Key Issues Impacting the USA Animal Health Market in 2011

1. Key Issues Impacting the USA Animal Health Market in 2011 Presentation to the Generic Animal Drug Alliance Fountain Agricounsel, LLC January 31, 2011

2. Background • Bob Fountain & Duane Thurman • Univ. Penn (B.A.) & Wharton (MBA) • Merial – Australia & W-W Bus. Devel in NJ • Pfizer – Japan/Asia; Africa/Mid-East; USA • Fountain Agricounsel: 1992 • M&A • Management Consulting – 200 clients • Industry Reports • Weekly Newsletter

3. Compan. Anim. Market: Strengths - 1 • The incredible market for flea & tick products, vaccines, NSAID’s • Animal health market is recession resistant • Human-animal bond • Great margins • Strong branding, consumer market • Market discipline being shown on generic pricing • Butler-Schein, MWI, and Webster have 75% of the C.A. veterinary market

4. Compan. Anim. Market: Strengths - 2 • Wal-Mart poised to make a major play in animal health - Watch Central Life Sciences and United Pet • Idexx and VCA-Antech will continue to dominate the diagnostic market • Increased participation of private equity investors • High valuations for acquisitions (eg. Dechra and Dermapet) • Companion animal divisions getting more support than food animal divisions • Mandated rabies and equine vaccines • Better compliance with monthly treatments, novel drug delivery

5. Compan. Anim. Market: Weaknesses - 1 • The economy - Unemployment will continue to be a problem - Watch out for many Municipal Bond failures - Drug company stock prices will remain weak • Consolidation will bring job losses - particularly sales reps and staff positons • Financial sensitivity of equine market, up-scale boarding/training, referral hospitals, and aquatics • Few un-met product needs • Lack of R&D - particularly discovery - most spending is in “D”

6. Compan. Anim. Market: Weaknesses - 2 • Regulatory delays - New Chemical Entities & Generics • Lack of coordination of the FDA, USDA, and EPA • Declining number of attractive acquisition candidates - increasing in value • Market development saturation - flea/tick, heartworm, NSAIDs • Animal health is orphan child to human pharma parents • Lack of market development success - eg. obesity, behavior modification, cancer • Veterinarians are marking up prices too high - more profit than to suppliers

7. Compan. Anim. Market: Weaknesses - 3 • Veterinarians and Vet Technicians have significant lack of commercial training • Distributors not sure with whom to align themselves - pioneers or generics • To many players in the accessory market • Shortage of veterinarians • Tier 2 and 3 players can’t keep pace with tier 1 competitor’s sales, marketing, tech. service resources & investments • Many tier 2 and 3 companies have narrow product lines

8. Compan. Anim. Market: Opportunities - 1 • The economy - On the rebound - Dow Jones will hit 14,000 (+15%) • Generics - Fipronil - Sergeants, Virbac - 8 participants? - Chewable carprofen - Clavamox - International markets first - Generic Animal Drug Alliance: Improved regulatory approval time for generics • Consumer market • Geriatric market products

9. Compan. Anim. Market: Opportunities - 2 • Growth of the OTC market - pet superstores & mass • Licensing of emerging technologies • Geriatric market - obesity, cancer, diabetes, arthritis • Increased compliance - home delivery • E-commerce, catalogs • Mandated product divestments - anti-trust • JV’s with API players in Japan, China and India • Vet diverters will be hurt as Bayer and Merial go OTC • New, proprietary nutraceuticals • Consolidation - many emerging and tier 2 companies still independent

10. Compan. Anim. Market: Opportunities - 3 • Product development - extending life cycles with combos, claims, novel drug delivery • Better communication with pet owners - eg. Vet Street • Pet containment - regulations • Pet insurance • Needle-less injectors • Enormous use of human pharmaceuticals off-label - get AH claims? • Taking human pharma drugs into animal health • International markets

11. Compan. Anim. Market: Threats - 1 • Pioneer companies will be the generic market leaders - do not require ANADA’s • Animal activists - eg. de-clawing • Pharmacy compounders • Pet foods with un-approved disease claims - greater regulation • Growth of the OTC market • Vets will lose some of the flea/tick franchise • Distributors relegated to agency support (pioneers going direct) - lower rebates, margins • Anti-trust implications for channel blockers

12. Compan. Anim. Market: Threats - 2 • Vet visits down - but AH sales up • Generic companies relegated to tier 2/3 distributors • Over-crowding of generic markets - disaster for late players • Increased FDA 483 non-compliance cases (particularly steriles) - Teva • Pet abandonment, over-run humane societies • Local pet stores facing enormous challenges • Heartworm products could go OTC • Mass merchandisers (Target) and drug stores (Walgreens) filling pet prescriptions

13. Food Anim. Market: Strengths • The USA market for injectable antibiotics, vaccines • Growing world-wide middle class with > disposable income - switching to animal protein • Short life-cycle for poultry production • Genetics & management programs providing better feed conversion • Emergence of the huge integrated producers - buy direct at best prices • Branded products - consumer market • Value-added “ready to serve” presentations • Substitution of capital for labor - eg. automation • Information systems • Genetics

14. Food Anim. Market: Weaknesses • Corn & fuel prices • The recession - hurting high-end beef & organic products • The small producer at a disadvantage • Economics of the dairy market - supply, demand • Huge commodity price and profit swings in the poultry, beef, dairy, and swine markets • Regulatory delays • Regulatory restrictions - eg. Posilac, hormone implants

15. Food Anim. Market: Opportunities • Generic products - eg. Naxcel • International markets - export • Key markets - China, Brazil, India • Better informed consumers - nutrition & health conscience • Sophisticated hedging contracts • Vertical and horizontal integration - capturing the value chain • Distributors targeting integrated producers - Dairy and cow-calf market still fractionated • More meals eaten in restaurants - working couples

16. Food Anim. Market: Threats • Disease outbreaks - Avian influenza, Mad-Cow Disease • Non-tariff import barriers - protection of local producers • Labor availability & increased litigation • Animal welfare - eg housing • Animal activists - vegans • Environmental issues - effluent, waste water, zoning • Fishing industry restrictions & supply • Anti-Trust - Producers, Processors • Distributor’s margins: agency agreements, lower rebates • Lower farm subsidy payments • Seasonal swings and round-abouts • Potential loss of medicated feed additive growth promotants - Issue of exports with these products in USA animals - Issue includes Posilac and hormone implants

17. Success Factors for A.H. Generic Companies – Original List • Strong regulatory skills wwith sound patent/legal planning & execution • High quality in-house formulation, R&D, and manufacturing know-how • Being first or second to market with a generic copy of the pioneer • Strong marketing strategy with effecctive distribution • Adequate capital and fiscal patience

18. Success Factors for A.H. Generic Companies – New Issues • Be a pioneer and create your own fighting brand • Non-pioneers will do better in the food animal market • Let channel partners do the OTC companion animal market • Exhibit price discipline • Brand your own products • Forget medicated feed additives

19. Success Factors for A.H. Generic Companies: New Issues - 2 • Develop NADA’s from ANADA’s – “Cascade” • Let someone else do the manufacturing – little value-added profit, filled with demons • Beware of steriles • Go to international markets first – Bimeda, Bomac, Norbrook, Sogeval, Virbac, Vetoquinol • Target human products • Avoid private labels

20. Success Factors for A.H. Generic Companies: New Issues - 3 • Be a virtual company like Putney – few assets • Acquire or license product rights • Be a marketing partner for the API companies • Consider vaccines & diagnostics • Access mandated divested products • Sell your company to a pioneer

21. Conclusions - 1 • This is the “dawn of the bull market for A.H. generics” • Pioneer companies will protect their franchises, extend product life cycles, and will develop generic divisions – and acquire stand-alone generic A.H. companies • Tumultuous times for I.P. litigation • Difficult times for late entry generics • Distributors face an awkward scenario – pioneers vs. branded generics

22. Conclusions - 2 • More consolidation: AH companies, distributors, and vet clinics • Vets will face huge competition from mass merchandisers and pet specialty • Fewer new chemical entities - research • Novel drug delivery – development • Compliance is the key issue fo growth • Pet food companies diversify into A.H.

23. Conclusions - 3 • Flea & Tick Market – Price erosion, OTC lowers eroades vet market, market saturation? • Growth of diagnostics and vaccines – no generics • Unchartered waters for generics via EPA and USDA • Tighter targeting of generic product lines and fewer generic A.H. companies • Growing alliances with API suppliers and sterile manufacturers

24. Conclusions - 4 • Key to success is to extend product life cycles • Consolidation makes it difficult for the small generic players, with narrow product lines • Animal health products are recession resistant • Generic products will out-sell current patented products by 2020 • More A.H. generics will be sourced from human pharma distributors • Only 4 ANADA’s issued in 2010

25. Comp. Animal Key Transactions - 1 Buyer Seller Bayer, BIAH, Elanco, Novartis Merial/Intervet-SPAH Wind Point Partners Bamboo (Munchkin), Doskocil (Petmate) Sergeants Sumitomo - Fipronil & IGR’s Pfizer Synbiotics Kohlberg, Kravis, Roberts Del Monte Foods Bayer Piedmont’s chewable technology Bayer Bomac Dechra Dermapet Nestle Waggin’ Train (VMG Partners) Ceva Sante Animale Summit VetPharm (Sumitomo) Irving Place Capital Pet Supplies “Plus”

26. Comp. Animal Key Transactions - 2 Buyer Seller AHII/Walco (Others) PVPL Radio Systems Drinkwell (Veterinary Ventures) VCA Antech Pet DRx Procter & Gamble (IAMS) Natura Pet Products Webster VetSource (< 50%) Sanofi-Merck Intervet/Schering-Plough Elanco Pfizer - EU Vaccine & AH assets Spectrum/United Pet LitterMaid PBI Gordon Lambert Kay Virbac Ft. Dodge Products in Australia Henry Schein/NLS Butler Animal Health

27. Selected Food Animal Transactions Buyer Seller U.S. AgBank and Co-Bank Merger Seaboard Corp Butterball, LLC Pfizer Alpharma (King) CitiVenture Huvepharma (38%) Boehringer Vetmedica Fort Dodge - Cattle Vaccine Assets Goldman Sachs Michael Foods Inc (Thomas H. Lee) Novus Albion Labs

28. Key Transaction Issues • Consolidation is a key to growth - external vs. internal • Strategic actions vs. buying market share • Growth imperative - investing in known technologies > risk of R&D (10% success?) • Anti-trust issues only with the mega deals - Spin-offs have been very profitable - huge multiples in bidding auctions • Winners have cash - credit still tight • Buyers should not over-pay for LRP projections - need to focus on trailing EBITDA

29. The $Billion Players – 2010 Pro-Forma - Merial/Intervet $5.0 - Pfizer $3.5 - Bayer $1.6 - Elanco $1.3 - Novartis $1.2 - Boehringer $1.2 - Idexx $1.1 Butler-Schein, MWI, and Webster control 75% of the vet channel, companion animal market

30. Initial Strong Results for 2010 CompanyGrowth MWI 31% Neogen 18% Abaxis 18% Webster 17% Elanco 15% Virbac 15% Novartis 10% Phibro 10% Pet-Med 9% Vetoquinol 5% 9 months: Butler/Schein 225%, Pfizer 40%, Intervet/SPAH 9%, Bayer 9%, Idexx 8%, Merial 4%, VCA 4%

31. - Abaxis - Abbott - Addison - Andover - American AH - Aspen-Bio - Bimeda - Bioniche - Covidien - Dechra - First Priority - Heska - Imulan - Janssen - Lloyd - Luitpold - Med-Pharmex - Neogen - Norbrook - Novus - PBI Gordon Targets for Consolidation - 1

32. - Pet-Ag - Putney - Sergeants - Sogeval - Synbiotics - Teva - Velcera - Vetcentric - Vetoquinol - Virbac - VetSource - Vet Street Distributors - Agri-Labs - Bradley-Caldwell - Clipper - Durvet, - Penn-Vet - Mid-West Vet - Vedco - Victor Targets for Consolidation - 2

33. Wrap Up • Thank you for inviting Fountain Agricounsel to make this presentation • We admire the work of GADA and feel that significant progress has been made on achieving your objectives • Let us know if we can be of assistance • Further questions?