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 cardiovascular, metabolic diseases, central nervous system disorders, respiratory and infectious diseases, etc.
Segment Revenue 83.6%

Self-medications, tobacco dependence, skin care, eye care, hair growth.

Treatment of diseases of livestock and companion animals.

R&D (in millions)

2005
Segment Revenue 7.6% Segment Revenue 4.3% $7442

2004
$7684

2003
$7487

Recent FDA Approvals

Product Exubera Aromasin Lipitor

Indication Inhaled form of insulin Treatment of early breast cancer Reduce the risk of stroke in type 2 diabetes patients For treatment of bacterial infections in pediatric patients Long-term cancer treatment

Date of Approval 1/2006 10/2005 9/2005

Zyvox

8/2005

Ellence 8 pending FDA applications

3/2005

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

(Value Line)=0.9 vs. (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 MoodsAaa; S&P-AAA
WACC=9.743%

Results

2006 DCF 21,431

2007 19,881

Continuation Value 357,807

Prize: $54.14

Stock performance: 6-months

Stock closed last: 24.40

Stock price: 1 year

P/E Ratio Comparison

Company Pfizer

P/E Ratio 12.6

Trailing P/E ratio 11.8

Relative P/E Ratio 0.67*

Merck&Co

13.2

14.0

0.70

Glaxosmith

16.5

17.6

0.87

*Compares the stocks 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