The Pharmaceutical Industry Presented to Geoffrey Poitras Bus 417 Thursday, March 16, 2006
Agenda Industry Analysis Merck Aventis Pfizer Sarah Vefghi Richard Li Nicole Yau Taraneh Ahrabian
Industry Analysis Market Leaders, Regulatory Bodies, Industry-wide Issues, and Future Trends
Typical Value Chain of a Pharmaceutical Product using Biotechnology Discovery of Marketing of the Product
Top Ten Companies In Terms of Market Capitalization Pfizer Johnson & Johnson Glaxo. Smith. Klein Roche Holding Novartis Sanofi-Aventis Astra Zeneca Merck Eli Lilly & Co. Wyeth Source: Yahoo Finance 182. 15 B 180. 88 B 141. 87 B 135. 28 B 128. 65 B 122. 80 B 75. 70 B 72. 71 B 64. 67 B 62. 78 B
Top-Selling Drugs, 2004 (US Only) Lipitor (Pfizer) Zocor (Merck) Prevacid (Abbott Laboratories) Nexium (Astra. Zeneca) Procit (Ortho Biotech) Zoloft (Pfizer) Epogen (Amgen) Plavix (Bristol-Myers Squibb) Advair (Glaxo. Smith. Klein) Zyprexa (Eli-Lilly) Source: IMS health $3. 0 B $7. 7 B $4. 6 B $3. 8 B $3. 2 B $3. 1 B $3. 0 B $2. 9 B $2. 8 B
Top-Selling Drugs, 2004 (Global) Lipitor (Pfizer) $12. 0 B Zocor (Merck) $ 5. 9 B Plavix (Bristol-Myers Squibb) $ 5. 0 B Nexium (Astra. Zeneca) $ 4. 8 B Zyprexa (Eli-Lilly) $ 4. 8 B Norvasc (Pfizer) $ 4. 8 B Advair (Glaxo. Smith. Klein) $ 4. 7 B Erypo (Ortho Biotech) $ 4. 0 B Prevacid (Abbott Laboratories) $ 3. 8 B Effexor (Wyeth) $ 3. 7 B Source: IMS health
Therapeutic Class Breakdown Cholesterol: Sales in the US in $ thousands
Therapeutic Class Breakdown Cont… Proton Pump Inhibitors/Stomach Acid (US sales, $ thousands)
Theraputic Class Breakdown Cont… Antidepressants (US sales only, $ thousands)
Sales Data Sales in prescription drugs increasing n n Up 5. 4% in 2005 from 2004 Sales of $251. 8 B Generic Growth up 20. 6% during 2005 Source: IMS health
2003 Pharmaceutical Sales by Region World Audited Market 2003 Sales ($ 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
New Drug Development The New Drug Approval Process
The FDA Government regulatory body for the industry 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 The FDA approval does not mean a product is harmless Source: fda. gov, prev presentation
New Drug Application The FDA reviewer’s key decisions: n n n “Whether the drug is safe and effective in its proposed use(s), and whether the benefits of the drug outweigh the risks. Whether the drug's proposed labeling (package insert) is appropriate, and what it should contain. Whether the methods used in manufacturing the drug and the controls used to maintain the drug's quality are adequate to preserve the drug's identity, strength, quality, and purity. ” Source: www. fda. gov
Drug Approval Process Average of 10 - 15 years and $800 million - $1 billion to nurture a drug from initial discovery to market Process: n Academic and Laboratory Research n Testing done on animals n Phase 1: Drug given to a small number of healthy people to test its safety n Phase 2: Drug administered to 100 or more people with the disease that it was intended to treat n Phase 3: Rigorous testing done on larger groups of ill patients n FDA Review – Approval/Disapproval Source: www. fda. gov (and prev. presentation)
Pre Clinical Tests The beginning of the drug approval process To see the potential effects on humans, tests are performed on: n n n Isolated tissues Cell Cultures Animals Company decides whether to put the drug into the human testing process, based on the marketability of the product, their financial situation On average, only one compound in a thousand will actually make it to human testing
The IND Filing The goal is to provide pre-clinical data of sufficient quality to justify the testing of the drug in humans FDA has 30 days to review the Investigational New Drug (IND) application Must be filed annually until the completion of clinical testing At this time patents are usually applied for; patents last generally for 20 years About 85% of all IND applications move on to begin clinical trials If they succeed, 20% chance of the product making it to the market
Phase I Duration: 1 to 3 years Sample size: less than 100 patients Test on: Healthy volunteers If passed this Phase, chances of the product reaching to the market will be 30% Begins to analysis and develop the drugs safety profile How the drug is absorbed, metabolized and excreted
Phase II Duration: 2 years Sample size: 100 – 300 patients Test on volunteers who suffer from the disease Upon passing this Phase, chances of the product reaching to the market will be 60% To evaluate the drug's safety and assess side effects Establishes the optimal dosage of the drug
Phase III Duration: 3 -4 years Sample size: >1000 patients Test on volunteers who suffer from the disease If passed this phase, chances of the product reaching to the market will be 70% Verifies the drug’s effectiveness in its intended use Assessment of long term effects
NDA Filing Upon desirable results from Phase III, New Drug Application (NDA) will be submitted NDA contains data supporting the efficacy and safety of the drug Approval can take 2 month to several years, but on average, it takes around 18 to 24 months Drugs are subject to ongoing review, making sure no adverse side effects appear from the drug. After FDA’s approval, the drug can be marketed and distributed
Patent Generally last 20 years Since most companies file for patent during pre-clinical trials, usually the patent is only good for another 10 years or so after it gains FDA approval What can be patented n Product n Method n Use Examples n DNA and RNA sequences n Proteins, enzymes, antibiotics n Antibodies, antigens n Micro-organisms, cell lines, hybrids
Key Points about the Clinical Process To bring a drug through all phases of the clinical trial process, it costs around: n n $800 M - $1 B 10 -15 years Key factors that determine the quality of a company's pipeline: n one or more successful products on the market n a large pipeline of candidate drugs with some in late-stage n enough cash to fund the development of their new drug candidates
Drug Discovery Process
Drug Approval in Canada Health Canada is in charge of new drug approval n Works “in tandem” with FDA Manufacturer must file New Drug Submission (NDS) Two generation reproduction studies are needed Notice of Compliance granted if NDS is satisfactory Source: ctv. ca
Facts and Figures
Advertising Costs $1. 3 B spent on magazine advertising last year $2. 4 B spent on cable and television network last year
Research and Development Costs $ 39. 4 B spent on R&D in 2005 by Ph. RMA members n n Up from $37 B in 2004 Up from $2 B spent in 1980
Generic Drug Sales
Prescriptions
Industry Market Capitalization Healthcare Industry 2558. 25 B Major Drug Manufacturers 1060. 70 B Source: Yahoo Finance
Industry Ratios Major Drug Manufacturers and the Healthcare Sector: P/E ROE% DIV. YIELD 18. 82 13. 24 1. 57 LT DEBT TO EQUITY PRICE TO BOOK VALUE NET PROFIT MARGIN PRICE TO FREE CASH FLOW 0. 01 12. 16 8. 94 -49. 27
Troubles the Pharmaceutical Industry is Facing
Patent Expiration 2006: Patents expire on $17 billion in sales for prescription drugs Expected loss of $25 billion in sales over the next three years for “blockbuster” drugs Expected loss of $40 billion expected in total Source: IMS health
Patent Exposure
Patent Protection However, drugs may have several patents n n Specific delivery method product/molecule manufacturing process medical indication w How molecules react n Specific Combination w Fixed dose/combination of several molecules Source: www. southcentre. org
Drug Backlash People needing medical attention are increasingly rejecting manufactured drugs n n Push towards more natural healing methods to avoid unpleasant side-effects Natural Healing is growing and becoming big business Food is being used as a substitute for medication
Substitutes for Drugs - Examples Dark chocolate is being pegged as the next new thing to combat blood pressure and prevent heart problems – could it replace Aspirin? Cherries and berries are being used by many elderly people with mild arthritis rather than joint medication
Drug Substitutes cont… Olive oil, fish oil, and flax seeds are being used to treat high cholesterol “Cleansing” methods involving apple juice and olive oil are being used to pass gallstones n Surgery – and the subsequent medication needed – are being shoved aside
Image Issues Pharmaceutical companies depend on ailments to succeed n This can create an image problem, as patients have become far less trusting Pharmaceutical companies are being accused of withholding potentially valuable preventative and alternate healing information from patients
Pricing Problems American Association of Retired Persons disagreeing with price increases: Prices up 7. 1% for brand-name drugs in 2004 n inflation was only 2. 7% Lipitor could increase price by 5% next year From 1999 -2004, Drug prices increased by 35. 1% on average; inflation was only 13. 5% Generic drug prices increased only 0. 5% in 2004 n More competition Source: Ad Med News
Safety Issues People worry about side-effects of drugs n Example: Accupril, a blood pressure medication, may cause kidney disease and/or failure Patients worry than side-effects may be worse than the original problem being treated
Safety Issues cont… The Vioxx crisis sent the Pharmaceutical Industry into a tailspin n There are questions as to whether or not patients can ever trust that their medications are safe. The Industry is now left to recover from a “Case of Bad PR” Source: Businessweek. com
Drug Instructions There are worries that people who are immigrants (and therefore speak different languages) or who are illiterate cannot properly read instructions Taking drugs improperly can lead to the drug not being effective or worse: overdose n n Side-effects can be magnified Immediate Death may result Source: msn. com, Does Intelligence Really Matter?
Drug Instructions Cont… Around 300, 000 adverse drug effects take place each year in US hospitals alone Many undesirable drug effects are preventable FDA will introduce new prescription drug instructions n n Known in industry as “Package Inserts” First revision in 25 years Source: www. phrma. org
Generic Growth Generic prescriptions grew from 33% in 1990 to 54% in 2004 Global generic sales estimated to grow from $29 billion in 2003 to $49 billion in 2007 Ave. brand-name drug price: $84. 21 Ave. generic drug price: $30. 56 n Generic manufacturers retain $5 more in profits Source: IMS health
Trends
Aging Population: Baby Boomers This could be a new opportunity for the Pharmaceutical Industry n n Baby boomers will be needing more medical care, including medication Baby boomers want to continue living full, active lives into old age, and there is room for the Pharmaceutical Industry to help them
Market Arthritis n 46 million adults (non-institutionalized) in the U. S. (2003) n 21% of adults (non-institutionalized) in the U. S. (2003) Cancer n 23 million suffering worldwide. Estimated of 1. 37 million people in the US were diagnosed with cancer in 2005 n about 1 in 3 lifetime risk; 38% of women and 43% of men n The average cost of cancer treatment is well over $100, 000 person. n Estimated $280 billion spent on treatment drugs for cancer annually. More than $100 Billions in US Diabetes n Estimated 18. 2 million people in the United States, or 6. 3% of the population (2005) n 165 million cases worldwide (2003) n $132 billion spent in direct and indirect costs in America (2002) Heart Disease n 25 million adults in the US n Heart disease and stroke cost US around $214 billion annually. ($115 billion direct) (2002)
Weight Loss Drugs FDA panel recently approved an overthe-counter fat-blocking drug n n Manufactured by Glaxo. Smith. Klein Is not a “magic bullet” – users will still need to control what they eat w Potential for misinterpretation by patients
Weight Loss Drugs cont… The Pharmaceuticals track record for “magic” diet pills is quite poor n Fen- Phen – a very, very dangerous diet drug that needed to be pulled off the shelves brought the dangers of diet pills to light However, if a truly safe, “magic bullet”-type diet drug were produced, it would most likely become the best-selling drug of all time Source: Dr. Andrew Weil, Eating Well for Optimum Health
Bottling Food To keep up with the “natural healing” trend, many companies are making pills out of foods with healing properties n n This is good for patients who cannot eat the actual food to due allergies, sensitivities, or taste issues Purity of pill can be an issue; it is important to read labels carefully
North America vs. Europe
Market Cap Trends Pfizer dropped from 205. 1 B in 2004 to 182. 15 B as of early 2006 Roche has risen from 87. 4 B to 135. 28 B in the same amount of time European Pharmaceutical Companies are putting much more emphasis on Research and Development – not so with North American firms Source: The National Post, Financial Post, January 21, 2006
Ethical Issues with Drug Testing SFBC International Inc. is the largest private centre for drug testing in North America US senate is cracking down on SFBC n n Questions as to whether or not they are truthfully reporting methodologies and results of clinical trials Questions as to whether or not they are truthfully reporting their financials
Ethical Issues cont… The Miami-Dade County Unsafe Structures Board has also cracked down on the SFBC n They are giving them a chance to correct “defects” at their facility in Miami There was fear that there is a lack of safety and integrity over their testing methods n Participants may have been subject to unsafe and dangerous situations Source: Bloomberg. com
Does the SFBC’s Problem Really Impact the Industry? It is forcing people to think about the way their over-the-counter and prescription drugs are being tested Bloomberg. com is covering this in an ongoing report titled “Big Pharma’s Shameful Secret” – putting a less-thanflattering spotlight on the industry
In Summary… What to look for in a pharmaceutical company n n Promising new drugs in the pipeline Patents on existing “blockbuster” drugs w Patents on the drug itself w Patents on the development, delivery n Success and track record of existing drugs
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 Overview a global research-driven pharmaceutical company dedicated to putting patients first. Established in 1891, Merck discovers, develops, manufactures and markets vaccines and medicines to address unmet medical needs. The company devotes extensive efforts to increase access to medicines through farreaching programs that not only donate Merck medicines but help deliver them to the people who need them. Merck also publishes unbiased health information as a not-for-profit service
Management Committee Richard T. Clark, CEO and president, Merck & Co. , Inc. , 2005; (1972) David W. Anstice, president, Human Health-Asia Pacific since 2005 (1974) Marcia J. Avedon, Ph. D. , senior vice president, Human Resources since 2003(2002) Willie A. Deese, president, Merck Manufacturing Division since 2005(2004) Kenneth C. Frazier, senior vice president and general counsel since 1999 (1992) Peter S. Kim, Ph. D. , president, Merck Research Laboratories (MRL) since 2003 (2001) Judy C. Lewent, executive vice president and chief financial officer since 2005 (1980) Adel A. F. Mahmoud, M. D. , Ph. D. , chief medical advisor, Vaccines and Infectious Diseases, Merck Vaccine Division (MVD) since 2005 (1998) Margaret G. Mc. Glynn, president, Merck Vaccine Division (MVD) since 2005 (1983) J. Chris Scalet, senior vice president, Global Process and Services, and Chief Information Officer since 2006 Bradley T. Sheares, Ph. D. , president, U. S. Human Health since 2001 (1987) Per Wold-Olsen, president, Human Health - Intercontinental since 2005 (1973)
Executive Compensation
Company Statistics Market Capitalization: $77. 07 Billion Total Sales Worldwide: $22. 01 Billion Total Shares Outstanding: 2. 2 Billion Stock price: $35. 23 (March 15, 2006) Total employee hired worldwide: 61, 500 (Dec 2005) --approximately 31, 900 employed in the US
Geographic Revenue Segments
Revenue Drivers
Major Products I Zocor #2 selling cholesterol drug in the world Zocor reduces cholesterol by blocking an enzyme in the liver helps produce cholesterol $4. 4 billion sales worldwide (2005) -drop 16% from $5. 2 billion in 2004 -represent 20% of the company revenue -lost patent in Canada and some European countries (2003) Will lose patent in US (June 2006) -expect a huge sales decline -only $2. 3 to $2. 6 billion for 2006
Major Products II Fosamax Most prescribed osteoporosis medicine in the world Inhibits bone removal by osteoclasts (cells that break down bone material) $3. 2 billion sales worldwide (2005) -14. 5% of total sales Will lose patent in US (Feb 2008) -expect a huge sales decline after that time
Major Products III Cozaar / Hyzaar High blood pressure drug 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 top-seller in Europe Hyzaar, Cozaar and a diuretic, removing water from the blood and lessens blood pressure $3 billion sales worldwide (2005) - 8% increase over 2004 -13. 6% of total revenue
Major Products IV Singulair Drug for chronic asthma and relief of symptoms of allergic rhinitis $3 billion sales worldwide (2005) - 13% increase over 2004 - 13. 6% of total sales
Joint Ventures Sanofi-Aventis S. A. in 1997 (provide pharmaceuticals and vaccines for animals) Sanofi Pasteur S. A. in 1994 (develop and market vaccines in Europe) Johnson & Johnson in 1989 (develop and market nonprescription medicines for U. S. consumers)
Joint Ventures II Astra AB (Astra) in 1982 (develop and market Astra products in US) -Equity income of $833. 5 million in 2005, $646. 5 million in 2004 Schering-Plough in 2000 (develop and market new prescription medicines in the cholesterol management and respiratory therapeutic areas in US) -Equity income of $570. 4 million in 2005, $132. 0 million in 2004 H. Lundbeck A/S in 2004 (Exclusive development and commercialization of a sleep disorder drug ) Bristol Myers Squibb in 2004 (jointly develop clinical and marketing strategy for a diabetes drug)
Acquisitions & Divestitures Increased ownership of Banyu from 51% to 99. 4%, costing $1. 5427 billion (2003) -Japan is the world’s second largest pharmaceutical market -Banyu is one of Japan’s top 10 pharmaceutical companies -strengthens Merck’s position in Japan Acquired Aton Pharma (2004) -privately-held biotech -novel treatments for cancer and other serious diseases
Acquisitions & Divestitures II Medco Health Spin-Off(2003) -Medco: high volume, low margin mail-order pharmacy -Merck shareholders get 0. 1206 share of Medco per Merck share Sold its 50% stake in J&J/MSD Europe to J&J for $244 million -continue to benefit through royalties - regain the rights to potential future products that switch from prescription to over-the-counter status in Europe
New Corporate Strategy Called “Merck’s Plan to Win” Developed by more than 200 of Merck’s senior managers Announced on Dec 15, 2005
Merck’s Plan to Win Focusing the research and development efforts on nine priority disease areas -Nine disease areas: Alzheimer’s disease, atherosclerosis, cardiovascular disease, diabetes, novel vaccines, obesity, cancer, pain and sleep disorders -Become acknowledged leader in treating or preventing disease by 1) building scientific leadership in these areas 2) pursuing acquisitions and licensing opportunities that help their work in the labs
Merck’s Plan to Win completely redefining discovery and development process -redefining our research and development model -increasing the productivity of our pipeline -use the most advanced scientific techniques to improve our rates of success throughout the R&D process
Current R&D Pipelines
R&D Expenditures
Merck’s Plan to Win create a new commercial model to provide all the customers the right information, at the right time, in the right way - more information resources through easily accessible channels 1) Internet 2) health professionals - two products per sales representative 1) focused and more value - A more targeted consumer education - expect to reduce the company’s US spending per brand by 15%-20% within next 5 years
Merck’s Plan to Win Emerging pharmaceutical markets - build a long-term leadership position in those markets - double the sales in those markets to $2 Billion by 2010
Merck’s Plan to Win create a lean and flexible cost structure - includes all general and administrative processes, global commercial processes, product development and lifecycle management process and developing partners to which they can outsource non-core activities eg. sell or close five manufacturing sites and two preclinical sites and cut 7, 000 positions world-wide by the end of 2008
RISK Factors
Vioxx $2. 5 Billion annual sales in 2003 -#1 arthritis and acute pain medicine outside the US -#2 in the US Use >18 months will cause heart attack and stoke Voluntarily withdraw worldwide (Sep 30, 2004) share price dropped from $45. 07 to $33. 00(one day) $27 billion in market cap was erased
Vioxx 9, 650 Vioxx liability lawsuits has been filed (Dec 31, 2005) 19, 100 plaintiffs has involved (Dec 31, 2005) The company spent $285 Million in legal defense during 2005 Increase the reserve amount to $685 Million for legal fees through 2006 and 2007 (Dec 2005) Unpredictable outcomes in lawsuits, substantial damages, fines, criminal penalties
Patents’ Expiration
Other Risk Factors Failure in developing and acquiring commercially successful products - decline in sales of Zocor and fosamax needs new pipeline Failure in regulatory approval Competition from other products 1) More efficiency 2) price pressure Unexpected future changes in government laws and regulations
Financial Results
Financial Highlights
Key Ratios
Stock Chart (6 Months)
Stock Chart (3 Years)
Stock Chart (5 Years)
Statement of Income
Balance sheet (Part I)
Balance sheet (part II)
Statement of Cash Flows (Part I)
Statement of Cash Flows (Part II)
Summary Pros • lots of cash • Maybe cheap Cons • Reletively inexperienced core managements • Tons of lawsuits against Vioxx • Weak pipeline • Unpredictable corporate restructuring • Key revenue drivers near expiration • Foreseeable intense products’ competition
Recommendation SELL
Company Overview Headquartered in Paris, France # 1 in Europe, # 3 worldwide in the pharmaceutical industry Present in more than 100 countries throughout the 5 continents. 5, 3% Market share Total number of shares: 1, 401, 306, 569 Capitalization (€): 105, 238, 126, 592 as of 3/2/ 06
History Formed in Aug 20, 2004 when Sanofi. Synthelabo merged with Aventis Sanofi- Synthelabo was formed in 1999 when Sanofi merged with Synthelabo Aventis was formed in 1999 when Rhone-Poulenc S. A. merged with Hoechst Marion Roussel
Management Chairman and CEO: Jean- Fran. Deputy Compensation paid: € 2. 74 million Granted 740, 000 stock options Senior Executive VP: Gerarad Le Fur (02 08) Compensation paid: € 1. 73 million Granted 377, 000 stock options Executive VP : Hanspeter Spek Senior VP : Jean-Claude Armbruster, Gilles Brisson, Pierre Chancel, Gilles Lhemould, Helnz -Werner Meler, James Mitchum, Christian Lajoux, Marie-Helene Lalmay, Jean-Pierre Kerjouan, Oliver Jacquesson, Nicole Cranois CEOG Finance: Jean-Claude Leroy Shareholder Relations: Pierre-Michel Bringer Investor Relations: Sanjay Gupta Note: 4, 185, 530 options granted > senior management
7 Therapeutic Areas Cardiovascular: Aprovel® Avapro® Function: anti -hypertension Thrombosis: Plavix® Lovenox® Clexane® Function: anticoagulant Oncology: Taxotere® Eloxatine® Function: Cancer treatment Metabolic Disorder : Lantus ® Amaryl® Function: Insulin for diabetes Central Nervous system : Stilnox®/ Copaxone® Function: Insomnia, reduce frequency of relapse Internal medicine : Allegra® Ketek ® Telfast® Function: Anti- infectives Vaccine
Major Revenue Drivers Products sales Q 4 05 % Lovenox Sales FY 05 FY 2005 % € 572 9% € 2143 13. 80% € 518 16. 90% € 2026 20. 20% Taxotere € 425 15. 50% € 1609 12. 80% Eloxatin € 423 19. 50% € 1564 30. 60% Stilnox/Ambien € 430 19. 10% € 1519 10. 60% Allegra € 160 -58. 50% € 1345 -9. 10% Lantus € 345 45% € 1214 47. 50% Tritace € 285 4% € 1009 2. 40% Copaxone € 256 24. 90% € 902 13. 90% Aprovel € 231 13. 20% € 892 0. 70% Amaryl € 135 -28. 60% € 677 23. 80% Actonel € 89 18. 70% € 364 4. 60% Depakine € 80 2. 60% € 318 18. 40% Xatral € 91 24. 70% € 328 -2. 10% Nasacort € 72 -5. 30% € 278 14% Plavix Total € 4112 6. 80% € 16188 16. 80%
Selected Key Products Lovenox – treatment for thrombosis
Selected Key Products Lantus: 24 hr insulin for metabolic disorder (blockbuster drug for Sanofi-Aventis)
Revenue by business segment & Geographic area Cardiovascular/Thrombosis: 39% Central Nervous System: 29% ; Oncology: 11% Internal Medicine: 18% ; Others: 3%
Business Strategy Ambitious research to ensure sustainable growth ( R&D investments) Innovation for basic medicines and vaccines Global Presence to ensure growth Mobilized resources
Recent Event Filed lawsuit with Procter & Gamble against Roche and Glazosmithkline for misleading advertising about the osteoporosis medication (Boniva) Start of hearings of motion for preliminary injunction in the Allegra" patent infringement case. Oct 27, 05 Entered into an agreement to transfer its rights of Exubera, an inhaled human insulin, to Pfizer. Alliance formed in 98, jointly developed Exubera (human insulin)
Alliance with. . Roche in 2006 , will develop shikimic acid by fermentation for Tamilflu supply chain Pfizer in 98, jointly developed Exubera (an inhalation device for recombinant human insulin) Bristol Myers Squibb in 97, jointly developed antihypertensive agent: Aprovel/Avapro/Karvea Procter & Gamble in 97, jointly developed Actonel, treatment and prevention of osteoporosis.
Growth 04 -05
Strongest Performance Products in 05
New Product launch in 2005
Risk Factors Integration of the Sanofi-aventis and Aventis - diverted management’s focus from other strategic opportunities. Incurred substantial debt in acquisition of Aventis. - (16 billion at Dec 2004) Depend on US market - US market is dominated by major US companies - Exchange rate risk : €/$ Potential changes in health care policies in US Foreign exchange rate risk - particularly sensitive to movements in €/$, ￡/$ and ￥/$
R&D portfolio (Cpd in development) Preclinical Phase IIa Phase IIb Phase III Total Cardiovascular 5 3 2 4 1 15 Thrombosis 4 1 1 3 1 10 Central Nervous System 10 6 3 2 7 28 Oncology 7 4 3 1 4 19 Metabolic Disorders 4 4 3 2 1 14 Internal Medicine 9 6 4 2 1 22 Vaccines 9 2 4 4 2 21 48 26 20 18 17 129 Total R&D portfolio updated on January 31, 2006
2005 consolidated Income Statements
Consolidated Balance Sheet 1
Consolidated Balance Sheet 2
Cash Flow Statement 1
Cash Flow Statement 2
Benchmark Stock Indices French pan-sector index - CAC 40 European pan-sector indices - Dow Jones Euro Stoxx 50 FTS Eurofirst 100, FTS Eurofirst 80 European pharmaceutical index - Dow Jones Stoxx Pharma American pan-sector indices NYSE International 100, NYSE World Leaders
5 Years Stock Comparison GSPC – S&P 500 IXIC – NASDAQ Dow DJI
One Year Stock History
Three Years Stock History
Financial Ratios - Price Ratios Sanofi - aventis Industry P/E 16 N/A P/S 3. 88 3. 58 P/BK Value 2. 35 3. 36
Financial Ratios. . Sanofi Aventis Industry Debt/ Equity 0. 16 0. 29 Current Ratio 0. 8 1. 6 Quick Ratio 0. 5 1. 1 Interest Coverage N/ A 2. 9 Leverage Ration 2 2. 2 Bk Value/ Share 19. 12 10. 69
Financial Ratios - Investment Returns (in%) ROE SNY Industry 14% ROA 6. 9 % -0. 7 % ROC 12. 1 % -1. 2 % β = 0. 75
DIRECT COMPETITOR COMPARISON SNY Market Cap 120. 52 B 64. 74 B 77. 32 B 191. 01 B 279. 14 M 96, 439 42, 600 63, 000 106, 000 126 Qtrly Rev Growth 38. 80% 6. 40% 0. 30% -8. 90% 28. 30% Revenue 34. 10 B 14. 65 B 22. 01 B 51. 30 B 26. 41 M Gross Margin 74. 85% 76. 28% 76. 61% 83. 77% 81. 78% EBITDA 12. 81 B 4. 39 B 9. 28 B 20. 92 B -5. 95 M Operatin Margins 32. 09% 24. 91% 26. 62% 29. 90% -27. 75% 7. 58 B 2. 00 B 4. 63 B 8. 09 B -12. 26 M EPS 2. 83 1. 813 2. 105 1. 09 -0. 35 P/E 15. 91 31. 6 16. 8 23. 82 25 PEG (5 yr expected) 1. 38 1. 84 5. 03 2. 39 1. 29 P/S 3. 54 4. 4 3. 49 3. 72 7. 35 Employ es e Net Income LLY MRK PFE Industry
Analysis from financial statements Dividend Rate = 0. 78 Dividend Yield = 1. 7 % Payout Ratio = 29% Dividend: 2003: € 1. 02 2004: € 1. 2 2005: € 1. 52 Net sales: + 9. 3 % EPS : + 25. 7% (18. 2% in 2004) Adjusted EPS: +25. 7% at € 4. 74 ( average number of shares: 1, 336. 5 m)
Analysis from financial statements 2 Operating income: +18. 7% at € 9, 072 m (33. 2% of net sales) Adjusted net income : + 26. 1% at € 6, 335 m Net Profit Margin: € 18. 56 LT Debt: € 4, 750 (€ 8, 654 in 2004)
Analysis from financial statements 3 Gross margin ratio : + by 1. 2 points in 2005 - Strong sales, favorable product mix, purchasing efficiencies R&D Expenses : + 2. 0% (€ 3, 961 million) - Discontinuation of some R&D collaborations and impact of pre-acquisition restructuring program
DCF Valuation ROE = 14% ; b = 29% => g = ROE * (1 -b) = 0. 0994 => D(1) = 0. 78 ( 1+ 0. 0994) = 0. 8575 Assume WACC = 12% DDM = D 1/ (k – g) = 41. 62
Recommendation HOLD
French GAAP VS US GAAP French GAAP License income Revenue License income Government levies selling& general expense cost of gd sold Require financial disclosures in US GAAP Classification difference : eg Exceptional items and intangible assets
Mission Statement 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 n We dedicate ourselves to humanity's quest for longer, healthier, happier lives through innovation in pharmaceutical, consumer, and animal health products
Line of Business Pfizer Inc. is a research-based, global pharmaceutical company. It discovers, develops, manufactures market leading prescription medicines for humans and animals as well as many of the world’s best known consumer healthcare products.
Company Statistics Market capitalization: US$191. 31 billion Average Volume (3 months): 33, 466, 600 Employees (worldwide): 106, 000 Annual R&D expenses as a % of revenues: 14. 5% in 2005 Largest markets: North America, Europe and Japan Stock symbol: PFE (NYSE) Stock price: US$25. 95 ( closing price as of March 15, 2006) 52 week Range: 20. 27 -29. 21 Number of outstanding common shares: 7. 53 billion Dividend Yield: 0. 81 (3. 12%) P/E: 23. 59
Pfizer Performance in one Year
Officers Henry A. Mc. Kinnell (1972), Chief Executive Officer (12 th CEO in Pfizer’s history) David Shedlarz (1976), Chief Financial Officer, Executive Vice Chairman Karen Katen (1974), Executive Vice President, Vice-Chairman of Health Care John La. Mattina (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 Stock Options
Major Acquisitions Pharmacia n n Deal completed in April, 2003 US$55. 97 billion w Identifiable intangible assets: US$37. 07 billion w Goodwill: US$21. 40 billion n Financing w Issuance of 1. 8 billion shares of Pfizer common stock (≈29% dilution) w 180 million options on Pfizer common stock w 6, 000 shares of Pfizer Series A convertible perpetual preferred stock (convertible into approximately 15. 5 million shares of Pfizer common stock) Warner-Lambert n Deal completed in June, 2000
Geographical Division of Revenue
Sources of Revenue by Therapeutic Area
Major Products I Lipitor n Treatment for elevated LDL cholestrol level n best-selling pharmaceutical product in the world n Worldwide sales of $12 billion in 2005 w An increase of 12% compared to 2004 w Accounts for 39% of all lipid-lowering prescriptions w More than 2. 5 times its next competitor n But Lipitor performance has slowed down w Slowdown in lipid-lowering market w Increased competition: n n April 2006: US generic prevastitin (Prevachol) June 2006: generic simvastatin (Zocor)
Major Products II Norvasc n World’s most-prescribed branded antihypertensive therapy w 4 th best-selling drug in the world n Worldwide sales of $4. 34 billion in 2003 w 9. 60% of total company sales n Sales increased by 5% in 2005 w Patent expirations in many EU countries w Maintains exclusivity in Canada, US, Japan, and Australia
Major Products III Zoloft n n Most- prescribed anti-depressant in US #10 best selling drug in the world Loses market exclusivity in US in June 2006 Since Feb 2005 Pfizer follows FDA rule of including a Black-Box warning that antidepressants elevate the risk of suicidal thinking in children and adolescents
Suspension of Bextra The market for pain- relievers changed since withdrawal of Vioxx in Sep 2004 In April 2005 FDA decided the increased risk of rare but serious skin reactions from Bextra require it to be withdrawn from market This suspension cost Pfizer $1. 2 billion One major reason for declined revenues in 2005
Filings in 2006 Pfizer has completed 17 filings for approval of new medicines since 2001, 11 of which are approved and on the market
Patent Expirations Drug Expiration Year Annual Sales (2005) % of Total Sales Zithromax 2005 2025 4% Zoloft 2006 3, 256 6. 7% Norvasc 2007 4, 706 9. 6% Zyrtec 2007 1, 338 2. 6% Aricept 2010 346 0. 7% Lipitor 2010 12187 24% Xalatan 2011 623 1. 25% Viagra 2012 1, 645 3. 8% Detrol 2012 544 0. 92% Celebrex 2013 1, 730 4% Xalacon 2015 1372 1. 5% Genotropin 2015 481 1. 1% Lyrica 2013 291 0. 7% 61% Total
Research & Development Expenditure
Major Drugs in the Pipeline LATE STAGE Development HIV/AIDS (FDA fast-track desig. ) Maraviroc UK-427, 857 a mechanistically unprecedented CCR-5 inhibitor Schizophrenia & Bipolar Disorder asenapine a 5 HT 2/D 2 antagonist (co-development with Akzo Nobel’s Organon healthcare unit Malaria Treatment Zithromax/ chloroquine Atherosclerosis Lipitor/torcetrapib a combination to elevate HDL cholesterol and lower LDL Lung Cancer Treatment PF-3512676 a toll-like receptor 9 agonist for non-small lung cancer 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
Pipeline Expansion Pfizer's pipeline continues to grow and now consists of 235 total projects: n including 152 novel compounds and 83 product enhancements. Pipeline is now 8 percent larger than at the end of 2004
Torcetrapib/atorvastatin Combines torcetrapib (a CEPT inhibitor to raise HDL) with Lipitor Continues in Phase 3 clinical trial Cardiovascular disease remains #1 killer worldwide with a residual risk of 60 to 70% Pfizer’s goal to prove increasing HDL and decreasing LDL can reduce this risk far beyond today’s possible treatments Torcetrapib/Atorvastatin Clinical Trial Program is the Largest Ever Conducted by Pfizer: 25, 000 Patients Enrolled in Studies Underway Around the World
Key Drivers in 2006
Prospects for 2006/07 Pfizer Anticipates Sustained Growth of Existing Medicines and Increasing Contribution from Next Generation of Innovative Medicines Pfizer to launch six new medicines in 2006; anticipates excellent prospects for Sutent, Exubera, Champix Delivering on industry's broadest pipeline, Pfizer expects to file five new medicines in 2006 -07: n n maraviroc for HIV/AIDS torcetrapib/atorvastatin for cholesterol management asenapine for schizophrenia ticilimumab for cancer and a licensed compound
Strategy to Build Shareholder Value "This is a time of transformation for Pfizer and our industry, " said Hank Mc. Kinnell, Pfizer chairman and chief executive officer. Productivity Enhancements n The Adapting to Scale initiative will continue to produce substantial cost savings while creating a more efficient company. Initiatives to Enhance Shareholder Value n Focused on three important initiatives to leverage cash flow: w increasing our dividend payout and yield w purchasing shares w changing Pfizer's business portfolio, including the recently announced decision to explore strategic alternatives for Pfizer Consumer Healthcare (PCH).
Source: Pfizer website
Broad-Based Strategy for Success in Evolving Global Marketplace R&D productivity gains driving pipeline expansion with 235 total projects and planned adjusted R&D expense* of $7. 8 billion in 2006 Pfizer establishing leadership in new areas of biologics and oncology; 2006 biologics revenues of $1. 5 billion expected; oncology pipeline has 22 mid- and early-stage candidates Pfizer demonstrating value of its medicines to payers through compelling pharmacoeconomic data; excellent formulary access achieved in U. S. Medicare market While reducing worldwide plant network from 93 to 66, Pfizer manufacturing investing in new technology and capacity for next generation of medicines
Financial Forecast Highlights: Building Shareholder Value 2006 Reported Diluted EPS expected to be $1. 52 to $1. 56 2006 Revenues and Adjusted Diluted EPS* of about $2. 00, expected to be comparable to 2005 including negative impact of stock-option expensing and foreign exchange Revenue growth expected to resume in 2007 as growth from new and in-line medicines more than offsets impact of loss of exclusivity High single-digit average annual growth anticipated in 2007 -08 Adjusted Diluted EPS* 2006 cash flow from operations expected to exceed $16 billion; continued strong growth in cash flow from operations anticipated over the planning period to more than $19 billion by 2008 Company evaluating strategic options for Pfizer Consumer Healthcare business
The Adapting to Scale Initiative Adapting to Scale focuses on n n enhancing R&D productivity optimizing the field force consolidating our network of manufacturing plants optimizing the procurement of goods and services. will continue to produce substantial cost savings while creating a more efficient company.
Adapting to Scale Initiative Cost. Savings
Latest News March 14 Pfizer Clinician: "First Data to Show that there are Important Differences in Raising HDL Cholesterol Levels with Torcetrapib and Atorvastatin Depending on Whether it is Dosed in the Morning or Evening" TNT Trial Investigator: "The TNT Sub-Analysis Suggests that HDL Cholesterol May Also Provide Important Therapeutic Benefits that May Result in Further Reductions in Cardiovascular Risk" Feb 21 Pfizer Receives FDA Approval for Eraxis to Treat Candidemia, a Potentially Life. Threatening Bloodstream Infection Feb 7 Pfizer to Explore Strategic Alternatives for Consumer Healthcare Business ` The objective of the review is to unlock the value of the business for Pfizer shareholders at a time when market valuations are attractive for large, high-quality consumer businesses
Performance in 2005 Substantially impacted by loss of exclusivity in US of w Difucan w Neurontin w Zithromax Suspension of Bextra sales Uncertainty related to Celebrex Collectively reduced Revenue by $5. 7 billion compared to 2004
Performance 2005 cont’nd Total Revenue decreased by 2% to $51. 3 billion from 2004 Revenue reduction due to loss of exclusivity by 44% These four products presented 7% as compared to 13% of total revenue in 2004 63% decline in revenue from suspension of Bextra sales and uncertainty about Celebrex But portfolio of patent-protected products includes 4 of 25 best-selling pharmaceutical products with six market leaders in their therapeutical area
Costs and Expenses Cost of sales increased 13% in 2005 and decreased 21% in 2004 while revenues decreased 2% in 2005 and increased 17% in 2004. Cost of sales in 2005 compared to 2004 increased as a result of: unfavorable geographic, segment and product mix, and adverse changes in production volume, among other factors, which reflect the loss of U. S. exclusivity for certain pharmaceutical products the uncertainty regarding the selective COX-2 inhibitors • $124 million related to implementation costs of our new At. S productivity initiative $73 million in write-offs of inventory and exit costs related to suspension of sales and marketing of Bextra.
Cost & Expenses cont’d Cost of sales in 2004 (which includes legacy Pharmacia’s product portfolio for the entire period) compared to 2003 decreased as a result of: impact of purchase accounting in 2003, which reflected the incremental charge of $2. 7 billion from the sale of inventory acquired from Pharmacia, adjusted to fair value merger-related cost savings favorable product mix partially offset by: higher product costs attributable to legacy Pharmacia products; and the unfavorable impact of the weakening of the U. S. dollar relative to many foreign currencies.
Gordon Growth Model DPS 1 = $0. 76(1+0. 0821)= $0. 822 Dividend payout ratio b= 42% Assume WACC k= 10% P/E= 23. 59 = b*(1+g)/(k-g) g= 8. 21% DDM: DPS 1/(k-g) = $45. 92
For 2005, Pfizer’s pharmaceutical peer group consisted of the following companies: Abbott Laboratories, Amgen, Astra. Zeneca, Bristol-Myers , Squibb Company, Eli Lilly and Company, Glaxo. Smith. Kline, Johnson & Johnson, Merck and Co. , Schering. Plough Corporation and Wyeth (New Peer Group). Prior to that, Pfizer’s pharmaceutical peer group : Abbott Laboratories, Baxter International, Bristol-Myers Squibb Company, Colgate-Palmolive Company, Eli Lilly and Company, Johnson & Johnson, Merck and Co. , Schering-Plough Corporation, and Wyeth (Old Peer Group).
The Fisher Approach Functional Factor n Superior R&D n Leader in 6 therapeutical areas People Factor n Educated and experienced management Essential Investment Characteristic n Strong competitive position n Prospective cost-saving movements The Price of the stock n 12. 6 % below 52 week high and 28 % above 52 week low n High P/E ratio
Recommendation Excellent long-time management team Very Strong prospective cost-saving improvements Promising products in pipeline Strong R&D Extensive financial resources BUY
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