1. THE MERGER The Upjohn – Pharmacia Case John Spiteri & Raj Joshi June 17, 2006

2. MERGERS & ACQUISITIONS MERGERS & ACQUISITIONS

3. Motivation Factors for M&A Take advantage of ‘economies of scale’ Improve ‘target management’ Combine ‘complementary resources’ Capture ‘tax benefits’ Provide ‘low cost financing’ to a financially constrained target Increase ‘product market rents’

4. Pricing the Deal Premium paid Price is a function of Hostile Takeover versus Friendly Merger Can the premium paid be justified (DCF or DAE) Industry metrics used in pricing the deal

5. Methods of Financing the Deal Cash Senior Debt Mezzanine Debt Capital Markets i.e. stocks, new-issue or swaps, options, warrants

6. THE 1994 PHARMACEUTICAL INDUSTRY

7. 1994 Pharmaceutical Industry Buyer power increasing - Hospitals, Consumers, Health Maintenance Organizations (HMOs) HMOs & Pharmaceutical Benefit Firms (PBMs) demanding use of generic drugs General feeling is that “Bigger is Better” Consolidations happening in industry 1992-1994 $70B in M&A activity like, Merck & Company, Bristol-Myers Squibb and American Home Products

8. 1994 Pharmaceutical Industry Estimated at $252B - North America $79B - Europe $77B - Japan $49B Industry expected to grow at 6% Top 10 firms have 28% market share Average industry expense on R&D is approx. 19% of gross sales

9. Motivation for Consolidation in the Pharmaceutical Industry 1.Vertical Integration  Move closer to patients by acquiring major drug buyers such as PBM’s & HMO’s

10. Motivation for Consolidation in the Pharmaceutical Industry 2.Horizontal Integration  Increasing buyer strength  Cost to develop new drugs rising  Markets globalization  Protect margins by seeking efficiency gains through economies of scale  By product lines

11. THE MERGER UPJOHN INC. & PHARMACIA AB

12. Company Comparables CATEGORYUpjohnPharmacia 1994 Sales $3.3B$3.4B European Sales 20%59% U.S. Sales 59% 16% Pacific Rim 13% Other 8%9% # of Employees 16,90018,600 Head Office MichiganSweden

13. The Upjohn Company Market leader: Central nervous system Central nervous system Steroids Steroids Anti-inflammatory & analgesic Anti-inflammatory & analgesic Reproductive & women’s health Reproductive & women’s health Critical care, transplant and cancer Critical care, transplant and cancer Infectious disease Infectious disease Metabolic Metabolic

14. The Upjohn Company Upjohn’s rationale for the proposed merger:  Patents expired on some of its key products  Fewer products compared to the competition  Weak foreign sales  Stock price stagnant, rumored to be a potential takeover target

15. Pharmacia AB Market leader: Cancer treatment Cancer treatment Growth hormones Growth hormones Cataract surgery products Cataract surgery products Intravenous nutrition Intravenous nutrition Allergy diagnostics Allergy diagnostics Smoking cessation Smoking cessation

16. Pharmacia AB Pharmacia’s rationale for the proposed merger:  Several companies were consolidating during this period  Access to new markets  No blockbuster drug in its pipeline  Relied on larger number of products with small sales potential

17. Terms - Proposed Merger 1 Upjohn share for 1.45 shares in the new company 1 Pharmacia share for 1 share in the new company Pooling of interests Pharmacia & Upjohn’s board of directors would be formed from an equal number Corporate head office in London Operational head office in Michigan

18. Performance Dec 31 1994 CATEGORY ($MM) UpjohnPharmaciaCOMBINED Revenues $3,344,538$3,478,244$6,822,782 Net Income$489,088$344,363$833,451 Gross Margin74.8%69.9%72% R&D$607,187 18% $490,081 14.1% $1,097,268 16.1% R&D % In millions JUNE 30, 1995 Cash & Equiv$632,357$1,099,070$1,662,427 A/R$671,767$913,046$1,584,813 Inventory$502,172$500,379$1,002,551 CPTD$60,285$700,034$760,319 LTD$515,005$85,508$600,513

19. Ratios as at June 30, 1995 RATIOSUpjohnPharmacia COMBINED Working Capital $1,062,807$1,007,367$2,001,174 Current Ratio2.01.61.7 Quick Ratio1.51.3 TNW ($000’s)$2,277,660$1,868,365$4,077,025 Debt : Networth1.2:10.7:10.9:1 A/R Turnover2.62.02.2 A/R DOH143182163 Invent Turnover0.91.11.0

20. Key Valuation Assumptions 1.Sales is the key driver for the valuation 2.Management believes combined sales will exceed industry growth rate 3.Estimated $500MM in operating cost synergies & 85% of that being achieved by 1996. 4.No accounting issues or noise

21. Assumptions cont’d…. 5.New entity is expected to have a 50% debt & 50% equity structure 6.Acquisition financed through stock swap, no change in interest expense 7.No additional stress on WC to support growth and R&D 8.Tax rates will approach the mean of both at 34% 9.WACC = 8%

22. Benefits of the Merger Merged companies more competitive due to economies of scale Product mix complements each other Complementary geographic positions Cost cutting savings expected Greater marketing leverage Stronger combined R&D efforts

23. Class Exercise Hand-out - 10 minute class exercise Discuss the factors that might affect the valuation of the combined companies - RISK & MITIGANTS - THE FOUR KEY DRIVERS 1.Implementation 2.Product Development 3.Revenue Expectations 4.Synergies

24. IMPLEMENTATION RISKS Loss of focus No one clear leader Company environment at risk - operating and cultural MITIGANTS History of acquisitions & operational optimizations Industry expertise Willingness to merge - Friendly

25. PRODUCT DEVELOPMENT RISKS No R&D synergy realization No blockbuster drugs Weak pipeline Industry approaching $1B a year in R&D MITIGANTS Combined R&D exceeds the $1B threshold Variety of drugs with high potential of success Strong W/C to support continued R&D investments New product launch – quicker to market

26. REVENUE EXPECTATIONS RISKS Analyst project new company to exceed industry growth rate Downtime for sales rep. training Acceptability of drugs in new countries MITIGANTS Strong sales cultural in both companies Employee expertise exists Complementary geographical strengths No product cannibalization

27. SYNERGIES RISKS Aggressive cost- cutting targets SG&A savings not realized True realization of economies of scale not achievable MITIGANTS Reduction of labour force (4000 jobs) Stronger buying power for materials Cost synergies due to reduction in SG&A, Manufacturing expenses ($500M) Foreign Exchange

28. VALUATIONS PHARMACEUTICAL INDUSTRY

29. Pharmaceutical Valuations Must think of the company as a collection of different experimental drugs that each have a market potential Treat each promising drug as a mini- company within the portfolio How to Valuate – do a Discounted Cash Flow (DCF) on each drug

30. Probabilities of Success in the Pharmaceutical World Each new drug conceived has a 1% chance of making it to the market..…...therefore each drug in pre-clinical trails are assigned zero value Entering Phase I trials = 15% prob. of success Entering Phase II trials = 30% prob. of success Entering Phase III trails = 60% prob. of success Entering FDA approval = 90% prob. of success

31. The 10 Year Life Cycle of a Drug

34. 5 Year Forecast

35. Equity Valuation

36. PHARMACIA & UPJOHN INC. Post Merger Merger was approved November 1995 John Zabriskie became CEO of the combined company Head office was moved to England 3 regional head offices: U.S., Sweden & Italy

37. PHARMACIA & UPJOHN INC. Post Merger Management announced in October 1996 lower than expected 3 rd quarter earnings due to merger integration issues Stock price dropped by about 10% Loss of about $2.8 billion in market cap.

38. PHARMACIA & UPJOHN INC. Post Merger Company continued to report earnings below expectations for 4 quarters in a row Poor performance was attributed to implementation problems due to cultural differences between Upjohn & Pharmacia John Zabriskie resigned as CEO early 1997

39. PHARMACIA & UPJOHN INC. 1998 Hired a new CEO – Fred Hassan, ex-executive from American Home Products Moved head office back to the U.S. Established a centralized management team Aggressively cut costs, shutting down 2 research sites, dismantled 3 independent centres Strengthened new-product pipeline by killing several research projects with poor prospects Analysts are warming up to the stock, upgraded from a “Neutral” to “Attractive’ BUY rating in June 1999

40. PHARMACIA & UPJOHN INC. 2003 “For over 150 years people have counted on Pfizer to discover and develop important new medicines. The acquisition of Pharmacia/Upjohn will allow us to do even more. We want to be the most valued company to patients, colleagues, shareholders and the communities where we work and live.” Hank McKinnell, Pfizer Chairman and CEO April 16, 2003