Global
Pharmaceutical
Industry
Robert Agon
Alex Luk
Jacky Lui
Ray Li
–
–
–
–
Industry Analysis
Bristol-Myers Squibb
Pfizer
Merck
Overall Health Care Industry
U.S. Government
- Regulatory Body (FDA)
For Profit Health Benefit Providers
a) Service Organizations
- Public Health Care Programs
- Medicare
- Medicaid
- Hospital management
Foreign Markets
& Governments
- Long term care (nursing homes)
- Special services
- Organizations providing
health care plans (HMOs)
U.S. Health Care
Industry
Biotechnology
Companies
b) Pharmaceutical Industry
(product organizations)
Not-for-Profit
Health Benefit Providers
- Diversified Companies
- Products & Supplies
- Drug Companies
Research Institutions
- Universities
- National Institutes of Health
Pharmaceutical vs. Biotech

Two Distinctions:
1) Business model

Biotech:



Much smaller and limited resources to market drug
Just a research engine
Pharmaceutical

Larger and market drug themselves
2) Field of Research

Biotech:


Use “genetic engineering”
Pharmaceutical

Use "empirical screening" to develop drugs
Pharmaceutical Industry Background

The U.S. is the leader in market share and has five of the ten
largest companies

Global pharmaceutical sales grew 9% in 2003 to $466.3 billion

In 2003, 64 blockbuster drugs had sales over $1 billion

Industry is less sensitive to swings in the business cycle

COGS, R&D and Marketing are the largest expenditures
Information from Phrma & Yahoo Finance November 2004
Industry Background (cont.)

Patents are extremely important; they give a company exclusive
rights to produce a drug for 20 years

Many pharmaceutical companies attempt to extend their patents
by significantly changing the nature of the drug

Future success of a drug company depends heavily on the
number and quality of drugs in the pipeline

The industry has traditionally relied on the “blockbuster model”,
where a few key drugs make up most of the company’s revenue
Potential New Business Strategies

The Diagnostic-Led Strategy


The Single-Pill Strategy


based on the observation that even when there are established treatments,
significant numbers of patients are either not diagnosed in a timely manner
or not diagnosed at all
seeks to simplify the lives of those taking multiple medications
The Treatment Platform Strategy

based on the assumption that various medical conditions share common
denominators and can be treated using the same therapeutic approach
Key Issues Affecting the Industry

In August 2004, New York officials filed a lawsuit against 44 drug
makers, claiming they overcharged Medicaid for prescription drugs

Merck’s Vioxx drug was pulled due to risk of heart attacks and strokes


Possible legal action by various patient groups

May affect sales of Pfizer's CeIebrex & Bextra COX-2 pain reliever
U.S. citizens are increasingly angry over rising drug costs, which is
fuelling political debate over Canadian imports


Online sales to the U.S. from Canadian pharmacies are expected to be $1.2
billion US in 2004
By 2005, over $50 billion of branded pharmaceuticals will have their
patents expire
Ethical vs. Proprietary Drugs
Ethical: branded and generic drugs sold only through
prescription
Proprietary: branded or generic drugs sold over the
counter
 After
patent expiration, many of the prescription drugs
can apply to the FDA for over-the-counter status.
 Lower
margins on over-the-counter products
 FDA requirements
counter drugs
are not as cumbersome for over-the-
Product Focus

Most ethical producers focus on 5 main therapeutic areas:
-
Central nervous system
Cardiovascular
Gastrointestinal / metabolism agents
Anti-infective
Respiratory drugs

More concentrated on chronic rather than acute diseases
with large patient populations (cancer, arthritis, CVD)

Ulcer medications, cholesterol treatments, and
antidepressants are the top three drug categories

Two of the best-selling drugs are Pfizer's Lipitor and
Merck’s Zocor for cholesterol
Breakdown of Sales Figures by Area
Central Nervous System
24%
Cancers, endocrine system, & metabolic diseases
17%
Digestive and genito-urinary system
13%
Respiratory system
13%
Parasitic and infectious diseases
11%
Cardiovascular agents
10%
Vitamins and related items
6%
Dermatological items
3%
Veterinary products
3%
U.S. Department of Commerce 2002
2003 Top Selling Blockbuster Drugs
Drug
Maker
Lipitor
Zocor
Zyprexa
Norvasc
Procrit/Eprex
Prevacid
Nexium
Plavix
Seretide/Advair
Zoloft
Pfizer
Merck
Eli Lilly
Pfizer
Johnson & Johnson
Abbott & Takeda
AstraZeneca
Bristol Myers
GlaxoKlineSmith
Pfizer
Total
Purpose
Cholesterol
Cholesterol
Antipsychotic
Hypertension
Anemia
Stomach acid
Stomach acid
Cardiovascular Disease
Asthma
Antidepressant
**Sales % Growth
($Billions) Rate
10.3
6.1
4.8
4.5
4
4
3.8
3.7
3.7
3.4
14
-4
13
7
13
0
62
40
40
11
$48.30
14%
Source: IMS World Review 2004
**Figures have been adjusted by IMS to include drug sales from distribution agreements
Market Leaders
Leaders by Market Capitalization ($ billion):
Pfizer
$205.1
Johnson & Johnson
$179.7
GlaxoKlineSmith PLC
$122.2
Novartis AG
$118.8
Roche Holding AG
$87.4
Aventis SA
$70.9
AstraZeneca PLC
$66.8
Abbot Laboratories
$66.6
Eli Lilly & Co
$62.5
Merck & Co Inc
$60.1
Retrieved from Yahoo Finance November 22, 2004
2003 Pharmaceutical Sales by Region
World Audited
Market
2003 Sales
($ billion)
% of Global
sales ($)
% Growth
(constant $)
North America
229.5
49%
11%
European Union
115.4
25%
8%
Rest of Europe
14.3
3%
14%
Japan
52.4
11%
3%
Asia, Africa and
Australasia
37.3
8%
12%
Latin America
17.4
4%
6%
$466.3
100%
9%
TOTAL
Source: IMS World Review 2004
Customers

Individual Patients

Pharmacies

Physicians

Large Scale Purchasers

Government Agencies (Medicare & Medicaid)
(Hospitals & Managed Care Providers)
Large Scale Purchasing Companies


Health Maintenance Organizations (HMO)

Offers consumers a comprehensive range of benefits at one annual fee

Patients are assigned to a primary care doctor as a "gatekeeper" who decides
what health services are needed and when.

They receive a discount from health care providers based upon their volume of
patients
Pharmaceutical Benefits Management Companies (PBMs)

Intermediary distributor between drug companies and large scale purchasers

Process drug claims for managed care companies & large employers

Immense buying power which allows saving to be passed to customers
Medicare & Medicaid
Medicare: Government health insurance program designed to
subsidize health services for the elderly and disabled
Medicaid: Government health insurance program designed to
subsidize health services for those living in poverty

These agencies buy in bulk to get a lower price, thus putting margin
pressure on pharmaceutical companies

Medicaid programs have preferred drug lists of reimbursable
medicines that doctors can prescribe

This decreases patients’ access to much needed medicines

Lowers the overall quality of care
Industry Politics & Government

Pharmaceuticals spend millions of dollars on lobbying and
campaign contributions to influence government

Re-election of Bush is good for U.S. pharmaceuticals
Note: The AMEX Pharmaceutical Index increased by
2.74% the day after the election

Issue of importing cheaper drugs from Canada

Industry is subject to extensive government regulation
(ie. FDA, foreign governments, environmental, & price constraints)
Food and Drug Administration

Imposes requirements on product testing, safety,
effectiveness, and marketing of pharmaceutical products

Monitors for proper manufacturing and labeling standards

Also responsible for food, medical devices, and
cosmetics products

Only one out of five medicines that enter clinical trials is
approved for patient use by the FDA
Source: www.fda.com (2004)
Drug Approval Process

Average of 10 - 15 years and $800 million to nurture a drug
from initial discovery to market
Process:

Academic and Laboratory Research

Testing done on animals

Phase 1: Drug given to a small number of healthy people to
test its safety

Phase 2: Drug administered to 100 or more people with the
disease that it was intended to treat

Phase 3: Rigorous testing done on larger groups of ill patients

FDA Review – Approval/Disapproval
Source: www.fda.com (2004)
Number of Drugs Approved by the FDA
Each Year
Industry Trends

Globalization

Aging worldwide population

Longer life expectancy

Increasing demand from developing nations

Outsourcing more activities

Increase in Direct-to-Consumer Advertising
Industry Trends (cont.)

Increasing drug prices

Rising R&D costs

Increase in mergers, acquisitions, and alliances

Increasing size of the generics market

Increased buying power of insurance companies

Increase in licensing agreements with Biotech firms to improve
drug pipelines
R&D Spending
Total R&D
(billions)
Total R&D
as a % of
Total Sales
Year
Domestic R&D
(billions)
R&D Abroad
(billions)
2003
$27,407
$5,808
$33,215
15.6%
2002
$25,655
$5,357
$31,012
16.1%
2001
$23,502
$6,221
$29,773
16.7%
2000
$21,364
$4,667
$26,031
16.2%
1999
$18,471
$4,220
$22,691
16.5%
1998
$17,128
$3,839
$20,997
16.8%
1997
$15,466
$3,492
$18,958
17.1%
1996
$13,627
$3,279
$16,906
16.6%
1995
$11,874
$3,334
$15,207
16.7%
1994
$11,102
$2,348
$13,449
17.3%
Growth in R&D
U.S. Marketing Expenses
Direct-to-consumer advertising
Office, hospital, & journal promotions
Retail value of samples
Total
$30
$25.3
$ Billions
$25
$19.1
$20
$15
$13.9
$21.2
$15.7
$10
$5
$0
1999
Source: http//:www.phrma.org (2004)
2000
2001
2002
2003
Generics Market

Generics now account for over 50% of all
prescription drugs

Americans spent over $182.7 billion dollars on
prescription drugs in 2002

The average branded prescription cost four times
as much as a generic drug

Generics save consumers $8 - 10 billion per year
Industry Financial Ratios
Market Capitalization:
1253 B
Price / Earnings:
20.1
Price / Book:
4.51
Quarterly Revenue Growth (YOY):
5.65%
Return on Equity:
24.10%
Total Debt / Equity:
0.4
Long-Term Debt to Equity
0.37
Dividend Yield:
Source: Yahoo Finance 2004
2.64%
Industry Performance (cont.)
AMEX pharmaceutical index is a market-capitalization weighted index
Comparison of Pharmaceutical
Index and Economy
Amex (DRG)
Dow Jones Industrial (DJI)
S&P 500 (GSPC)
Nasdaq (IXIC)
Future Industry Growth

Growth rates for 2005 are estimated by IMS to be:
Country
Growth Rate
U.S.
United Kingdom
Germany
France
12%
7%
5%
4%
Japan
1.5%
IMS and Standard & Poors 2003
History - Squibb

Founded by Dr. Edward
Squibb in 1858

Bought by Mathieson
Chemical in 1952

Bought by Olin Industries
in 1953
1858
History – Bristol-Myers

William Bristol and John Myers
founded Clinton
Pharmaceutical in 1887

Renamed to Bristol-Myers in
1900

Went public in 1929

Bought Squibb in 1989 and
formed Bristol-Myers Squibb
1887
Mission
To extend and enhance human life by providing
the highest-quality pharmaceuticals and health
care products.
Company Statistics

Employee: 44,000 in over 100 countries (2003)

Global Sales: $20.9 billion (2003)

Market Capitalization: $46.05 billion (Sep 30, 04)

Stock Price: $23.50 (Nov 19, 2004)

Number of Outstanding Shares: 2,201 million

Annual R&D expense as a percentage of sales: 10% -12%

Largest Market: U.S., Europe, Japan
Company Overview

Bristol-Myers Squibb (BMS) is a diversified
worldwide health and personal care company
that researches and manufactures medicines
and other products.

The Company's products include therapies for
various diseases and disorders, consumer
medicines, wound management, nutritional
supplements, infant formulas, and skin care
products.
Management Team

Peter R. Dolan (49) ($5.92 million ex. option)



Andrew R. J. Bonfield (42) ($3.80 million ex. option)




Chief Scientific Officer and President of The Pharmaceutical Research Institute
Joined in 1997
Donald J. Hayden Jr. (48) ($2.66 million ex. option)



Senior Vice President and Chief Financial Officer
Joined in 2002
Elliot Sigal, M.D., Ph.D. (52) ($2.59 million ex. option: figures for previous CSO)


CEO, Chairman of the Board
Joined in 1988, became Chairman in 2000 and CEO in May 2001
Executive Vice President and President, Americas
Joined in 1993
John L. McGoldrick (63) ($1.92 million ex. option)


Executive Vice President and General Counsel
Joined in 1995
Recent Events

March 2004 - BMS was found liable for damage
for “channel stuffing” between 1999 and 2001 –
BMS was fined $150 million

May – BMS & Sanofi sued Apotex on patent
infringement on Plavix

August – Investors sued BMS for $300 million
claiming that BMS lied about its accounting and
investment in ImClone
Key Elements of 5yr Strategy

Focus on 10 Disease Areas

Increase Sales and Marketing emphasis
on specialists and high value Primary Care prescribers

Invest in R&D and R&D growth

Increase A&P spending behind growth drivers

Enter the biologics business

Target all other spending flat or slightly
down over the next several years
Successful Past Partnerships

Sanofi-Synthelabo
 Co-developed

Otsuka Pharmaceutical
 Co-developed

Avapro and Plavix
Abilify
ImClone Systems
 Co-developed
Erbitux
Current Strategic Partnerships

Merck & Co.


Corgentech


co-developing Basulin
Solvay Pharmaceuticals


co-developing E2F Decoy
Flamel Technologies S.A.


co-developing and co-promoting Muraglitazar
co-developing SLV319
Pierre Fabre Médicament S.A.

co-developing Javlor
Major Acquisition/Divestiture
Action
Date
Subsidiaries/Product Line
Value
Sold
Dec 13, 2003
Mead Johnson Adult Nutrition
$385 million cash
Sold
Nov 15, 2001
Clairol
$4.95 billion cash
Invested
Nov 2001
ImClone
14.4 million share at $70 (19.9%
of outstanding share)
Acquired
Oct 1, 2001
DuPont Pharmaceuticals
$7.8 billion cash partly financed
by $1.5 billion commercial paper
and $5 billion medium term note
Spin-off
Aug 6, 2001
Zimmer (in tax free distribution)
Paid $203 million in common
share dividend
Patent Expiration
2003 Sales
($million)
2002 Sales
($million)
2001 Sales
($million)
Expiration Year in
U.S.
Pravachol
2,827
2,266
2,101
2006
Plavix
2,467
1,890
1,171
2011
Taxol
934
857
1,112
1997
Paraplatin
905
727
592
2004
Avapro/Avalide
757
586
487
2011
Sustiva
544
455
68
2013
Monopril
470
426
413
2003
Glucovance
424
246
269
2004
Glucophage XR
395
297
230
2003
Zerit/Zerit ER
354
443
515
2008
Coumadin
303
300
63
1997
Abilify
283
25
---
2009
Videx/Videx EC
267
262
240
2001
Tequin
208
262
240
2007
Glucophage IR
118
184
250
2000
Serzone
98
221
234
2003
Reyataz
88
---
---
2017
Buspar
35
53
297
2001
Erbitux
---
---
---
2017
Pharmaceutical Product
Selected Product Sales
% Change
Change ($ million)
2004 3rdQ Sales
($ million)
Pravachol
-24%
-189
598
787
Plavix
30%
208
908
694
Taxol
2%
5
243
238
Paraplatin
-28%
-68
177
245
Avapro/Avalide
32%
59
241
182
Sustiva
65%
62
157
95
Glucophage
-82%
-193
43
236
Zerit
6%
4
69
65
Abilify
63%
64
165
101
Videx/Videx EC
18%
10
67
57
Reyataz
172%
67
106
39
Erbitux
N/A
84
84
0
4.13%
113
2,852
2,739
Pharmaceutical
Product
Total
2003 3rdQ Sales
($ million)
Selected Key Products

Pravachol
 Cholesterol
lowering
 $2,827 million sales in 2003 (13.01% of total
company sales)
 Licensed patent to Sankyo Company for exclusive
distribution in four Asia countries
 Patent expires in U.S. in 2006
Selected Key Products

Plavix
 Cardiovascular
product
 $2,467 million sales in 2003 (11.35% of total company
sales)
 Co-developed with Sanofi
 Patent expires in US in 2011
Selected Key Products

Taxol
 Anti-cancer
agent
 $934 million sales in 2003 (4.30% of total company
sales)
 Co-developed with U.S. Government
 Patent expired in U.S. in 1997 – no generic
competition until January 2002
 Patent expired in EU and Japan in 2003
Recently Released Drugs

Abilify (schizophrenia)

Erbitux (cancer)

Reyataz (HIV/AIDS)
Compounds in Development
Number of Compound
10
8
6
4
2
0
Phase I
Phase II
Number of Compound
Phase III
Compounds Under Development

Abatacept (phase III)


hepatitis B
Muraglitazar (phase III)

rheumatoid arthritis
Entecavir (phase III)



LEA29Y (phase II)


E2F Decoy (phase III)

vein graft failure prevention

Ixabepilone (phase III)

cancer

MDX-010 (phase III)

metastatic melanoma
deep vein thrombosis prevention
Javlor (phase II,III)


solid organ transplant
Razaxaban (phase II)


type 2 diabetes and other
metabolic disorder
phase III for bladder and nonsmall cell lung cancer
 phase II for breast and ovarian
cancer
Other Business Segment

Oncology Therapeutic Network (OTN)

Nutrition
 Mead

Johnson
Other Healthcare
 ConvaTec
 Medical Imaging
 Consumer
Medicine
Sales Breakdown by Business
Segment
100%
80%
8%
10%
11%
9%
10%
10%
7%
10%
8%
Other
60%
40%
Nutrition
71%
71%
OTN
75%
Pharmaceuticals
20%
0%
2003
2002
2001
Source: 2003 Annual Report
Sales by Geographic Areas
100%
80%
8%
6%
8%
7%
7%
7%
24%
22%
20%
Pacific
60%
Other Western
Hemisphere
40%
Europe, Middle
East and Africa
62%
63%
65%
United States
20%
0%
2003
2002
2001
Source: 2003 Annual Report
Cost Breakdown (2003)
R&D
14%
A&P
9%
Marketing, S&A
29%
Others
2%
COGS
46%
R&D as a Percentage of Sales
$ million
$25,000
50%
$20,000
40%
$15,000
30%
$10,000
20%
$5,000
10%
0%
$0
2004
(ttm)
2003
2002
Sales
2001
2000
% R&D of Sales
1999
Stock Price Summary
Ticker Symbol: BMY (NYSE)
Price as of Nov. 19, 2004: $23.50
52 weeks low: $22.22
52 weeks high: $31.30
Average Daily Volume  5,149,227
Number of Shares Outstanding: 2,201 million
Dividend Record
Year Ended
Div per Quarter
Total Div
Dividend Yield
2004 (ttm)
$ 0.28
$ 1.12
4.73%
2003
$ 0.28
$ 1.12
3.92%
2002
$ 0.28
$ 1.12
4.84%
2001
$ 0.275
$ 1.11
2.18%
2000
$ 0.245
$ 0.98
1.33%
One Year Stock History
Fined for
Overstated
Revenue
BMS sued
Apotex for
Patent
Infringement
BMS sued by
Investors for
ImClone
Scandal
Five Years Stock History
Five Years Stock Comparison
Financial Statements Summary
2004
(ttm)
2003
2002
2001
2000
Share Price (End of period):
23.67
28.60
23.15
51.00
73.94
Revenue ($ million):
21,703
20,894
18,106
18,044
17,695
Net Earnings ($ million):
2,249
3,106
2,067
1,871
3,686
EBIT ($ million)
3,614
4,971
3,125
2,445
5,355
Total Assets ($ million)
30,176
27,391
25,022
27,864
17,921
Total Liabilities ($ million):
19,513
17,605
16,266
18,737
8,398
Total Debt ($ million):
10,190
8,649
7,640
6,411
1,498
219
277
364
182
108
Stockholder’s Equity
($ million):
10,663
9,786
8,756
8,762
9,180
Shares Outstanding (million):
2,201
2,201
2,201
2,200
2,198
Operating Cash Flow
($ million):
2,493
3,512
945
5,372
4,652
Dividend per share:
1.12
1.12
1.11
1.01
0.89
Interest Expense ($ million):
Financial Ratios
2004
(ttm)
2003
2002
2001
2000
Price to Book Ratio
(P/B)
4.31
6.43
5.82
12.36
20.60
Debt/Equity Ratio
0.80
0.87
0.72
0.69
0.19
Return on Asset (ROA)
9.13%
11.31%
8.54%
16.76%
25.18%
Return on Equity
(ROE)
25.84%
31.74%
24.41%
51.37%
56.68%
Earning per Share
(EPS basic)
1.63
1.60
1.07
0.96
1.95
Price Earning (P/E)
16.67
17.88
21.64
53.13
37.92
Operating Margin
33.12%
34.58%
34.83%
40.29%
41.99%
Liquid Asset per share
$ 5.50
$ 4.69
$ 3.84
$ 5.25
$ 3.78
Free Cash Flow
($ million)
$ 2,938
$ 2,575
$ (130)
$ 4,192
$ 4,063
Recommendation

Pros

Extremely strong pipeline

High dividend yield


Cons

Patent expiration for key
products

Uncertain litigation
outcome

Dividend payout
sustainability in question

Financial statement
accuracy in question
Strong cash flow
HOLD
Mission Statement

Mission


We will become the world's most valued company to patients,
customers, colleagues, investors, business partners, and the
communities where we work and live
Purpose

We dedicate ourselves to humanity's quest for longer, healthier,
happier lives through innovation in pharmaceutical, consumer, and
animal health products
Company Overview

A research-based, global pharmaceutical
company that discovers, develops, manufactures
and markets prescription medicines for humans
and animals, and consumer healthcare products
Company Statistics

Market capitalization: US$205.07 billion

Employees (worldwide): 122,000

Annual R&D expenses as a % of revenues: 15-16%

Largest markets: North America, Europe and Japan

Stock symbol: PFE (NYSE)

Stock price: US$27.23 (as of November 19, 2004)

Number of outstanding common shares: 7.53 billion
Company Highlights in 2003

With the addition of Pharmacia in 2003, Pfizer
became the #1 pharmaceutical company in every
region of the world

14 of the company’s prescription medicines were
category leaders

In 2003:
 65th
consecutive year of cash dividends
 37th consecutive year of dividend increases
Strategic Alliance

Has agreements to copromote pharmaceutical
products discovered by other companies
 Alliance revenue
is primarily based upon a percentage of
our copromotion partners’ net sales
Major Acquisitions

Pharmacia
 Deal
completed in April, 2003
 US$55.97 billion


Identifiable intangible assets: US$37.07 billion
Goodwill: US$21.40 billion
 Financing
 Issuance of 1.8 billion shares of Pfizer common stock (≈29%
dilution)
 180 million options on Pfizer common stock
 6,000 shares of Pfizer Series A convertible perpetual preferred stock
(convertible into approximately 15.5 million shares of Pfizer
common stock)

Warner-Lambert
 Deal
completed in June, 2000
Top Institutional Holders
Institution Name
Shares Held
Position Value
(000)
% Shares
Outstandi
ng
Portfolio
Date
BARCLAYS GLOBAL INVESTORS INTL
317,165,142
$10,872,421.07
4.20%
6/30/2004
FIDELITY MANAGEMENT & RESEARCH CO
313,574,154
$10,749,322.00
4.15%
6/30/2004
STATE STREET GLOBAL ADVISORS
238,527,803
$8,176,733.09
3.16%
6/30/2004
VANGUARD GROUP
163,360,414
$4,998,828.67
2.16%
9/30/2004
WELLINGTON MANAGEMENT
144,173,354
$4,942,262.58
1.91%
6/30/2004
ALLIANCE CAPITAL MANAGEMENT
133,272,306
$4,568,574.65
1.76%
6/30/2004
NORTHERN TRUST CO (CHICAGO)
115,212,146
$3,949,472.36
1.53%
6/30/2004
PUTNAM INVESTMENT MGMT
102,454,572
$3,512,142.73
1.36%
6/30/2004
SMITH BARNEY ASSET MANAGEMENT
86,040,999
$2,949,485.45
1.14%
6/30/2004
GOLDMAN SACHS ASSET MANAGEMENT
84,718,489
$2,904,149.80
1.12%
6/30/2004
STATE FARM INVESTMENT MGMT CORP
80,709,105
$2,766,708.12
1.07%
6/30/2004
DEUTSCHE BANK ALEX. BROWN
74,050,477
$2,538,450.35
0.98%
6/30/2004
CAPITAL RESEARCH & MANAGEMENT CO
69,650,780
$2,387,628.74
0.92%
6/30/2004
TIAA CREF INVESTMENT MANAGEMENT
INC
73,608,756
$2,252,427.93
0.97%
9/30/2004
FAYEZ SAROFIM & CO
54,326,810
$1,862,323.05
0.72%
6/30/2004
Officers

Henry A. McKinnell (1970), Chief Executive Officer (12th
CEO in Pfizer’s history)

David Shedlarz (1976), Chief Financial Officer, Executive
Vice President

Karen Katen (1974), Executive Vice President, President of
Pfizer Pharmaceuticals Group

Nat Ricciardi (1974), President of Pfizer Global
Manufacturing

John LaMattina (1977), Senior Vice President, President of
Pfizer Global Research and Development

Peter Corr (2000), Senior Vice President of Science and
Technology (from Warner-Lambert)

Yvonne Jackson (2002), Senior Vice President of Human
Resources (from Compaq)
Executive Compensation
Annual Compensation
Name
Principal
Position
Long-Term Compensation
Year
Salary ($)
Bonus ($)
Restricted
Stock Awards
($)
Securities
Underlying
Options (#)
LTIP
Payouts ($)
All Other
Compensation
($)
Dr.
McKinnel
Chairman and
CEO
2,003
2,042,700
4,607,400
-
1,000,000
2,786,978
249,390
Ms. Katen
Executive V.P.;
President, Pfizer
Global
Pharmaceuticals
2,003
1,086,700
1,434,400
326,840
275,000
1,510,448
103,631
Mr.
Schedlarz
Executive V.P.;
CFO
2,003
889,133
1,043,100
260,866
225,000
1,216,379
79,922
Mr.
Kindler
Senior V.P. of
General Counsel
2,003
827,900
901,500
248,989
200,000
857,703
68,962
Dr. Corr
Senior V.P. of
Science and
Technology
2,003
806,000
815,000
242,403
110,000
1,316,630
89,354
Major (Revenue) Markets –
Geographic Breakdown (2003 figures)
% of total revenues
 United
States
 Japan
 All
other
59%
6%
35%
100%
Revenues Breakdown
Millions of Dollars
Revenues - Geographic Breakdown (2003 figures)
50,000
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
-
All Other Countries
Japan
United States
2003
2002
Year
2001
Operating Segments (2003 figures)
Pharmaceutical
 Consumer healthcare
 Animal healthcare
 Other

% of total revenues
87.7%
6.7%
3.5%
2.1%
100%
Major Product Areas





Revenues % of total
(billion $) revenues
Cardiovascular & Metabolic Diseases $16.17
35.8%
Central Nervous Systems Disorders
7.38
16.3%
Arthritis & Pain
3.05
6.7%
Infectious & Respiratory Diseases
4.68
10.4%
Urology
2.46
5.4%
$33.75
74.7%
Major Revenue Drivers (2003 figures)







Lipitor (Cardiovascular)
Norvasc (Cardiovascular)
Zoloft (Anti-depressant)
Neurontin (Epilepsy)
Zithromax (Infectious diseases)
Celebrex (Arthritis)
Viagra (Erectile dysfunction)
$9.23 billion
4.34 billion
3.12 billion
2.70 billion
2.01 billion
1.88 billion
1.88 billion
$25.14 billion
(≈55.6% of total revenues)
Major Products I

Lipitor
 Treatment
 #1
for lowering cholesterol
best-selling prescription drug in the world
 Worldwide

20.43% of total company sales
 10%

sales of $9.23 billion in 2003
growth in Sept. 2004 in U.S.
Maintained a 43% total prescription share
Major Products II

Norvasc
 World’s
most-prescribed branded antihypertensive
therapy

4th best-selling drug in the world
 Worldwide

sales of $4.34 billion in 2003
9.60% of total company sales
declined in the 3rd quarter of 2004 compared
to the same period in 2003
 Sales

Patent expirations in some EU countries
Major Products III

Zoloft
 World’s
 #10
leading antidepressant
best selling drug in the world
 Worldwide

sales of $3.12 billion in 2003
6.90% of total company sales
declined in 3rd quarter of 2004 compared to
same period in 2003
 Sales

Overall market decline due to media coverage of the use
of antidepressants in children and teenagers
Revenues Growth – Major Products
Revenues
(millions of dollars)
2003
2002
% change
2001
03/02
02/01
Cardiovascular:
Lipitor
9,231
7,972
6,448
15.79%
23.64%
Norvasc
4,336
3,846
3,581
12.74%
7.40%
Zoloft
3,118
2,742
2,365
13.71%
15.94%
Neurontin
2,702
2,269
1,751
19.08%
29.58%
1,883
100
76
1783.00%
31.58%
-
-
N/A
N/A
Central Nervous System:
Arthritis and Pain:
Celebrex
Bextra
687
Infectious and Respiratory Diseases:
Zithromax
2,010
1,516
1,506
32.59%
0.66%
Diflucan
1,176
1,112
1,066
5.76%
4.32%
1,879
1,735
1,518
8.30%
14.30%
1,338
1,115
990
20.00%
12.63%
Urology:
Viagra
Others:
Zyrtec
Research & Development
R&D Expenses
Billions of Dollars
9.0
7.8
8.0
7.0
6.0
5.0
7.1
4.8
5.2
R&D Expenses
4.0
3.0
2.0
1.0
2001
2002
2003
Year
2004
Patent Expirations
Drug
Expiration Year
Annual Sales (2003)
% of Total Sales
Zithromax
2005
2,010
4.4%
Zoloft
2006
3,118
6.9%
Norvasc
2007
4,336
9.6%
Zyrtec
2007
1,338
3.0%
Aricept
2010
254
0.6%
Lipitor
2010
9,231
20.4%
Xalatan
2011
623
1.4%
Viagra
2012
1,879
4.2%
Detrol
2012
544
1.2%
Celebrex
2013
1,883
4.2%
Bextra
2015
687
1.5%
Genotropin
2015
481
1.1%
2,702
6.0%
Total
29,086
64.4%
Total sales
45,188
Neurontin
20-in-5 Goal

Pfizer’s goal is to submit an unprecedented 20 new
medicines for regulatory approval during the fiveyear period ending in 2006
Major Drugs in the Pipeline
MIDDLE STAGE (PHASE 2):
HIV/AIDS
UK-427,857 a mechanistically unprecedented CCR-5 inhibitor
Organ Transplant Rejection
CP-690,500 a Janus kinase-3 inhibitor for immunosuppression
Sleep Disorders
PD-200,390 a novel alpha-2 delta compound
LATE STAGE (PHASE 3):
Atherosclerosis
Lipitor/torcetrapib a combination to elevate HDL cholesterol and lower LDL
Cancer
edotecarin a next-generation topoisomerse inhibitor for cancer
Cancer*
SU-11,248 a novel angiogenesis inhibitor
COPD/ASTHMA
roflumilast a novel anti-inflammatory agent distinct from existing treatments
Diabetes
Exubera an inhaled insulin system
HIV/AIDS
capravirine a novel antiviral compound active against resistant strains of HIV
Insomnia
indiplon a unique non-benzodiazepine GABA modulator
Macular Degeneration*
Macugen a novel anti-VEGF therapy
Neuropathic
Pain/Epilepsy/Generalized
Anxiety Disorder
pregabalin a neurologic agent develoepd by Pfizer
Osteoporosis
lasofoxifene a selective estrogen receptor modulator to maintain bone density
Parkinson's Disease
sumanirole a novel leva-dopa-enhancing compound
Schizophrenia & Bipolar Disorder
asenapine a 5HT2/D2 antagonist
Smoking cessation*
varenicline a selective nicotine partial agonist
Recently Launched Products

Geodon
 Schizophrenia
 Competitor

Spiriva
 Novel

to Abilify (Bristol-Myers Squibb)
treatment for obstructive pulmomnary disease
Relpax
 Migraine headaches

Caduet
 Single-pill dual

therapy of Lipitor and Norvasc
Inspra
 Post-myocardial-infarction (MI)
heart failure
Recent News

Sept. 30, 2004
 Merck
withdrew arthritis drug Vioxx from the
market

Oct. 15, 2004
 Pfizer
warns that Bextra “may raise heart attack
risk in high-risk bypass surgery patients”

Nov. 10, 2004
 Study
by American Heart Association shows that
Bextra has shown a high incidence of heart attacks
and strokes among patients
1-year Stock Chart
_1year price chart
5-year Stock Chart
5year price chart
Stock chart with industry benchmark
Financial Highlights
(millions of dollars, except share price and dividend)
Share price (e.o.p.)
2004 (ttm)
2003
2002
2001
27.23
35.33
30.57
39.85
52,027
45,188
32,373
29,024
9,138
3,910
9,126
7,788
122,229
116,775
46,356
39,153
53,846
51,398
26,406
20,860
7,956
5,755
3,140
2,609
68,383
65,377
19,950
18,293
7,554
8,702
6,829
6,792
Operating cash flow
14,746
11,725
9,864
8,861
Capital expenditures
2,305
2,641
1,758
2,105
Free cash flow (FCF)
12,441
9,084
8,106
6,756
Dividends per share
0.66
0.60
0.52
0.44
Price-to-book ratio
3.01
4.70
10.46
14.80
Earnings per share (EPS)
1.21
0.45
1.34
1.15
Price-to-earnings (P/E)
22.51
78.63
22.88
34.75
ROA
7.48%
3.35%
19.69%
19.89%
ROE
13.36%
5.98%
45.74%
42.57%
Debt-to-equity ratio
11.63%
8.80%
15.74%
14.26%
Dividend yield (based on purchase @ b.o.p.)
2.17%
1.96%
1.30%
0.96%
Revenue
Net earnings
Total assets
Total liabilities
Total debt
Equity
Number of shares outstanding (e.o.p.)
Market capitalization (e.o.p.)
205,687
307,442
208,763
270,661
Financial Statement Analysis (I)

Deferred taxes increased by $12.87 billion
from 2003 to 2002 due to deferred taxes
recorded in connection with the acquisition of
Pharmacia

40% of revenue growth from 2002 to 2003 was
mainly due to the acquisition of Pharmacia
Financial Statement Analysis (II)

ROE was very strong, above 40%, in 2001 &
2002

ROE in 2003 decreased dramatically to 5.98%
 Increase
of $55.40 billion for additional paid-in
capital due to the Pharmacia deal in 2003
 Lower net income in 2003 due to merger-related
in-process R&D charges => lower ROE
Recommendation
Excellent long-time management team
 Strong existing product lines
 Promising products in pipeline
 Market leader in 14 different prescription
drugs
 Extensive financial resources

BUY
Ticker: MRK
Ray Li
Mission Statement
“To provide society with superior products
and services by developing innovations
and solutions that improve the quality of
life and satisfy customer needs, and to
provide employees with meaningful work
and advancement opportunities, and
investors with a superior rate of return”
Company Statistics
$22.5 billion in sales worldwide (2003)
 2.22 billion shares outstanding

 59.54%
held by institutions
Stock price (Nov. 19): $27.12
 Market cap: $60.206 billion
 63,200 employees worldwide

 33,200
employees in US
Strategies

Develop & launch novel medicines and vaccines
at competitive prices

Aggressively pursuing external alliances with
smaller companies

Lowering cost structure

Maximizing in-line franchises
2003 Highlights

Q4-03: Cut 4,400 positions, to be
completed in 2004

Q4-03: Implemented new distribution
program
 Lowered

quantity limit of average purchases
Withdrew 2 products from late-phase trials
 Diabetes
and depression drug
Management

R. Gilmartin, Chairman, President & CEO (1994)

Term ends 2006

D. Anstice, President, Human Health (1974)

M. Avedon, Senior VP, Human Resources (2002)

R. Clark, President, Manufacturing Division (1972)

K. Frazier, Senior VP, General Counsel (1992)

P. Kim, President, Research Laboratories (2001)

J. Lewent, Executive VP, CFO (1980)

P. Wold-Olsen, President Human Health, Europe, MidEast, Africa
Executive Compensation
Position
R. V. Gilmartin Chairman,
President, CEO
J. C. Lewent
P. Wold-Olsen
D. W. Anstice
P. S. Kim
Executive VP,
CFO, President,
Human Health Asia
President,
Human Health Europe, Middle
East, & Africa
President,
Human Health
President, Merck
Research Labs
Annual Compensation
Salary
Bonus
Other
1,583,340 1,375,000
Long-Term Compensation
Options (#)
527,495
720,000
615,000
137,149
585,004
550,000
137,149
606,674
520,000
137,149
610,008
500,000
140,580
210,998
Joint Ventures

AstraZeneca LP (Nexium, Prilosec)


J&J (dev. & market non-prescription medicines in US)


$669.0 million
Merial (JV w/ Aventis; pharma/vaccines for animals)


$445.8 million
Aventis Pasteur (dev. & market vaccines in Eur)


$1.9 billion plus $391.5 million in preferential return
$1.84 billion
Schering-Plough (cholesterol mgmt – Zetia/Ezetrol)

$469.4 million
Joint Ventures II

Bristol Myers Squibb (Apr. 04)
 Jointly
develop clinical and marketing strategy for a
diabetes drug (muraglitazar ~Phase III)
 Development and commercialization costs to be
shared equally

H. Lundbeck A/S (Feb. 04)
 Exclusive
development and commercialization of a
sleep disorder drug (gaboxadol ~Phase III)
Recent Acquisitions & Divestitures

Increased ownership of Banyu from 51% to 99.4%,
costing $1.5427 billion (2003)




Banyu is one of Japan’s top 10 pharmaceutical companies
Strengthens Merck’s position in Japan
Took $101.8 million charge against useless products
Spun-off Medco Health (2003)


Medco: high volume, low margin mail-order pharmacy
Merck shareholders got 0.1206 share of Medco per Merck share
Recent Acquisitions & Divestitures II

Sold its 50% stake in J&J/MSD Europe (Mar. 04)
 Non-prescription
 For

joint venture
$244 million
Acquired Aton Pharma (Mar. 04)
 Privately-held
biotech
 Anti-tumor agents
Major Product Areas
2003
%
$ millions
Atherosclerosis (Zocor)
23%
5,077.9
Hypertension/hear failure (Cozaar, Hyzaar, Vasotec)
15%
3,421.6
Other (Maxalt, Propecia, Nexium, Prilosec)
13%
2,967.3
Anti-inflammatory/analgesics (Vioxx, Arcoxia)
12%
2,677.3
Osteoporosis (Fosamax)
12%
2,676.6
9%
2,009.4
84%
20,833.1
Repiratory (Singulair)
Revenues by Region
$ million
US
13,321.1
Eur, Mid East, Afr
5,341.3
Japan
1,600.9
Other
2,222.6
Total
22,485.9
Pipeline I
Phase I
Diabetes
c-3347
Pain
c-1246
Alzheimer's disease
c-7617
c-9138
Glaucoma
c-3859
Osteoporosis
c-3578
Multiple Sclerosis
c-6448
AIDS
c-1605
Vaccines
HIV vaccine
Pipeline II
Phase II
Obesity
Phase III
c-2735
Rotavirus vaccine
RotaTeq
c-2624
Shingles
Zoster vaccine
c-5093
Human papillomavirus
HPV vaccine
Diabetes
MK-0431 (2Q04)
Alzheimer's disease
c-9136
Antherosclerosis
c-8834
Respiratory disease
c-3885
Muraglitazar*
Sleep disorders
Gaboxadol
c-3193
Post-operative nausea and
vomiting
c-9280
2003 U.S. Submissions
Vaccines
Pediatric
combination
Pediatric combination vaccine
Cancer
SAHA
Psychiatric Disease
c-9054
2004 U.S. Submissions
Arthritis
c-5997
Arthritis/Pain
c-4462
ProQuad
Arcoxcia
Patents
Drug
Cancidas
Cosopt
Cozaar/Hyzaar
Crixivan
Emend
Fosamax
Invanz
Maxalt
Propecia
Proscar
Singulair
Vioxx
Zocor
Zetia
Expiry
2013
Expired
2009
2012
2012
2008
2013
2012
2006
2006
2012
2013
2006
Revenue (billions)
0.27
0.49
2.5
0.29
0.03
2.7
0.03
0.33
0.24
0.61
2.0
2.6
5.0
2013
0.46
Zocor

$5 billion in annual revenues (2003)






-13% Q3-04 (Wholesaler buy-in in 2003)
+12% Q2-04
+10% Q1-04
#2 selling cholesterol drug in the world
Zocor reduces cholesterol by blocking an enzyme in the
liver helps produce cholesterol
Loses patent in US in 2006
Fosamax

$2.7 billion in annual revenues (2003)





+13% Q3-04
+45% Q2-04
-4% Q1-04
Most prescribed osteoporosis medicine in the world
Inhibits bone removal by osteoclasts (cells that break
down bone material)
Vioxx

$2.5 billion in annual revenues




Sales grew by 2% in 2003 worldwide
Recalled on Sep. 30, 2004


Announcement wiped out $27 billion in market cap
Took Q3 charge of $0.25 per share due to the recall




Regular use > 18 months increased cardiovascular risk
On Sept. 29, MRK closed at $45.07, on Sept. 30 it was $33.00


#1 arthritis and pain medicine outside US
#2 in US
$491.6 million reduction in sales
$93.2 million in inventory write-off
$141.4 million in marketing and administrative expense
Analysts expect a further charge of $0.25-$0.30 per share in Q4
COX-2 Inhibitors




Enzyme: a protein that catalyzes a chemical reaction
COX-2 is an enzyme that aids the production of chemical
messengers (prostaglandins) that cause the pain and swelling of
arthritis
Vioxx works by blocking COX-2
Previous generation of arthritis drugs are called Nonsteroidal antiinflammatory drugs (NSAIDs)

Aspirin, Motrin
 They inhibitor the COX enzyme but have gastrointestinal side effects
 Long-term NSAID usage could lead to stomach ulcers


There was some evidence that COX-2 inhibitors interfered with
enzymes that help prevent cardiovascular disease
Arcoxia: launch possibly delayed until 2009
Litigation


Over 20 million Americans have taken Vioxx
Liability range is $4 billion-$18 billion



This will be spread over the decade
Mostly for CV Event liability, not incl. punitive damage
Issues:




Did Merck knowingly mislead consumers?
18 months usage?
Proving causation
Merck recall voluntary
Cozaar, Hyzaar


Hypertension drug
$2.5 billion in annual revenues (2003)







+14% and +15% Q3-04
+34% and +15% Q2-04
-1% Q1-04
Cozaar is a angiotensin II antagonists (AIIAs)
Angiotensin is a hormone that causes blood vessels to
narrow
Cozaar is 2nd most prescribed AIIA in US and the topseller in Europe
Hyzaar combines Cozaar and a diuretic, removing water
from the blood and lessens blood pressure
1 Year Stock Performance
5 Years Stock Performance
5 Year Relative Performance
Ratios
ROA
ROE
TTM
14.63%
36.95%
2003
16.83%
43.85%
2002
15.02%
39.26%
2001
16.54%
45.37%
2000
16.99%
45.99%
Debt/Equity
38.05%
43.63%
46.97%
55.24%
46.65%
9.91
3.50
15.25
6.69
18.03
7.08
18.73
8.50
32.28
14.85
7,510
16.64%
6,511
14.13%
6,583
12.48%
5,942
11.59%
4,960
11.71%
Cash/sh.
0.82
0.54
1.00
0.94
1.10
Diluted EPS
Dividends
2.74
1.49
3.03
1.46
3.14
1.42
3.14
1.38
2.90
1.26
2,217,584,609 2,221,763,509
2,244,983,250
P/E
P/B
FCF ($ billion)
R&D % of Sales
Shares outstanding
Paid
Pay
dividends since 1935
out ratio of 40%-50%
2,272,729,321 2,307,599,179
2003 Cap Ex Breakdown
Millions of $
Production
facilities
788.3
R&D facilities
763.8
Environmental
projects
41.8
Admin, safety,
general
322
1915.9
Recommendation

Pros
 Strong
balance sheet
 Lots of cash
 May be cheap

SELL
Cons
 Weak
pipeline
 Key management are outsiders
 Vioxx uncertainty
Quarterly Income Statements
Q3-04
Q2-04
Q1-04
Q4-03
5538.1
6021.7
5630.8
5627.1
Materials and production
1364.2
1131.3
1115.8
1228.3
Marketing and administrative
1752.9
1616.2
1611.4
1794.1
Research and development
919.3
986.0
996.3
906.3
Equity income from affiliates
(307.1)
(220.5)
(194.7)
(6.0)
(4.2)
69.9
(240.9)
(56.5)
3,725.1
3582.9
3287.9
3866.2
1,813.0
2438.8
2342.9
1,760.9
487.4
670.7
724.3
365.7
1325.6
1768.1
1618.6
1,395.2
-
-
-
1325.6
1768.4
1618.6
1,395.2
0.60
0.80
0.73
0.63
-
-
-
-
0.60
0.80
0.73
0.63
Continuing Operations
0.60
0.79
0.73
0.62
Net Income
0.60
0.79
0.73
0.62
Sales
Costs, Expenses and Other
Other (income) expenses, net
Income from Continuing Operations Before Taxes
Taxes on Income
Income from Continuing Operations
Income from Discontinued Operations, Net of Taxes
Net Income
Basic Earnings per Common Share
Continuing Operations
Discontinued Operations
Net Income
Earnings per Common Share Assuming Dilution