Watson, Teva, Pfizer: Reviewing The Current Status of The Lipitor Genericization Process These Tails May Grow Fat

September 29, 2010
Aaron (Ronny) Gal, Ph.D. (Senior Analyst) • ronny.gal@bernstein.com • +1-212-756-4208

Tim Anderson, MD (Senior Analyst) • tim.anderson@bernstein.com • +1-212-407-5901
Watson, Teva, Pfizer: Reviewing the Current Status of the

Lipitor Genericization Process; These Tails May Grow Fat
9/28/2010 TTM EPS P/E

Closing Target Rel.
Ticker Rating CUR Price Price Perf. 2009A 2010E 2011E 2009A 2010E 2011E Yield
WPI M USD 43.75 46.00 10.7% 3.04 3.37 3.89 14.4 13.0 11.2 NA
TEVA M USD 53.61 58.00 -4.1% 3.37 4.62 5.44 15.9 11.6 9.9 1.4%
PFE M USD 17.43 19.00 -2.1% 2.02 2.25 2.36 8.6 7.7 7.4 4.1%
SPX 1147.70 61.70 83.68 96.04 18.6 13.7 12.0 2.0%
O – Outperform, M – Market-Perform, U – Underperform, N – Not Rated
Highlights
 The timeline for genericization of Lipitor has been complicated by Pfizer’s strategy to delay late filers
and Ranbaxy’s manufacturing difficulties. Here we review the situation and comment on the potential
impact on our coverage companies, notably Watson, Teva, and Pfizer.
 Pfizer strategy of delaying subsequent entrants appears to be partially working. Pfizer settled with
early challengers Ranbaxy and Watson (Arrow) for November ‘11 market entry (Teva can enter May
'12). However, it has sued most subsequent filers on late patents expiring ’17 with intent to leverage
delays built into the system (30m stays, court’s turnaround time) to extent the period of limited
competition, maximizing Lipitor’s tail revenue. Assuming November ’11 launch by Ranbaxy/WPI, we
expect Teva to enter May ’12 but others’ entry may be delayed toward year end 2012 or 2013.
U.S. Pharmaceuticals/Specialty
 First filer Ranbaxy compliance issues exacerbate and add ambiguity to the situation. The FDA
found Ranbaxy falsified data submitted out of its Paonta Sahib plant and the company is currently
undergoing FDA investigation which includes halt to review of all submissions out of Paonta Sahib. It
is thus possible that Ranbaxy will be unable to launch its generic Lipitor in November ’11. As Ranbaxy
is first filer and this is a pre-MMA submission (no exclusivity triggers), entry of all other generics may
be held up by Ranbaxy's delay with the exception of Watson (the authorized generic). Other generic
filers are acutely aware of the possibility of further delay and may seek to invalidate the Ranbaxy ANDA,
opening the door for early entry.
 There appear to be three possible outcomes:
 The highest likelihood is that Ranbaxy will be able to launch generic Lipitor (fully or partially) on
time. This would require some sort of resolution of a very challenging regulatory situation (Ranbaxy
violated an honor system). However, (i) Ranbaxy will do all it can to resolve the issue (we see the
recent departure of Ranbaxy CEO as related), (ii) a solution is best for the public wallet and (iii) may
also be organizationally better for FDA (avoids lawsuits and negative attention). We can see a
compromise solution like transferring the application to a new manufacturing site as possible.
 A less likely possibility is that Ranbaxy is delayed holding other generics off. This is the most
likely result if Ranbaxy can’t launch. In this scenario, Watson will launch its authorized generic
November ’11 and the market will be split between the brand and AG until the Ranbaxy situation is
resolved.
See Disclosure Appendix of this report for important disclosures and analyst certifications.
September 29, 2010
 The least likely scenario is that Ranbaxy ANDA file is disqualified being of insufficient quality
(as the result of potential fraud). While uncommonly used, the Hatch Waxman law does provide for
ANDA filing invalidation in cases of fraud or application of insufficient quality. If Ranbaxy ANDA is
invalidated, the exclusivity is lost and it is likely Teva, Watson (and potentially Apotex) will launch in
June 2011 (Teva was not sued on later patents, Watson can launch with any other generic).
 More clarity to emerge over the next few months. Ranbaxy is first to file on Aricept and is due to
enter the market on 11/25/10. FDA has so has not granted the company full approval and if Ranbaxy
cannot launch due to manufacturing issue a similar situation will ensue and require resolution. We will
thus have more clarity of FDA's approach to the issue by YE10.
 Quantifying the impact
 Watson agreement with the Arrow shareholders provides it with only moderate economics if Ranbaxy
launches November ’11 (~20c for the full 3Q11-4Q12 period, although it will book close to $1.20).
The real home run for Watson would be if Ranbaxy application bottle-necks other generics. In this
case WPI will generate additional 44c in EPS in EPS contribution per quarter ($250, 5% of
capitalization by YE2012). Early entry by Teva/Apotex will drop its earning to 12c.
 Teva is a net gainer from Pfizer's effort to delay late filers. It will likely make ~17c of additional EPS
if Ranbaxy launches on time. Its economics will be delayed if it can't launch and invalidation of the
Ranbaxy ANDA will shift the impact two quarters earlier and raise it to 30c+).
 Our current Pfizer estimates (and consensus) assume generic entry by Ranbaxy in November 2011. If
Ranbaxy were to be delayed in coming to market until, say, the end of 2012 - meaning the only generic
would then be the authorized generic - our 2012 EPS estimate for PFE would rise by around ~8%.
Conversely, if generics were to launch in June 2011 (earlier than we currently model), our 2011 EPS
estimate would lower by around ~3%. Either way, neither later-than-expected nor earlier-than-
expected generic entry would substantially change the investment case for Pfizer, in our view.
 A delay in generic Lipitor launch may have broader implication. Further delays in entry of Lipitor
generics to the US market will cost the US system ~$4.5B/year (fully branded vs. fully genericized) and
may put the drug industry in unfavorable light (Pfizer using loopholes to delay competition, Ranbaxy
delaying others’ entry after being caught falsifying data). However, the major culpability lies with poorly
written provisions of the HW act and we suspect additional round of calls to reform is likely.
Investment Conclusion
When it acquired Arrow, Watson chose not to acquire most of the Lipitor earning stream. It will thus have
moderate economic benefit from the drug (~20c) unless Ranbaxy has difficulties launching the product. In
which case, Watson will enjoy very substantial upside. We thus tend to think of Lipitor as a 'free option' for
the company. Attractive, but not enough to change the thesis
Teva's CFO needs to send some flowers to 42nd Street as his company is a clear beneficiary of Pfizer's
delay strategy gaining. Teva will gain some 10c-20c in additional 2012 earnings if Pfizer is successful in
delaying other generics from entering the market. A similar situation is likely to occur in 2011 with Effexor
XR where we see similar potential (10c-20c).
For Pfizer, our base case assumption is that Lipitor faces full generic competition by Ranbaxy in November
2011. If this were to get delayed by a year in a better-case scenario (but with an authorized generic still
coming on time), or come five months earlier in a worse-case scenario, the impact on PFE share price
would likely be modest in either direction. In our view, neither scenario would change the overall
investment case with Pfizer much.
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September 29, 2010
Details
These tails may get fat

The generization of Pfizer flagship drug Lipitor is an important investment controversy for Pfizer, Ranbaxy,
Watson and to a lesser extent for subsequent generic entrant Teva (and later Mylan). The main corporate
actors (PFE, WPI, RNBXY) have largely been guiding investors to the default option of November '11
entry by Ranbaxy and Watson, followed by additional players in May '12 and we believe this is the
outcome most investors are modeling.
There is, however, (i) potential for radically different outcomes if Ranbaxy's troubles with FDA are not
resolved and the company is unable to launch and (ii) potential for period of 'tail' revenue for Pfizer and
early entrants beyond May 2012 if Pfizer is able to slow the entry of at least some of the generic followers
In this note we attempt to provide the background information about the case. We start with review of the
Pfizer strategy to delay generic entry and Ranbaxy's FDA troubles. We then describe the potential outcome
and quantify their impact on key stocks. Last, we comment on broader implication of the Lipitor
generization process.
Pfizer strategy of delaying subsequent entrants appears to be partially working

As a reminder, Pfizer's original patents on Lipitor '893 (expires 3/24/10) and '995 (exp. 6/28/11) were first
challenged by Ranbaxy in early 2003 (before the Medicare Modernization Act, MMA). After extensive
review the courts found the '893 patent valid and the one disputed claim of the '995 patent invalid,
suggesting a March '10 generic entry (or at the latest a June '11 entry).
However, in what we believe is becoming a model for other compounds Pfizer developed a strategy to
delay generic entry. The strategy is based on the willingness of the US patent office to grant patents on
minor inventions, gaps in the Hatch Waxman framework and the delays of the US court system
(i) Pfizer obtained long duration patents on minor aspects of Lipitor and listed them in the orange
book. Late into the lifecycle of Lipitor Pfizer obtained additional patents on the Lipitor formulation ('971,
'105) and its crystalline structure ('156, the latest patent, lasting to 1/8/2017). After the patents were
granted, Pfizer requested FDA to add these patents to the Orange Book. The FDA views its role in the
orange book as custodial and added the patents. The listing of the patents in the orange book does not add
significant procedural delay for existing filers (at the time Ranbaxy, Watson and Teva) but other generic
companies which previously believed they could enter after May '12 with no court proceeding found
themselves having to challenge the new patents and overcome a new set of patents to enter.
(ii) Settlement with first-to-file Ranbaxy. Pfizer reached a global settlement with Ranbaxy under-which
Ranbaxy would launch its generic November 30, 2011 in the US market (five months after what was
expected). As part of the same agreement, it can launch in other O-US market on variable schedule (mostly
before November 11) and it also got the right to enter under license on Lipitor follow-on drug Caduet. Part
of the smarts of the deal is that it did not contain any tangible payment from Pfizer to Ranbaxy. Instead
Ranbaxy received (i) certainty it will not be sued on existing patents (ii) certainty and lawsuit-free entry in
multiple other countries and (iii) Caduet profit stream down the road. Thus it is very difficult for the FTC
to demonstrate any reverse payment from Pfizer to Ranbaxy (see Exhibit 1 for details).
(ii) Agreement with other early filers Arrow and Teva. Arrow and Teva had already challenged Lipitor
at the time of Ranbaxy settlement. They were thus not subject to 30m stays on some late-entry patents and
could (if successful in court) invalidate Pfizer late patents (and thus allow generic entry). However, as
Watson and Teva share with Pfizer an interest in slowing other generics entries, they were willing to sign
agreements with Pfizer. The Arrow (now Watson) agreement allows it to be the authorized generic during
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September 29, 2010
Ranbaxy's six months exclusivity under more attractive economics than typical authorized generic
agreement according to our estimates. The terms of the Teva agreements are undisclosed and we believe it
was a simple case dismissal. Pfizer relinquished any claims against Teva on late patents and the latter
accepted it would launch after the Ranbaxy exclusivity period (presumably May '12).
(iii) Delaying the entry of late filers. The listing of the additional patents led to a rush of challenges by
five other generic companies (Apotex, Mylan, Kudco, Reddy and Actavis). When faced with these late
challenges, Pfizer chose to sue on the latest expiring patent ('156, expires: 1/8/2017). In doing so, it
obtained three advantages: (a) the 30m stays for many of these filers expire late '11 to late '12, eliminating
risk of earlier launch; (b) The '156 patent covers crystalline structures of Lipitor and it is our expectations it
is not a strong patent (the generics filed mostly amorphous forms). However, the case law on polymorphs
is a bit convoluted (some readers may remember the disappearing/reappearing theory of the Paxil case) and
there is an off chance Pfizer will win. (c) The court cases are unlikely to conclude before late '12 and it is
possible small companies may not be willing to launch at risk on such a large drug given (b) keeping prices
high.
Summary: Pfizer's strategy is likely to be successful; the question is really how much. It appears
highly likely Pfizer will extend its product monopoly to November 2011 (we discuss the exception case
below). It is also likely that after the Ranbaxy exclusivity expires in May 2012 competition will be
moderate for the rest of 2012. (i) Teva will certainly enter; (ii) Apotex and Mylan are probably big enough
to take the risk, but (iii) the other three filers may wait for their case to be over, which may take as long as
somewhere in 2013. We note that Pfizer can also settle with the additional generics just before their case
resolves (giving them entry to the market, but keeping the patents valid on the orange book). Using this
strategy, Pfizer could keep the prices in the market above commodity level for years.
Exhibit 1
Lipitor paragraph IV applicants and current status of their legal dispute
30M stay 5,273,995*PE RE40,667 6,126,971 5,686,104 6,087,511 5,969,156
Status Notes
expiry D *PED *PED *PED 6,274,740 *PED
6/28/2011 6/28/2011 7/19/2013 5/11/2015 7/16/2016 1/8/2017
Court of Appeals
FTF, blocks later filers (Except
Ranbaxy Federal Circuit (cafc) Expired Settled Litigated Not sued Not sued Not sued Not sued Not sued
WPI)
06-1179
Delaware District
Watson Settled entry as AG Nov. 30, 2011
Court (dedc) Expired Settled Litigated Not sued Litigated Litigated Not sued Litigated
(Cobalt) or with others, whichever is earlier
1:2007cv0790
Teva settle '995; can enter after
Ranbaxy exclusivity expires or
TEVA Settled Expired Settled Litigated Not sued Not sued Not sued Not sued Not sued
6/28/11 if Ranbaxy ANDA is
disqualified
Apotex not sued on post 6/28/11
Illinois Northern patents; Apotex filed DJ and won,
Litigated Litigated
Apotex District Court (ilndc) 5/4/2011 Discovery Litigated Litigated Not sued Litigated PFE request for reconsideration
(DJ) (DJ)
1:2008cv07231 pending, offers covenant on '971,
'104 (Ashman)
Delaware District
Expire before Expire before
Mylan Court (dedc) 11/1/2011 Discovery Not sued Not sued Litigated Litigated Case in discovery (Stark)
30M stay 30M stay
1:2009cv0441
Delaware District
Expire before Expire before Case really has not progressed
KUDCO Court (dedc) 4/22/2012 Discovery Not sued Not sued Not sued Litigated
30M stay 30M stay (Stark)
1:2009cv00924
Delaware District
Expire before Expire before Bench trial scheduled 12/5/2011
Reddy Court (dedc) 4/26/2012 Discovery Not sued Not sued Not sued Litigated
30M stay 30M stay (Stark)
1:2009cv00943
Delaware District
Expire before Expire before
Actavis Court (dedc) 12/29/2012 Discovery Not sued Not sued Not sued Litigated Case just started (Stark)
30M stay 30M stay
1:2010cv00675
Source: paragraphfour.com; PACER
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September 29, 2010
First filer Ranbaxy compliance issues exacerbate and add ambiguity to the situation
The Lipitor file is likely affected by Paunta Sahib application halt. As a reminder, on September 16, '08
FDA sent Ranbaxy a warning letter noting good manufacturing practices violations in Paunta Sahib and
another facility (Dawas). The violations in Paunta Sahib the violations were particularly severe as they
included falsifying data (e.g. staff signing manufacturing logs was not in the factory the day they
supposedly signed the log). FDA decided not to approve any applications coming out of Paunta Sahib and
announced a shipping ban on 30 products made in the facility. In February '09, the agency decided to apply
a particularly severe regulatory tool called Application Integrity Policy essentially halting all reviews of
data for Paunta Sahib until it is convinced there is no more risk of false data (see the letters at
http://www.accessdata.fda.gov/scripts/warningletters/wlSearchResult.cfm?qryStr=Ranbaxy&Search=Searc
h) and
http://www.fda.gov/downloads/Drugs/GuidanceComplianceRegulatoryInformation/EnforcementActivitiesb
yFDA/ucm118418.pdf).
Ranbaxy has never disclosed if the Lipitor application was out of Paunta Sahib, but we suspect it was for
three reasons
Paunta Sahib is Ranbaxy's largest oral facility, it is thus a natural choice for such a large exclusivity
product
Both Pravachol and Zocor generics are made in Paunta Sahib (we know that from FDA documentation)
and as the chemistry and formulation of the statins are similar, it is likely the product is manufactured there.
Industry contacts believe this is the case
Ranbaxy has multiple options to unblock the application; reasonably one will likely work. An FDA
integrity violation is one of the most severe ones possible and may well take longer than November 2011.
However, Ranbaxy has 2.5+ years to develop contingency plans and a prudent management would
reasonably act on several to ensure the launch.
Ranbaxy may have asked FDA to approve manufacturing out of other sites before the warning letter.
Ranbaxy won its 6-month exclusivity on Lipitor in January 2006. Faced with the need for very substantial
manufacturing capacity during that period, we suspect it asked FDA to approve manufacturing at additional
sites (in similar situation Teva manufactured Zocor in several facilities to meet exclusivity period demand).
It almost certainly asked for approval out of additional sites after the warning letter. If Ranbaxy did
not ask FDA to approve additional sites before September 2008, it almost certainly did so immediately
after. The FDA would thus have 2+ years to approve the product out of alternative site, which we think is a
possibility.
Ranbaxy may have asked and received exception process on Lipitor. The Feb. '09 letter to Ranbaxy
states that "In the case of certain applications, however, the Agency may review and act on an application
prior to completion of the validity assessment in special circumstances where such an action is clearly in the
interest of public health." While not strictly a matter of public health, we see rationale for FDA providing
an procedural exception when a large amount of the public money is at stake (given potential delay if
Ranbaxy can't launch)
In short, it appears there are decent odds Ranbaxy could reach the Market in November 2011. However, all
paths depend on FDA willingness to work with Ranbaxy to approve Lipitor out of its facilities and we are
uncertain FDA will do so. As an aside we note that Ranbaxy cannot selectively waive exclusivity to a
selected partner before its exclusivity is triggered. It may only waive exclusivity to all participants, which it
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September 29, 2010
does not have commercial interest to do (for details on pre-MMA exclusivity waiving policy see:
http://www.fda.gov/ohrms/dockets/dailys/04/july04/070704/04p-0227-pdn0001.pdf).
If Ranbaxy can't launch in November 2011, then exclusivity may remain locked (except an authorized
generic by Watson would still come to market). Under the pre-MMA rules, all other generics must wait
until after the first generic filer completes its exclusivity. Thus if Ranbaxy cannot launch, neither can any
of the other generics who are 'stuck' behind Ranbaxy until it is able to launch. Under pre-MMA rules, the
only other way to trigger exclusivity is to invalidate all the patents protecting Lipitor through the appeal
process. This could take until 2013 and potentially much later as Pfizer is trying hard to keep couple ('971,
'104) of patents 'in reserve' out of litigation and is not suing the generics on them. If it is successful it could
protect the Ranbaxy exclusivity from being triggered dragging the process potentially to 2015 or later. The
situation may appear unreasonable to the reader, but it is legally well-established (the 'cork in the bottle'
problem which was partially fixed in the MMA). It will not be simple to legally undo. Thus, the most
likely outcome if Ranbaxy cannot launch is delay in the introduction of generics to the Lipitor market. This
situation will favor innovator Pfizer, which will remain the only allowed manufacturer of the product and
Watson, its authorized generic, which has the right to sell a no-brand Lipitor starting November 2011
regardless of the Ranbaxy situation.
Alternatively, FDA may reject Ranbaxy's filing. There is one way we are aware of to undo the Ranbaxy
exclusivity. The HW law gives FDA permission to reject an application if "(J) the application does not
meet any other requirement of paragraph (2)(A); or (K) the application contains an untrue statement of
material fact." (FD&C law, section 505J4(j-k). The (2)(A) clause refers to an application which does not
contain enough information for fair evaluation. Thus, if FDA decides there was direct falsification of
Lipitor data or that the falsification of data renders it unable to evaluate Ranbaxy's product, it may reject the
Ranbaxy exclusivity. This is not FDA's preferred choice of pathway, as it will almost certainly be sued by
Ranbaxy (and if Ranbaxy does not Pfizer or Watson may). We note if FDA does not invalidate the
application, it may be sued anyways by other generic filers seeking rejection of the filing.
If FDA decides to reject the Ranbaxy application, the exclusivity is lost (no other generic company is
eligible). In that case, Teva may be able to enter as early as June 2011, although we cannot be sure if its
agreement with Pfizer states otherwise. If Teva enters early Watson can as well, under its agreement with
Pfizer). Other generics are eligible to enter at their 30m stay (although if they do it without prior agreement
with Pfizer, they would do so at risk). Apotex is eligible for immediate entry (30M expiry April 2011),
Mylan is next in November 2011. (for text of the relevant law see:
http://www.fda.gov/RegulatoryInformation/Legislation/FederalFoodDrugandCosmeticActFDCAct/FDCAct
ChapterVDrugsandDevices/ucm108125.htm).
More clarity will emerge over the next six months. An early view on the Lipitor situation might come
from Aricept where the situation is somewhat similar. Ranbaxy was first filer on Aricept and has sole
exclusivity (and it is likely a pre-MMA challenge). Ranbaxy putative entry date is November 25, 2010. In
this case Ranbaxy has tentative approval which should have already converted to full approval. However, it
appears the agency is holding it at 'tentative' state until the manufacturing issues are resolved. A solution to
the Aricept situation if found, may serve as a model for Lipitor.
There are several other potential news on the situation whose likelihood increases over the next few months
and which may also be triggered by FDA action on Aricept. First, FDA may approve Ranbaxy's Lipitor out
of Paunta Sahib or another facility or it action on Aricept may point toward that solution. Second, FDA or
Ranbaxy may provide more information voluntarily. Ranbaxy because the Aricept situation will necessitate
a comment and FDA may need to answer congressional questions on the situation with both drugs. Third,
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September 29, 2010
if Aricept is not launched, other generic companies may file citizen petition asking FDA to reject Ranbaxy's
exclusivity on Lipitor (and do that with enough time to go to court if FDA rejects their petition). Last,
Ranbaxy itself may also sue FDA, if it sees its situation as hopeless.
Summary, likely an on-time entry (with caveats) but watch for alternative scenarios. Ranbaxy is
likely leaving no stone unturned in its effort to ensure FDA approval of its ANDA. It is in FDA
organizational benefit to do so as well and thus we would expect the agency will cooperate with Ranbaxy
on this particular drug (all other solutions involve litigation, cost to the US health care system and/or bad
press). However, it is possible the agency would not be convinced Ranbaxy's generic can be safely
approved. In this case, we are more likely to see substantial delay in generics approval (good for PFE and
WPI). There is also a less likely possibility Ranbaxy's application would be rejected, leading to early of
Teva, WPI and maybe Apotex in June 2011, followed by other generics in late '11-mid '12 (negative for
PFE, somewhat negative for WPI, moderately positive for Teva)
Exhibit 2
Three possible options
Situation Watson Other generics Outcome for Watson

Ranbaxy product is valid and can Arrow shareholders get 85% share
Teva enters May 30, 12
enter the market, company enters Enters Nov. 30, 2011 of post-tax profits up to $250M; than
Others blocked, enter as cases resolve
market Nov. 30, 2011 100% to WPI
Teva may enter 6/28/11 when '995
Enters 11/30/2011 or if Teva Arrow shareholders get 85% share
Ranbaxy product is invalidated expires;
(or others) launch earlier, of post-tax profits up to $250M; than
(ANDA approval removed) others enter as their own case
enters at same time 100% to WPI
resolution/risk tolerance allow
Ranbaxy product is valid but can Arrow shareholders get 50% of post-
Blocked until Ranbaxy exclusivity is
not enter the market by Nov. 30, Enters Nov. 30, 2011 tax profits as long as there are no
triggered
2011 additional competitors
Source: Bernstein estimates and analysis

Quantifying the impact
Watson impact appears moderate under likely scenario but gains if Ranbaxy is delayed. When WPI
acquired Arrow, it was unwilling to pay for the Lipitor revenue stream (it approached the acquisition as a
'fixed budget' situation). It therefore agreed to pay the Arrow shareholders about 85% of the value
generated by Lipitor of a pre-tax basis (Exhibit 3) which the two sides agreed is unlikely to pass $250M
(assuming Ranbaxy launches on time). There were two wrinkles to the agreement (i) Watson created a
balance-sheet reserve from which it would pay Arrow. It would thus be able to book the entire profit from
the product (the Arrow payment will not hit the P&L statement). (ii) the two sides agreed that if Ranbaxy
can't launch, the profit will equally split.
Based on this agreement we estimated Watson's profits from Lipitor under the three scenarios detailed
above (Exhibit 4). The base case assumes Ranbaxy launches on time, Teva enters in May and the rest of
the generics trickle in over the next two quarters. In that case, we estimate Watson will make ~19c from
Lipitor on cash basis to year end 2012 although it will book the full sum on accounting basis ($1.27).
Similar economics are likely if Teva launches early (12c, 80c). In the event Ranbaxy can't enter and all the
generics are delayed Watson will make 44c/quarter in Lipitor profits ($2 if the situation continues to YE12).
This would be a material impact on WPI ($250M in additional net income to YE12, or ~5% of market
capitalization)
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September 29, 2010
Reminder to Teva: send Pfizer legal department some flowers. In discussion with Teva few years ago,
the company expected to have to "give away" Lipitor at cost for couple of quarters in order to keep market
share until the marginal players exit the market. We now see opportunity for Teva to make ~17c from
Lipitor assuming May '12 entry simply as result of limited competition. If it is able to somehow undo
Ranbaxy's stay, we would expect it would do about twice as much ~35c.
Pfizer removed the overhang of a possible 2010 generic Lipitor launch when they settled with Ranbaxy in
June 2008 allowing Ranbaxy to launch its generic in November 2011 instead. If Ranbaxy gets delayed for,
say, one year, the impact to PFE's 2012 EPS would be around +8%. Conversely, if other generics are
allowed to come in early (i.e. June 2011) the impact to PFE's 2011 EPS would be around -3%. Either way,
the investment case with PFE won't have changed much, in our view. Investors should also realize that
PFE loses not only Lipitor, but seven other high margin franchises through 2015.
Exhibit 3
Watson agreement with the Arrow Shareholders
… Arrow Selling Shareholders will... receive certain contingent payments based on the after−tax gross
profits on sales of atorvastatin within the U.S. … from product launch date up to… May 31, 2013...
The… payment amount is dependent upon the existence of generic competition... Should there be no
competing generic product launched… payment… will be calculated as 50% of the post−tax gross profits…
Should there be a competing product … payment… will be… either 85% of the post−tax gross profits or
15% of post-tax gross profits, as defined in the Acquisition Agreement, with total… payments… limited to
$250.0 million…
Source: Watson 10K
Exhibit 4
Impact estimate by company and scenario
Watson Teva Pfizer (Incremental)
3Q11-4Q12 3Q11-4Q12
3Q11-4Q12 3Q11-4Q12 3Q11-4Q12 3Q11-4Q12 3Q11-4Q12
Scenario EPS EPS
Revenue Revenue EPS Revenue EPS
(Economic) (Accounting)
Base Case - Ranbaxy
launches Nov. 2011, 2
generics each with 35% 727 0.19 1.27 243 0.17 0 0.00
share at 70% pricing until
May 2012
Ranbaxy Delayed - Watson
Launches alone Nov. 2011,
2250 2.00 0 0.00 2890 0.21
exclusivity not triggered until
end of 2012
Ranbaxy ANDA
Disqualified - 3 generics
459 0.12 0.80 498 0.35 (1260) (0.09)
launch June 2011 each with
25% share at 50% pricing
Source: Bernstein estimates and analysis. Key assumptions: (i) Lipitor is a $5B product at generic entry, (ii) With 2 generics, each gets 35% share at 70% price at
launch. With three entrants shares are 25% each at 50% price. Share erodes over time. (iii) WPI pays 65% of product revenue to Pfizer.
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September 29, 2010
Summary and thoughts: a delay in Lipitor launch may have broader implication.
The delays cause system cost. Assuming Ranbaxy launches on time, Lipitor will cost the US health care
system ~$4.5B more vs. immediate availability of generic Lipitor in June 2011. The cost divides $2.3B,
$1.6 and $0.6 for the 5m extra exclusivity, Ranbaxy's exclusivity period and the delay in entry of other
generics into the market caused by Pfizer's strategy, respectively (Exhibit 5).
The delays stem from poorly written law. It is tempting to blame Pfizer and Ranbaxy for the additional
system cost. Our view is that the real culpability resides with the Hatch Waxman law (and the legislative
process around it). Congress had multiple opportunities to reform the law incorporating forfeiture
provisions to settlements and apply them to pre-MMA situation. It did not and pharmaceutical companies
are simply maximizing their profits within the rules they were provided.
Time for reform? There is a string of these problematic cases coming up. In addition to Lipitor, we
mentioned Aricept above. In addition we see similar situations developing on Effexor XR, Provigil and
Nexium with a total cost to the system of several billions of dollars. Several generic companies hinted to us
that the Ranbaxy situation is on their legislative agenda. If the Aricept situation is not effectively resolved,
we believe there is possibility the issue will be taken up by Congress.
Exhibit 5
Additional costs health care system from delays in Lipitor launch
450
400
Pfizer branded revenue

350
Cost to public
Cost if Generic
300
250
Additional
exclusivity period
$2.3B Ranbaxy exclusivity
200 period
$1.6B
150
100 Delay of additional

generics
$0.6B
50
0
Dec-11
Dec-12
Aug-11
Oct-11
Aug-12
Oct-12
Apr-12
Sep-11
Nov-11
Jan-12
Feb-12
May-12
Sep-12
Nov-12
Jun-11
Jul-11
Mar-12
Jun-12
Jul-12
Source: Bernstein estimates; Assumptions: Lipitor branded revenue at $5B run rate, price drops by 30% at exclusivity period, 65% from May to September and
82.5% in 4Q12
9
September 29, 2010
Exhibit 6
Watson P&L statement
Annual Annual Annual Annual Annual
2009 1Q10 2Q10E 3Q10E 4Q10E 2010 2011 2012 2013
Distribution revenue 664 221 201 197 193 812 811 867 920
Authorized Generics 46 9 9 7 7 32 12 8 0
Baseline Generics 870 215 215 211 207 849 859 911 941
OC Generics 362 90 97 95 95 398 324 261 239
Paragraph IV 7 8 11 26 36 82 210 193 249
Differentiated 312 106 117 97 97 418 592 672 227
Non product (other) 26 10 10 10 9 39 37 36 35
US Generics 1,623 438 461 446 452 1,796 2,034 2,081 1,692
OUS Generics 106 111 122 129 468 516 557 601
Generic revenue 1,623 544 571 568 581 2,264 2,550 2,638 2,293
Iron Products 142 10 9 13 21 53 70 59 56
Gelnique 13 7 9 10 11 37 46 50 55
Rapaflo 12 9 11 14 18 52 75 88 107
Other urology 95 22 24 26 28 101 124 137 173
Crinone/Prochieve 5 8 11 24 55 72 113
Other Womens Health 4 4 48 104 133
Other brands 132 25 23 23 23 95 90 105 135
Brand royalties 67 19 27 22 22 90 101 104 108
Total branded revenue 461 91 104 117 138 450 609 717 878
Net Revenue 2,572 667 678 662 786 2,793 3,525 3,970 4,222
COGS 1,569 488 486 484 487 1,945 2,196 2,331 2,136
Gross Profit 1,224 369 390 397 425 1,580 1,774 1,891 1,955
SG&A 492 138 157 162 174 631 704 750 793
R&D 197 60 53 63 66 250 283 319 328
Operating Income 536 172 180 172 185 708 787 822 834
Interest Income 5 0 0 0 0 1 1 2 5
Interest Expense (34) (20) (20) (13) (12) (65) (31) (20) (12)
Total Other Income (expense) 10 3 5 5 5 17 19 19 19

Pretax income (pro forma) 516 154 165 164 178 662 775 823 847
Tax provision 195 57 62 60 65 244 287 294 282
Net income (Pro forma) 348 97 103 104 113 418 488 529 566
Pro Forma EPS, diluted $3.04 $0.79 $0.83 $0.84 $0.91 $3.37 $3.89 $4.19 $4.45
Basic weighted avg shares 106 122 122 122 123 122 123 124 125
Diluted weighted avg shares 116 123 124 124 124 124 126 126 127
Source:
10
September 29, 2010
Exhibit 7
Teva model
2008 2009 1Q10 2Q10E 3Q10E 4Q10E 2010E 2011E 2012E 2013E
North America Baseline 3,005 3,233 928 1,045 1,049 1,133 4,155 4,527 4,902 5,093
Specialized generics 214 844 250 233 235 200 919 597 454 412
US Para IV 1,172 1,288 367 382 602 549 1,901 1,749 1,479 757
US Generics 4,392 5,364 1,546 1,660 1,887 1,882 6,974 6,873 6,835 6,262
Copaxone US 1,224 1,917 513 531 583 565 2,192 2,440 2,428 1,900
Azilect US 82 131 41 45 48 51 185 233 275 311
US Branded respiratory 442 568 124 143 169 204 640 850 876 936
Laquinimod - - - - - - - - 70 188
Womens health - 357 79 82 80 84 325 413 425 447
Other branded - - 6 6 6 6 25 76 345 495
North America 6,139 8,337 2,309 2,467 2,772 2,792 10,341 10,883 11,254 10,540
EU generics 1,917 2,195 566 586 568 1,076 2,797 4,285 4,607 4,837
Copaxone O-US 442 454 142 122 129 124 516 493 827 718
Azilect X-US 94 113 36 25 27 28 116 130 142 147
O-US Branded respiratory 330 331 69 78 67 79 293 293 302 317
Europe 2,782 3,093 812 811 792 1,308 3,722 5,201 5,878 6,018
Israel 496 458 144 131 135 97 507 531 563 597
Latin America 729 717 160 193 194 167 714 786 864 951
CEE and other 337 728 229 198 214 278 919 1,175 1,293 1,422
International 1,561 1,903 532 522 544 542 2,140 2,492 2,720 2,969
Total Revenue 11,085 13,899 3,653 3,800 4,108 4,642 16,203 18,576 19,782 19,339
Cost of sales 4,960 5,780 1,518 1,557 1,594 1,934 6,603 7,810 8,353 8,584
Gross Profit 6,125 8,119 2,135 2,243 2,514 2,709 9,600 10,767 11,429 10,756
Operating Expenses
R&D 787 802 207 217 234 278 937 1,120 1,310 1,338
Sales & Marketing 1,550 2,162 616 636 638 682 2,572 2,549 2,428 2,464
Payment to Sanofi 267 479 128 - - - 128 - 105 108
G&A 669 823 182 189 195 245 811 922 894 913
Operating Income (Loss) 2,852 3,853 1,002 1,191 1,447 1,504 5,143 6,176 6,692 5,933
Financial income (expenses), other income (44) (210) (27) (15) (20) (25) (87) (78) (37) 9
Pre-tax income 2,808 3,643 975 1,176 1,427 1,478 5,056 6,098 6,655 5,943
Provision for income taxes 286 577 136 183 222 230 771 960 1,032 1,070
Income before minority interest, associated
companies and add backs 2,522 3,066 839 993 1,205 1,248 4,285 5,138 5,623 4,873
Minority investment, share equity investments
and add backs (6) (37) (9) (12) (12) (12) (45) (60) (75) (113)
Net income $ 2,516 $ 3,029 $ 830 $ 981 $ 1,193 $ 1,236 $ 4,240 $ 5,078 $ 5,548 $ 4,760
Share Count - Basic 780 872 892 895 896 897 895 901 904 906
Share Count - Diluted 837 909 921 921 922 923 922 938 942 944
EPS (Basic) $ 3.22 $ 3.47 $ 0.93 $ 1.10 $ 1.33 $ 1.38 $ 4.74 $ 5.64 $ 6.14 $ 5.25
EPS (Diluted) $ 3.03 $ 3.37 $ 0.91 $ 1.08 $ 1.29 $ 1.34 $ 4.62 $ 5.44 $ 5.89 $ 5.04
Source:
11
September 29, 2010
Exhibit 8
Pfizer Income Statement
$ in millions except per share data Annual Annual Annual Annual Annual Annual Annual Annual
2008A 2009A 1QA 2QA 3QE 4QE 2010E 2011E 2012E 2013E 2014E 2015E
Total Revenue $48,341 $49,934 $16,743 $17,321 $16,732 $17,197 $67,908 $67,220 $61,455 $60,520 $58,917 $59,390
Cost of Goods 7,040 7,673 2,935 2,951 3,346 3,611 12,844 12,839 12,783 12,951 12,962 13,244
Gross Profit 41,301 42,255 13,808 14,370 13,385 13,586 55,064 54,381 48,672 47,569 45,955 46,146
SG&A 14,044 14,667 4,375 4,727 4,600 5,100 18,802 17,802 15,602 14,102 13,402 13,102
R&D 7,488 7,739 2,196 2,182 2,250 2,375 9,003 8,503 7,818 7,618 7,418 7,318
Total Expenses 27,329 29,777 9,742 10,051 10,601 11,466 41,861 40,037 36,596 34,765 33,675 33,457
Operating Income 19,769 19,849 7,237 7,461 6,535 6,111 27,344 28,076 25,252 25,848 25,135 25,726
Other (Income) Expense (772) (448) 210 157 370 345 1,082 763 263 (37) (237) (337)
Amortization of Intangibles (614) 146 26 34 35 35 130 130 130 130 130 130
Restructuring and acquisition-related 143 0 0 0 0 0 0 0 0 0 0 0
Acquisition related in-process R&D 0 0 0 0 0 0 0 0 0 0 0 0
Income Before Tax 21,012 20,157 7,001 7,270 6,130 5,731 26,132 27,183 24,859 25,755 25,242 25,933
Income Taxes 4,623 5,946 2,110 2,301 1,839 1,719 7,969 8,155 7,458 7,727 7,573 7,780
Minority Interests 23 9 9 10 0 0 0 0 0 0 0 0
Net Income $16,366 $14,202 $4,882 $4,959 $4,291 $4,011 $18,144 $19,028 $17,401 $18,029 $17,669 $18,153
EPS (diluted, post-options) $2.42 $2.02 $0.60 $0.62 $0.53 $0.50 $2.25 $2.36 $2.21 $2.37 $2.41 $2.56
Avg. Diluted Shares (mil) 6,750 7,007 8,101 8,072 8,072 8,072 8,079 8,079 7,877 7,602 7,336 7,079
Margin Analysis (% of Revenue)

Cost of Goods 15% 15% 18% 17% 20% 21% 19% 19% 21% 21% 22% 22%
Gross Margin 85% 85% 82% 83% 80% 79% 81% 81% 79% 79% 78% 78%
SG&A 29% 29% 26% 27% 27% 30% 28% 26% 25% 23% 23% 22%
R&D 15% 15% 13% 13% 13% 14% 13% 13% 13% 13% 13% 12%
Operating Margin 43% 40% 43% 43% 39% 36% 40% 42% 41% 43% 43% 43%
Pretax Margin 43% 40% 42% 42% 37% 33% 38% 40% 40% 43% 43% 44%
Tax Rate 22% 29% 30% 32% 30% 30% 30% 30% 30% 30% 30% 30%
Net Margin 34% 28% 29% 29% 26% 23% 27% 28% 28% 30% 30% 31%
Growth Rates (YoY)

Total Revenues 0% 3% 54% 58% 44% 4% 36% (1%) (9%) (2%) (3%) 1%
Cost of Goods (8%) 9% 123% 75% 87% 25% 67% (0%) (0%) 1% 0% 2%
Gross Profit 2% 2% 45% 55% 36% 0% 30% (1%) (10%) (2%) (3%) 0%
SG&A (8%) 4% 54% 45% 43% -5% 28% (5%) (12%) (10%) (5%) (2%)
R&D (1%) 3% 32% 32% 39% -15% 16% (6%) (8%) (3%) (3%) (1%)
Operating Income 9% 0% 44% 71% 32% 11% 38% 3% (10%) 2% (3%) 2%
Income Before Tax 9% (4%) 34% 61% 21% 7% 30% 4% (9%) 4% (2%) 3%
Net Income 8% (13%) 33% 53% 24% 5% 28% 5% (9%) 4% (2%) 3%

EPS 11% (17%) 11% 30% 4% 2% 11% 5% (6%) 7% 2% 6%
Shares Outstanding (sequential) (3%) 4% 20% 20% 19% 3% 15% 0% (3%) (4%) (4%) (4%)
Source: Company reports, Bernstein estimates and analysis
12
September 29, 2010
Disclosure Appendix
Valuation Methodology
We value generic companies on next year EPS multiples. Companies with diverse revenue sources and
better strategic position are given a higher multiple. Based on our Teva 2011 EPS of $5.25, we arrive at a
target price of $58 (11x). Based on our Watson 2011 EPS of $3.89, we arrive at a target price of $46 (12x).
We determine target P/E multiples for our large cap pharma stocks by scoring each along four main criteria
that include: (1) late-stage R&D assets; (2) historic R&D track record; (3) generic exposure through 2015;
and (4) management consistency. Each company is scored relative to its pharmaceutical company peers,
and we consider the valuation of broad market indices when determining the average target multiple for the
drug group. Our price target for Pfizer is $19 which reflects a target P/E multiple of ca. 8x our 2011 EPS
estimate of $2.36.
Risks
The downside risks to Teva achieving our price target are:

 Deterioration of Copaxone revenue due to rapid entry and adoption of oral MS agents (FTY 720,
cladribine) or rapid success of a Paragraph IV challenge on Copaxone
 Inability to monetize its Paragraph IV portfolio or adverse rulings and substantial fines on at-risk
launches.
 Intensifying global competition in commodity generics beyond our current estimates.
 Failure of late stage branded/specialty/biosimilars programs
Teva may outperform our expectation if:
 It wins more Paragraph IV challenges than we had expected
 The baseline generic business may outperform our expectations

 Rapid uptake of Azilect, ProAir or failure of oral MS products
 Rapid advancement of late stage branded/specialty/biosimilars programs
The key downside risks to our Watson thesis and to our target price are:
 More than expected pricing pressure in the commodities generics business
 More than expected competition in the OC generics area
The key upside risks to our Watson thesis and to further exceeding our target price are:
 Further than expected resolution of Lovenox approval
 Rapid success of branded product portfolio
Pfizer
Specific risks on the downside include:
 Risk that Lipitor faces intensifying competitive pressure, beyond what we currently model.
13
September 29, 2010
 Risk that Pfizer fails to advance drugs through phase 3 development successfully.
 Risk that Pfizer pursues strategies out of desperation to overcome the upcoming patent "cliff" that do not
create shareholder value over the longer-term.
 Risk that Pfizer cannot realize anticipated cost synergies post-integration with Wyeth.
Specific risks on the upside include:
 Risk that Pfizer has better pipeline progress than we currently build into our model.
 Risk that lead drug Lipitor captures more share in the cholesterol market place than we currently model.
 Risk that the Pfizer/Wyeth combination yields greater operational synergies than we have forecasted.
14
SRO REQUIRED DISCLOSURES
 References to "Bernstein" relate to Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, and Sanford C. Bernstein, a unit of
AllianceBernstein Hong Kong Limited, collectively.
 Bernstein analysts are compensated based on aggregate contributions to the research franchise as measured by account penetration,
productivity and proactivity of investment ideas. No analysts are compensated based on performance in, or contributions to, generating
investment banking revenues.
 Bernstein rates stocks based on forecasts of relative performance for the next 6-12 months versus the S&P 500 for stocks listed on the
U.S. and Canadian exchanges, versus the MSCI Pan Europe Index for stocks listed on the European exchanges (except for Russian
companies), versus the MSCI Emerging Markets Index for Russian companies and stocks listed on emerging markets exchanges outside
of the Asia Pacific region, and versus the MSCI Asia Pacific ex-Japan Index for stocks listed on the Asian (ex-Japan) exchanges - unless
otherwise specified. We have three categories of ratings:
Outperform: Stock will outpace the market index by more than 15 pp in the year ahead.
Market-Perform: Stock will perform in line with the market index to within +/-15 pp in the year ahead.
Underperform: Stock will trail the performance of the market index by more than 15 pp in the year ahead.
Not Rated: The stock Rating, Target Price and estimates (if any) have been suspended temporarily.
 As of 09/28/2010, Bernstein's ratings were distributed as follows: Outperform - 45.0% (1.7% banking clients) ; Market-Perform - 47.8%
(1.0% banking clients); Underperform - 7.2% (0.0% banking clients); Not Rated - 0.0% (0.0% banking clients). The numbers in parentheses
represent the percentage of companies in each category to whom Bernstein provided investment banking services within the last twelve
(12) months.
 Accounts over which Bernstein and/or their affiliates exercise investment discretion own more than 1% of the outstanding common stock of
the following companies TEVA / Teva Pharmaceutical Industries Ltd, PFE / Pfizer Inc.
 Bernstein currently makes a market in the following companies TEVA / Teva Pharmaceutical Industries Ltd.
 The following companies are or during the past twelve (12) months were clients of Bernstein, which provided non-investment banking-
securities related services and received compensation for such services PFE / Pfizer Inc.
 An affiliate of Bernstein received compensation for non-investment banking-securities related services from the following companies PFE /
Pfizer Inc.
 In the next three (3) months, Bernstein or an affiliate expects to receive or intends to seek compensation for investment banking services
from WPI / Watson Pharmaceuticals Inc, TEVA / Teva Pharmaceutical Industries Ltd, PFE / Pfizer Inc.
12-Month Rating History as of 09/28/2010
Ticker Rating Changes
PFE M (IC) 10/23/07
TEVA M (RC) 07/26/10 O (IC) 03/07/06
WPI M (IC) 03/07/06
Rating Guide: O - Outperform, M - Market-Perform, U - Underperform, N - Not Rated

Rating Actions: IC - Initiated Coverage, DC - Dropped Coverage, RC - Rating Change
OTHER DISCLOSURES
A price movement of a security which may be temporary will not necessarily trigger a recommendation change. Bernstein will advise as and
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Aaron (Ronny) Gal, Ph.D. (Senior Analyst) • ronny.gal@bernstein.com • +1-212-756-4208