Pfi zer, lnc.

Vijaya Narapareddy University of Denver

2009

On May 9,2009, Japanese pharmaceutical manufacturer Eisai threatened Pfizer to terminate its long-standing partnership on the news of Pflzer's proposed acquisition of Wyeth. Eisai's venture with Pflzer dates back to the mid-1990s when Pfizer entered into an

alliance to sell Eisai's Aricept, the world's leading medicine fur the treatment of
Alzheimer's disease. Headquartered in New York City, Pfizer generated about $482 million in 2008 from the sale of Aricept, an increase of 20 percent fiom 2007, as shown in Exhibit l. Pflzer vows to fight back, claiming that Eisai lacks any legal basis for termination of their alliance.
Pfizer engages in the discovery, development, manufacture, and marketing of prescription medicines for humans and animals worldwide. Some of its well-known drugs are Lipitor, Viagra, Lyrica, Zeldox, and Aricept used for people, as well as Draxxin used fbr cattle.

The proposed Ptizer acquisition of Wyeth, a company based in Madison, New Jersey, for a cash and stock purchase of $68 billion would enable Pflzer to diversity its product offerings and make further inroads into emerging markets. Exhibit 2 provides details of the benefits of the proposed Wyeth acquisition.

Pfizer operates from three business segments, Pharmaceuticals, Animal Health, and a third one that contains "Corporate & Other." The Pharmaceuticals business offers human health products for the treatment of cardiovascular diseases, central nervous system disorders, arthritis and pain, infectious and respiratory diseases, urogenital conditions, cancer, eye disease, endocrine disorders, and allergies, among others. Pfizer is well known fbr its prescription medicines and the many over-the-counter medical products it offers. The overthe-counter self-medications range from oral care, upper respiratory health to tobacco dependence, skin and eye care, and hair growth. The Animal Health division offers medicines for livestock and pets. The company also manufactures empty gelatin capsules and engages in producing contract and bulk pharmaceuticals/chemicals, which it classifies under "Corporate/other" business. The company's revenues by segment are provided in Exhibit 3 and reveal that the Pharmaceuticals business dorninates the portfolio with over 90 percent of the revenues generated each year, whereas the Animal Health division accounts for only 5 percent each year. The "Corporate/other" segment is the smallest of all, with less than 3 percent of total sales.

Pfizer's international operations contributed $27.9 billion in revenues in 2008 as opposed to the $20.4 billion generated in the United States. Exhibit 4 provides detailed statistics of revenues by business segment and geographic region. This exhibit indicates that the double-digit declines in U.S. sales of Pharmaceuticals have been off'set by double-digit growth in international sales.
From Case 25 of Strategic Management: Concepts and Cases.l3le. Fred R. David. Copyright O 201 I by Pearson Edr.rcation. Published by Prentice Hall. All rights reserved. ZY

PFtZER. rNC.

2009

Revenues by Key Products ($ in

PRODUCT

millions)-continued
YEAR ENDED DECEMBER
31

PRIMARY

INDICATIONS

% CHANGE
08/07 07to6

2008
All other: ZyfieclzyfiecD
Alliance revenues
Allergies Alzheimer's disease (Aricept), neovascuiar (wet) age-related
macular degeneration (Macugen), 129

2007

2006

1,541

1,569 1,314

/o?\
,\A

(2)
JU

2,251

r,189

Parkinson's disease (Mirapex), hypertension (Exforge and Olmetec), multiple sclerosrs (Rebil) and chronic obstructive pulmonary disease (Spiriva)
(a) Represents direct sales under license agrcement with Eisai Co., Ltd. Certain amounts and percentages may reflect rounding adjustments

Sottrce: Pfrzer's2008 Fctnn 10k,

The Proposed Wyeth Merger Benefits to Pfizer Wyeth diversifies offering and expands presence in EMS
Biopha rmaceutica

Pharmaceuticals

. . . .

Primary care Specialty Care Oncology Established Products

F F
O

. .

ls

Primary care
Soecialtv Care - Vaccines

. arnrntnav

Bioloqics

7, tr b
.N

Diversified businesses

Research Pf lizer Global R&D

Market presence . Significant in Emerging

lvlarkets

. ' . .

Animal Health
Lapsugel Consumer Health Nutritional Health

Racorrrh

.';;;;; Therapeutics Research Group . Bio Therapeutics Research Group .

Enhanced in Emerging Markets

Market presence

Soirrce. www.phzer.com

Total Revenues by Business Segment

2008 Pharmaceuticals
91.57c 5.87o

2007
91.8Vo

2006
93.2Vo 4.8Vo

Animal Health
Corporate Other

5.47o 2.87o

2.7% 100.jVc

2.070
100.OVa

TOTAL REVENUES

l00.j7o

Sor.trce: Pfrzer AnnuaL Report (2008'1.

Operating a global business is associated with complex challenges. In addition to multiple and diverse regulatory environments to contend with, global companies like Pfizer are subject to unexpected changes in revenues and profits resulting from unpredictable cunency fluctuations. Pfizer's income statement is provided in Exhibit 5. Note that Pfizer's sales in 2006,

200'7,afi 2008 were approximately $48.37 billion, $48.42 billion, and $48.3 billion,

respec-

tively. During the same time period, Pfizer's net income was $19.34 billion, 118.14 billion, and $8.10 billion, respectively. Note that Pfizer's Research & Development expenditures rose $7.6 billion in 2006 to $7.9 billion in 2008, whereas Selling, General, and Administrative (SG&A) expenses declined from $15.59 billion in 2006 to $14.54 billion in 2008.
21

PFTZER, tNC,

2009

Pfizer's consolidated Balance Sheet in Exhibit 6 reveals that total assets shrunk fiom $114.84 billion in 2006 ro $111.15 billion in 2008, and total liabilities increased lrom $43.48 billion in 2006 to $53.59 billion in 2008. Note that total stockholders' equity iell 19.34 percenr, from $71 .36 billion in 2006 to Xi57.56 billion in 2008.

Pfizer faces high competition in all its business segments due to the presence of many players, large and small, in the industry. Bayer AG, Merck & Co., and Novartis AG are Pfizer's direct competitors in the pharmaceutical industry. Of the four maior players in the pharmaceutical industry, Ptizer and Merck are American companies Bayer is German, and Novartis is Swiss. A comparison of key indicators included in Exhibit 7 shows that Pfizer leads the pack, with Novarlis trailing closely behind. With $97.13 billion in market capitalization, Pfizer is the largest company in this strategic group. It has 80,250 employees, second to Novarlis, but it is the leader in revenues ($1'7.32 biilion), gross margins (85.86 percent), operating margins (36.13 percent), and net income of $7.96 billion. However, note that Pfizer has the lowest earnings per share ($1.23) and price-earnings (PlE) ratio among its direct competitors.

The Wyeth acquisition is fraught with potential risks. First and foremost, there are severai regulatory hurdles to overcome not only from regulators in the United States, but also overseas. Some of these approvals include the expiration or termination of the waiting period under the Hart-Scott-Rodino Act, a decision to be issued by the European Commission under the EC Merger Regulation declaring that the proposed merger is compatible with the

Common Market, and the approval of the proposed acquisition under the China AntiMonopoly Law and by regulators in Canada and Australia as well' The acquisition would also increase Pfizer's debt because it is set to take on about $i22.5 billion of debt in addition to assuming Wyeth's debt. Servicing this much additional
debt is a risky move for Pfizer, which experienced a decline of revenues from $48.42 billion tn2007 to $48.3 billion in 2008. Assuming the merger agreement moves forward unencumbered, Pfizer will assume all responsibilities for pending litigation facing Wyeth. Like other companies in the industry, Wyeth is currently facing various iawsuits and litigation claims related to patents, product liability, consumers, commercial, securities, environmental and tax laws, and government investigations. Outcomes of these pending claims can overburden Pfizer and mitigate potential benefits fiom the Wyeth acquisition. Pfizer also faces iitigation in several courts around the world. For example, Pfizer is in a contentious battle in a Jamaican court to protect its patented medication amlodipine (Norvasc) used for treating high biood pressure to avoid complications of severe congestive healt failure, stroke, renal failure, and other vascular complications due to hypertension. The company is fighting the Jamaican court's decision that Pfizer's patent on its drug

expired in Jamaica as it had expired in other countries. At home, Pfizer spent about $900 million in June 2008 to settle pending U.S.

consumer fraud-related class action lawsuits and personal injury claims involving Celebrex and Bextra. Several ofPfizer's key products are slated to expire in the near future, as indicared in Exhibit 8.

As shown in Exhibit 9, Pfrzer is determined to become the leading biopharmaceutical company in emerging markets through bold and innovative parlnerships. In addition to traditional partnerships, alliances, mergers and acquisitions, Pfizer recently partnered with world-c1ass foundations and nonprofit organizations like the Grammeen Foundation in Bangladesh, whose founder is Mohammad Yunus, the recipient of the Nobel Peace Prize in 2006 for his efforts in alleviating poverty through microfinancing. Pfizer recently entered into a partnership with Grammeen Health, an affiliate of Grammeen Foundation, to bring sustainable health-care delivery models that address

PFTZER, rNC.

2009

Overview of Direct Competitors

Pf

izer

Merck
52.31B
54,1 00

Novartis
86.79B

Industry
13.99l0rl 33s

Market Cap
Employees Revenue Gross Margin Operat. Margins

91.138
80,250

98,000

41.328
85,8670

23.418
76.03Vo 25.53V0

42.298
73.107o

253.49M
7l.00Vo
5.89V0

36.l37a

2l.60Vo

Net Income
EPS

7968
1.193

5.93B

1.'798
J.+J

2.185

NiA N/A

Source: Cornpany Form l0kReports

Pfizer's Product Patent Expiration

lnformation
Drug
U.5. Basic Product Patent Expiration Year

Aricept

Lipitor
Xalatan Geodon

20lo 20 t0
2011

2012

Viagra Detrol
Celebrex

20t2
2012

20r4
2015
2018

Zyvox Lyrica
Chantix
Seizentry Sutent
Source: SEC Form

2020
2021

202r
l0K, February 21,2009

Pfizer's Mission and Vision in Emerging Markets

ffi 1;; ; ;
ffi]H
n*"0*

;;;";;;;;;;;;;;;of patrents In Emerging lvlarkeis

--l
{

rround the r,vorld in

i i

ffi$

on innovative.

ffiil"o'"

*nn''.

socially resFansibie and c*mtnercialiy

_
irnr

We w!11... iI:vt:ii,i bolcl shl innovalive

r!:i{rh O:rtirnis r.r
l,.1vr.r

t']rr:i1i!s

qEver feaeheal llefor

In

lfavldB n.:il[ili9.,.]!rd:tlliigi

6f affcrdable nlrnoi
rrr

li! ttc)qil:z.:d lor lrirrnrq it'! bgsr talent

areiilthcare

1*.trr::c a leading biopharmaceuliEal conrpary ir F!!r.rri,lin$ trlnrka:i:;

S o u rc e

ww

w.pftzelcom

?6

LL

'Jezlld roJ uBId cl8eluJls Jee.(-eorql Jualc u eJuderd 'serrunoc SurSrerue ut eldoad sselc-re,uo1 uo 8ut -snroJ oslu ,^Aou eJe stuJg l^rJ stl puu rezg6 'eldoed sselc-.reddn pu -elpplul uo Sutsnco3 uql reqled 'reuenb tt{t sonue^er rozgd lelol uollllq 8'0I$ Jo 1no 'uot11tq ?'lg ore^\ sle>l -reu SurS;erue IuoU senueler s(Jezgd '6002 Jo relrenb lsrg eq] 3ur;nq '.{e>pn; pu 'eISSnd '{Ir.zet7 'erpu1 'eurq3 olur flprder Surpuedxe sI rezlJd'lonzeue1 ol uonlppe uI'senssl qcns srolruoru qcrq,^d 'qlieH SIAU ol Sutproccu 'EI1Z q uollllq S9Z$ qtuor plnoqs reqlunu
5002

)Nr 'uSzlld

PFIZER, INC.

2OO9

Revenues by Key Products ($ in millions)

PRODUCT

PRIMARY

INDICATIONS

YEAR ENDED DECEMBER 31

% CHANGE

2008
Cardiovascular & metabolic diseases:

2007
q 1' 675
3,001 883

2006

08t07 (2) (2s) (4) 454

(t )
41

07t06

Lipitor
Norvasc

Reduction of LDL cholesterol Hypertension

$ 12,401 2,244 846

589 499

$ r2,886
4,866
101

(2) (38)
173

Chantix/Champix
Caduet Cardura

An aid to smoking cessation

Reduction of LDL cholesterol
and hypertension

568 506

370
538

Hypertension/Benign prostatic
hyperplasia (6)

Central nervous system disorders:

Lyrica

Epilepsy, post-herpetic neuralgia and diabetic peripheral neuropathy fi bromyalgia

Schizophrenia and acute manic or mixed episodes associated

2,573

I R?q

,156

58

Geodon/Zeldox

1,007

854

7s8

i8

with bipolar disorder Zoloft

Aricept(a) Neurontin Xanax/Xanax XR Relpax
Depression and certain anxiety disorders 539
531

2,110
358

Alzheimer's disease Epilepsy and post-herpetic

neuralgia

482
387 350

401 431

2 20
(

(.7

s)

12

496
316

t0)
8

(13)

Anxiety/Panic disorders Migraine headaches

325 -tlf

321

286

10

Arthritis and pain:

Celebrex

Arthntis pain and inflammation,

acute pain

2,489

t ton
944
632 438

o?q

t2

Infectious & respiratory diseases: Zyvox Bacterial infections

Vfend Zithromax/Zmax
Fungal infections

1,1 15

182
515 638

743
429

Bacterial infections
Fungal infections

Diflucan Urology:

373 1,934 1,214

4t5
1,764 1,657

18 18 (2) (10) 106 28

46

21

23

(31)
(5)

Vagra
Detrol/Detrol LA Oncology:
Sutent

Erectile dysfunction
Overactive bladder

1,190

l,100
219

Advanced and/or metastatic renal cell carcinoma (mRCC) and refractory gastrointestinal stromal
tumors (GiST)

847

581

166

Camptosar

Metastatic colorectal cancer

Breast cancer

563 465

969
401

903

(42)
16

Aromasin

320

25

Ophthalmology:
Xalatan Claucoma and ocular hypertension
Replacement of human growth hormone

1,745

t,604

1,453

10

Endocrine disorders:
Genotropin
898
843 '795

66
continued

CU

PFtZER, tNC.

2009

Revenues by Business and Geographical Segment

(ln millions of
$)

u.5.

INTERNATIONAL 2006 $ 24,503 q 2007 2006 $ 20,s80

Year ended Dec.31,

Pharmaceuticals

2008
$ 18,851
1,168

2007
$ 21,s48

?{ ?r1
r,657
881

$22,816
1,507

Animal Health
Corporate/Other

1,132
473 $ 23,153

1,032
281

| 1'70 690 $ 22,549

416
$ 20,435

882

TOTAL

$25,822

$ 27,861

$25,265

ANNUAL PERCENTAGE CHANGES

WORLDWIDE TOTALS
U5

INTERNATIONAL

% CHANGE
Pharmaceuticals

2008t07
(1)
7

2007to6

2008t07
(

2007t06
(.12)
10

2008t07
11

2007106
11

(l)
14

13)
3

Animal Health
Corporate/Other

l0
10

18 12

(12)

(10)

Source: Pfrzer Annual. Report (2O08).

Pfizer's Income Statement (in thousands)

PERIOD ENDING

31-Dec-08 $48,296,000 8,112,000

31-Dec-07

31-Dec-06 48,371,000 7,640,000 40,731,000 7,599,000 15,589,000

Total Revenue
Cost of Revenue

48,418,000
11,239,000

Gross Profit Operating Expenses

Research Development

40,184,000 7,945,000
14,537,000 3,308,000

37,179,000
8,089,000 15,626,400 2,817,000 3,128,000 29,660,000 7,519,000

Selling General and Administrative Non Recurring

Others

2,1s8,000 3,261,000
28,607,000

2,668,000 28,4s8,000 1r,726,000

(

Total Operating Expenses

Operating Income or Loss

Income from Continuing Operations Total Other Income/Expenses Net Earnings Before Interest and Taxes
Interest Expense

t2r124,000
1,392,000 13,516,000 488,000 13,028,000 1,992,000

,5

16,000)

2,156,000 9,675,000
397,000

10,210,000 516,000

Income Before Tax Income Tax Expense

9,694,000
1,645,000

9,278,000
1,023,000

Minority Interest
Net Income from Continuing Ops Non-recurring Events Discontinued Operations Extraordinary Items Effect of Accounting Changes Other Items

(23,000)
8,026,000

(42,000)
8,213,000
1

(12,000)
1,024,000 8,313,000

78,000

(69,000)

Net Income
Preferred Stock and Other Adjustments

8,104,000

8,144,000 $ 8,144,000

19,337,000

Net Income Applicable to Common Shares

Source: Pfrzer's2008 Form l0k.

8,104,000

$ 19,337,000

32

PFTZER, rNC.

2009

Pfizer's Balance Sheet

(all numbers in thousands)
PERIOD ENDING

31-Dec-08

31-Dec-O7

31-Dec-06

Assets

Current Assets
Cash and Cash Equivalents Short Term Investments $ 2,122p00 3,406,000 1,827,000 26,400,000

22,433,000
13,992,000

22,686,000 9,843,000
5,416,000 5,498,000

Net Receivables Inventory Other Current Assets

9,392,000
6,1
1 1 ,000 3,219,000

4,529,000
43,076,000 11,478,000 13,287,000

Total Current Assets

Long Term Investments Property Plant and EquiPment

46,849,000
4,856,000 15,734,000

46,949,000 3,892,000 16,632,000 20,876,000 24,350,000 2,138,000 114,837,000

Goodwill
Intangible Assets Accumulated Amortization Other Assets Deferred Long Term Asset Charges

2r,464,000
l',t,'72r,000 4,122,000 $ 111,148,000

2l,382,000
20,498,000 1,844,000 4,105,000 115,268,000

Total Assets

Liabilities Curent Liabilities

Accounts PaYable Short/Current Long Term Debt Other Current Liabilities
6,233,000 9,320,000 11,4s6,000 27,009,000
14,53 r ,000 7,78',7,000

t2,443,000

s,825,000
8,223,00O

4\40,0,0

6,512,000 21,389,000 5,546,000 8,529,000 8,015,000

Total Current Liabilities

Long Term Debt
Other Liabilities Def'erred Long Term Liability Charges

21,835,000
7,314,000 13,299,000 7,696,000 114,000 50,258,000

8,909,000

2,959,000
184,000 53,592,000

Minority Interest
Negative Goodwill

Total Liabilities
Stockholderso EquitY Misc. Stocks Options Warrants
Redeemable Preferred Stock Preferred Stock

43,479,000

73,;
443,000 49,142,004 (s7,391,000)
70,283,000

93,000 442,000 49,660,000 (s6,847,000)

69,913,000 1,749,000 65,010,000 115,268,000

141,000 441,000 49,669,000

Common Stock
Retained Earnings Treasury Stock

(46,740,000)
69,104,000

Capital Surplus Other Stockholders' EquitY

(4,994,000)
57,556,000

(1,2s7,000)
71,358,000 114,837,000

Total Stockholders' EquitY Total Liabilities and SE

$ 111,148,000

34

PFtZER. tNC.

2009

the needs o1'4 billion people worldwide with incomes of less than $3,000 a year. Another innovative partnership involves Pflzer and PlaNet Finance, which is examining ways in which health-care access mav be exoanded in China.

In May 2009,Pfizer announced it was giving away more than 70 of its most widely prescribed drugs, including Lipitor and Viagra, tbr up to a year to people who have lost jobs in calendar 2009 and had been taking the drug for three months or more. "Everybody knows now a neighbor, a relative who has lost their job and is losing their insurance. People are definitely hurting out there," Dr. Jorge Puente, Pfizer's head of pharmaceuticals outside the United States and Europe, told the Associated Press in an exclusive interview. "Our aim is to help people bridge this point."
The 70-plus drugs covered in the new Pfizer program include several diabetes drugs

as well as some of Pflzer's top money makers, from cholesterol fighter Lipitor to painkiller Celebrex. Also included are fibromyalgia treatment Lyrica and also Viagra, used lbr male erectile dysfunction. The new Pfizer program includes some antibiotics, antidepressants, heart medications, contraceptives, and smokin-e cessation products. Cheaper generic versions are available for most of the drugs. The new program will likely help prevent patients from switching to cheaper brands or generics through the worst of the recession and could help retain those taking top-seller Lipitor, which will begin competing wlth generic versions in 2010. Many analysts contend that the giveaway is a brilliant marketing move that will generate low-cost publicity, build consumer loyalty, and keep inventory from piling up.

a record $2.3 billion to settle civil and criminal charges over marketing of its recalled Bextra arthritis drug and three other medicines. The charges involved representatives ofPfizer promoting dlugs for conditions that they had not been approved for and giving doctors kickbacks to encourage them to prescribe the medications. This is the largest such settlement in the United States for claims o1'off-label drug promotion, topping the $ I .42 billion Eli Lilly (LLY) agreed to pay earlier in 2009 for offlable sales of its Zyprexa schizophrenia drug. Moreover, the $1.3 billion criminal penalty related only to Bextra is "the largest criminal fine ever imposed in the United States for any matter," according to the U.S. Department of Justice. The settlement also involves pain management pill Lyrica, the schizophrenia treatment Geodon, and the anti-infection drug Zyvox, as well as nine other medicines. The world's biggest drugmaker, Pfizer spent nearly $5.6 million lobbying the U.S. government in the second quarter of 2009 on health-care reform, government spending on medication, and patent and trade issues, according to a recent disclosure report. Pfizer nearly doubled its lobbying spending from the $3.1 million in the year-ago period. The company lobbied on legislation on numerous health refbrm provisions, including health insurance, information technology, electronic prescriptions, drug pricing, allowing generic versions of expensive biologic drugs, and requiring research comparing the effectiveness of medications and other types of treatment as well as on U.S. patent reform and on international patent, market access, and regulatory issues involving at least 20 countries.

In September 2009,Pftzer agreed to pay

Drug firms are reducing, not adding, to their sales forces. By the end of 2008, the number of pharmaceutical sales representatives in the United States had decreased to 90,000 from a high of about i 06,000 in 2006. In early 2009, Amylin Pharmaceuticals cut 35 percent of its sales force, or 200 representatives. For the tlrst time in fifty years, sales of prescription drugs in the United States declined in 2009 fbr a variety of reasons. The United States has historically been the industry's largest and most profitable area, but now drug companies are looking more and more to developing countries such as Venezuela. Sales of prescription drugs in developing or emerging markets increased to $152.7 billion in 2008, up fiom $67.2 billion in 2003. This
JO

8e