Pfi zer, lnc.

2009
Vijaya Narapareddy
-
University of Denver

On May 9,2009, Japanese pharmaceutical manufacturer Eisai threatened Pfizer to termi-

nate 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 mil-
lion 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 termina-
tion of their alliance.
Pfizer engages in the discovery, development, manufacture, and marketing of prescrip-
tion 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 offer-
ings and make further inroads into emerging markets. Exhibit 2 provides details of the ben-
efits 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 pre-
scription medicines and the many over-the-counter medical products it offers. The over-
the-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 medi-
cines 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 gen-
erated 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 dou-
ble-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 millions)-continued
PRODUCT PRIMARY INDICATIONS YEAR ENDED DECEMBER 31 % CHANGE
2008 2007 2006 08/07 07to6

All other:
ZyfieclzyfiecD Allergies 129 1,541 1,569 /o?\ (2)
,\A
Alliance revenues Alzheimer's disease (Aricept), 2,251 r,189 1,314 JU
neovascuiar (wet) age-related
macular degeneration (Macugen),
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 ls
. Primary care
. Soecialtv Care
Pharmaceuticals F - Vaccines
. Primary care F - Bioloqics
O . arnrntnav
. Specialty Care
. Oncology
. Established Products 7- Diversified businesses
Research , . Animal Health
.Pf lizer Global R&D tr .'
Lapsugel
Consumer Health
Market presence b . Nutritional Health
. Significant in Emerging .N Racorrrh
lvlarkets E .';;;;; Therapeutics Research Group
. Bio Therapeutics Research Group
Market presence
. Enhanced in Emerging Markets

Soirrce. www.phzer.com

Total Revenues by Business Segment

2008 2007 2006

Pharmaceuticals 91.57c 91.8Vo 93.2Vo
Animal Health 5.87o 5.47o 4.8Vo
Corporate Other 2.7% 2.87o 2.070
TOTAL REVENUES 100.jVc l00.j7o 100.OVa

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

Operating a global business is associated with complex challenges. In addition to multi-

ple 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 play-
ers, 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 pharma-
ceutical 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 over-
seas. 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 Anti-
Monopoly 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 indus-
try, 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 conges-
tive healt failure, stroke, renal failure, and other vascular complications due to hyperten-
sion. 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 com-

pany 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 micro-
financing. 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 Novartis Industry

Market Cap 91.138 52.31B 86.79B 13.99l0rl

Employees 80,250 54,1 00 98,000 33s
Revenue 41.328 23.418 42.298 253.49M
Gross Margin 85,8670 76.03Vo 73.107o 7l.00Vo
Operat. Margins 36.l37a 25.53V0 2l.60Vo 5.89V0
Net Income 7968 5.93B 1.'798 NiA
EPS 1.193 2.185 J.+J N/A

Source: Cornpany Form l0kReports

Pfizer's Product Patent Expiration

lnformation
U.5. Basic Product Patent
Drug Expiration Year
Aricept 20lo
Lipitor 20 t0
Xalatan 2011
Geodon 2012
Viagra 20t2
Detrol 2012
Celebrex 20r4
Zyvox 2015
Lyrica 2018
Chantix 2020
Seizentry 2021
Sutent 202r

Source: SEC Form l0K, February 21,2009

Pfizer's Mission and Vision in

Emerging Markets

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 PFIZER, INC. _ 2OO9

Revenues by Key Products ($ in millions)

PRODUCT PRIMARY INDICATIONS YEAR ENDED DECEMBER 31 % CHANGE

2008 2007 2006 08t07 07t06
Cardiovascular & metabolic diseases:
Lipitor Reduction of LDL cholesterol $ 12,401 q 1' 675
$ r2,886 (2) (2)
Norvasc Hypertension 2,244 3,001 4,866 (2s) (38)
Chantix/Champix An aid to smoking cessation 846 883 101 (4) 173
Caduet Reduction of LDL cholesterol
and hypertension 589 568 370 454
Cardura Hypertension/Benign prostatic
hyperplasia 499 506 538 (t ) (6)
Central nervous system disorders:
Lyrica Epilepsy, post-herpetic neuralgia 2,573 I R?q I ,156 41 58
and diabetic peripheral
neuropathy fi bromyalgia
Geodon/Zeldox Schizophrenia and acute manic 1,007 854 7s8 i8
or mixed episodes associated
with bipolar disorder
Zoloft Depression and certain anxiety
disorders 539 531 2,110 2 (.7 s)
Aricept(a) Alzheimer's disease 482 401 358 20 12
Neurontin Epilepsy and post-herpetic
neuralgia 387 431 496 ( t0) (13)
Xanax/Xanax XR Anxiety/Panic disorders 350 325 316 8
Relpax Migraine headaches 321 -tlf 286 z 10

Arthritis and pain:

Celebrex Arthntis pain and inflammation,
acute pain 2,489 t ton , o?q t2
Infectious & respiratory diseases:
Zyvox Bacterial infections 1,1 15 944 182 18 21
Vfend Fungal infections 743 632 515 18 23
Zithromax/Zmax Bacterial infections 429 438 638 (2) (31)
Diflucan Fungal infections 373 4t5 (10) (5)

Urology:
Vagra Erectile dysfunction 1,934 1,764 1,657 106
Detrol/Detrol LA Overactive bladder 1,214 1,190 l,100 28
Oncology:
Sutent Advanced and/or metastatic renal 847 581 219 46 166
cell carcinoma (mRCC) and
refractory gastrointestinal stromal
tumors (GiST)
Camptosar Metastatic colorectal cancer 563 969 903 (42) 7

Aromasin Breast cancer 465 401 320 16 25

Ophthalmology:
q
Xalatan Claucoma and ocular hypertension 1,745 t,604 1,453 10

Endocrine disorders:
Genotropin Replacement of human growth
hormone 898 843 '795 66
continued
CU
 PFtZER, tNC. 2009
-
Revenues by Business and Geographical Segment

(ln millions of $) u.5. INTERNATIONAL

Year ended Dec.31, 2008 2007 2006 2007 2006
q ?{ ?r1
Pharmaceuticals $ 18,851 $ 21,s48 $ 24,503 $22,816 $ 20,s80
Animal Health 1,168 1,132 1,032 r,657 1,507 | 1'70
Corporate/Other 416 473 281 881 882 690
TOTAL $ 20,435 $ 23,153 $25,822 $ 27,861 $25,265 $ 22,549

ANNUAL PERCENTAGE CHANGES

WORLDWIDE TOTALS U5 INTERNATIONAL

% CHANGE 2008t07 2007to6 2008t07 2007t06 2008t07 2007106

Pharmaceuticals (1) (l) ( 13) (.12) 11 11

Animal Health 7 14 3 10 l0 18

Corporate/Other (12) (10) 10 12

Source: Pfrzer Annual. Report (2O08).

Pfizer's Income Statement (in thousands)

PERIOD ENDING 31-Dec-08 31-Dec-07 31-Dec-06

Total Revenue $48,296,000 48,418,000 48,371,000

Cost of Revenue 8,112,000 11,239,000 7,640,000
Gross Profit 40,184,000 37,179,000 40,731,000
Operating Expenses
Research Development 7,945,000 8,089,000 7,599,000
Selling General and Administrative 14,537,000 15,626,400 15,589,000
Non Recurring 3,308,000 2,817,000 2,1s8,000
Others 2,668,000 3,128,000 3,261,000
Total Operating Expenses 28,4s8,000 29,660,000 28,607,000
Operating Income or Loss 1r,726,000 7,519,000 t2r124,000
Income from Continuing Operations
Total Other Income/Expenses Net ( 1 ,5 16,000) 2,156,000 1,392,000
Earnings Before Interest and Taxes 10,210,000 9,675,000 13,516,000
Interest Expense 516,000 397,000 488,000
Income Before Tax 9,694,000 9,278,000 13,028,000
Income Tax Expense 1,645,000 1,023,000 1,992,000
Minority Interest (23,000) (42,000) (12,000)
Net Income from Continuing Ops 8,026,000 8,213,000 1 1,024,000
Non-recurring Events
Discontinued Operations 78,000 (69,000) 8,313,000

Extraordinary Items
Effect of Accounting Changes
Other Items
8,104,000 8,144,000 19,337,000
Net Income
Preferred Stock and Other Adjustments
Net Income Applicable to Common Shares $ 8,104,000 $ 8,144,000 $ 19,337,000

Source: Pfrzer's2008 Form l0k.

32
 PFTZER, rNC. 2009
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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 $ 2,122p00 3,406,000 1,827,000

Short Term Investments 22,433,000 22,686,000 26,400,000

Net Receivables 13,992,000 9,843,000 9,392,000

Inventory 4,529,000 5,416,000 6,11 1 ,000

Other Current Assets 5,498,000 3,219,000

Total Current Assets 43,076,000 46,849,000 46,949,000

Long Term Investments 11,478,000 4,856,000 3,892,000

Property Plant and EquiPment 13,287,000 15,734,000 16,632,000

Goodwill 2r,464,000 2l,382,000 20,876,000

Intangible Assets l',t,'72r,000 20,498,000 24,350,000

Accumulated Amortization
4,122,000 1,844,000 2,138,000
Other Assets
Deferred Long Term Asset Charges 4,105,000
$ 111,148,000 115,268,000 114,837,000
Total Assets

Liabilities
Curent Liabilities
6,233,000 7,78',7,000 t2,443,000
Accounts PaYable
9,320,000 s,825,000 ) 4\40,0,0
Short/Current Long Term Debt
11,4s6,000 8,223,00O 6,512,000
Other Current Liabilities

27,009,000 21,835,000 21,389,000

Total Current Liabilities
14,53 r ,000 7,314,000 5,546,000
Long Term Debt
8,909,000 13,299,000 8,529,000
Other Liabilities
2,959,000 7,696,000 8,015,000
Def'erred Long Term Liability Charges
184,000 114,000
Minority Interest
Negative Goodwill
53,592,000 50,258,000 43,479,000
Total Liabilities

Stockholderso EquitY
Misc. Stocks Options Warrants
Redeemable Preferred Stock
Preferred Stock 73,; 93,000 141,000
443,000 442,000 441,000
Common Stock
49,142,004 49,660,000 49,669,000
Retained Earnings
(s7,391,000) (s6,847,000) (46,740,000)
Treasury Stock
70,283,000 69,913,000 69,104,000
Capital Surplus
(4,994,000) 1,749,000 (1,2s7,000)
Other Stockholders' EquitY
57,556,000 65,010,000 71,358,000
Total Stockholders' EquitY
$ 111,148,000 115,268,000 114,837,000
Total Liabilities and SE

34
 PFtZER. tNC. 2009
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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 pre-
scribed 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 com-
peting wlth generic versions in 2010. Many analysts contend that the giveaway is a bril-
liant marketing move that will generate low-cost publicity, build consumer loyalty, and
keep inventory from piling up.

In September 2009,Pftzer agreed to pay 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 med-
ications. 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 off-
lable 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 inter-
national patent, market access, and regulatory issues involving at least 20 countries.

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 indus-
try'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

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