PFIZER, Inc

Company Valuation

Krastina Dzhambova
Company Overview

•Research based, global pharmaceutical company

•Discovers, develops, manufactures and markets prescription drugs
•3 segemets:

Human Health Consumer Products Animal Care

Treatments for Self-medications, Treatment of

cardiovascular, tobacco diseases of livestock
metabolic diseases, dependence, skin and companion
central nervous care, eye care, hair animals.
system disorders, growth.
respiratory and R&D (in millions)
infectious diseases,
etc. 2005 2004 2003
Segment Revenue Segment Revenue Segment Revenue $7442 $7684 $7487
83.6% 7.6% 4.3%
Recent FDA Approvals

Product Indication Date of Approval

Exubera Inhaled form of 1/2006

insulin
Aromasin Treatment of early 10/2005
breast cancer
Lipitor Reduce the risk of 9/2005
stroke in type 2
diabetes patients
Zyvox For treatment of 8/2005
bacterial infections
in pediatric patients
Ellence Long-term cancer 3/2005
treatment
8 pending FDA
applications
 Challenges
 Losing exclusivity on blockbuster drugs.

Diflucan, Neurontin, Accupril, Zithromax and the suspension of Bextra at the request of
FDA collectively reduced revenues by 5.7 billion.
Revenues of the 4 major drugs with lost exclusivity in the US declined by 44%.
8% Human Health and 7% of total revenue of the year ended 12/31/2005 compared
with 13% and 12% in 2004.

Zoloft and Norvasc with expiring patents: revenue contribution of $3,256 million and
$4,706 million in 2005.

 Pricing Pressure related to price controls enforced by foreign governments and legal
changes in Medicare.

 Defending intellectual property rights

 Legal defense cost, the risk of adverse settlement and settlement expenses.
December, 2005- exclusivity of Lipitor granted till 2011.

 Fluctuation in foreign exchange rates

Adapting Scale to Productivity Initiative

•Goal: increasing efficiency through optimization of plant network, processes

and systems.
•Projected cost savings: $4 billion by 2008.
•$124 million in implementation cost in 2005 vs $800 million in achieved cost
saving.
•Acquisition of Pharmacia (2003): improvement of plant network and
information technology.
Acquisition cost and Restructuring cost: $3,122 million
Cost synergies from Pharmacia: 4.2 billion in 2005, 3.6 in 2004,
1.3 in 2003.
 Acquisition of Vicuron in September, 2005

 $1.4 billion acquisition

 R&D Projects in anti-infectives
 February, 2006- Eraxis approved by the FDA

Global Standing
Revenues exceed 500 million in all 12 countries outside the US in
2005.
Discounted Cash Flow Analysis

 Revenue in 2005: $51 298 million. (reasons for decline in comparison with
2004)
 Net Profit Margin: 15.8%
 Net Income: $8,085
 Depreciation: $5,576
 Increase in Working Capital: $768
 CAPEX: $2,106
 Net Interest After Tax: $334.41
 Free Cash Flow to all security holders: $22,974
 Assumptions about growth rate

 2006 and 2007 important drugs will be going off patent and revenues (cash
flow) will be tampered. We assume inconstant growth after 2007.
2006: ROC(2005)*b(2005)=2.09%
2007: ROC(2006)*b(2006)=2.375%

 Continuation growth after 2007: 2.86%

 Cost of Capital

 β (Value Line)=0.9 vs. β (S&P)=0.55

 Risk-free return (10-year fixed)=5.04%
 Market Risk Premium=6%
 Cost of Equity: 10.436%

 Cost of Debt: 3.92%

Basis for using promised yield to maturity: Long term debt rating by Mood’s-
Aaa; S&P-AAA

 WACC=9.743%
 Results

2006 2007 Continuation

Value
DCF 21,431 19,881 357,807

Prize: $54.14
 Stock performance: 6-months

Stock closed last: 24.40

Stock price: 1 year

 P/E Ratio Comparison

Company P/E Ratio Trailing P/E Relative P/E

ratio Ratio
Pfizer 12.6 11.8 0.67*

Merck&Co 13.2 14.0 0.70

Glaxosmith 16.5 17.6 0.87

*Compares the stock’s P/E ratio to the P/E ratios of the 1700 stocks included in Value Line
Basis for Comparative Analysis:
•Size: large cap
Pfizer: $182 billion in Market Capitalization
Glaxosmithk.: $143 billion in Market Capitalization
Merck & Co.: $73.2 billion in Market Capitalization

•Growth:
Pfizer: 2.86%
Glaxosmithk.: 12% (timeliness 2)
Merck & Co: 1,665%

Due to unavoidable limitation in finding

•Risk (Safety): comparables, this a analysis is only used to
complement the DCF valuation.
Pfizer: 1
Glaxosmithk.: 1
Merck & Co: 3 Lowered 1/12/05
 Interpretation of Results

 The company is undervalued.

 Despite the loss of exclusivity on certain drugs, it has a sufficient number of new
patents and pending approvals to offset the loss in revenues.
 Synergies and efficiency. Cuts in cost to augment R&D.
 Long term projects which will generate growth in the future.
 Future opportunities for generating cash flows include:
current demographics of developed countries
large number of untreated patients within certain therapeutic categories (ex. High
cholesterol)
development in emerging markets