PFIZER, Inc Company Valuation Krastina Dzhambova

Company Overview Research based, global pharmaceutical company Discovers, develops, manufactures and markets prescription drugs 3 segemets: Human HealthConsumer ProductsAnimal Care Treatments for cardiovascular, metabolic diseases, central nervous system disorders, respiratory and infectious diseases, etc. Self-medications, tobacco dependence, skin care, eye care, hair growth. Treatment of diseases of livestock and companion animals. Segment Revenue 83.6% Segment Revenue 7.6% Segment Revenue 4.3% R&D (in millions) $7442$7684$7487

ProductIndicationDate of Approval ExuberaInhaled form of insulin 1/2006 AromasinTreatment of early breast cancer 10/2005 LipitorReduce the risk of stroke in type 2 diabetes patients 9/2005 ZyvoxFor treatment of bacterial infections in pediatric patients 8/2005 EllenceLong-term cancer treatment 3/ pending FDA applications Recent FDA Approvals

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 Zoloft and Norvasc with expiring patents: revenue contribution of $3,256 million and $4,706 million in 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, exclusivity of Lipitor granted till 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 $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, 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: $ 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: $ 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 : 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: % 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 Continuation Value DCF21,43119,881357,807 Prize: $54.14

Stock performance: 6-months Stock price: 1 year Stock closed last: 24.40

P/E Ratio Comparison CompanyP/E RatioTrailing P/E ratio Relative P/E Ratio Pfizer * Merck&Co Glaxosmith *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% Risk (Safety): Pfizer: 1 Glaxosmithk.: 1 Merck & Co: 3 Lowered 1/12/05 Due to unavoidable limitation in finding comparables, this a analysis is only used to complement the DCF valuation.

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