2010 Global Biotechnology Sector Preview

Expect a Positive 2010 For Biotech

�� Expect large-caps to benefit from several thematic drivers in 2010
In our view, resolution of US healthcare reform is likely to benefit biotech with
volume increases, a moderate FOB bill and limited cost cutting. We also view the
regulatory environment post HC reform as benign. Additionally, valuations seem
attractive, as the sector trades at the lowest premium to the S&P since the biotech
bubble burst in 2001, despite strong double-digit EPS growth in the low teens.

�� After big 2009; Small/Mid-caps to trade on fundamentals and newsflow
We believe fundamentals will drive the small/mid-cap space in 2010 following a
bullish 2009 and an oversold 2008. Among our US covered names, we look to
VRTX (phase III telaprevir data) and HGSI (filing and possible regulatory
approval for Benlysta) as names with key catalysts during the year.

�� M&A and licensing deals key focus of sector as well
We expect the acceleration of Pharma/biotech M&A in 4Q09 to continue. We
view HGSI, VRTX, BIIB, and OSIP as potential M&A targets in our US coverage
universe, as well as Basilea, Crucell, and Elan in the EU. We believe pipeline gaps
will continue to drive M&A in the sector, with biotech filling the void.

�� 2010: top picks for the biotechnology sector
We view Gilead, benefiting from pipeline news-flow and a growing HIV franchise,
and Celgene, benefiting from greater worldwide Revlimid adoption, as the best
positioned names among large-caps. Alexion is our top pick in US small/mid-cap
biotech, with Soliris growth underpinning outperformance. In Europe, we view
Basilea as oversold, with Toctino more than underpinning current valuation.

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