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 n Two Distinctions: 1) Business model n Biotech: ¨ ¨ n Much smaller and limited resources to market drug Just a research engine Pharmaceutical ¨ Larger and market drug themselves 2) Field of Research n Biotech: ¨ n Use “genetic engineering” Pharmaceutical ¨ Use "empirical screening" to develop drugs
Pharmaceutical Industry Background n The U. S. is the leader in market share and has five of the ten largest companies n Global pharmaceutical sales grew 9% in 2003 to $466. 3 billion n In 2003, 64 blockbuster drugs had sales over $1 billion n Industry is less sensitive to swings in the business cycle n COGS, R&D and Marketing are the largest expenditures Information from Phrma & Yahoo Finance November 2004
Industry Background (cont. ) n Patents are extremely important; they give a company exclusive rights to produce a drug for 20 years n Many pharmaceutical companies attempt to extend their patents by significantly changing the nature of the drug n Future success of a drug company depends heavily on the number and quality of drugs in the pipeline n 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 n The Diagnostic-Led Strategy ¨ n The Single-Pill Strategy ¨ n 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 n In August 2004, New York officials filed a lawsuit against 44 drug makers, claiming they overcharged Medicaid for prescription drugs n Merck’s Vioxx drug was pulled due to risk of heart attacks and strokes n n n Possible legal action by various patient groups May affect sales of Pfizer's Ce. Iebrex & Bextra COX-2 pain reliever U. S. citizens are increasingly angry over rising drug costs, which is fuelling political debate over Canadian imports n n Online sales to the U. S. from Canadian pharmacies are expected to be $1. 2 billion US in 2004 By 2005, over $50 billion of branded pharmaceuticals will have their patents expire
Ethical vs. Proprietary Drugs Ethical: branded and generic drugs sold only through prescription Proprietary: branded or generic drugs sold over the counter ¨ After patent expiration, many of the prescription drugs can apply to the FDA for over-the-counter status. ¨ Lower margins on over-the-counter products ¨ FDA requirements are not as cumbersome for over-the- counter drugs
Product Focus n Most ethical producers focus on 5 main therapeutic areas: - Central nervous system Cardiovascular Gastrointestinal / metabolism agents Anti-infective Respiratory drugs n More concentrated on chronic rather than acute diseases with large patient populations (cancer, arthritis, CVD) n Ulcer medications, cholesterol treatments, and antidepressants are the top three drug categories n Two of the best-selling drugs are Pfizer's Lipitor and Merck’s Zocor for cholesterol
Breakdown of Sales Figures by Area Central Nervous System 24 % Cancers, endocrine system, & metabolic diseases 17 % Digestive and genito-urinary system 13 % Respiratory system 13 % Parasitic and infectious diseases 11 % Cardiovascular agents 10 % Vitamins and related items 6% Dermatological items 3% U. S. Department of Commerce 2002
2003 Top Selling Blockbuster Drugs Source: IMS World Review 2004 **Figures have been adjusted by IMS to include drug sales from distribution agreements
Market Leaders by Market Capitalization ($ billion): Pfizer $205. 1 Johnson & Johnson $179. 7 Glaxo. Kline. Smith PLC $122. 2 Novartis AG $118. 8 Roche Holding AG $87. 4 Aventis SA $70. 9 Astra. Zeneca 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 n Individual Patients n Pharmacies n Physicians n Large Scale Purchasers (Hospitals & Managed Care Providers) n Government Agencies (Medicare & Medicaid)
Large Scale Purchasing Companies n Health Maintenance Organizations (HMO) ¨ ¨ Patients are assigned to a primary care doctor as a "gatekeeper" who decides what health services are needed and when. ¨ n Offers consumers a comprehensive range of benefits at one annual fee 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 n These agencies buy in bulk to get a lower price, thus putting margin pressure on pharmaceutical companies n 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 n Pharmaceuticals spend millions of dollars on lobbying and campaign contributions to influence government n Re-election of Bush is good for U. S. pharmaceuticals Note: The AMEX Pharmaceutical Index increased by 2. 74% the day after the election n Issue of importing cheaper drugs from Canada n Industry is subject to extensive government regulation (ie. FDA, foreign governments, environmental, & price constraints)
Food and Drug Administration n Imposes requirements on product testing, safety, effectiveness, and marketing of pharmaceutical products n Monitors for proper manufacturing and labeling standards n Also responsible for food, medical devices, and cosmetics products n 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 n 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 n Globalization n Aging worldwide population n Longer life expectancy n Increasing demand from developing nations n Outsourcing more activities n Increase in Direct-to-Consumer Advertising
Industry Trends (cont. ) n Increasing drug prices n Rising R&D costs n Increase in mergers, acquisitions, and alliances n Increasing size of the generics market n Increased buying power of insurance companies n 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 Source: http//: www. phrma. org (2004)
Generics Market n Generics now account for over 50% of all prescription drugs n Americans spent over $182. 7 billion dollars on prescription drugs in 2002 n The average branded prescription cost four times as much as a generic drug n 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 n 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 n Founded by Dr. Edward Squibb in 1858 n Bought by Mathieson Chemical in 1952 n Bought by Olin Industries in 1953 1858
History – Bristol-Myers n William Bristol and John Myers founded Clinton Pharmaceutical in 1887 n Renamed to Bristol-Myers in 1900 n Went public in 1929 n 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 n Employee: 44, 000 in over 100 countries (2003) n Global Sales: $20. 9 billion (2003) n Market Capitalization: $46. 05 billion (Sep 30, 04) n Stock Price: $23. 50 (Nov 19, 2004) n Number of Outstanding Shares: 2, 201 million n Annual R&D expense as a percentage of sales: 10% -12% n Largest Market: U. S. , Europe, Japan
Company Overview n Bristol-Myers Squibb (BMS) is a diversified worldwide health and personal care company that researches and manufactures medicines and other products. n 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 n Peter R. Dolan (49) ($5. 92 million ex. option) ¨ ¨ n Andrew R. J. Bonfield (42) ($3. 80 million ex. option) ¨ ¨ n Chief Scientific Officer and President of The Pharmaceutical Research Institute Joined in 1997 Donald J. Hayden Jr. (48) ($2. 66 million ex. option) ¨ ¨ n 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) ¨ ¨ n 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. Mc. Goldrick (63) ($1. 92 million ex. option) ¨ ¨ Executive Vice President and General Counsel Joined in 1995
Recent Events n March 2004 - BMS was found liable for damage for “channel stuffing” between 1999 and 2001 – BMS was fined $150 million n May – BMS & Sanofi sued Apotex on patent infringement on Plavix n August – Investors sued BMS for $300 million claiming that BMS lied about its accounting and investment in Im. Clone
Key Elements of 5 yr Strategy n Focus on 10 Disease Areas n Increase Sales and Marketing emphasis on specialists and high value Primary Care prescribers n Invest in R&D and R&D growth n Increase A&P spending behind growth drivers n Enter the biologics business n Target all other spending flat or slightly down over the next several years
Successful Past Partnerships n Sanofi-Synthelabo ¨ Co-developed Avapro and Plavix n Otsuka Pharmaceutical ¨ Co-developed Abilify n Im. Clone Systems ¨ Co-developed Erbitux
Current Strategic Partnerships n Merck & Co. ¨ n Corgentech ¨ n co-developing Basulin Solvay Pharmaceuticals ¨ n co-developing E 2 F Decoy Flamel Technologies S. A. ¨ n co-developing and co-promoting Muraglitazar co-developing SLV 319 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 Im. Clone 14. 4 million share at $70 (19. 9% of outstanding share) Acquired Oct 1, 2001 Du. Pont 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 ($ million) 2004 3 rd. Q 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 3 rd. Q Sales ($ million)
Selected Key Products n 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 n 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 n 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 n Abilify (schizophrenia) n Erbitux (cancer) n Reyataz (HIV/AIDS)
Compounds in Development
Compounds Under Development n Abatacept (phase III) ¨ n rheumatoid arthritis Entecavir (phase III) ¨ n hepatitis B Muraglitazar (phase III) ¨ n LEA 29 Y (phase II) ¨ n E 2 F Decoy (phase III) ¨ vein graft failure prevention n Ixabepilone (phase III) ¨ cancer n MDX-010 (phase III) ¨ metastatic melanoma deep vein thrombosis prevention Javlor (phase II, III) phase III for bladder and nonsmall cell lung cancer ¨ phase II for breast and ovarian cancer ¨ n solid organ transplant Razaxaban (phase II) ¨ n type 2 diabetes and other metabolic disorder
Other Business Segment n Oncology Therapeutic Network (OTN) n Nutrition ¨ Mead Johnson n Other Healthcare ¨ Conva. Tec ¨ Medical Imaging ¨ Consumer Medicine
Sales Breakdown by Business Segment Source: 2003 Annual Report
Sales by Geographic Areas Source: 2003 Annual Report
Cost Breakdown (2003)
R&D as a Percentage of Sales $ million
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 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 Im. Clone Scandal
d tu by x r FD eje A cte bi Er A c D qu iv is Pe est itio rio itu n / d re 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, 200 2, 198 Operating Cash Flow ($ million): 2, 493 3, 512 945 5, 372 4, 652 Dividend per share: 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 n Pros ¨ Extremely strong pipeline ¨ n Cons High dividend yield Patent expiration for key products ¨ ¨ ¨ Uncertain litigation outcome ¨ Dividend payout sustainability in question ¨ Financial statement accuracy in question Strong cash flow HOLD
Mission Statement n Mission ¨ n 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 n A research-based, global pharmaceutical company that discovers, develops, manufactures and markets prescription medicines for humans and animals, and consumer healthcare products
Company Statistics n Market capitalization: US$205. 07 billion n Employees (worldwide): 122, 000 n Annual R&D expenses as a % of revenues: 15 -16% n Largest markets: North America, Europe and Japan n Stock symbol: PFE (NYSE) n Stock price: US$27. 23 (as of November 19, 2004) n Number of outstanding common shares: 7. 53 billion
Company Highlights in 2003 n With the addition of Pharmacia in 2003, Pfizer became the #1 pharmaceutical company in every region of the world n 14 of the company’s prescription medicines were category leaders n In 2003: ¨ 65 th consecutive year of cash dividends ¨ 37 th consecutive year of dividend increases
Strategic Alliance n 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 n Pharmacia ¨ Deal completed in April, 2003 ¨ US$55. 97 billion n Identifiable intangible assets: US$37. 07 billion n Goodwill: US$21. 40 billion ¨ Financing n Issuance of 1. 8 billion shares of Pfizer common stock (≈29% dilution) n 180 million options on Pfizer common stock n 6, 000 shares of Pfizer Series A convertible perpetual preferred stock (convertible into approximately 15. 5 million shares of Pfizer common stock) n 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 $1, 862, 323. 05 0. 72% 6/30/2004
Officers n Henry A. Mc. Kinnell (1970), Chief Executive Officer (12 th CEO in Pfizer’s history) n David Shedlarz (1976), Chief Financial Officer, Executive Vice President n Karen Katen (1974), Executive Vice President, President of Pfizer Pharmaceuticals Group n Nat Ricciardi (1974), President of Pfizer Global Manufacturing n John La. Mattina (1977), Senior Vice President, President of Pfizer Global Research and Development n Peter Corr (2000), Senior Vice President of Science and Technology (from Warner-Lambert) n Yvonne Jackson (2002), Senior Vice President of Human Resources (from Compaq)
Executive Compensation Annual Compensation Name Principal Position Dr. Mc. Kinnel Chairman and CEO Long-Term Compensation LTIP Payouts ($) All Other Compensation ($) 1, 000, - 000 2, 786, 9 78 249, 390 1, 434, 4 00 326, 8 40 275, 000 1, 510, 4 48 103, 631 889, 1 33 1, 043, 1 00 260, 8 66 225, 000 1, 216, 3 79 79, 922 2, 00 3 827, 9 00 901, 5 00 248, 9 89 200, 000 857, 7 03 68, 962 2, 00 3 806, 0 00 815, 0 00 242, 4 03 110, 000 1, 316, 6 30 89, 354 Year Salary ($) Bonus ($) 2, 00 3 2, 042, 7 00 4, 607, 4 00 Ms. Katen Executive V. P. ; President, Pfizer Global Pharmaceutical 2, 00 s 3 1, 086, 7 00 Mr. Schedlarz Executive V. P. ; CFO 2, 00 3 Mr. Kindler Senior V. P. of General Counsel Dr. Corr Senior V. P. of Science and Technology Restricted Stock Awards ($) Securities Underlying Options (#)
Major (Revenue) Markets – Geographic Breakdown (2003 figures) % of total revenues n United States 59% n Japan 6% n All other 35% 100%
Revenues Breakdown
Operating Segments (2003 figures) Pharmaceutical n Consumer healthcare n Animal healthcare n Other n % of total revenues 87. 7% 6. 7% 3. 5% 2. 1% 100%
Major Product Areas n n n 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) n n n n Lipitor (Cardiovascular) $9. 23 billion Norvasc (Cardiovascular) 4. 34 billion Zoloft (Anti-depressant) 3. 12 billion Neurontin (Epilepsy) 2. 70 billion Zithromax (Infectious diseases) 2. 01 billion Celebrex (Arthritis) 1. 88 billion Viagra (Erectile dysfunction) 1. 88 billion $25. 14 billion (≈55. 6% of total revenues)
Major Products I n Lipitor ¨ Treatment for lowering cholesterol ¨ #1 best-selling prescription drug in the world ¨ Worldwide sales of $9. 23 billion in 2003 n 20. 43% of total company sales ¨ 10% growth in Sept. 2004 in U. S. n Maintained a 43% total prescription share
Major Products II n Norvasc ¨ World’s most-prescribed branded antihypertensive therapy n 4 th best-selling drug in the world ¨ Worldwide sales of $4. 34 billion in 2003 n 9. 60% of total company sales ¨ Sales declined in the 3 rd quarter of 2004 compared to the same period in 2003 n Patent expirations in some EU countries
Major Products III n Zoloft ¨ World’s leading antidepressant ¨ #10 best selling drug in the world ¨ Worldwide sales of $3. 12 billion in 2003 n 6. 90% of total company sales ¨ Sales declined in 3 rd quarter of 2004 compared to same period in 2003 n Overall market decline due to media coverage of the use of antidepressants in children and teenagers
Revenues Growth – Major Products (millions of dollars) Revenues 2003 2002 % change 2001 03/02 Cardiovascular: 02/01 Lipitor 9, 231 7, 972 6, 448 15. 79% 23. 64% Norvasc 4, 336 3, 846 3, 581 12. 74% 7. 40% Central Nervous System: Zoloft 3, 118 2, 742 2, 365 13. 71% 15. 94% Neurontin 2, 702 2, 269 1, 751 19. 08% 29. 58% Arthritis and Pain: Celebrex 1, 883 100 76 1783. 00% 31. 58% Bextra 687 - N/A 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% Urology: Viagra 1, 879 1, 735 1, 518 8. 30% Others: Zyrtec 14. 30% 1, 338 1, 115 990 20. 00% 12. 63%
Research & Development
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% Neurontin 2, 702 6. 0% Total 29, 086 64. 4% Total sales 45, 188
20 -in-5 Goal n 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 5 HT 2/D 2 antagonist Smoking cessation* varenicline a selective nicotine partial agonist
Recently Launched Products n Geodon ¨ Schizophrenia ¨ Competitor to Abilify (Bristol-Myers Squibb) n Spiriva ¨ Novel treatment for obstructive pulmomnary disease n Relpax ¨ Migraine headaches n Caduet ¨ Single-pill dual therapy of Lipitor and Norvasc n Inspra ¨ Post-myocardial-infarction (MI) heart failure
Recent News n Sept. 30, 2004 ¨ Merck withdrew arthritis drug Vioxx from the market n Oct. 15, 2004 ¨ Pfizer warns that Bextra “may raise heart attack risk in high-risk bypass surgery patients” n Nov. 10, 2004 ¨ Study by American Heart Association shows that Bextra has shown a high incidence of heart attacks and strokes among patients
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Financial Highlights (millions of dollars, except share price and dividend) 2004 (ttm) 2003 2002 2001 Share price (e. o. p. ) 27. 23 35. 33 30. 57 39. 85 Revenue 52, 027 45, 188 32, 373 29, 024 Net earnings 9, 138 3, 910 9, 126 7, 788 Total assets 122, 229 116, 775 46, 356 39, 153 Total liabilities 53, 846 51, 398 26, 406 20, 860 Total debt 7, 956 5, 755 3, 140 2, 609 Equity 68, 383 65, 377 19, 950 18, 293 Number of shares outstanding (e. o. p. ) 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% 205, 687 307, 442 Market capitalization (e. o. p. ) 208, 763 270, 661
Financial Statement Analysis (I) n Deferred taxes increased by $12. 87 billion from 2003 to 2002 due to deferred taxes recorded in connection with the acquisition of Pharmacia n 40% of revenue growth from 2002 to 2003 was mainly due to the acquisition of Pharmacia
Financial Statement Analysis (II) n ROE was very strong, above 40%, in 2001 & 2002 n 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 n Strong existing product lines n Promising products in pipeline n Market leader in 14 different prescription drugs n Extensive financial resources n 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) n 2. 22 billion shares outstanding n ¨ 59. 54% held by institutions Stock price (Nov. 19): $27. 12 n Market cap: $60. 206 billion n 63, 200 employees worldwide n ¨ 33, 200 employees in US
Strategies n Develop & launch novel medicines and vaccines at competitive prices n Aggressively pursuing external alliances with smaller companies n Lowering cost structure n Maximizing in-line franchises
2003 Highlights n Q 4 -03: Cut 4, 400 positions, to be completed in 2004 n Q 4 -03: Implemented new distribution program ¨ Lowered quantity limit of average purchases n Withdrew 2 products from late-phase trials ¨ Diabetes and depression drug
Management n R. Gilmartin, Chairman, President & CEO (1994) ¨ Term ends 2006 n D. Anstice, President, Human Health (1974) n M. Avedon, Senior VP, Human Resources (2002) n R. Clark, President, Manufacturing Division (1972) n K. Frazier, Senior VP, General Counsel (1992) n P. Kim, President, Research Laboratories (2001) n J. Lewent, Executive VP, CFO (1980) n P. Wold-Olsen, President Human Health, Europe, Mid. East, Africa
Executive Compensation
Joint Ventures n Astra. Zeneca LP (Nexium, Prilosec) ¨ n J&J (dev. & market non-prescription medicines in US) ¨ n $669. 0 million Merial (JV w/ Aventis; pharma/vaccines for animals) ¨ n $445. 8 million Aventis Pasteur (dev. & market vaccines in Eur) ¨ n $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 n 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 n H. Lundbeck A/S (Feb. 04) ¨ Exclusive development and commercialization of a sleep disorder drug (gaboxadol ~Phase III)
Recent Acquisitions & Divestitures n 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 ¨ n 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 n Sold its 50% stake in J&J/MSD Europe (Mar. 04) ¨ Non-prescription joint venture ¨ For $244 million n 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 c-2735 Rotavirus vaccine Rota. Teq c-2624 Shingles Zoster vaccine c-5093 Obesity Phase III Human papillomavirus HPV vaccine Diabetes MK-0431 (2 Q 04) 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 vaccine Cancer SAHA Psychiatric Disease c-9054 2004 U. S. Submissions Arthritis c-5997 Arthritis/Pain c-4462 Pro. Quad Arcoxcia
Patents
Zocor n $5 billion in annual revenues (2003) -13% Q 3 -04 (Wholesaler buy-in in 2003) ¨ +12% Q 2 -04 ¨ +10% Q 1 -04 ¨ n n n #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 n $2. 7 billion in annual revenues (2003) +13% Q 3 -04 ¨ +45% Q 2 -04 ¨ -4% Q 1 -04 ¨ n n Most prescribed osteoporosis medicine in the world Inhibits bone removal by osteoclasts (cells that break down bone material)
Vioxx n $2. 5 billion in annual revenues ¨ ¨ n n Sales grew by 2% in 2003 worldwide Recalled on Sep. 30, 2004 ¨ n Announcement wiped out $27 billion in market cap Took Q 3 charge of $0. 25 per share due to the recall ¨ ¨ ¨ n Regular use > 18 months increased cardiovascular risk On Sept. 29, MRK closed at $45. 07, on Sept. 30 it was $33. 00 ¨ n #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 Q 4
COX-2 Inhibitors n n 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 ¨ n n There was some evidence that COX-2 inhibitors interfered with enzymes that help prevent cardiovascular disease Arcoxia: launch possibly delayed until 2009
Litigation n n 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 ¨ n Issues: Did Merck knowingly mislead consumers? ¨ 18 months usage? ¨ Proving causation ¨ Merck recall voluntary ¨
Cozaar, Hyzaar n n Hypertension drug $2. 5 billion in annual revenues (2003) +14% and +15% Q 3 -04 ¨ +34% and +15% Q 2 -04 ¨ -1% Q 1 -04 ¨ n n Cozaar is a angiotensin II antagonists (AIIAs) Angiotensin is a hormone that causes blood vessels to narrow Cozaar is 2 nd 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 n. Paid dividends since 1935 n. Pay out ratio of 40%-50%
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 n Pros ¨ Strong balance sheet ¨ Lots of cash ¨ May be cheap n SELL Cons ¨ Weak pipeline ¨ Key management are outsiders ¨ Vioxx uncertainty
Quarterly Income Statements Q 3 -04 Q 2 -04 Q 1 -04 Q 4 -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 Income from Continuing Operations Before Taxes 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 (income) expenses, net Taxes on 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
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