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.
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%
R&D (in millions)
Segment Revenue
4.3%
2005
2004
2003
$7442
$7684
$7487
Recent FDA Approvals
Product
Indication
Date of Approval
Exubera
Inhaled form of
insulin
1/2006
Aromasin
Treatment of early
breast cancer
10/2005
Lipitor
Reduce the risk of
stroke in type 2
diabetes patients
9/2005
Zyvox
For treatment of
bacterial infections
in pediatric patients
8/2005
Ellence
Long-term cancer
treatment
3/2005
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

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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



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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’sAaa; S&P-AAA

WACC=9.743%
Results
DCF
Prize: $54.14
2006
2007
Continuation
Value
21,431
19,881
357,807
Stock performance: 6-months
Stock closed last: 24.40
Stock price: 1 year
P/E Ratio Comparison
Company
P/E Ratio
Trailing P/E
ratio
Relative P/E
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%
•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

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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