In tl            Intl               I ntl          Intl       R e ve nu e      R e v en ue
                        % T ota l       % T ota l            $ Bn           $ Bn          C AG R           C AG R
                       R ev e nu e      Re v en ue        R e ve nu e     Re v en ue    20 1 0-2 0 15   2 01 0 -20 1 5
B ra nd ed
SLXP                      0%               0%                  $0            $0                NM         3 5. 9%
E N DP                    0%               0%                  $0            $0                NM           9. 6%

G e ne r ic
TE V A                    3 8%            47 %               $6 ,2 1 2    $ 1 0, 39 6      10 .8 %          6. 4%
MYL                       4 9%            49 %               $2 ,7 0 7      $ 3, 68 4       6 .4 %          6. 3%
W PI                      1 3%            12 %                 $4 4 4          $ 64 0       7 .6 %          9. 1%
Source: Company data, Credit Suisse estimates




Specialty Pharmaceuticals                                                                                                           160
                                                                                                  13 December 2010




Investment Risks
Generic Copaxone approval could provide significant downside risk to earnings and
revenue
Representing 18% of revenues and 34% of earnings in 2010, Copaxone is a significant
portion of Teva’s business. Sandoz, in partnership with Momenta, and MYL in partnership
with Natco Pharma have filed ANDA applications which are under FDA review. The
Copaxone patent set to expire in 2014 is currently being litigated.
Other MS therapies competing with Copaxone
With the approval of Gilenya, an oral therapy for Multiple Sclerosis, and other oral
therapies in the pipeline, Copaxone, an injectable therapy for MS, will face significant
competition in the coming years.
Dependence on successful Paragraph IV challenges involving costly and potentially
prolonged litigation
Paragraph IV challenges present significant windfall profit opportunities and are a major
contributor to Teva’s success story. However, Paragraph IV challenges involve costly and
potentially prolonged litigation. The pendulum can swing either way and unfavorable
rulings present significant downside to earnings.
FDA approval delays in ANDA applications
Failure to obtain timely FDA approval or unexpected delays in FDA approval of Teva’s
generic drugs is an inherent external risk.
Intense competitive pressures that accompany the generic industry with regard to
players, pricing, and share
Increasing number of generic players, due to low barriers to entry, is making generics a
difficult and crowded playing field. More companies are competing for a piece of the post-
patent pie driving down pricing and compressing margins. Additionally, maintaining
sizeable share is becoming challenging.
Global pricing pressures could affect top-line growth
With the recent economic crisis and fiscal pressures facing governments, especially in
Europe, there have significant drug legislation amendments leading to price cuts in some
countries. While volumes have offset price decline in certain geographies, further pricing
pressures present significant headwinds to the business.. In the event that Teva is not
able to adapt nimbly to this changing pricing environment, the company’s top-line revenue
and global growth are at risk.
Risk of damages assessed due to at risk launches
Teva fairly frequently launches generics at risk i.e. when patent litigation has not resolved
and faces the risk of damages being assessed for at-risk launches. In the event of an at
risk launch, there is a possibility that the innovator sues Teva if the final outcome of
litigation is in favor of the innovator. For instance, in the recent Protonix ruling, the court
upheld Pfizer’s patent and Pfizer is now demanding damages for all these past years of
lost Protonix revenues due to Teva’s generic. Teva believes it is unlikely to get treble
damages and is pursuing litigation. Furthermore, management has revealed that they
have insurance against at-risk damages. The amount insured remains undisclosed but of
course the insurance premium is likely to go up if Teva uses the policy.
Foreign exchange risk due to global revenue exposure
Teva does business in a number of countries and its financials are exposed to a variety of
currencies exposing about 38% of revenues in 2010. In the current environment of




Specialty Pharmaceuticals                                                                                    161
                                                                                                  13 December 2010


currency volatility, it is difficult to predict what turn the exchange rates will take and what
impact that will have on Watson’s profitability.
Delay in development or failure to obtain FDA approval of pipeline assets
Teva has a very active pipeline and a delay or setback in development of any of these
assets or failure to obtain FDA approval is a risk to future earnings power of the company.
Unsuccessful commercialization of currently marketed products
Teva may not be able to fully realize the commercial value of the its currently marketed
products due to supply disruptions, market dynamics or FDA hold ups, hurting its top-line
growth prospects.
The biosimilars opportunity proves elusive due to regulatory, clinical and
competitive reasons
Teva has multiple partnerships with Lonza and CoGenesys and in-house expertise to
harness the biosimilars opportunity. Biosimilars present a potentially large market
opportunity for many years. However, the clinical, regulatory and competitive and
competitive landscape remain undefined and depending on how they evolve, could prove
to be less lucrative than hoped for.




Specialty Pharmaceuticals                                                                                    162
                                                                                                                                                                                13 December 2010




Valuation
Historical Perspective and Stock Drivers
As shown in Exhibit 201, Teva’s stock price was steadily climbing since September 2009,
reaching a peak closing price of $64.54 on March 23, 2010 before it started a slide
downhill. Around end of March 2010 -- early April 2010 came headwinds in the form of
European pricing pressure driven by sovereign debt default fears close to the heels of
Teva’s Ratiopharm acquisition announcement, which would increase Teva’s exposure to
Europe. Unfavorable litigation outcome in the Protonix case against Pfizer further raised
investor concerns with the overhang of possible treble damages for Teva’s at risk launch.
The summer brought with it more good news with MNTA/Sandoz’s Lovenox approval
fuelling investor fears of sooner approval of generic Copaxone without clinical trials. Since
then, generic Copaxone continues to remain a major overhang on the stock, currently
hovering around the $50 mark. The denial of Sandoz/Momenta’s summary judgment
seeking invalidity of Teva’s Copaxone patents brought some temporary relief. The markets
didn’t react favorably to the $1 billion share buyback program announced by management
on December 1, 2010 either. Positive phase III ALLEGRO trial results evaluating
Laquinimod’s efficacy and safety in treatment of Multiple Sclerosis as compared to
placebo lifted the stock, languishing in the high $40’s to $53.80, the close on Friday.

Exhibit 201: Stock-Price Chart with Key Events—TEVA

                                                                                                TEVA                                                                            Teva to
                                                                                                                                                                                acquire
                                                                                                                                                                              Theramex,
               $70.00
                                                      Teva reports solid 15-year       Teva announces Ratiopharm                                                             Merck's EU
                                                       safety and efficacy data       acquisition giving the combined                                                       base Womens
                                                       from a study evaluating      company a leading market position                                                           Health
                                                       Copaxone treatment for            in 10 European countries                                                              Business
                                                                                                                                     Approval of MNTA/NVS
                                                                 MS
                                                                                                                                  generic Lovenox has negative
               $65.00          FDA accepts BLA for                                                                                   readthrough - increasing
                                Neutroval-biologic                                                                               likelihood of generic Copaxone                        Annouces a
                                                                                                     FDA rejects Teva's                                                                 $1 billion
                               molecule of Amgen's                                                     2nd citizen's
                                    Neupogen                                                                                                                                              share
                                                                                                      petition against                                                                 repurchase
                                  Teva                                                               generic Copaxone                                                                    program
                             announced FDA
               $60.00                                                                                                                               Sandoz/Momenta's
                              approval and
                                                                                                                                                   summary judgement
                               commerical
                                                                                                                                                  of Copaxone invalidity
                                launch of
                                                                                                                                                         denied
                                 Valtrex
 Stock Price




                                                             Speculation about
                                                              Teva as possible
               $55.00
                                                           bidder for Ratiopharm




                                    Teva's lays out 5 year
               $50.00             strategic plan -CEO says
                                   Teva's annual revenue                                    Positive results from study
                                     will double by 2015                                     assessing new low dose
                                                                                             formulation of Copaxone
                                                                                                                                         Respiratory growth
                                                               Protonix patent upheld by                                               strategy -- expected to
                                                               NJ Court, Teva launched                                                                                  FDA reports positive top-
                                                                                                                                      contribute $2.4bn to co.        line results from ALLEGRO
               $45.00                                          generic version at risk in          FDA issues complete
                                                                                                                                      overall target of $31b by
                                                                       Dec 2007                response letter for Neutroval,                                                study evaluating
                                                                                                                                                 2015                   Laquinimod in MS; meets
                                                                                               but does not ask for additional
                                                                                                       clinical trials                                                primary endpoint and EDSS
                                                                                                                                                                         alongwith clean safety
                                                                                                                                                                                  profile
               $40.00
                    Nov-09       Dec-09      Jan-10       Feb-10       Mar-10      Apr-10     May-10        Jun-10        Jul-10        Aug-10       Sep-10       Oct-10      Nov-10



Source: Company data, Credit Suisse estimates

Short interest ratio in Teva has been relatively flat in the 1.5 – 2.5. range with a slight dip
(Exhibit 202) to almost 0.5 when the stock price bottomed.




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Exhibit 202:TEVA Short Interest Ratio Expressed as a % of Trading Volume Days

                                                            TEVA Short Interest Ratio
                            3.0




                            2.5




                            2.0
    Short Interest Ratio




                            1.5




                            1.0




                            0.5




                            0.0
                             11/30/2009     01/29/2010     03/31/2010     05/28/2010      07/30/2010      9/30/2010       11/30/2010


Source: Bloomberg, Credit Suisse estimates, Short interest ratio is calculated by dividing the short interest
by average 30-day daily volume. The ratio implies the number of days it takes to cover the outstanding
short interest



Exhibit 203: TEVA Short Interest as % of Outstanding Shares Has Fallen to About 2%
Recently

                                     TEVA Short Interest Expressed as % of Outstanding Shares

                            1.4%


                            1.2%


                            1.0%
     Short Interest Ratio




                            0.8%


                            0.6%


                            0.4%


                            0.2%


                            0.0%
                               11/30/2009     01/29/2010     03/31/2010      05/28/2010      07/30/2010       9/30/2010       11/30/2010


Source: Bloomberg, Credit Suisse estimates. Short Interest Ratio is calculated by dividing the short interest
by number of outstanding shares. The ratio implies what percentage of outstanding shares are currently
held as short positions.




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Our Teva Target Price of $58 a Blend of P/E and DCF
Methodologies
We have valued Teva using a 50/50 blend of discounted cash flow (DCF) analysis
and relative multiples of 2011 EPS, in order to capture the merits of each method.
Our target price derivation is summarized in Exhibit 204

Exhibit 204: Our Blended Target Price is $58 per share
                                                                      CS Price Target (1)                  DCF                                Relative Valuation
                                Current        Rating         Price        Upside/          2011 PT        DCF           Premium/        Relative   Target      2011      Rel. Val.
                                 Price                       Target      (Downside)     Implied P/E       Price         Discount (2)     Multiple   Multiple   EPS Est.    Price
S&P 500, Current                  $1,240
S&P 500, as of 12/3/2010          $1,225                                                                                                             13.5x     $91.00

Weighting                                                                                                  50%                                                             50%
Generic Specialty Pharma Group                                  ---           ---             ---           ---            (10%)          0.90x      12.1x        ---       ---
MYL                         $20.14          Outperform         $25          24.1%            12.6x         $25              5%            1.05x      12.7x      $1.99      $25
TEVA                        $53.80           Neutral           $58          7.8%             11.1x         $59             (10%)          0.90x      10.9x      $5.20      $57
WPI                         $49.40          Outperform         $60          21.5%            14.2x         $64              10%           1.10x      13.3x      $4.22      $56



(1) Average of DCF and relative valuation, weighted as shown.
(2) Each group's valuation is relative to S&P 500, while each stock is relative to its group (parity to group = 1.0).
Source: Company data, Credit Suisse estimates.

We believe that DCF is an appropriate method for valuing generic specialty pharma
companies, as it avoids overweighting short-lived events like 180 day exclusivity periods
for successful first-to-file generic challenges. DCF is particularly relevant at the present
time, in that it allows us to look beyond the impending “patent cliff” – peaking for the
industry in 2011-2012 and Teva leveraging them with its filed ANDAs and PIVs – and
value the cash flows before and after the cliff opportunity. Additionally, this way we fully
capture the impact of Copaxone genericization post the 2014 patent expiry.
We model cash flows to 2020 and calculate a terminal value. We use a 9% discount rate
and a 0.5% perpetuity growth rate in the terminal value. Although we calculate a weighted
average cost of capital of 6.6% using CAPM, we have elected to use a 9% discount rate
for a more conservative estimate of a return expected by an investor commensurate with
Teva’s risks. Our assumptions and valuation are detailed below in Exhibit 205, and a
sensitivity analysis assuming a range of discount rates and terminal growth rates is shown
in Exhibit 206.

Exhibit 205: TEVA DCF: Assumptions and Valuation Exhibit
$ in millions, except for stock price and unless otherwise stated
Assumptions:                                                                  Valuation:
Risk-Free Rate (10 yr UST)                           3.3%                     PV Cash Flow 2011-2020                         $31,992
Market Risk Premium                                  8.0%                     PV Terminal Value                              $28,443
Beta                                                 0.46                     Enterprise Value                               $60,435
Cost of Equity                                       6.9%
MV Equity to Capital                                89.9%                     Less: Net Debt/(Cash)                          $4,980
Debt Rate                                            5.0%                     Equity Value                                   $55,455
Tax Rate                                            35.0%
Cost of Debt                                         3.3%                     Diluted shares (MM)                              940.0
MV Debt to Capital                                  10.1%                     Current Stock Price*                            $53.80
WACC                                                 6.6%                     Equity value per share                               $58
Terminal Growth Rate                                 0.5%                     Upside                                               8%
* closing price as of 12/10/2010
Source: Company data, Credit Suisse estimates.

.




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Exhibit 206: Our DCF Analysis Values Teva at $59 per share
                                Discount Rate         Equity Value per Share (b)
                                    (WACC)        -0.5%         0.5%           1.5%
                                      7.0%       $72.95        $79.71         $88.93
                                      8.0%       $63.20        $67.96         $74.18
                                      9.0%       $55.54        $58.99         $63.37
                                     10.0%       $49.36        $51.94         $55.12
                                     11.0%       $44.28        $46.24         $48.62
Source: Company data, Credit Suisse estimates.

In addition, we include a relative P/E component in our valuation due to the common
use of this metric among investors, and also due to the tendency of the specialty pharma
stocks to respond to near-term earnings performance. For our P/E based valuation, we
start by assuming that the generic specialty pharma group will trade at a 10% discount to
the S&P 500, as discussed in our industry note, and then apply a 10% discount for TEVA.
We base this discount on slowing growth of Copaxone and earnings risk due to generic
Copaxone overhang. This 10% discount is slightly greater than Teva’s current 2%
discount to the group, based on next twelve months’ earnings (Exhibit 207, Exhibit 208).
Current 2011 and 2012 multiples for TEVA and comparable companies are shown in
Exhibit 209.

Exhibit 207: TEVA Has Historically at a Slight Premium to the Generic Spec Pharma Sector
U.S Generic Spec Pharma Sector comprises of MYL, TEVA and WPI
                         45.0
                                                                       US Generic Spec Pharma Sector
                         40.0                                          Teva

                                                                       S&P
                         35.0


                         30.0
    NTM Price/Earnings




                                      Average: 17.9x
                         25.0


                         20.0
                                                                                       Average: 19.1x


                         15.0
                                                                       Average: 16.1x
                         10.0
                                                                                                                10.2

                          5.0


                          0.0
                                01

                                01

                                02

                                02

                                03

                                03

                                04

                                04

                                05

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                                07

                                07

                                08

                                08

                                09

                                09

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                              20

                              20

                              20

                              20

                              20

                              20

                              20

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                              20

                              20

                              20

                              20

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                              20

                              20

                              20

                              20

                              20

                              20
                           1/

                           1/

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                            1/

                            1/

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                            1/
                         1/

                         7/

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                         7/

                         1/

                         7/

                         1/

                         7/

                         1/

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                         7/

                         1/

                         7/




Source: FactSet, Company data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                          166
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Exhibit 208: TEVA Is Currently Trading at a 2% Discount to the Generics Group
*Generic Spec Pharma comprises of MYL, TEVA, and WPI
                                                        1.80

                                                        1.70
   TEVA Generic Spec Pharma Weighted Relative P/FE




                                                        1.60

                                                        1.50

                                                        1.40

                                                        1.30

                                                        1.20

                                                        1.10                                                                             Average: 1.1x

                                                        1.00
                                                                                                                                                                                                                       0.98
                                                        0.90

                                                        0.80
                                                                                                                               TEVA Relative to Generic Spec Pharma
                                                        0.70

                                                        0.60

                                                        0.50
                                                                01

                                                                01

                                                                02

                                                                02

                                                                03

                                                                03

                                                                04

                                                                04

                                                                05

                                                                05

                                                                06

                                                                06

                                                                07

                                                                07

                                                                08

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                                                                09

                                                                09

                                                               10

                                                               10
                                                             20

                                                             20

                                                             20

                                                             20

                                                             20

                                                             20

                                                             20

                                                             20

                                                             20

                                                             20

                                                             20

                                                             20

                                                             20

                                                             20

                                                             20

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                                                             20

                                                             20

                                                             20

                                                            20
                                                          1/

                                                          1/

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                                                       1/

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                                                       1/

                                                       7/

                                                       1/

                                                       7/

                                                       1/

                                                       7/

                                                       1/

                                                       7/
Source: FactSet, Company data, Credit Suisse estimates.



Exhibit 209: Generic Specialty Pharmaceutical Valuation Comparables
*rows highlighted in grey i.e. MYL, TEVA and WPI are CS covered stocks and use CS estimates
                                                                         Price             Market    Enterprise     Relative Valuation             Relative Valuation     Relative Valuation     Relative Valuation
                                                                            52 week         Cap        Value        2011         2012       EPS    2011       2012        2011        2012       2011         2012
 Ticker Company                                                Current   High     Low      ($ MM)     ($ MM)        P/E          P/E      CAGR % PEG          PEG       EV/Sales    EV/Sales   EV/EBITDA EV/EBITDA     YTD
                                                                                                               CS Generic SpecPharma Index (Equal Weighted)
HSP                                                  Hospira    $56.27   $60.49   $47.36    $9,566      $10,660     13.0x        11.7x      12.4   1.0x       0.9x        2.5x        2.3x        8.4x        7.7x    10.3%
IPXL                                                 Impax       19.11    22.39     7.20     1,251          893     15.2x        13.2x      10.5   1.5x       1.3x        1.8x        1.6x       6.4x        6.2x     40.4%
MYL                                                  Mylan       20.14    23.63    16.55     9,791       13,725     10.1x         8.8x      13.4   0.8x       0.7x        2.2x        2.0x        8.2x        7.3x     9.3%
PRGO                                                 Perrigo     66.06    68.38    37.46     6,161        7,009     17.2x        15.8x      13.6   1.3x       1.2x        2.5x        2.3x       11.2x       10.4x    65.9%
PRX                                                  Par         38.00    38.78    23.09     1,356        1,136     11.0x        11.1x       2.6   4.2x       4.3x        1.3x        1.4x        5.5x        5.7x    40.4%
TEVA                                                 Teva        53.80    64.95    46.99    51,506       55,672     10.3x         9.4x      14.7   0.7x       0.6x        3.0x        2.7x        8.8x        8.0x    (4.2%)
WPI                                                  Watson      49.40    52.20    37.26     6,190        7,159     11.7x         8.7x      14.5   0.8x       0.6x        1.7x        1.3x        7.0x        4.9x    24.7%
CS Generics SpecPharma Index (Equal Weighted)                                                                       12.7x        11.2x             1.5x       1.4x        2.1x        2.0x       7.9x         7.2x     27%
CS Branded SpecPharma Index Median (Equal Weighted)                                                                 11.7x        11.1x             1.0x       0.9x        2.2x        2.0x       8.2x         7.3x     25%
*rows highlighted in grey are CS covered stocks and use CS estimates

Source: FactSet, Company data, Credit Suisse estimates.




Specialty Pharmaceuticals                                                                                                                                                                                               167
                                                                                            13 December 2010




Catalysts
Teva’s stock is most sensitive to Copaxone related events, paragraph IV process news,
European pricing environment, branded and generic pipeline updates, and competing
therapy news. Copaxone litigation hearings and rulings will be key events in January.
Although a delay is widely expected, January 1, 2010 PDUFA date for low volume dose
injection of Copaxone will be closely watched. Data readout related to Laquinimod, one of
the most important and promising pipeline products, in Multiple Sclerosis in 1H 2011 and
3Q 2011 will be gating factor for NDA filing and potential mid-2012 launch.




Specialty Pharmaceuticals                                                                              168
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Exhibit 210: Teva’s Catalyst Calendar
        Timing                    Catalyst/Event  Sensitivity                                 Fundamentals
                            Adenovirus Vaccines:       *      Teva expects FDA approval for BLA of Type 4 and Type 7 Adenovisrus
         4Q10
                            FDA approval                      Vaccines developed for the US Department of Defense
                            Protonix: Appeal          **      Resolution of damages discovery and Teva's appeal with respect to
         4Q10
                            decision                          Protonix at risk launch
                            Copaxone Case: claims      *      Expected ruling on claims construction in Copaxone infringement case
         4Q10
                            construction                      against Sandoz/Momenta
                            Debrase: EMEA filing      *       Debrase met early stopping rules in PIII trial for debridement of burn
         4Q10
                                                              wounds and is expecting to file in EU soon
                            Respiratory product               Teva plans to file for approval of BFC Spiromax (Symbicort) and FP HFA
         2011
                            filings in EU                     MDI (Flovent)
                            StemEx: Report PIII        *      Data from PIII trial evaluating safety and efficacy of StemEx, a novel
         2011               data                              therapy for critical hematological disorders such as leukemia and
                                                              lymphoma
                            StemEx: Report PIII        *      Data from PIII trial evaluating safety and efficacy of StemEx, a novel
         2011               data                              therapy for critical hematological disorders such as leukemia and
                                                              lymphoma
                            Copaxone: FDA Action     ***      FDA action date for low volume injection of Copaxone; Likely be delayed
    January 1, 2011         Date                              due to Teva submitting additional clinical data from the FORTE study per
                                                              FDA request
                            Copaxone Patent Case:    ***      30 month stay for Sandoz/Momenta's Copaxone aNDA expected to expire
     January 2011           30 month expiration

                            Copaxone Patent Case:        ***    Teva expected to relaunch generic as pediatric extension of Protonix
   January 12, 2011         Mylan claims                        patent expires
                            construction hearing
                            Protonix: Pediatric           *     Teva expected to relaunch generic as pediatric extension of Protonix
   January 19, 2011
                            patent expiration                   patent expires
                            Gemzar: 75 days post         **     Deadline for Teva to launch gemcitabine (generic Gemzar) and maintain
                            patent expiry, possible             180 day exclusivity. Teva is attempting to transfer manufacturing to an
   January 29, 2011         forefeiture of Teva's 180           alternate site and under has 75 days to launch generic after the Nov 15,
                            day exclusivity                     2010 patent expiry to prevent forfeit exclusivity.

                            Analyst Day                  ***    Teva will provide guidance, business updates and pipeline review at their
     January 2011
                                                                Annual Analyst day in January
                            Cladribine: FDA Action        *     FDA extended PDUFA date by 3 months in November 2010. Merck
  February 28, 2011
                            Date                                KGaA's oral Multiple Sclerosis drug, Teva gets royalties.
                            Laquinimod: PIII study       **     ALLEGRO PIII data - Detailed clinical readout from ALLEGRO expected in
   2Q11 (potentially
                            data                                2011, top-line was reported in December. Expected to be presented in April
        April)
                                                                2011 at the American Academy of Neurology Meeting
                            Laquinimod: PIII study       **     BRAVO PIII data - Clinical readout from two PIII trials, studying
         3Q11               data                                Laquinimoid in relapsiong-remitting multiple sclerosis, BRAVO and
                                                                ALLEGRO in 2011.
                            Qnaze: Product Launch        **     We assume TEVA launches Qnaze, a competitor to Flonase, for treatment
         2012
                                                                of seasonal allergic rhinitis (SAR) in US
                            Debrase: Product             **     We assume TEVA launches Debrase Gel Dressing for debridement of burn
         2012
                            Launch                              wounds in the EU in 2012
                            Respiratory Launches         **     We assume TEVA launches BFC Spiromax, a competitor to Symbicort,
         2012
                            in EU                               and FP HFA MDI, a competitor to Advair, in the EU
                            DR-103: Product Launch        *     We assume TEVA launches the oral contraceptive DR-103 in late 2012
         2012
                            Copaxone Patent Case:        ***    30 month stay for MYL/Natco's Copaxone aNDA expected to expire
      March 2012            30 month expiration

       Mid 2012             Laquinimod: Launch           ***    30 month stay for MYL/Natco's Copaxone aNDA expected to expire
Source: Company data, Credit Suisse estimates

Below in Exhibit 211, we identify a few 30 month expiries in 2010 and 2011, which if Teva
chose to launch at risk, could be meaningful opportunities.




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                                                                                            13 December 2010



Exhibit 211 TEVA Potential Meaningful 30-Month At-Risk Launches in 2010 and 2011
USD in millions, unless otherwise stated

                                      Date          Drug               2009 IMS Sales
                                    April, 2011      Amrix                         $119.3
                               September, 2011      Lovaza                         $759.1
                               November, 2011       Levitra                        $268.2
                               December, 2011     Travatan Z                       $400.5
Source: Company data, Credit Suisse estimates




Specialty Pharmaceuticals                                                                              170
                                                                                                                                           13 December 2010




Company Description
Teva Pharmaceuticals is a global pharmaceutical company specializing in developing,
producing, and marketing branded pharmaceuticals, generic medications, and active
pharmaceutical ingredients.
Teva is the largest generic pharmaceutical company in the world and has been successful
in leveraging its vertically integrated structure across geographies to gain a competitive
edge. With a diversified business model, the company has a proprietary branded business
focused on a few therapeutic categories including multiple sclerosis, Parkinson’s disease,
respiratory disorders, and women’s health therapies, as well an emerging pipeline of
oncology products.
Furthermore, the company is an early mover in developing a biogenerics pipeline with the
acquisition of Cogenesys and joint venture with Lonza. With about 84% of the company’s
revenue from businesses in North America and Europe, Teva is focused on expanding its
footprint in the emerging markets, including South America, Eastern Europe and Asia.
The recent acquisition of Ratiopharm further consolidates Teva’s position in Eastern
Europe and Germany.

Exhibit 212: TEVA – 2010E Sales by Products                                 Exhibit 213: TEVA – 2015E Sales by Products
                     TEVA Net 2010E Revenue Breakdown                                               TEVA Net 2015E Revenue Breakdown

                                                                                                                          API/Other
                                          API/Other                                                           ROW Brand
                             ROW Brand                                                                                       3%
                                             4%                                                                  1%
                                1%
                ROW Generics                                                           ROW Generics
                   11%                                                                    13%


               EU Brand                                    NA Generics                                                                  NA Generics
                  6%                                          40%                                                                          41%
                                                                                         EU Brand
                                                                                            9%


              EU Generics
                 18%


                                                                                                EU Generics
                                                                                                   22%
                                      NA Brand                                                                            NA Brand
                                        20%                                                                                 11%
     NA Generics          NA Brand           EU Generics         EU Brand        NA Generics           NA Brand           EU Generics        EU Brand
     ROW Generics         ROW Brand          API/Other                           ROW Generics          ROW Brand          API/Other


Source: Company data, Credit Suisse estimates.                              Source: Company data, Credit Suisse estimates.

Along with being the largest generic drugmaker, Teva also markets the leading Multiple
Sclerosis therapy, Copaxone. Teva has a robust branded pipeline focusing on a few key
therapeutic categories including respiratory, women’s health, oncology, CNS and biologics
(Exhibit 214.)




Specialty Pharmaceuticals                                                                                                                               171
                                                                                                                  13 December 2010



Exhibit 214: Teva’s Branded Pipeline




Source: Company data, Teva’s Presentation at Credit Suisse Conference in November 2010, Credit Suisse estimates

Laquinimod
Another possible oral treatment in development, Laquinimod is being investigated by Teva
in treatment of Multiple Sclerosis. Partnered with Active Biotech, Teva reported positive
topline data from the ALLEGRO phase III trial on December 9, 2010. The drug had an
excellent safety profile and met its primary end point by statistically reducing relapse rate
compared to placebo. Furthermore, the secondary endpoint of reduction in disability
progression measured by expanded disability severity scale (EDSS) was also met. We
expect full data to be presented in 1H 2011, most likely April at American Academy of
Neurology Meeting. Clinical readout from the second PIII trial BRAVO comparing
Laquinimod head-to-head with both placebo and Avonex is expected in 3Q 2011.
Women’s Health
Keen to grow its Women’s Health business to about 17% of $9.2 billion branded revenues.
In line with this focus, Teva acquired Merck KGaA’s EU based women’s health business,
Theramex, for €265 MM. With operations in 50 countries worldwide, Theramex provides
                 €
Teva with the commercial infrastructure to take its repertoire of women’s health offerings
to rest of the world.
DR-102 is an oral contraceptive with expected P III trial completion in August 2012 per
clinicaltrials.gov. DR-103, another oral contraceptive, is expected to complete PIII trial by
October 2011 according to clinicaltrials.gov. Teva is developing an oxybutynin vaginal ring
for the treatment of overactive bladder. The company suggests PIII will complete between
2010-2012. DR-2011, a progesterone vaginal ring, is currently being investigated in PIII
trials for treating infertility in women.




Specialty Pharmaceuticals                                                                                                    172
                                                                                                                                                  13 December 2010


Respiratory
Teva held its Respiratory Day on November 4, 2010 where it presented its growth strategy
for the respiratory franchise. According to 2015 goals set by management, the respiratory
business will account for 26% of the branded business at $2.4 bn revenues. In Exhibit 215,
we present a snapshot of Teva’s marketed and pipeline products.

Exhibit 215: Teva’s Branded Respiratory Franchise
                                                                                            Current
                                                                                            Branded                 2010             Teva
            Product                 Category                    US            EU          Equivalent           Global Market        Target
                                                                                         or Competitor         in $ billion (1)      Filing

ProAir                              SABA                         a             a             Ventolin                $3.2          Marketed
(albuterol sulfate)
QVAR                                ICS                          a             a              Flovent                $4.4          Marketed
(beclomethasone)                                                                           (fluticasone)
QNAZE                               Intranasal steroid           a             a          Nasonex                    $3.2             2011
(beclomethasone)                                                                     (mometasone furoate)
BFC Spiromax                        Combination                                a            Symbicort               $11.7             2011
(budesonide formoterol)             ICS/ LABA
FP HFA MDI                          ICS                                        a              Flovent                $4.4             2011
(fluticosone)
FSC HFA                             Combination                                a              Advair                $11.7             2012
(fluticosone salmetorol)            ICS/ LABA
FSC Spiromax                        Combination                  a             a              Advair                $11.7           2012 EU
(fluticosone salmetorol)            ICS/ LABA                                                                                       2014 US
ProAir Spiromax                     SABA                         a                           Ventolin                $3.2             2014
(albuterol sulfate)
FP Spiromax                         ICS                          a                            Flovent                $4.4             2014
(fluticosone)
Anticholinergic in BAI              Anticholinergic             N/A           N/A             Spiriva                $4.2         Not disclosed
(1) IMS 2Q:2010 Moving Average Total
(2) ICS: Inhaled Corticosteroid; SABA: Short-Acting Beta Agonist; LABA: Long-Acting Beta Agonist; BAI: Breath Actuated Inhaler

Source: Company data, Credit Suisse estimates

Teva also has a fertile biologics pipeline with novel therapies in development for a variety
of indications, including oncology, diabetes, and debridement of burn wounds.
Teva receives royalties on sales of Cladribine, an oral therapy for MS being developed by
Merck KGaA.
Debrase Gel Dressing is currently in PIII in the US and likely to be filed soon in the EU for
the debridement of burn wounds.
A potential alternate treatment to insulin replacement therapy, DiaPep 277 is being
investigated in Type I adult diabetes.
Stem Ex is a cell replacement therapy for patients with blood cancers such as leukemia
and lymphoma. This could potentially present an alternative to bone marrow transplant.
Currently in second P III trial, Custirsen (TV-1101/OGX-011) is being evaluated in the
treatment of progressive metastatic prostate cancer in combination with docetaxel.
In addition to branded biologics, Teva is also developing a basket of biosimilars, of which
Rituxan and Neugranin have been publicly disclosed.




Specialty Pharmaceuticals                                                                                                                                    173
                                                                                                            13 December 2010




Management
Management Team
Shlomo Yanai, President, CEO and Director, has been successfully executing the growth,
vertical integration and global expansion strategy at Teva. Under his leadership, Teva has
completed two important acquisitions, Barr Labs in the US and Ratiopharm in Europe,
expanding the company’s global footprint.

Exhibit 216: Teva’s Management Team – Collectively over 100 Years in Pharmaceuticals
          Name            Principal Position                                       Comments
                                                 ■ President and CEO of Teva since joining in March 2007
                                                 ■ Previously served as President and CEO of Makhteshim-Agan Industries
                                                 Ltd. from 2003 until 2006
                                                 ■ Board member of Bank Leumi Le-Israel Ltd. from 2004 until 2007
                                                 ■ Serrved in the Israel Defense Forces for 32 years and reaching the
                        Chief Executive Officer,
     Shlomo Yanai                                important ranking of Major General
                               President
                                                 ■ Currently a member of the Board of Governors of the Technion (Israel
                                                 Institute of Technology) and of the International Advisory Board, M.B.A.
                                                 Program of Ben-Gurion University
                                                 ■ Recipient of Max Perlman Award for Excellence in Global Business
                                                 Management in 2005 and Dun & Bradstreet Leadership Excellence Award
                                                 ■ CFO of Teva since joining in July 2008
                                                 ■ Previously served as Executive Vice President and CFO of Check Point
      Eyal Desheh        Chief Financial Officer Software Technologies Ltd for 8 years
                                                 ■ CFO of Scitex Corporation Ltd
                                                 ■ Deputy CFO at Teva from 1989 to 1996
                                                 ■ Over 19 years at Teva, serving in various capacities, most recently
                                                 President of Teva International since April 2002
                           President of Teva     ■ Previously Vice President-Israeli Pharmaceutical Sales and President
     Chaim Hurvitz
                          International Group and CEO of Teva Pharmaceuticals Europe
                                                 ■ Received his B.A. in political science and economics from Tel Aviv
                                                 University in 1985
                                                 ■ Over 10 years at Teva, serving in various capacities, most recently as
                                                 President and CEO of Teva North America since January 2008
                          President and Chief ■ Previously held various positions of increasing responsibility at Bristol-
    William S. Marth      Executive Officer of Myers Squibb
                          Teva North America ■ Currently serving on the University of the Sciences in Philadelphia, the
                                                 American Society for Health-System Pharmacists (ASHP), and the
                                                 Generic Pharmaceutical Association (GPhA)
                                                 ■ President and CEO of Teva Europe since joining in January 2006
                                                 ■ Over 22 years experience in a variety of senior positions
                          President and Chief
                                                 ■ Tenures in Europe at Glaxo as Senior Vice President and Area Director
 Gerard W.M. Van Odijk    Executive Officer of
                                                 of GlaxoSmithKline Northern Europe
                              Teva Europe
                                                 ■ Currently serving as a non-executive director on the board of Bavarian
                                                 Nordic A/S
Source: Company Data, Credit Suisse estimates

Board of Directors
Dr. Philip Frost was recently appointed the Chairman of the Board and also heads the
Science and Technology Committee (Exhibit 217.)




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Exhibit 217: Teva Board of Directors


               Name                              Afflitiation                        Position                 Independent


                                     OPKO Health; PROLOR Biotech;
                                      Ladenburg Thalmann Financial       Chairman of the Board, Chairperson
          Dr. Phillip Frost                                                                                        No
                                          Services; Continucare          of Science & Technology Committee
                                        Corporation; Castle Brands
                                                                           Vice-Chairman of the Board,
                                                                         Chairman of Human Resources &
                                                                          Compensation Committee,Vice
        Prof. Moshe Many                     Rosetta Genomics            Chairman of Science & Technology         Yes
                                                                           Committee, Audit Committee,
                                                                              Corporate Governance &
                                                                               Nominating Committee
                                    Luxottica Group; Banca Nazionale
         Roger Abravanel                                                        Finance Committee                 Yes
                                                del Lavoro
                                                                          Chairman of Finance Committee,
                                                                         Audit Committee, Human Resources
                                                                           and Compensation Committee,
          Joseph Nitzani                         Migdal group                                                     Yes
                                                                               Corporate Governance &
                                                                         Nominating Committee, Community
                                                                                  Affairs Committee
          Ruth Cheshin                    Jerusalem Foundation             Community Affairs Committee            Yes
     Prof. Yitzhak Peterburg                   Applisonix                 Science & Technology Committee          Yes
                                                                                  Human Resources
                                        Chugai Pharmaceutical;
                                                                           and Compensation Committee,
                                      Neurobiological Technologies;
        Abraham E.Cohen                                                       Corporate Governance &              Yes
                                     BioTime; Mannkind Corporation
                                                                          Nominating Committee, Science &
                                           and Vasomedical
                                                                               Technology Committee
                                     Osem Investments; Check Point                Human Resources
           Dan Propper                                                                                            Yes
                                        Software Technologies              and Compensation Committee
                                                                               Chairman of Community
                                       Tower Semiconductor; Israel           Affairs Committee, Finance
            Amir Elstein                                                                                           No
                                              Corporation                       Committee, Science &
                                                                               Technology Committee
                                                                              Chairperson of Corporate
                                                                              Governance & Nominating
                                      U. Dori Group; Oil Refineries;
                                                                         Committee, Audit Committee, Human
            Ory Slonim                Harel Insurance Investments &                                               Yes
                                                                                      Resources
                                            Financial Services
                                                                           and Compensation Committee,
                                                                           Community Affairs Committee
       Prof. Elon Kohlberg               Harvard Business School                   Audit Committee                Yes
                                    Migdal Insurance Company; Ness
        Dan S. Suesskind                                                              Director                     No
                                     Technologies; Syneron Medical
                                        Protalix BioTherapeutics;
      Prof. Roger Kornberg                                                Science & Technology Committee          Yes
                                          Cocrystal Discovery
          Erez Vigodman                Makhteshim Agan Industries               Finance Committee                 Yes
                                                                           Chairperson of Audit Committee,
                                                                         Human Resources & Compensation
                                       Alrov (Israel), Gilat Satellite   Committee, Corporate Governance &
    Dr. Leora (Rubin) Meridor                                                                                     Yes
                                       Networks; Osem Investment           Nominating Committee, Finance
                                                                          Committee, Science & Technology
                                                                                     Committee

Source: Company Data, Credit Suisse estimates.




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Financial Models
Exhibit 218: Teva Global Revenue Forecast Summary
USD in millions, unless otherwise stated
                            FY 2007        FY 2008     FY 2009     FY 2010     FY 2011     FY 2012     FY 2013     FY 2014     FY 2015
North America (NA)
NA Generics (est.)            $3,979.0      $4,322.0    $5,352.4    $6,571.7    $7,013.7    $8,025.7    $8,389.9    $8,627.1    $9,133.3
  Copaxone                       568.9       1,214.3     1,917.0     2,239.7     2,351.7     2,350.3     2,215.7     1,099.6       482.0
  Azilect (est.)                  52.2          62.2        92.6       124.4       148.0       162.6       175.5       184.4       193.7
  Respiratory (est.)             442.0         431.7       568.0       567.6       581.8       603.4       631.4       737.3       751.4
  Women's Health (est.)            0.0           0.0       357.0       364.8       389.3       406.9       464.2       509.0       544.9
  Animal Health (est.)           100.0          85.0        24.0         0.0         0.0         0.0         0.0         0.0         0.0
  Biosimilars (est.)              20.0          24.0        26.0        33.8        36.5        78.7       121.0       163.5       206.1
  Branded Pipeline                 0.0           0.0         0.0         0.0         0.0        30.5       138.8       198.8       288.8
NA Brand (est.)                1,183.0       1,817.1     2,984.6     3,330.3     3,507.3     3,632.3     3,746.7     2,892.6     2,466.9
API/Other (est.)                 266.0         274.0       248.0       271.0       271.0       284.6       298.8       313.7       329.4
Total North America           $5,428.0      $6,413.0    $8,585.0   $10,172.9   $10,792.0   $11,942.5   $12,435.3   $11,833.4   $11,929.6
Europe (EU)
EU Generics (est.)            $1,820.5      $1,917.6    $2,180.6    $2,875.6    $4,220.1    $4,370.2    $4,528.6    $4,696.1    $4,873.2
  Copaxone (est.)                287.1         444.1       481.0       552.4       586.8       800.2       825.7       790.2       677.2
  Azilect (est.)                  34.3          55.9        74.4        92.4       101.7       108.8       116.4       122.2       128.3
  Respiratory (est.)             300.0         340.4       331.0       322.9       329.3       368.9       470.9       575.6       683.6
  Women's Health (est.)            0.0           0.0         0.0         0.0       150.0       172.5       200.7       248.6       295.8
  Biosimilars (est.)              20.0          24.0        26.0        33.8        36.5        38.7        41.0        43.5        46.1
  Branded Pipeline                 0.0           0.0         0.0         0.0         0.0        20.0        85.1       139.0       185.8
EU Brand (est.)                  641.5         864.4       912.4     1,001.5     1,204.2     1,509.1     1,739.8     1,919.2     2,016.7
API/Other (est.)                 183.0         194.0       178.0       166.1       166.1       174.4       183.2       192.3       201.9
Total Europe                  $2,645.0      $2,976.0    $3,271.0    $4,043.2    $5,590.5    $6,053.6    $6,451.6    $6,807.5    $7,091.9
Rest Of World (ROW)
ROW Generics                  $1,156.1      $1,455.5    $1,782.3    $1,835.5    $2,080.1    $2,259.0    $2,442.4    $2,641.9    $2,859.2
  Copaxone (est.)                 55.9          86.9        95.4       108.4       116.3       159.7       172.8       164.1       139.5
  Azilect (est.)                   1.0           3.6         4.4         5.0         5.1         5.2         5.3         5.4         5.5
  Respiratory (est.)               0.0           0.0         0.0         0.0         0.0         0.0         0.0         0.0         0.0
  Women's Health (est.)            0.0           0.0         0.0         0.0         0.0         0.0         0.0         0.0         0.0
  Biosimilars (est.)              10.0          15.0        22.0        43.4        57.4        71.8        76.1        80.6        85.5
  Branded Pipeline                 0.0           0.0         0.0         0.0         0.0         0.0         0.0         0.0         0.0
ROW Brand (est.)                  66.9         105.5       121.7       156.8       178.7       236.6       254.1       250.2       230.5
API/Other (est.)                 112.0         135.0       139.0       176.4       176.4       185.2       194.5       204.2       214.4
Total Rest Of World           $1,335.0      $1,696.0    $2,043.0    $2,168.6    $2,435.2    $2,680.8    $2,891.0    $3,096.3    $3,304.1

Total Revenues                $9,408.0     $11,085.0   $13,899.0   $16,384.8   $18,817.7   $20,677.0   $21,777.9   $21,737.3   $22,325.6
Source: Company data, Credit Suisse estimates.




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Exhibit 219: Teva Global Revenue Forecast Summary
Growth Rate
                            FY 2007    FY 2008      FY 2009     FY 2010     FY 2011    FY 2012    FY 2013    FY 2014     FY 2015
Growth Rates
North America (NA)
NA Generics (est.)                         8.6%       23.8%        22.8%       6.7%      14.4%       4.5%        2.8%        5.9%
  Copaxone                               113.4%       57.9%        16.8%       5.0%      (0.1%)     (5.7%)     (50.4%)     (56.2%)
  Azilect (est.)                          19.2%       49.0%        34.4%      18.9%       9.8%       8.0%        5.1%        5.0%
  Respiratory (est.)                      (2.3%)      31.6%        (0.1%)      2.5%       3.7%       4.6%       16.8%        1.9%
  Women's Health (est.)                                             2.2%       6.7%       4.5%      14.1%        9.7%        7.0%
  Animal Health (est.)                    (15.0%)     (71.8%)    (100.0%)
  Biosimilars (est.)                       20.0%        8.3%       30.0%        8.0%    115.6%      53.8%       35.1%       26.1%
  Branded Pipeline                                                                                 355.7%       43.2%       45.2%
NA Brand (est.)                           53.6%       64.3%       11.6%         5.3%      3.6%       3.1%      (22.8%)     (14.7%)
API/Other (est.)                           3.0%       (9.5%)       9.3%         0.0%      5.0%       5.0%        5.0%        5.0%
Total North America                       18.1%       33.9%       18.5%         6.1%     10.7%       4.1%       (4.8%)       0.8%
Europe (EU)
EU Generics (est.)                         5.3%       13.7%       31.9%       46.8%       3.6%       3.6%       3.7%         3.8%
  Copaxone (est.)                         54.7%        8.3%       14.8%        6.2%      36.4%       3.2%      (4.3%)      (14.3%)
  Azilect (est.)                          62.9%       33.0%       24.3%       10.0%       7.0%       7.0%       5.0%         5.0%
  Respiratory (est.)                      13.5%       (2.7%)      (2.5%)       2.0%      12.0%      27.7%      22.2%        18.7%
  Women's Health (est.)                                                                  15.0%      16.4%      23.9%        19.0%
  Biosimilars (est.)                      20.0%         8.3%      30.0%         8.0%      6.0%       6.0%       6.0%         6.0%
  Branded Pipeline                                                                                 325.4%      63.4%        33.6%
EU Brand (est.)                           34.8%         5.6%       9.8%       20.2%      25.3%      15.3%      10.3%         5.1%
API/Other (est.)                           6.0%        (8.2%)     (6.7%)       0.0%       5.0%       5.0%       5.0%         5.0%
Total Europe                              12.5%         9.9%      23.6%       38.3%       8.3%       6.6%       5.5%         4.2%
Rest Of World (ROW)
ROW Generics                              25.9%       22.5%        3.0%       13.3%       8.6%       8.1%        8.2%        8.2%
  Copaxone (est.)                         55.6%        9.7%       13.7%        7.3%      37.3%       8.2%       (5.0%)     (15.0%)
  Azilect (est.)                         270.3%       22.6%       13.7%        2.0%       2.0%       2.0%        2.0%        2.0%
  Respiratory (est.)
  Women's Health (est.)
  Biosimilars (est.)                      50.0%       46.7%       97.3%       32.3%      25.0%        6.0%      6.0%        6.0%
  Branded Pipeline
ROW Brand (est.)                          57.8%       15.4%       28.8%       14.0%      32.4%       7.4%       (1.6%)      (7.9%)
API/Other (est.)                          20.5%        3.0%       26.9%        0.0%       5.0%       5.0%        5.0%        5.0%
Total Rest Of World                       27.0%       20.5%        6.1%       12.3%      10.1%       7.8%        7.1%        6.7%

Total Teva Revenues                       17.8%       25.4%       17.9%        14.8%       9.9%       5.3%      (0.2%)       2.7%
Source: Company data, Credit Suisse estimates.




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Exhibit 220: Teva Global Revenue Forecast Summary
Revenue Contribution
                            FY 2007    FY 2008    FY 2009   FY 2010   FY 2011   FY 2012   FY 2013   FY 2014    FY 2015
Revenue Contribution
North America (NA)
NA Generics (est.)            42.3%       39.0%     38.5%     40.1%     37.3%     38.8%     38.5%     39.7%       40.9%
  Copaxone                     6.0%       11.0%     13.8%     13.7%     12.5%     11.4%     10.2%      5.1%        2.2%
  Azilect (est.)               0.6%        0.6%      0.7%      0.8%      0.8%      0.8%      0.8%      0.8%        0.9%
  Respiratory (est.)           4.7%        3.9%      4.1%      3.5%      3.1%      2.9%      2.9%      3.4%        3.4%
  Women's Health (est.)        0.0%        0.0%      2.6%      2.2%      2.1%      2.0%      2.1%      2.3%        2.4%
  Animal Health (est.)         1.1%        0.8%      0.2%      0.0%      0.0%      0.0%      0.0%      0.0%        0.0%
  Biosimilars (est.)           0.2%        0.2%      0.2%      0.2%      0.2%      0.4%      0.6%      0.8%        0.9%
  Branded Pipeline             0.0%        0.0%      0.0%      0.0%      0.0%      0.1%      0.6%      0.9%        1.3%
NA Brand (est.)               12.6%       16.4%     21.5%     20.3%     18.6%     17.6%     17.2%     13.3%       11.0%
API/Other (est.)               2.8%        2.5%      1.8%      1.7%      1.4%      1.4%      1.4%      1.4%        1.5%
Total North America           57.7%       57.9%     61.8%     62.1%     57.4%     57.8%     57.1%     54.4%       53.4%
Europe (EU)
EU Generics (est.)            19.4%       17.3%     15.7%     17.6%     22.4%     21.1%     20.8%     21.6%       21.8%
  Copaxone (est.)              3.1%        4.0%      3.5%      3.4%      3.1%      3.9%      3.8%      3.6%        3.0%
  Azilect (est.)               0.4%        0.5%      0.5%      0.6%      0.5%      0.5%      0.5%      0.6%        0.6%
  Respiratory (est.)           3.2%        3.1%      2.4%      2.0%      1.8%      1.8%      2.2%      2.6%        3.1%
  Women's Health (est.)        0.0%        0.0%      0.0%      0.0%      0.8%      0.8%      0.9%      1.1%        1.3%
  Biosimilars (est.)           0.2%        0.2%      0.2%      0.2%      0.2%      0.2%      0.2%      0.2%        0.2%
  Branded Pipeline             0.0%        0.0%      0.0%      0.0%      0.0%      0.1%      0.4%      0.6%        0.8%
EU Brand (est.)                6.8%        7.8%      6.6%      6.1%      6.4%      7.3%      8.0%      8.8%        9.0%
API/Other (est.)               1.9%        1.8%      1.3%      1.0%      0.9%      0.8%      0.8%      0.9%        0.9%
Total Europe                  28.1%       26.8%     23.5%     24.7%     29.7%     29.3%     29.6%     31.3%       31.8%
Rest Of World (ROW)
ROW Generics                  12.3%       13.1%     12.8%     11.2%     11.1%     10.9%     11.2%     12.2%       12.8%
  Copaxone (est.)              0.6%        0.8%      0.7%      0.7%      0.6%      0.8%      0.8%      0.8%        0.6%
  Azilect (est.)               0.0%        0.0%      0.0%      0.0%      0.0%      0.0%      0.0%      0.0%        0.0%
  Respiratory (est.)           0.0%        0.0%      0.0%      0.0%      0.0%      0.0%      0.0%      0.0%        0.0%
  Women's Health (est.)        0.0%        0.0%      0.0%      0.0%      0.0%      0.0%      0.0%      0.0%        0.0%
  Biosimilars (est.)           0.1%        0.1%      0.2%      0.3%      0.3%      0.3%      0.3%      0.4%        0.4%
  Branded Pipeline             0.0%        0.0%      0.0%      0.0%      0.0%      0.0%      0.0%      0.0%        0.0%
ROW Brand (est.)               0.7%        1.0%      0.9%      1.0%      0.9%      1.1%      1.2%      1.2%        1.0%
API/Other (est.)               1.2%        1.2%      1.0%      1.1%      0.9%      0.9%      0.9%      0.9%        1.0%
Total Rest Of World           14.2%       15.3%     14.7%     13.2%     12.9%     13.0%     13.3%     14.2%       14.8%

Total Teva Revenues          100.0%      100.0%    100.0%    100.0%    100.0%    100.0%    100.0%    100.0%      100.0%
Source: Company data, Credit Suisse estimates.




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                            Exhibit 221: : Teva Income Statement Forecast
                            in millions, unless otherwise stated
                                                                                                                                               2010
                                                                                                                          Mar-10       Jun-10       Sep-10       Dec-10
                                                                                   FY 2007      FY 2008      FY 2009       1QA          2QA          3QA          4QE         FY 2010      FY 2011      FY 2012      FY 2013      FY 2014      FY 2015
                                 Net Sales                                          $9,408.0    $11,085.0    $13,899.0     $3,653.0     $3,800.0     $4,250.0     $4,681.8    $16,384.8    $18,817.7    $20,677.0    $21,777.9    $21,737.3    $22,325.6
                                     Cost of sales                                   4,531.0      4,960.0      5,780.0      1,518.0      1,557.0      1,594.0      1,974.0      6,643.0      7,739.3      8,474.4      8,931.2      9,185.2      9,589.6
                                 Gross Profit                                       $4,877.0     $6,125.0     $8,119.0     $2,135.0     $2,243.0     $2,656.0     $2,707.7     $9,741.7    $11,078.4    $12,202.6    $12,846.7    $12,552.1    $12,736.0
                                     S&M expenses                                      355.0      1,814.0      2,641.0       744.0        636.0        742.0         764.3      2,886.3      3,174.9      3,397.1      3,567.0      3,638.3      3,820.2
                                     G&A expenses                                      163.0        669.0        823.0       182.0        189.0        236.0         239.8        846.8        889.1        933.6        980.3      1,029.3      1,080.8
                                 Total SG&A                                         $1,901.0     $2,483.0     $3,464.0      $926.0       $825.0       $978.0      $1,004.1     $3,733.1     $4,064.0     $4,330.7     $4,547.3     $4,667.6     $4,901.0
                                     R&D                                               581.0        786.0        802.0       207.0        217.0        239.0         317.6        980.6      1,242.6      1,466.2      1,495.5      1,525.4      1,556.0
                                 EBITDA                                             $2,899.0     $3,166.0     $4,276.0     $1,107.0     $1,304.0     $1,554.0     $1,507.6     $5,472.6     $6,301.1     $6,979.5     $7,455.3     $7,092.1     $7,093.6
                                     Depreciation (incl above)                         504.0        310.0        423.0       ,105.0       ,103.0        115.0        121.4        444.4        529.3        573.8        651.4        733.0        814.5
                                 Operating Profit (Loss)                            $2,395.0     $2,856.0     $3,853.0     $1,002.0     $1,201.0     $1,439.0     $1,386.1     $5,028.1     $5,771.9     $6,405.7     $6,803.9     $6,359.1     $6,279.1
                                     Interest expense                                 (249.0)      (201.0)      (230.0)       (41.5)       (40.8)       (42.4)       (43.2)      (167.9)      (149.5)      (139.3)      (112.3)      (112.3)      (112.0)
                                     Interest income                                   136.0        127.0         58.0         14.5         16.8         30.5          6.0         67.8         28.6          7.7         20.4         46.6         71.1
                                     Others, amortization                               71.0          4.0        (38.0)         0.0         (1.0)       (36.1)        (7.5)       (44.6)        (4.9)         0.0          0.0          0.0          0.0
                                 Financial Expenses,net                               ($42.0)      ($70.0)     ($210.0)      ($27.0)      ($25.0)      ($48.0)      ($44.6)     ($144.6)     ($125.8)     ($131.6)      ($91.9)      ($65.7)      ($40.9)
                                 Pretax Income                                      $2,353.0     $2,786.0     $3,643.0      $975.0      $1,176.0     $1,391.0     $1,341.5     $4,883.5     $5,646.0     $6,274.1     $6,712.0     $6,293.3     $6,238.2
                                     Provision for Income taxes                        397.0        286.0        577.0       136.0         183.0        207.0        206.6        732.6        903.4      1,066.6      1,208.2      1,195.7      1,247.6
                                     Share in profits of associated companies, n        (3.0)        (1.0)       (33.0)       (8.0)         (9.0)         0.0                     (17.0)
                                     Minority Interests, net                            (1.0)        (6.0)        (4.0)       (1.0)         (3.0)        (2.0)        (2.0)        (8.0)        (8.0)        (2.0)        (2.0)        (2.0)        (2.0)
                                     Net Income (Loss)                               1,952.0      2,493.0                    830.0         981.0      1,182.0      1,132.9      4,125.9      4,734.7      5,205.5      5,501.9      5,095.6      4,988.6
                                     Add back convertible interest                         0           46           43          11            11           11           11         44.0          7.2            0            0            0            0
                                 Adjusted Net Income (Loss)                         $1,952.0     $2,539.0     $3,072.0      $841.0        $992.0     $1,193.0     $1,143.9     $4,169.9     $4,741.8     $5,205.5     $5,501.9     $5,095.6     $4,988.6
                                 Average Shares (Diluted)                              830.3        836.8        913.0       921.0        921.0        921.0        921.0         921.0        911.5        911.5        911.5        911.5        911.5
                                 Earnings Per Share                                    $2.35        $3.03        $3.36       $0.91        $1.08        $1.30        $1.24         $4.53        $5.20        $5.71        $6.04        $5.59        $5.47
                                 Cash Dividend per share                               $0.42        $0.53        $0.65       $0.19        $0.18        $0.19        $0.19         $0.75        $0.81        $0.83        $0.85        $0.87        $0.89

                                 Margin Analysis
                                 Gross margin                                         51.8%        55.3%        58.4%        58.4%        59.0%        62.5%        57.8%        59.5%        58.9%        59.0%        59.0%        57.7%        57.0%
                                   S&M expenses                                        3.8%        16.4%        19.0%        20.4%        16.7%        17.5%        16.3%        17.6%        16.9%        16.4%        16.4%        16.7%        17.1%
                                   G&A expenses                                        1.7%         6.0%         5.9%         5.0%         5.0%         5.6%         5.1%         5.2%         4.7%         4.5%         4.5%         4.7%         4.8%
                                 Total SG&A as % of sales                             20.2%        22.4%        24.9%        25.3%        21.7%        23.0%        21.4%        22.8%        21.6%        20.9%        20.9%        21.5%        22.0%
                                 R&D % sales                                           6.2%         7.1%         5.8%         5.7%         5.7%         5.6%         6.8%         6.0%         6.6%         7.1%         6.9%         7.0%         7.0%
                                 Operating margin                                     25.5%        25.8%        27.7%        27.4%        31.6%        33.9%        29.6%        30.7%        30.7%        31.0%        31.2%        29.3%        28.1%
                                 Pre-tax margin                                       25.0%        25.1%        26.2%        26.7%        30.9%        32.7%        28.7%        29.8%        30.0%        30.3%        30.8%        29.0%        27.9%
                                 Tax rate, effective                                  16.9%        10.3%        15.8%        13.9%        15.6%        14.9%        15.4%        15.0%        16.0%        17.0%        18.0%        19.0%        20.0%
                                 Net margin                                           20.7%        22.9%        22.1%        23.0%        26.1%        28.1%        24.4%        25.5%        25.2%        25.2%        25.3%        23.4%        22.3%
                                 DPS as a % of EPS                                    17.7%        17.3%        19.2%        20.6%        16.8%        14.9%        15.3%        16.6%        15.6%        14.5%        14.1%        15.6%        16.3%

                                 Year/Year Changes
                                 Sales                                                             17.8%        25.4%        16.1%        11.8%        19.7%        23.1%        17.9%        14.8%         9.9%         5.3%        (0.2%)        2.7%
                                 Gross profit                                                      25.6%        32.6%        16.2%        12.8%        28.6%        21.5%        20.0%        13.7%        10.1%         5.3%        (2.3%)        1.5%
                                   S&M expenses                                                   411.0%        45.6%        24.8%        (0.8%)       12.1%         3.0%         9.3%        10.0%         7.0%         5.0%         2.0%         5.0%
                                   G&A expenses                                                   310.4%        23.0%        (7.1%)       (4.1%)       11.3%        10.0%         2.9%         5.0%         5.0%         5.0%         5.0%         5.0%
                                 SG&A                                                              30.6%        39.5%        16.9%        (1.6%)       11.9%         4.6%         7.8%         8.9%         6.6%         5.0%         2.6%         5.0%
                                 R&D                                                               35.3%         2.0%        (5.5%)       28.4%        22.6%        45.0%        22.3%        26.7%        18.0%         2.0%         2.0%         2.0%
                                 Operating profit                                                  19.2%        34.9%        21.3%        22.4%        44.3%        32.1%        30.5%        14.8%        11.0%         6.2%        (6.5%)       (1.3%)




                                                                                                                                                                                                                                                            13 December 2010
                                 Net income                                                        30.1%        21.0%        30.4%        31.6%        46.2%        33.5%        35.7%        13.7%         9.8%         5.7%        (7.4%)       (2.1%)
                                 Earnings per share                                                29.1%        10.9%        28.8%        29.7%        45.2%        32.8%        34.6%        14.9%         9.8%         5.7%        (7.4%)       (2.1%)


                            Source: Company data, Credit Suisse estimates.
179
Specialty Pharmaceuticals




                            Exhibit 222: Teva Balance Sheet Forecast
                            in millions, unless otherwise stated
                                                                                                                                                                  2010
                                                                                                                                            Mar-10       Jun-10          Sep-10       Dec-10
                                                                                                     FY 2007      FY 2008      FY 2009       1QA          2QA             3QA          4QE         FY 2010      FY 2011      FY 2012      FY 2013      FY 2014      FY 2015
                                   Current Assets
                                   Cash and Cash Equivalents                                           1,488.0      1,854.0      1,995.0      2,356.0      4,854.0           935.0      1,347.0      1,347.0      1,216.9      3,247.5      7,433.2     11,347.8     13,498.3
                                   Short term investment                                               1,387.0         53.0        253.0        337.0         24.0            21.0         21.0         21.0         21.0         21.0         21.0         21.0         21.0
                                   Accounts Receivable, net                                            3,546.0      4,653.0      5,019.0      5,136.0      4,985.0         5,228.0      5,387.2      5,387.2      5,732.2      6,514.7      6,563.2      6,551.0      6,728.3
                                   Inventories, net                                                    2,440.0      3,396.0      3,332.0      3,244.0      3,078.0         3,862.0      3,893.9      3,893.9      4,186.2      4,411.3      4,526.8      4,655.5      4,860.5
                                   Prepaid expenses and other current assets                             998.0      1,470.0      1,542.0      1,538.0      1,502.0         1,813.0      1,872.7      1,872.7      1,955.4      2,067.7      2,177.8      2,173.7      2,232.6
                                     Total Current Assets                                             $9,859.0    $11,426.0    $12,141.0    $12,611.0    $14,443.0       $11,859.0    $12,521.8    $12,521.8    $13,111.6    $16,262.2    $20,722.0    $24,749.0    $27,340.5

                                   Long-term assets
                                   Long term investments and receivables                                 632.0        425.0        534.0        665.0        628.0           680.0        680.0        680.0        680.0        680.0        680.0        680.0        680.0
                                   Property plant and equipment, net                                   2,515.0      3,699.0      3,766.0      3,737.0      3,622.0         4,228.0      4,340.7      4,340.7      4,752.3      5,212.3      5,649.9      6,003.7      6,305.4
                                   Identified intangible assets, net                                   1,919.0      4,581.0      4,053.0      3,872.0      3,639.0         5,881.0      6,124.8      6,124.8      5,697.8      5,280.8      4,865.8      4,482.8      4,099.8
                                   Goodwill                                                            8,407.0     12,297.0     12,674.0     12,563.0     12,223.0        15,569.0     15,569.0     15,569.0     15,569.0     15,569.0     15,569.0     15,569.0     15,569.0
                                   Deferred charges and other assets                                      80.0        492.0        642.0        603.0        630.0           819.0        842.7        842.7        879.9        930.5        980.0        978.2      1,004.7
                                   Total Assets                                                      $23,412.0    $32,920.0    $33,810.0    $34,051.0    $35,185.0       $39,036.0    $40,079.0    $40,079.0    $40,690.6    $43,934.8    $48,466.6    $52,462.6    $54,999.4
                                   LIABILITIES AND SHAREHOLDERS' EQUITY
                                   Current liabilities
                                   Short-term debt and current maturities of long term liabilities     1,841.0      2,906.0      1,301.0      1,974.0      1,946.0         2,408.0      2,415.5      2,415.5      1,076.3      1,076.3      1,076.3      1,076.3      1,076.3
                                   Sales reserves and allowances                                       1,733.0      2,708.0      2,942.0      3,006.0      2,978.0         3,348.0      3,348.0      3,348.0      3,348.0      3,348.0      3,348.0      3,348.0      3,348.0
                                   Accounts payable and accruals                                       1,383.0      2,244.0      2,680.0      2,671.0      2,647.0         2,514.0      2,812.3      2,812.3      2,864.2      3,018.3      3,181.0      3,271.4      3,415.5
                                   Other current liabilities                                             414.0        623.0        679.0        692.0        611.0         1,053.0        936.4        936.4        977.7      1,033.8      1,088.9      1,086.9      1,116.3
                                    Total Current Liabilities                                         $5,371.0     $8,481.0     $7,602.0     $8,343.0     $8,182.0        $9,323.0     $9,512.1     $9,512.1     $8,266.3     $8,476.5     $8,694.2     $8,782.6     $8,956.1

                                   Long-term liabilities
                                   Deferred income taxes                                                 459.0      1,723.0      1,741.0      1,713.0      1,686.0         2,330.0      2,330.0      2,330.0      2,330.0      2,330.0      2,330.0      2,330.0      2,330.0
                                   Other taxes and long term payables                                    326.0        621.0        727.0        675.0        712.0           738.0        738.0        738.0        738.0        738.0        738.0        738.0        738.0
                                   Employee related obligations                                          149.0        182.0        170.0        174.0        171.0           199.0        199.0        199.0        199.0        199.0        199.0        199.0        199.0
                                   Senior notes and loans                                              1,914.0      3,654.0      3,494.0      3,416.0      5,050.0         4,726.0      4,726.0      4,726.0      4,070.0      3,070.0      3,070.0      3,070.0      1,637.0
                                   Convertible senior debentures                                       1,433.0      1,821.0        817.0         47.0         21.0            14.0         14.0         14.0         14.0         14.0         14.0          0.0          0.0
                                    Total Long-Term Liabilities                                       $4,281.0     $8,001.0     $6,949.0     $6,025.0     $7,640.0        $8,007.0     $8,007.0     $8,007.0     $7,351.0     $6,351.0     $6,351.0     $6,337.0     $4,904.0

                                   Shareholders' equity
                                   Ordinary Shares                                                        46.0         48.0         49.0         49.0         49.0            49.0         49.0         49.0         49.0         49.0         49.0         49.0         49.0
                                   Additional paid-in capital                                          8,254.0     11,673.0     12,880.0     13,035.0     13,139.0        13,178.0     13,178.0     13,178.0     13,178.0     13,178.0     13,178.0     13,178.0     13,178.0
                                   Retained Earnings                                                   5,041.0      5,191.0      6,662.0      7,210.0      7,843.0         8,726.0      9,579.9      9,579.9     13,093.4     17,127.3     21,441.4     25,363.0     29,159.3
                                   Accumulated other comprehensive income                              1,365.0        390.0        555.0        280.0       (779.0)          639.0        639.0        639.0        639.0        639.0        639.0        639.0        639.0
                                   Tresury Shares                                                       (982.0)      (924.0)      (924.0)      (924.0)      (924.0)         (924.0)      (924.0)      (924.0)    (1,924.0)    (1,924.0)    (1,924.0)    (1,924.0)    (1,924.0)
                                     Total Shareholders' Equity                                      $13,724.0    $16,378.0    $19,222.0    $19,650.0    $19,328.0       $21,668.0    $22,521.9    $22,521.9    $25,035.4    $29,069.3    $33,383.4    $37,305.0    $41,101.3
                                   Non Controlling Interest                                               36.0         60.0         37.0         33.0         35.0            38.0         38.0         38.0         38.0         38.0         38.0         38.0         38.0
                                     Total Liabilities and Shareholders' Equity                      $23,412.0    $32,920.0    $33,810.0    $34,051.0    $35,185.0       $39,036.0    $40,079.0    $40,079.0    $40,690.6    $43,934.8    $48,466.6    $52,462.6    $54,999.4

                            Source: Company data, Credit Suisse estimates.




                                                                                                                                                                                                                                                                                 13 December 2010
180
Specialty Pharmaceuticals




                            Exhibit 223: Teva Cash Flow Statement Forecast
                            in millions, unless otherwise stated
                                                                                                                                                  2010
                                                                                                                             Mar-10      Jun-10          Sep-10       Dec-10
                                                                                      FY 2007      FY 2008      FY 2009       1QA         2QA             3QA          4QE        FY 2010      FY 2011      FY 2012      FY 2013      FY 2014      FY 2015
                            Statement of Cash Flows
                            Cash From Operating Activities
                            Net Income (Loss)                                          $1,952.0      $615.0      $2,004.0      $714.0      $800.0        $1,052.0     $1,028.9     $3,594.9     $4,251.7     $4,790.5     $5,088.9     $4,714.6     $4,607.6
                            Adjustments to Net Income
                              Depreciation and ammortization                              504.0        490.0        908.0       235.0       233.0           259.0        234.9        961.9        961.1        990.8      1,066.4      1,116.0      1,197.5
                              Stock based compensation                                     67.0         63.0         54.0        18.0        23.0            18.0          0.0         59.0          0.0          0.0          0.0          0.0          0.0
                              Decrease (increase) in working capital items               (854.0)        76.0        445.0       (85.0)     (132.0)          (57.0)       (69.2)      (343.2)      (626.6)      (909.7)       (56.3)       (24.0)      (267.7)
                              Other items, net                                            144.0      1,987.0        (38.0)        4.0        30.0           (78.0)         0.0        (44.0)         0.0          0.0          0.0          0.0          0.0
                            Net Cash From Operations                                   $1,813.0     $3,231.0     $3,373.0      $886.0      $954.0        $1,194.0     $1,194.6     $4,228.6     $4,586.2     $4,871.6     $6,098.9     $5,806.6     $5,537.4

                            Cash From Investing Activi