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Pfizer

EXECUTIVE SUMMARY

After careful and thorough analysis, the team’s recommendation is that Pfizer is a must BUY

stock. As a leader in the pharmaceutical industry Pfizer shows some clear financial strengths

such as an increased return on equity (11.78 in 2011 to 17.84 in 2012), a current ratio which has

remained steady and higher than competitors and a shareholder’s equity which has increased in

the past years from $57 billion to $81 billion. In addition, the pharmaceutical industry is

expected to increase from $300 billion to $400 billion over the next three years and Pfizer is one

of the only companies with the resources to acquire additional companies and capitalize on this

market share.

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Table of Contents

Page

Strategic Analysis 3

SWOT Analysis 9

Accounting Analysis 14

Financial Analysis 22

Forecasting 35

Valuation 46

Assessment of Solvency 56

Conclusion 59

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STRATEGIC ANALYSIS

Overview

Pfizer Inc. (Pfizer) was started in 1849 in New York by two cousins, Charles Pfizer and Charles

Erhart. The discovery of Terramycin in 1950 paved the pathway of the company’s growth from a

small-scale chemical company to becoming the world’s largest pharmaceutical company.1 They

were able to achieve revenues of 59 billion in 2012 with the help of their 91,500 employees

worldwide. The company is publically traded on the New York Stock Exchange (PFE), London

(PFZ), Euronext and Swiss stock exchanges. Pfizer has acquired several companies over the past

decade including Warner-Lambert in 2000, Pharmacia 2003 and Wyeth in 2009. Their operations

are focused on the discovery, development, manufacturing and marketing of prescription drugs.

The organization’s product portfolio is targeted towards a wide range of therapeutic areas

including respiratory, cardiovascular, metabolic, infection, inflammation, oncology,

ophthalmology, neuroscience, pain, tissue repair, gastrointestinal, women’s health, orphan

diseases and genitourinary, among others.2 Pfizer has secured its position as the industry leader

by maintaining its portfolio of 600 established products. Its most profitable drug to date is a

cholesterol medication, Lipitor, which is currently the most profitable drug in the United States

grossing 7.2 billion in 2012. 3 Pfizer announced that it will restructure its business into two

innovative business segments and one value business segment. The first innovative business

segment will include products that have patent protection beyond 2015 across several therapeutic

1 http://listdose.com/top-‐10-‐worlds-‐largest-‐pharmaceutical-‐companies-‐2013/

2 http://www.researchandmarkets.com/reports/1314910/pfizer_inc_pfe_financial_and_strategic_swot

3 http://americanactionforum.org/sites/default/files/OHC_PharmaIndPrimer.pdf

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areas such immunology, cardiovascular, metabolic, neuroscience, etc. The second innovative

business segment will deal with vaccines, oncology and consumer healthcare. In addition to this,

the value business segment will include mature drugs that have either lost patent protection or

will lose before 2015.4

Industry Analysis

In order to understand the strategic avenues a company pursues, one must have a complete

comprehension of the industry in which they compete in. The global pharmaceutical industry is

compromised of three sub-industries; brand name drugs, generic drugs and medical devices. The

global pharmaceuticals market is worth $300 billion a year, a figure expected to rise to $400

billion within three years. The 10 largest drugs companies control over one-third of this market,

several with sales of more than $10 billion a year and profit margins of about 30%. Six are based

in the United States and four in Europe.5 Over the past few years the industry has realized a

decline in sales, causing mergers and acquisitions. Despite the recent obstacles the industry is

expected to growth 5.1% in 2014. Currently, the U.S. biopharmaceutical sector employs more

than 810,000 workers and supports a total of 3.4 million jobs across the country. 6 Although the

industry is very lucrative, it faces many challenges. Costs associated with developing a single

drug can reach up to $1.2 billion. Subsequently, many developed drugs never reach the market

due to strict regulations and lengthy FDA approvals. However, 43 new medicines were approved

by the U.S. Food and Drug Administration (FDA) in 2012 representing the highest total in 15

4 http://www.trefis.com/stock/pfe/articles/199104/pfizer-‐looks-‐forward-‐to-‐restructuring-‐its-‐business-‐as-‐it-‐battles-‐ patent-‐issues/2013-‐08-‐01

5 http://www.who.int/trade/glossary/story073/en/index.html

6 : http://www.phrma.org/economic-‐impact#sthash.YpKsUlZF.dpuf

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years. This is a proud landmark for an industry.7 The nature of the industry is faced with

uncertainty and relies on scientific and technological breakthroughs for its survival.

Competitive Environment

RIVALRY AMONG COMPETITION- The pharmaceutical industry is highly competitive. A

company’s operations may be affected by new regulations, FDA denials, and technological

advances of competitors, patents granted to competitors, competitive combination products, post-

marketing surveillance and generic competition as company products mature. Current patent

positions are significantly challenged by industry competitors. If the company faces an adverse

result in a patent dispute this could lead to impairment charges attributed to certain products,

price reductions and product displacements.8

THREAT OF SUBSTITUTION- Most companies focus on different classes of drugs. The threat

from direct competition for a specific drug line is low. The dominate companies have billions of

dollars invested into their research which puts them years ahead of others attempting to compete.

However, many high grossing drugs are facing patent expiration within the next couple of years,

which will enable generic versions to hit the market. There is an estimated $140 billion in total

sales lost from patent expiration from 2012 to 2017. 9

7 http://phrma.org/sites/default/files/pdf/PhRMA%20Profile%202013.pdf

8 Ron Sanchez, Aime Heene, 2004, The New Strategic Management, John Wiley & Sons.


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THREAT OF NEW ENTRANTS- New entrants into the pharmaceutical industry face a high

number of barriers. Heavy expenditures on research and development can be a major deterrent

for new entrants. In 2012, Pharmaceutical Research and Manufacturers of America (PhRMA)

member companies invested an estimated $48.5 billion in R&D.10 The probability creating a

drug that makes it to market is very low. For every 5,000 to 10,000 compounds that enter the

pipeline, only one receives approval. Even medicines that reach clinical trials only have a 16%

chance of being approved.11 An organization considering entering into the market must have a

huge financial backing to fund the required research and development, marketing, legal

expenses, and waiting period for approval. Strict laws and regulations are also a deterrent for

those considering entering in to this highly competitive industry.

BARGAINING POWER OF BUYERS- Buyers of the pharmaceutical industry are defined as

wholesalers, retailers, hospitals, clinics, government agencies and pharmacies. Some buyers

possess high purchasing power while others remain relatively low. The size of the buyer

determines the influence they have over manufacturers. For instance, the U.S government has

strong bargaining power by representing 50 million Medicare patients, where clinics that

represent few thousand patients have weak bargaining power.12 The pharmaceutical industry is

unique in regards to patented drugs. If a patented drug is in high demand or patients rely on the

10 Tufts Center for the Study of Drug Development. “Large Pharma Success Rate for Drugs Entering Clinical Trials in 1993–2004:

11 Pharmaceutical Research and Manufacturers of America. “PhRMA Annual Membership Survey.” 2013.

12 http://kff.org/medicare/state-‐indicator/total-‐medicare-‐beneficiaries/

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drug for survival, then the drug maker retains bargaining power regardless of the size of the

buyer.

BARGAINING POWER OF SUPPLIERS-The bargaining power of suppliers in the

pharmaceutical industry is relatively low. Seven major companies control 65.4% of the brand

name pharmaceutical industry and three companies control the generic pharmaceuticals with

28.1% . 13 These companies purchase extremely high volumes of supplies, thus enabling them to

leverage lower prices from their suppliers. However, when supplies are scarce and/or

unpredictable the supplier will have a higher bargaining power. This typically occurs when

dealing with agricultural-based material.

Competitive Advantage

Pfizer has positioned themselves in their market by utilizing a differentiation business strategy.

Their business model is supported by innovation, technical, and medical advances. Patent

protected products and brand recognition have given Pfizer a competitive advantage over other

pharmaceutical companies competing within their sector. Most of their strategic efforts are

geared towards bringing something new to the market. Pfizer’s largest expenditure is research

and development. They recruit the world’s most sought after scientists to help them achieve their

goal of creating new, inimitable drugs to add to their portfolio. Pfizer is then able to charge

premium prices for their products. Currently Pfizer’s drug Lipitor is the most profitable drug in


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the United States. Pfizer has successfully utilized a differentiation business strategy to earn its

position as the largest and most recognized pharmaceutical company in the world.

SWOT Analysis

STRENGTHS- Pfizer is a marketing and sales powerhouse. They have mastered the art of

marketing and have been able to achieve making some the most recognized drugs with Viagra,

Lipitor and Lyrica to name a few. Other companies began lucrative partnership deals for Pfizer

to market their medicines. Pfizer has numerous blockbuster drugs that have been the driving

forces of their success. Although some of these drugs have lost their patents, they still maintain a

strong portfolio of patent protected blockbusters. Pfizer employs some of the world’s most

renowned scientists in the world which has and will continue to make them the leaders in

industry of innovation and medical breakthroughs. Pfizer also has economy of scales on their

side. They are able to use their bargaining power to drive down costs and increase profit margins.

WEAKNESSES- Over the next five years some of the world’s most profitable drugs patents will

be expiring. This opens the door for generics drugs to capitalize on this opportunity. However,

Pfizer dedicated the majority of their resources towards their brand name division. Generics

represent a $10 billion business for Pfizer but there has been speculation for some time that the

company may decide to sell off the unit in order to fund the more profitable innovative

medicines business.14 If Pfizer exits the generic drug market they will be exiting a market that

will be realizing a large growth over the next five years. Pfizer has also been involved in many

14 http://www.pmlive.com/pharma_news/pfizer_separates_branded_and_generic_divisions_493253

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controversies including lawsuits that were filed against it for illegal marketing of the arthritis

drug Bextra, experimenting a new drug during a cholera outbreak in Nigeria on children which

led to the death of about 50 children and one of its acquired companies called Quigley which

sold asbestos-containing insulation products for years; a settlement deal is being negotiated to

date between the asbestos victims and Pfizer.15 Pfizer needs to rebuild their brand name and gain

confidence back from consumers.

OPPORTUNITIES- From demographic viewpoint it can be stated that in the U.S. the aging baby

boomer population in past 5 years and in next 15 years will have a significant impact on demand

of pharmaceutical products, thus the whole pharmaceutical industry in U.S. has and will enjoy

the economic increase in form of increasing scale of the market.16 As more global markets

emerge pharmaceutical product demand will increase, thus presenting an opportunity for Pfizer

to consume a greater market share. Pfizer is one of the few companies in the industry who has

the resources to acquire struggling companies. Mergers, acquisitions, and partnerships could

extend Pfizer’s consumer reach. Another opportunity will come from the implementation of the

Patient Protection and Affordable Care Act (PPACA). The PPACA will expand coverage to 32

million Americans through state run Health Insurance Exchanges, which is expected to increase

drug sales in 2015, when the act is up and running. 17 Pfizer new drug, ofacitinib, which is an

autoimmune drug, was adapted by the CDC as the recommended treatment for anyone over 19

with severe autoimmune problems. It was sanctioned by the CDC as the required treatment, thus

15 http://listdose.com/top-‐10-‐worlds-‐largest-‐pharmaceutical-‐companies-‐2013/

16 http://pure.au.dk/portal-‐asb-‐student/files/35261047/Thesis_vc86596_Final.pdf


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creating a monopoly for Pfizer in regards to this particular market.18 Their rheumatoid arthritis

and pneumonia drugs will help Pfizer regain market share lost with the recent patent expirations

of multiple blockbuster drugs.

THREATS- Global brand name drugs sales is forecasted to lose over $227 billion in sales due to

generic erosion following patent expirations. Over the same time span, the generic

pharmaceutical industry will have an annual growth of 6.3%. Pfizer will experience patient

expirations on 14 of its key drugs over the next five years, which account for approximately 42%

of their yearly revenue. 19 With an extremely low stake in the generic sector, this possesses a

great threat to Pfizer. The company faces legislative and regulatory action in several states of

U.S. (its largest market by revenues 47%) could adversely affect companies business. Those

actions could include changes in patent laws, the importation of prescription drugs from outside

the U.S. at prices that are regulated by foreign governments, as well as restrictions to innovative

products in form of abandoning direct to customer advertising or limitations on interactions with

health care professionals.20If the healthcare reform is enacted, Pfizer could be faced with new

government regulations and standards affecting pricing, patents, and greater government

controls. These changes could reshape the manner in which the entire pharmaceutical industry

operates.

18 http://www.cbsnews.com/8301-‐504763_162-‐57431614-‐10391704/new-‐rheumatoid-‐arthritis-‐pill-‐tofacitinib-‐backed-‐by-‐fda-‐panel/

19 http://www.evaluategroup.com/Public/PressReleases/Return-‐to-‐Growth-‐for-‐Pharmaceutical-‐Sector-‐World-‐Preview-‐2013-‐Outlook-‐to-‐2018.aspx

20 http://pure.au.dk/portal-‐asb-‐student/files/35261047/Thesis_vc86596_Final.pdf

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Values of Key Personnel

Pfizer is committed to applying science and their global resources to improve health and well-

being at every stage of life. They strive to provide access to safe, effective and affordable

medicines and related health care services to the people who need them.21 Pfizer values

themselves on being a leader of industry in research and development, creating programs to

provide medication to those who cannot afford, funding educational programs and reducing the

impact of operations on the environment. Pfizer promotes a corporate culture that is aimed

towards delivering and helping all those in need of preventing, managing and curing infections

and/or diseases. The Global Health Fellows Program (GHF) is an international corporate

volunteer program that places Pfizer colleagues and teams in short term assignments with

leading international development organizations in key emerging markets.Since 2003, over 300

Pfizer colleagues, from offices around the world, have participated in the program working in

close to 45 countries.. Via the program, Pfizer has partnered with over 40 international

development organizations.22 Pfizer also contributes millions of dollars every year through

education, training research and development grants. They believe in investing in other institutes

(educational, non-profits and government) to make medical breakthrough, and to develop the

talents of future leaders in the industry. Pfizer is very committed to delivering medications to

those who cannot afford it. In the U.S., Pfizer has developed the U.S. Patent Assistance Program,

which offers medicines for free or at a savings to patients who qualify. Some programs also offer

reimbursement support services for people with insurance. Pfizer has also provided over $ 1.2

billion in medicine since 2000 to more than 2,400 sites in 63 countries in Africa, Asia, the 21 http://www.pfizer.com/about

22 http://www.pfizer.com/responsibility/global_health/global_health_fellows

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Caribbean and Latin America.23 Pfizer’s key personnel have demonstrated how the importance

of realizing a healthier world is their primary motivator.

Societal Expectation

The pharmaceutical industry is expected to provide safe, effective drugs, affordable drugs to the

masses. Most societies view healthcare as something that should be offered to anyone who needs

it. Many countries have a government sponsored healthcare system in which healthcare is

provided to all citizens. More and more countries are starting to implement forms of universal

healthcare. The expectation for the pharmaceutical companies is to work with agencies to

provide medications to all who need it. Societies have pressured pharmaceutical companies to

make world-wide efforts to cure and contain diseases that plague underdeveloped countries. In

response to these demands Pfizer has donated more than 225 million Zithromax® treatments in

19 countries, trained over 6,500 healthcare workers from 27 African countries since 2004,

and provided quality care and treatment to over 31,154 African patients.24 Another important

expectation from the global community is the environmental impact of a company. Pfizer is

dedicated to not only minimizes their environmental impact, but also to provide green buildings,

green chemistry, green biotechnology, green design, greening fleet, and greening their processes.

Pfizer is very conscience about energy use and climate changes. Their Energy and Climate

Change Program seeks to minimize the cost and operational restrictions arising from a carbon-

constrained environment, reduce Pfizer's contribution to GHG emissions, and assess the risk

23 http://www.pfizer.com/responsibility/global_health/infectious_diseases_institute

24 http://www.pfizer.com/responsibility/global_health/malaria_efforts

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presented to Pfizer's operations from the potential physical changes resulting from a warming

global climate.25 Pfizer has responded very well to societal pressures while still being able to

remain the most profitable company in their industry.

ACCOUNTING ANALYSIS

Revenue

Pfizer records revenues from product sales when the goods are shipped and title passes to the

customer. At the time of sale, Pfizer also records estimates for a variety of sales deductions,

such as sales rebates, discounts and incentives, and product returns. When Pfizer cannot

reasonably estimate the amount of future product returns and/or other sales deductions, Pfizer

records revenues when the risk of product return and/or additional sales deductions has been

substantially eliminated. Pfizer records sales of certain of vaccines to the U.S. government as

part of the Pediatric Vaccine Stockpile program, these rules require that for fixed commitments

made by the U.S. government, Pfizer records revenues when risk of ownership for the completed

product has been passed to the U.S. government. 26 There are no specific performance

obligations associated with products sold under this program.

Aggregate revenue is recognized during the period (derived from goods sold, services rendered,

insurance premiums, or other activities that constitute an entity's earning process). For financial

services companies, this also includes investment and interest income, and sales and trading

25 http://www.pfizer.com/responsibility/protecting_environment/protecting_the_environment

26 Source: Pfizer Inc., Annual Report

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gains. Pfizer Inc.'s revenues increased from 2010 to 2011 but then declined significantly from

2011 to 2012.

Cash, Cash Equivalents and Investments

Many, but not all, of Pfizer's financial instruments are carried at fair value. For example,

substantially all of Pfizer's cash equivalents, short-term investments and long-term investments

are classified as available-for-sale securities and are carried at fair value, with changes in

unrealized gains and losses, net of tax, reported in Other comprehensive loss. Derivative

financial instruments are carried at fair value in various balance sheet categories, with changes in

fair value reported in current earnings or deferred for qualifying hedging relationships. Virtually

all of Pfizer's valuation measurements for investments and derivative financial instruments are

based on the use of quoted prices for similar instruments in active markets, or quoted prices for

identical or similar instruments in markets that are not active or are directly or indirectly

observable. Realized gains or losses on sales of investments are determined by using the specific

identification cost method.

Investments where Pfizer has significant influence over the financial and operating policies of

the investee are accounted for under the equity method. Under the equity method, Pfizer records

share of the investee's income and expenses, in other deductions—net. The excess of the cost of

the investment over Pfizer's share of the equity of the investee as of the acquisition date is

allocated to the identifiable assets of the investee, with any remaining allocated to goodwill. 27

Such investments are initially recorded at cost, which typically does not include amounts of

contingent consideration.


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Pfizer regularly evaluates all of financial assets for impairment. For investments in debt and

equity securities, when a decline in fair value, if any, is determined to be other-than-temporary,

an impairment charge is recorded in the statement of income, and a new cost basis in the

investment is established. Impairment reviews can involve a complex series of judgments about

future events and uncertainties and can rely heavily on estimates and assumptions.

Inventory Accounting Policy

Pfizer carries inventories at the lower of cost or market. The cost of finished goods, work in

process and raw materials is determined using average actual cost. 28 Pfizer regularly reviews

inventories for impairment and reserves are established when necessary. Carrying amount

(lower of cost or market) as of the balance sheet date of inventories less all valuation and other

allowances. Excludes noncurrent inventory balances (expected to remain on hand past one year

or one operating cycle, if longer).

Pfizer’s inventories declined from 2010 to 2011 and from 2011 to 2012.

Raw Materials and Supplies

Raw materials are aggregated as the amount of unprocessed materials to be used in

manufacturing or production process and supplies that will be consumed. Pfizer’s raw materials

declined from 2010 to 2011 and from 2011 to 2012.


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Work in Process

Carrying amount as of the balance sheet date of merchandise or goods that are partially

completed. Work in process is generally comprised of raw materials, labor and factory overhead

costs, and which require further materials, labor and overhead to be converted into finished

goods. Generally require the use of estimates to determine percentage complete and pricing.

Pfizer’s work in process increased from 2010 to 2011 but then slightly declined from 2011 to

2012 not reaching 2010 level.

Finished Goods

Carrying amount as of the balance sheet date of merchandise or goods held by the company that

are readily available for sale. Pfizer’s finished goods declined from 2010 to 2011 and from 2011

to 2012.

Property Plant and Equipment

Property, plant and equipment, less accumulated depreciation are recorded at cost and are

increased by the cost of any significant improvements after purchase. Property, plant and

equipment assets, other than land and construction in progress, are depreciated on a straight-line

basis over the estimated useful life of the individual assets. Depreciation begins when the asset is

ready for its intended use. For tax purposes, accelerated depreciation methods are used as

allowed by tax laws. 29


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Carrying amount at the balance sheet date for long-lived physical assets used in the normal

conduct of business and not intended for resale. This can include land, physical structures,

machinery, vehicles, furniture, computer equipment, construction in progress, and similar items.

Amount does not include depreciation. Pfizer's property, plant and equipment gross declined

from 2010 to 2011 and from 2011 to 2012.

Property Plant and Equipment Less Accumulated Depreciation

Tangible assets that are held by an entity for use in the production or supply of goods and

services, for rental to others, or for administrative purposes and that are expected to provide

economic benefit for more than one year; net of accumulated depreciation. Examples include

land, buildings, and production equipment. Pfizer's property, plant and equipment, less

accumulated depreciation declined from 2010 to 2011 and from 2011 to 2012.

Construction in Progress

Carrying amount at the balance sheet date of long-lived asset under construction that include

construction costs to date on capital projects that have not been completed and assets being

constructed that are not ready to be placed into service. Pfizer's construction in progress

increased from 2010 to 2011 but then slightly declined from 2011 to 2012.

Furniture Fixtures and Others

Carrying amount at the balance sheet date for long-lived, depreciable asset commonly used in

offices and stores. Examples include desks, chairs, and store fixtures. Pfizer's furniture, fixtures

and other declined from 2010 to 2011 and from 2011 to 2012.

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Machinery and Equipment

Carrying amount as of the balance sheet date of long-lived, depreciable asset used in production

process to produce goods and services. Pfizer's machinery and equipment declined from 2010 to

2011 and from 2011 to 2012.

Buildings

Carrying amount as of the balance sheet date of long-lived, depreciable assets that include

building structures held for productive use including any addition, improvement, or renovation to

the structure, such as interior masonry, interior flooring, electrical, and plumbing. Pfizer's

buildings declined from 2010 to 2011 and from 2011 to 2012.

Land

Carrying amount as of the balance sheet date of real estate held for productive use. This excludes

land held for sale. Pfizer's land declined from 2010 to 2011 and from 2011 to 2012.

Goodwill

Goodwill represents the excess of the consideration transferred for an acquired business over the

assigned values of its net assets. Goodwill is not amortized.

Identifiable intangible assets, less accumulated amortization: These acquired assets are recorded

at cost. Intangible assets with finite lives are amortized on a straight-line basis over their

estimated useful lives. Intangible assets with indefinite lives that are associated with marketed

products are not amortized until a useful life can be determined. Intangible assets associated with

IPR&D projects are not amortized until approval is obtained in a major market, typically either

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the U.S. or the European Union (EU), or in a series of other countries, subject to certain specified

conditions and management judgment. 30 The useful life of an amortizing asset generally is

determined by identifying the period in which substantially all of the cash flows are expected to

be generated.

Carrying amount as of the balance sheet date, which is the cumulative amount paid and (if

applicable) the fair value of any non-controlling interest in the acquire, adjusted for any

amortization recognized prior to the adoption of any changes in generally accepted accounting

principles (as applicable) and for any impairment charges, in excess of the fair value of net assets

acquired in one or more business combination transactions. Pfizer Inc.'s goodwill increased from

2010 to 2011 but then slightly declined from 2011 to 2012.

Sum of the carrying amounts of all intangible assets, including goodwill, as of the balance sheet

date, net of accumulated amortization and impairment charges. Pfizer Inc.'s goodwill and other

intangible assets declined from 2010 to 2011 and from 2011 to 2012.

Identifiable Intangible Assets, Less Accumulated Amortization

Sum of the carrying amounts of all intangible assets, excluding goodwill, as of the balance sheet

date, net of accumulated amortization and impairment charges. Pfizer Inc.'s identifiable

intangible assets, less accumulated amortization declined from 2010 to 2011 and from 2011 to

2012.


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Income Taxes

Deferred tax assets and liabilities are recognized for the expected future tax consequences of

differences between the financial reporting and tax bases of assets and liabilities using enacted

tax rates and laws. Pfizer provides a valuation allowance when believes that deferred tax assets

are not recoverable based on an assessment of estimated future taxable income that incorporates

ongoing, prudent and feasible tax-planning strategies.

Pfizer accounts for income tax contingencies using a benefit recognition model. If Pfizer

considers that a tax position is more likely than not to be sustained upon audit, based solely on

the technical merits of the position, Pfizer recognizes the benefit. Pfizer measures the benefit by

determining the amount that is greater than 50% likely of being realized upon settlement,

presuming that the appropriate taxing authority that has full knowledge of all relevant

information examines the tax position.

Under the benefit recognition model, if initial assessment fails to result in the recognition of a tax

benefit, Pfizer regularly monitors position and subsequently recognize the tax benefit: (i) if there

are changes in tax law, analogous case law or there is new information that sufficiently raise the

likelihood of prevailing on the technical merits of the position to more-likely-than-not; (ii) if the

statute of limitations expires; or (iii) if there is a completion of an audit resulting in a favorable

settlement of that tax year with the appropriate agency. 31 Pfizer regularly re-evaluates tax

positions based on the results of audits of federal, state and foreign income tax filings, statute of


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limitations expirations, changes in tax law or receipt of new information that would either

increase or decrease the technical merits of a position relative to the more-likely-than-not

standard. Liabilities associated with uncertain tax positions are classified as current only when

Pfizer expects to pay cash within the next 12 months. Interest and penalties, if any, are recorded

in Provision for taxes on income and are classified on Pfizer's consolidated balance sheet with

the related tax liability.

Comparison of Accounting Policies to Competitors and Overall Assessment Choices

Pfizer’s main competitors are Abbot Laboratories, Bristol-Meyers Squibb, Novartis, and Merck.

Pfizer expects to sustain long-term growth driven by innovative products, strong research and

development pipeline and operating efficiencies. They are constantly seeking to improve, and

making the necessary changes to become more effective, in order to further separate themselves

from the competition.

Pfizer’s accounting strategy and policies are conservative in nature and reflect the underlying

economic reality of the company. Pfizer’s policy is in accordance with generally accepted

accounting procedures as set forth by the Financial Accounting Standards Board. GAAP is

subject to choices and multiple methods of valuation. Pfizer has chosen a policy that accurately

reflects the situation of the company and does not capitalize on the accounting flexibility offered

by GAAP to manipulate its financial statements to look more appealing to investors. Overall,

Pfizer is conservative in nature with its financials and discloses all pertinent information. 32The

pharmaceutical industry is dominated by large companies in the US and Europe. Merck & Co.

along with Bristol-Meyers Squibb are two of Pfizer’s competitors in the US. Pfizer and Merck do

32 http://finance.yahoo.com/

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a good job in disclosing financial information while Bristol-Meyers is slightly more hesitant isn’t

as transparent as the other two companies. The three companies’ accounting policies are similar

in regard to the key accounting policies such as revenue recognition, inventory, principles of

consolidation, etc. with no major differences. Bristol-Meyers is more aggressive in its accounting

policies.33

FINANCIAL ANALYSIS

33 http://pfizer.com/main.html

Profitability Ratios

2005 2006 2007 2008 2009 2010 2011 2012

ROE

Pfizer Inc 1 12.1 28.19 11.96 13.24 11.71 9.29 11.78 17.84

GlaxoSmithKline PLC2 70.85 64.55 54.95 52.46 61.67 17.3 62.19 65.96

Novartis AG3 18.36 19.37 26.45 16.47 15.6 16.24 14.12 14.09

Johnson & Johnson4 29.88 28.64 25.6 30.17 26.35 24.88 17.02 17.81

Average 32.8 35.19 29.74 28.09 28.83 16.93 26.28 28.93

2005 2006 2007 2008 2009 2010 2011 2012

ROA

Pfizer Inc1 6.7 16.64 7.08 7.16 5.33 4.05 5.23 7.8


Novartis AG3 10.93 11.41 16.65 10.66 9.67 8.95 7.57 7.86

Johnson & Johnson4 18.7 17.19 13.96 15.61 13.66 13.5 8.93 9.24

Average 13.79 16.42 14.04 11.63 10.53 7.59 8.59 8.99

Market Value Ratios

2005 2006 2007 2008 2009 2010 2011 2012

Earnings Per Share

Pfizer Inc1 1.09 2.66 1.17 1.2 1.23 1.02 1.27 1.94


Novartis AG3 2.62 3.04 5.13 3.59 3.69 4.26 3.78 3.89

Johnson & Johnson4 3.46 3.73 3.63 4.57 4.4 4.78 3.49 3.86

Average 2.20 2.83 2.95 2.78 2.87 2.68 2.65 2.88

23 | P a g e

0

10

20

30

40

50

60

70

80

2005 2006 2007 2008 2009 2010 2011 2012

ROE

Pfizer Inc

GlaxoSmithKline PLC

Novarhs AG

Johnson & Johnson

Average

Return on Equity

When evaluating ROE we can see that Pfizer is below the average as well as the competition.

Pfizer’s lowest ROE in this 8-year span came in 2010 when its ROE was 9.29 and it’s highest

was in 2006 when it was 28.19. Pfizer had an increase in ROE in 2006 but it was shortly

whipped away after that as in 2007 it went back down. ROE allows us to see how profitable a

company based on the amount of money that has been invested. In respect to Pfizer since ROE

really hasn’t been to high we can expect that the company is not utilizing the money invested

efficiently. The one spike could be due to an increase in sale for that year but it eventually

evened out the following year. Had we just looked at 2006’s ROE we could have been fooled by

the efficiency of the company.

24 | P a g e

0

5

10

15

20

25

2005 2006 2007 2008 2009 2010 2011 2012

ROA

Pfizer Inc

GlaxoSmithKline PLC

Novarhs AG

Johnson & Johnson

Average

Return On Assets

Return on Assets for Pfizer again is the lowest amongst its competitors, but did have a spike in

2006, which was their highest point. During this 8-year span their highest point was in 2006 with

an ROA of 16.64 and their lowest coming in 2010 with an ROA of 4.05. During this period

Pfizer’s ROA began strong then decreased and ended the period with a slight increase to get

them closer to their competition. ROA allows us to review financial statements and see how well

the company is in converting investments into profits. For a 5 year stretch we can see that this

was not the case with Pfizer’s ROA being around 4-6 but did finish the period with an increase in

ROA.

25 | P a g e

0

1

2

3

4

5

6

2005 2006 2007 2008 2009 2010 2011 2012

Earnings Per Share

Pfizer Inc

GlaxoSmithKline PLC

Novarhs AG

Johnson & Johnson

Average

Earnings Per Share

Earnings per share enable investors to have a good grasp on how profitable a company is. In

Pfizer’s they are at the bottom compared to its competitors, only to out match GlaxoSmithKline

in 2012. Their highest EPS came in 2006 when it was $2.66 and its lowest in 2010 with an EPS

of $.72. This tells us how much the profit is divided by the common stocks available to the

public. In this span overall Pfizer was the least profitable and coming falling significantly short

of what the average EPS is for the industry

26 | P a g e

Liquidity Ratios and Debt Ratios

34 http://financials.morningstar.com/ratios/r.html?t=PFE&region=USA&culture=en-‐US

35 http://financials.morningstar.com/ratios/r.html?t=GSK&region=USA&culture=en-‐US

36 http://financials.morningstar.com/ratios/r.html?t=NVS&region=USA&culture=en-‐US

37 http://financials.morningstar.com/ratios/r.html?t=JNJ&region=USA&culture=en-‐US

Liquidity Ratios 2005 2006 2007 2008 2009 2010 2011 2012

Current Ratio

Pfizer Inc 34 1.47 2.2 2.15 1.59 1.66 2.11 2.06 2.15 GlaxoSmithKline PLC35

1.39 1.51 1.32 1.72 1.45 1.25 1.08 0.99

Novartis AG36 1.4 1.32 1.65 1.27 1.73 1.08 1.04 1.16 Johnson & Johnson37 2.48 1.2 1.51 1.65 1.82 2.05 2.38 1.9 Average 1.69 1.56 1.66 1.56 1.67 1.62 1.64 1.55

2005 2006 2007 2008 2009 2010 2011 2012

Quick Ratio

Pfizer Inc1 1.14 1.76 1.65 1.24 1.12 1.51 1.78 1.9 GlaxoSmithKline PLC2

1.06 1.15 0.97 1.23 1.11 0.95 0.77 0.7


Debt Ratios 2005 2006 2007 2008 2009 2010 2011 2012

Total Assets/ Common

Equity (Financial Leverage)


3.81 3.72 2.72 3.23 4.97 4.28 4.75 5.11

Novartis AG3 1.75 1.65 1.53 1.56 1.66 1.95 1.78 1.8 Johnson & Johnson4 1.53 1.79 1.87 2 1.87 1.82 1.99 1.87 Average 2.22 2.19 1.98 2.18 2.72 2.57 2.70 2.77

2005 2006 2007 2008 2009 2010 2011 2012

Total Liabilities/ Common

Equity


2.72 1.72 2.23 3.97 3.28 3.75 4.12 6.14


27 | P a g e

0

0.5

1

1.5

2

2.5

3

2005 2006 2007 2008 2009 2010 2011 2012

Current RaDo

Pfizer Inc

GlaxoSmithKline PLC

Novarhs AG

Johnson & Johnson

Average

Current Ratio

Pfizer’s current ratio had its ups and downs from 2005-2012. It began this period well while it

was increasing and was steady for two years. After the two years the ratio dropped and then two

years later it was able to increase again ending with a slight increase from its highest point in

2006. Although Pfizer’s current ratio did drop for a two-year span it was always above 1. This

means that even though it might have fluctuated during this period liabilities never out weighted

the assets present, this is a good sign for a company because it shows that it has the capability to

pay off their short-term liabilities. According to chart Pfizer was above the average of its

competitors shown, and finished off the 4th quarter of 2012 with the highest current ratio.

28 | P a g e

Quick Ratio

Pfizer’s quick ratio consisted of two steep increases and one steep decrease. The lowest the quick

ratio was in 2009 of 1.12 and the highest coming in 2012 with 1.9. Although Pfizer’s quick ratio

did drop off quickly to begin this period it never went below 1. This ratio is significant because

this allows us to know how quickly a company can pay off their short-term liabilities. Another

way to look at this ratio in terms of dollars is that in Pfizer’s lowest point during this period they

had $1.12 of assets for every $1 of liabilities and at its highest point it was $1.90 of assets for

every $1 of liabilities. Again for this ratio Pfizer ranked highest compared to its competitors.

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

2005 2006 2007 2008 2009 2010 2011 2012

Quick RaDo

Pfizer Inc

GlaxoSmithKline PLC

Novarhs AG

Johnson & Johnson

Average

29 | P a g e

DEBT RATIOS

Total Assets/ Common Equity

Here Pfizer’s Total Assets to Common Equity tends to have a slight increase from 2005-2012.

According to the graph Pfizer seems to be slightly below the average with its competitors. The

highest point came in 2009 with a ratio of 2.37 and its lowest point was in 2006 with a ratio of

1.61. This ratio explains that the company is using a great amount of financing from a bank and

it does not look like a good sign as they ended this period with an upward trend.

0

1

2

3

4

5

6

2005 2006 2007 2008 2009 2010 2011 2012

Total Assets/ Common Equity

Pfizer Inc

GlaxoSmithKline PLC

Novarhs AG

Johnson & Johnson

Average

30 | P a g e

Total Liabilities/ Common Equity

During this 8 year period Pfizer’s Debt to Equity ratio has been right around 1. They began the

period with a ratio of .79 and ended the period with a ratio of 1.29. The lowest point for Pfizer

was in 2006 with a ratio of .61 and the highest point came in 2009 with a ratio of 1.37. This ratio

allows us to see how the company is financing their assets. In this period Pfizer was below the

average of its competitors.

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

2005 2006 2007 2008 2009 2010 2011 2012

Total LiabiliDes/ Common Equity

Pfizer Inc

GlaxoSmithKline PLC

Novarhs AG

Johnson & Johnson

Average

31 | P a g e

0

10

20

30

40

50

60

70

80

90

100

2005 2006 2007 2008 2009 2010 2011 2012

Days Sales Outstanding

Pfizer Inc

GlaxoSmithKline PLC

Novarhs AG

Johnson & Johnson

Average

Asset Management Ratios


2005 2006 2007 2008 2009 2010 2011 2012


Pfizer Inc 68.06 72.28 72.5 71.04 86.14 78.74 76.38 80.4 GlaxoSmithKline PLC

69.06 68.89 79.1 88.17 82.07 78.97 75.76 74.7

Novartis AG 57.76 58.27 61.4 58.6 62.05 64.36 62.08 64.6 Johnson & Johnson

50.01 53.81 54.23 54.86 57.1 57.55 57.12 59.43

Average 61.22 63.31 66.81 68.17 71.84 69.91 67.84 69.78 2005 2006 2007 2008 2009 2010 2011 2012

Asset Turnover Pfizer Inc 0.43 0.42 0.42 0.43 0.31 0.33 0.35 0.32 GlaxoSmithKline PLC

0.87 0.88 0.8 0.69 0.69 0.67 0.66 0.64

Novartis AG 0.57 0.57 0.53 0.55 0.52 0.47 0.49 0.48 Johnson & Johnson

0.91 0.83 0.81 0.77 0.69 0.62 0.6 0.57

Average 0.70 0.68 0.64 0.61 0.55 0.52 0.53 0.50

32 | P a g e

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1

2005 2006 2007 2008 2009 2010 2011 2012

Asset Turnover

Pfizer Inc

GlaxoSmithKline PLC

Novarhs AG

Johnson & Johnson

Average

When looking over DIO we can see how well a company is selling its products. “Days Sales

Outstanding (DIO) is an average collection period in days for the accounts receivable (accounts payable

outstanding in days).” 38 When comparing Pfizer to its competitors we see that their DIO is higher than

the others. This typically is not good because it shows that they are not selling to their consumers with

cash payments, they are selling the product on credit. The highest DIO for Pfizer came in 2009 at 84.14

which is odd considering the fact that their lowest was the year before at 71.04. Pfizer closed out this

period with the highest ratio when compared to its competitors.

Asset Turnover

38 http://www.readyratios.com/reference/asset/days_sales_outstanding_dio.html

33 | P a g e

Asset turnover (total asset turnover) is a financial ratio that measures the efficiency of a company's use of

its assets to product sales.39 When comparing Pfizer to its competitors their asset turnover was well below

the others. This shows us that they were not efficient in turning over their products to the consumers, in

comparison to its competitors. Pfizer’s year in this period in reference to Asset Turnover was in 2005 and

2008 when it was at .43, which was the lowest compared to its competitors in those years. Their worst

year came in 2009 when their asset turnover was .31, which means they were not selling their product in

respect to what they had in stock. Comparing Pfizer to its competitors in this ratio shows us that Pfizer

had a tough time in this period to turnover their products.

Specific markets and industries will usually tend to have increases and decreases compared to its

competitors. The financial analysis demonstrates many similarities in respect to profitability in

comparison to Pfizer. The pharmaceutical industry shows similar trends. With the respect to the

profitability ratios, 2006 and 2010 were the years which Pfizer and its competitors were similar.

In those years these companies showed a very high margin, in 2006, and their lost in 2010. So

when it came down to the profitability ratios this industry was very consistent throughout.

The biggest difference shown between Pfizer and its competitors is their debt ratios. These ratios

reveal how much of the companies liabilities are owed to banks in loans or to its investors. In

some calculations the averages were increased and some were decreased based on how different

these ratios were. With respect to the debt ratios the company with the biggest difference

was GlaxoSmithKline PLC. For both of the debt ratios depicted Glaxo was the only one who had

the biggest difference between Pfizer and the other two companies present.

39 http://www.readyratios.com/reference/asset/#ref25

34 | P a g e

Reviewing financial statements can play a huge role in determining how profitable and how

efficient a company is running. The only thing is that in order to do so a sample size of 5-10 is

usually recommended in order to see trends so that an educated decision can be made. In order to

see how a company is doing in its industry it is best to compare it to its competitors, if not you

will just be looking at the number blind not knowing why an amount decreased or increased from

one year to the next. It is pivotal to know trends within an industry so that you can be informed

and not just assume something drastically happened because investors or managers were doing

something different in one year and not in another. Once you have examined a good sample and

compare amongst a company’s competitors then a decision can be made to see whether or not a

company is efficient and profitable.

FORCASTING

With the state of the economy and the uncertainty in the changes with healthcare, there are many

unknown in the market. Regardless doctors must still practice medicine and patients will still

demand care which means there will always be a demand for pharmaceutical drugs. North

America holds the largest market in the world for pharmaceutical drugs at 49%. This is a strong

indicator that the largest opportunities exist within the US. Important to note however that is, the

innovation / research and development aspect of developing new compounds is on a significant

decline. The future of the branded market and the security for future profits depends heavily on

a company’s ability to develop. The Generic market has already captured a huge percentage of

the viable market. The patent expiration of major drugs such as Lipitor, Zyprexa, Plavix, and

Seroquel going generic over the coming years poses a huge threat. The generic market anxiously

waits to capitalize on these blockbuster drugs, as revenue source gets eroded from big pharma.

35 | P a g e

Pfizer, U.S.’s largest pharmaceutical company passed 2012 with mixed reviews. Last year was

the first operational year without their blockbuster drug Lipitor, and then came the delay of the

once a day anticoagulant drug Eliquis. However with the new approvals of their Rheumatoid

arthritis and Autoimmune drugs the company gains a boost. One interesting promise for the

future is a pneumonia vaccine that was quickly adopted by the CDC and recommended for adults

over 19 years with impaired immune system. While the future after Lipitor seemed dim, this past

year proved to have changed the game for Pfizer.

Some additional changes bringing hope to the future of the company including the patent case

for pain drug Lyrica, which gave the company exclusive rights until 2018 for the sales of Lyrica.

Pfizer’s sustainability will be dependent on their ability to increase revenue beyond the declining

sales of their drugs losing exclusivity. The table below shows the decline in sales for drugs

losing patent over 6 years from 2011 as they become due and likewise the increase in sales for

products being added over the same period. It is important to note that sales of 2011 still beat its

forecasted five year predictions.

36 | P a g e

i40

The chart above represents the past 5 years from 2009 up to 2013 and shows the impact of some

of the company’s patent loses from 2011. Most importantly to note is the fact that in spite of the

decline due to patent losses starting back in 2011, Pfizer price has continuously increased, due to

its heavily driven pipeline and its ability to sustain beyond the patent losses. Additionally the

40 http://www.forbes.com/sites/ycharts/2013/07/09/pfizers-‐projected-‐3b-‐drug-‐name-‐will-‐shock-‐you/

37 | P a g e

case won versus the Generic Lyrica maker will sustains Pfizer’s ability to capitalize on that drug

through 2015.

Assumptions

Years 2013-2017

Sales Growth

-12%

Tax Rate

24%

Total Asset Turnover

0.32

41

41 http://financials.morningstar.com/ratios/r.html?t=PFE

38 | P a g e

Historical Growth Profitability and Financial Ratios for Pfizer Inc 2003 - 2012

2003-‐12

2004-‐12

2005-‐12

2006-‐12

2007-‐12

2008-‐12 2009-‐12

2010-‐12

2011-‐12

2012-‐12 TTM

Revenue USD Mil 45,188 52,516 51,298 48,371 48,418 48,296 50,009 67,809 67,425 58,986 56,556

Gross Margin % 78.2 85.6 83.4 84.2 76.8 83.2 82.2 76 77.6 80.8 80.4

Operating Income USD Mil 4,690 14,760 11,881 12,124 7,519 11,726 10,827 9,422 15,241 12,080 11,551

Operating Margin % 10.4 28.1 23.2 25.1 15.5 24.3 21.7 13.9 22.6 20.5 20.4

Net Income USD Mil 3,910 11,361 8,085 19,337 8,144 8,104 8,635 8,257 10,009 14,570 26,368

Earnings Per Share USD 0.54 1.49 1.09 2.66 1.17 1.2 1.23 1.02 1.27 1.94 3.6

Dividends USD 0.6 0.63 0.76 0.96 1.16 1.28 0.8 0.72 0.8 0.88 0.92

Payout Ratio % 272.7 42.2 69.7 63.2 98.3 107.6 65 70.6 72.1 69.8 60.7

Shares Mil 7,286 7,614 7,411 7,274 6,939 6,750 7,045 8,074 7,870 7,508 7,316

Book Value Per Share USD 8.54 9.04 8.9 9.88 9.51 8.52 11.15

10.84 11.16 11.86

Operating Cash Flow USD Mil 11,739 16,340 14,733 17,594 13,353 18,238 16,587 11,454 20,240 17,054 16,330

Cap Spending USD Mil -‐2,641 -‐2,601 -‐2,106 -‐2,050 -‐1,880 -‐1,701 -‐1,205 -‐1,513 -‐1,660 -‐1,327 -‐1,290

Free Cash Flow USD Mil 9,098 13,739 12,627 15,544 11,473 16,537 15,382 9,941 18,580 15,727 15,040

Free Cash Flow Per Share USD 1.25 1.8 1.7 2.14 1.65 2.45 2.18 1.23 2.36 2.09

Working Capital USD Mil 6,084 13,236 13,448 25,560 25,014 16,067 24,445 31,859 29,659 32,796

Key Ratios -‐> Profitability

Margins % of Sales

2003-‐12

2004-‐12

2005-‐12

2006-‐12

2007-‐12

2008-‐12 2009-‐12

2010-‐12

2011-‐12

2012-‐12 TTM

Revenue 100 100 100 100 100 100 100 100 100 100 100

COGS 21.76 14.36 16.62 15.79 23.21 16.8 17.77 24.01 22.37 19.21 19.59

Gross Margin 78.24 85.64 83.38 84.21 76.79 83.2 82.23 75.99 77.63 80.79 80.41

SG&A 33.73 32.19 33.13 32.23 32.27 30.1 29.74 28.93 28.87 28.17 28.43

R&D 15.78 14.63 14.51 15.71 16.71 16.45 15.82 13.88 13.51 13.34 13.32

Other 18.35 10.72 12.58 11.2 12.28 12.37 15.01 19.29 12.63 18.79 18.23

Operating Margin 10.38 28.11 23.16 25.06 15.53 24.28 21.65 13.89 22.6 20.48 20.42

Net Int Inc & Other -‐3.16 -‐1.43 -‐0.68 1.87 3.63 -‐4.21

-‐3.68

5.75

EBT Margin 7.22 26.67 22.48 26.93 19.16 20.07 21.65 13.89 18.93 20.48 26.17

Profitability

2003-‐12

2004-‐12

2005-‐12

2006-‐12

2007-‐12

2008-‐12 2009-‐12

2010-‐12

2011-‐12

2012-‐12 TTM

Tax Rate % 49.68 19.03 29.69 15.29 11.03 16.97 20.29 11.93 31.52 21.21 24.64

Net Margin % 8.64 21.62 15.75 39.97 16.81 16.78 17.27 12.18 14.84 24.7 46.62

Asset Turnover (Average) 0.55 0.44 0.43 0.42 0.42 0.43 0.31 0.33 0.35 0.32 0.31

39 | P a g e

Return on Assets % 4.79 9.45 6.7 16.64 7.08 7.16 5.33 4.05 5.23 7.8 14.56

Financial Leverage (Average) 1.79 1.82 1.8 1.61 1.78 1.93 2.37 2.22 2.29 2.29 2.28

Return on Equity % 9.18 17.05 12.1 28.29 11.96 13.24 11.71 9.29 11.78 17.84 33.37

Return on Invested Capital % 6.69 13.31 9.11 23.27 9.9 10.05 7.17 4.94 7.01 11.15 21.64

Interest Coverage

8.59

Key Ratios -‐> Growth

2003-‐12

2004-‐12

2005-‐12

2006-‐12

2007-‐12

2008-‐12 2009-‐12

2010-‐12

2011-‐12

2012-‐12

Latest Qtr

Revenue %

Year over Year 39.59 16.22 -‐2.32 -‐5.71 0.1 -‐0.25 3.55 35.59 -‐0.57 -‐12.52 -‐13.84

3-‐Year Average 15.18 17.64 16.58 2.29 -‐2.67 -‐1.99 1.12 11.88 11.76 5.66

5-‐Year Average 27.25 26.51 11.64 8.44 8.38 1.34 -‐0.97 5.74 6.87 4.03

10-‐Year Average 19.71 20.29 17.74 15.65 14.5 13.56 11.93 8.65 7.65 6.18

Operating Income %

Year over Year -‐59.74 214.71 -‐19.51 2.05 -‐37.98 55.95 -‐7.67 -‐12.98 61.76 -‐20.74 -‐16.72

3-‐Year Average -‐18.52 13.34 0.66 37.24 -‐20.13 -‐0.44 -‐3.7 7.81 9.13 3.72

5-‐Year Average 5.41 26.54 6.5 3.64 -‐8.38 20.11 -‐6.01 -‐4.53 4.68 9.95

10-‐Year Average 17.78 22.29 16.59 14.69 8.43 12.52 9.06 0.84 4.16 0.36

Net Income %

Year over Year -‐57.16 190.56 -‐28.84 139.17 -‐57.88 -‐0.49 6.55 -‐4.38 21.22 45.57

3-‐Year Average 1.62 13.41 -‐3.96 70.37 -‐10.5 0.08 -‐23.57 0.46 7.29 19.05

5-‐Year Average 3.13 29.01 16.76 19.95 -‐2.25 15.69 -‐5.34 0.42 -‐12.34 12.34

10-‐Year Average 19.52 24.22 17.79 25.92 13.92 9.23 10.51 8.28 2.54 4.79

EPS %

Year over Year -‐63.01 175.93 -‐26.85 144.04 -‐56.02 2.56 2.5 -‐17.07 24.51 52.76 360.47

3-‐Year Average -‐2.91 6.89 -‐9.28 70.15 -‐7.74 3.26 -‐22.67 -‐4.47 1.91 16.4

5-‐Year Average -‐8.67 12.69 13.06 16.87 -‐4.33 17.32 -‐3.76 -‐1.32 -‐13.75 10.64

10-‐Year Average 12.25 15.62 10.09 18.23 7.52 3.51 4.14 5.63 0.4 2.88

Key Ratios -‐> Cash Flow

Cash Flow Ratios

2003-‐12

2004-‐12

2005-‐12

2006-‐12

2007-‐12

2008-‐12 2009-‐12

2010-‐12

2011-‐12

2012-‐12 TTM

Operating Cash Flow Growth % YOY 15.28 39.19 -‐9.83 19.42 -‐24.1 36.58 -‐9.05 -‐30.95 76.71 -‐15.74

Free Cash Flow Growth % YOY 7.99 51.01 -‐8.09 23.1 -‐26.19 44.14 -‐6.98 -‐35.37 86.9 -‐15.36

40 | P a g e

Cap Ex as a % of Sales 5.84 4.95 4.11 4.24 3.88 3.52 2.41 2.23 2.46 2.25 2.28

Free Cash Flow/Sales % 20.13 26.16 24.61 32.13 23.7 34.24 30.76 14.66 27.56 26.66 26.59

Free Cash Flow/Net Income 2.33 1.21 1.56 0.8 1.41 2.04 1.78 1.2 1.86 1.08 0.57

Key Ratios -‐> Financial Health

Balance Sheet Items (in %)

2003-‐12

2004-‐12

2005-‐12

2006-‐12

2007-‐12

2008-‐12 2009-‐12

2010-‐12

2011-‐12

2012-‐12

Latest Qtr

Cash & Short-‐Term Investments 10.24 16.08 18.91 24.13 22.1 21.35 12.19 14.36 14.23 17.6 18.8

Accounts Receivable 7.85 8.1 8.74 8.63 9.07 8.8 7.44 7.73 12.29 11.61 6.43

Inventory 5 5.38 5.14 5.32 4.6 3.94 5.82 4.31 4.13 3.8 3.5

Other Current Assets 2.39 2.52 2.85 2.8 4.87 4.66 3.5 4.6 0.05 0.04 5.53

Total Current Assets 25.47 32.09 35.64 40.88 40.64 38.76 28.96 31.01 30.71 33.05 34.26

Net PP&E 15.66 14.86 14.54 14.48 13.65 11.95 10.7 9.81 9.01 7.78 6.94

Intangibles 50.23 46.09 43.86 39.38 36.33 35.25 51.84 52.05 52.61 48.81 46.96

Other Long-‐Term Assets 8.64 6.95 5.97 5.25 9.37 14.04 8.5 7.14 7.68 10.35 11.85

Total Assets 100 100 100 100 100 100 100 100 100 100 100

Accounts Payable 2.23 2.16 1.89 1.76 1.97 1.58 2.05 2.06 2.04 2.29 1.1

Short-‐Term Debt 7.55 9.11 9.86 2.12 5.05 8.39 2.57 2.88 2.14 3.46 2.91

Taxes Payable

4.75 0.49 0.54 0.54 0.5

Accrued Liabilities 2.7 1.78 1.46 1.66 1.71 1.5 1.05 1.08 1.15 1.1 0.8

Other Short-‐Term Liabilities 7.78 8.34 10.98 13.09 10.21 12.84 7.06 8.16 9.06 8.01 7.76

Total Current Liabilities 20.26 21.39 24.2 18.63 18.94 24.3 17.48 14.67 14.93 15.4 13.08

Long-‐Term Debt 4.93 5.89 5.4 4.83 6.35 7.16 20.28 19.7 18.58 16.7 17.58

Other Long-‐Term Liabilities 18.83 17.52 14.58 14.41 18.31 16.75 19.97 20.6 22.77 24.16 25.54

Total Liabilities 44.01 44.8 44.18 37.86 43.6 48.22 57.73 54.97 56.28 56.26 56.2

Total Stockholders' Equity 55.99 55.2 55.82 62.14 56.4 51.78 42.27 45.03 43.72 43.74 43.8

Total Liabilities & Equity 100 100 100 100 100 100 100 100 100 100 100

Liquidity/Financial Health

2003-‐12

2004-‐12

2005-‐12

2006-‐12

2007-‐12

2008-‐12 2009-‐12

2010-‐12

2011-‐12

2012-‐12

Latest Qtr

Current Ratio 1.26 1.5 1.47 2.2 2.15 1.59 1.66 2.11 2.06 2.15 2.62

Quick Ratio 0.89 1.13 1.14 1.76 1.65 1.24 1.12 1.51 1.78 1.9 1.93

Financial Leverage 1.79 1.82 1.8 1.61 1.78 1.93 2.37 2.22 2.29 2.29 2.28

Debt/Equity 0.09 0.11 0.1 0.08 0.11 0.14 0.48 0.44 0.43 0.38 0.4

41 | P a g e

Pfizer Income Statement 5 Year Projection All numbers in millions except shares

Actual Estimate

d 5- Year

Projection Fiscal Year 2012 2013 2014 2015 2016 2017

Revenue

Net Sales

$58,986 58597 59469 60481 61628 62600

New Drugs

6791 7514 8173 8910 8990

Total Revenue

$58,986 65388 66983 68654 70538 71590

Cost Of Sales

($11,334) -11907 -12038 -12174 -12343 -12516

Gross Profit

$47,652 $53,481

$54,945

$56,480 $58,195

$59,074

Operating Expenses -16616 -17699 -17953 -18219 -18534 -18885

Operating Income $31,036 $35,782

$36,992

$38,261 $39,661

$40,189

Int Exp

-1685 -1725 -1797 -1773 -1749 -1712 Other

-17726 -15000 -15000 -15000 -15000 -15000

Key Ratios -‐> Efficiency Ratios

Efficiency 2003-‐12

2004-‐12

2005-‐12

2006-‐12

2007-‐12

2008-‐12 2009-‐12

2010-‐12

2011-‐12

2012-‐12 TTM

Days Sales Outstanding 58.8 63.05 68.06 72.28 72.5 71.04 86.14 78.74 76.38 80.4 78.75

Days Inventory 158.05 302.44 271.86 290.23 185.33 217.84 344.63 233.27 195.67 238.82 218.79

Payables Period 78.35 127.61 104.85 101.4 69.65 90.46 125.68 94.13 95.12 130.43 84.71

Cash Conversion Cycle 138.51 237.87 235.07 261.11 188.18 198.43 305.08 217.89 176.94 188.8 212.83

Receivables Turnover 6.21 5.79 5.36 5.05 5.03 5.14 4.24 4.64 4.78 4.54 4.63

Inventory Turnover 2.31 1.21 1.34 1.26 1.97 1.68 1.06 1.56 1.87 1.53 1.67

Fixed Assets Turnover 3.12 2.86 2.89 2.87 2.99 3.33 2.77 3.24 3.74 3.76 4.16

Asset Turnover 0.55 0.44 0.43 0.42 0.42 0.43 0.31 0.33 0.35 0.32 0.31

42 | P a g e

Int income

455 598 642 657 679 693

Pre-Tax Income

$12,080 $19,655

$20,837

$22,145 $23,591

$24,170

Income Taxes

-2561 -4033 -4276 -4549 -4854 -5112

Gain on Sales

5080 500 500 500 500 500

minority interest -28 -29 -31 -32 -33 -34 Net Income

$14,571 $16,093

$17,030

$18,064 $19,204

$19,524

Diluted EPS

$1.94 $2.20 $2.39 $2.60 $2.84 $2.97

PFE 5 Year Projected Balance Sheet and Growth Statistics

Fiscal Year 2012 2013 2014 2015 2016

Cash 10.39B 1.98B 1.74B 10.39B 3.54B

Short-Term Investments 22.32B 23.99B 26.28B 22.32B 23.22B

Cash & STI 32.71 32.7088 32.7076 32.6988 32.7064

Cash & Short Term Investments Growth 22.24% 9.43% 7.87% 22.24% -4.48%

Cash & ST Investments / Total Assets 17.60% 12.19% 14.36% 17.60% 14.23%

Total Accounts Receivable 12.38B 15.84B 13.85B 12.38B 13.66B

Accounts Receivables, Net 12.38B 14.65B 13.38B 12.38B -

Accounts Receivables, Gross 12.75B 14.82B 13.59B 12.75B 227M

Bad Debt/Doubtful Accounts (374M) (176M) (208M) (374M) (227M)

Other Receivables 0 1.2B 467M 0 -

Accounts Receivable Growth -9.38% 61.93% -12.58% -9.38% -1.36%

43 | P a g e

Accounts Receivable Turnover 4.77 3.16 4.84 4.77 4.94

Inventories 7.06B 12.4B 8.28B 7.06B 7.77B

Finished Goods 2.53B 5.25B 3.67B 2.53B 2.77B

Work in Progress 3.79B 5.78B 3.73B 3.79B 4.12B

Raw Materials 740M 1.38B 883M 740M 885M

Other Current Assets 9.27B 7.46B 10.88B 9.27B 9.54B

Miscellaneous Current Assets 9.27B 7.46B 10.88B 9.27B 9.54B

Total Current Assets 61.42B 61.67B 61.01B 61.42B 57.73B

2012 2013 2014 2015 2016 Net Property, Plant & Equipment 14.46B 22.78B 18.65B 14.46B 16.94B

Property, Plant & Equipment - Gross 27.88B 33.92B 31.38B 27.88B 30.52B

Buildings 11.42B 14.19B 13.2B 11.42B 10.8B

Land & Improvements 597M 937M 791M 597M 747M

Other Property, Plant & Equipment 3.96B 4.6B 4.64B 3.96B 4.29B

Accumulated Depreciation 13.42B 11.14B 12.73B 13.42B 13.58B Total Investments and Advances 14.15B 13.12B 9.75B 14.15B 9.46B

Other Long-Term Investments 14.15B 13.12B 9.75B 14.15B 9.46B

Intangible Assets 90.69B 110.39B 101.48B 90.69B 98.9B

Net Goodwill 44.67B 42.38B 43.93B 44.67B 45.07B

Net Other Intangibles 46.01B 68.02B 57.56B 46.01B 53.83B

Other Assets 4.39B 3.66B .93B 4.39B 3.78B

Tangible Other Assets 4.39B 3.66B 2.93B 4.39B 3.78B

Total Assets 185.8B 212.95B 193.01B 185.8B 186B

Assets - Total - Growth -1.17% 91.59% -8.22% -1.17% -3.50%

Liabilities & Shareholders' Equity

2012 2013 2014 2015 2016

Short Term Debt 3.98B 5.44B 2.1B 3.98B 4.01B

44 | P a g e

Long Term Debt 2.45B 27M 3.5B 2.45B 6M

ST Debt & Curr LT Debt 6.42B 5.47B 5.6B 6.42B 4.02B

Accounts Payable 4.26B 4.37B 3.99B 4.26B 3.84B

Accounts Payable Growth 11.16% 149.57% -8.60% 11.16% -3.96%

Income Tax Payable 1.02B 10.33B 1.06B 1.02B 1.3B

Other Current Liabilities 16.91B 17.05B 17.98B 16.91B 18.91B

Dividends Payable 1.73B 1.45B 1.6B 1.73B 1.8B

Accrued Payroll 2.05B 2.24B 2.08B 2.05B 2.17B Miscellaneous Current Liabilities 13.13B 13.36B 14.3B 13.13B 14.95B

Total Current Liabilities 28.62B 37.23B 28.64B 28.62B 28.07B

Long-Term Debt 31.04B 43.19B 38.41B 31.04B 34.93B

Long-Term Debt excl. Capitalized Leases 31.04B 43.19B 38.41B 31.04B 34.93B

Non-Convertible Debt 31.04B 43.19B 38.41B 31.04B 34.93B

Provision for Risks & Charges 17.93B 18.64B 15.47B 17.93B 16.59B

Deferred Taxes 20.89B 16.51B 17.43B 20.89B 20.4B

Deferred Taxes - Credit 21.59B 17.84B 18.63B 21.59B 19.6B

Deferred Taxes - Debit 700M 1.33B 1.2B 700M 1.2B

Other Liabilities 4.94B 5.61B 5.6B 4.94B 6.2B

Other Liabilities (excl. Deferred Income) 4.94B 5.61B 5.6B 4.94B 6.2B

Total Liabilities 104.12B 122.5B 106.75B 104.12B 105.38B

Total Liabilities / Total Assets 56.04% 57.53% 54.74% 56.04% 56.05%

Retained Earnings 54.24B 40.43B 40.72B 54.24B 46.21B

Cumulative Translation Adjustment/Unrealized For. Exch. Gain (177M) 3.55B 169M (177M) 944M

Unrealized Gain/Loss Marketable Securities 75M 275M (51M) 75M (315M)

Treasury Stock (40.12B) (21.63B) (22.71B) (40.12B) (31.8B)

Common Equity / Total Assets 43.71% 42.24% 45.00% 43.71% 43.69%

Total Shareholders' Equity 81.26B 90.01B 87.81B 81.26B 82.19B

Accumulated Minority Interest 418M 432M 452M 418M 431M

45 | P a g e

Total Equity 81.68B 90.45B 88.27B 81.68B 82.62B

Liabilities & Shareholders' Equity 185.8B 212.95B 193.01B 185.8B 186B

There has been a decline in sales growth over the last 3-4 years. It is expected with the loss of

key account to patent expiration that this will have a negative growth until its new products are

being taken into the market place.Tax Rate for the previous year’s averaged around 24/25 %. An

assumption can be made that it may return to roughly the same amount. Asset turnover was

based on the previous 5 year turnover and included the period of patent losses.

VALUATION

The weighted average cost of capital (WACC) is the rate that a company is expected to pay on

average to all of its security holders to finance its assets (Wiki.) WACC for Pfizer has been

calculated to be 8.5 % for 2012. Calculations were made using the Capital Asset Pricing Model

(CAPM) based on the following data:

(Note: Equity and Debt in Billions)

Amount of Equity: $232299

Amount of Debt: $44949

Tax Rate: 22.52%

Equity Beta: 0.71

% of Debt: 19.35%

% of Equity: 80.65

Risk free Rate (rF): 3% (Treasury bond yield (30 years)

Market Risk Premium: 7.5%

46 | P a g e

Cost of Equity: 8.33 %. rE = rF +β (rM – rF) à rE = 0.03 + 0.71 (0.075) = 8.33 %)

Cost of Debt: 11.94 %42

Weights

Weighted Cost

After-tax cost of debt 9.3% 19.4%

1.8%

Cost of equity 8.3% 80.7% 6.7% Weighted average cost of capital

8.5%

43 The calculated historical company’s (Pfizer-PFE) WACC are as follows: Year WACC 2003 6.3% 2004 6.5% 2005 5.80% 2006 6.2% 2007 5.6% 2008 6.5% 2009 6.6% 2010 6.8% 2011 8.00% 2012 8.5%

The following valuation methods have been utilized in order to calculate and assess Pfizer Inc’s

value. Those methods are: DCF (discounted cash flow) model, DAE (discounted abnormal

earnings) model, Discounted Abnormal Return on Equity (DAROE) mode and Buffet’s model

(sustainable growth model).

42 http://www.google.com/finance?fstype=ii&q=NYSE:PF

43 http://financials.morningstar.com/income-‐statement/is.html?t=PFE&region=USA&culture=en-‐US

47 | P a g e

Discounted Cash Flow (DCF) model

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Cash Flow to Capital

$17350

$16817

$16214

$16145

$16044

$15910

$15740

$15530

$15278

$14982

Terminal Value-No Growth

$71986 (To=FCF/k-g)

PV factor At existing WACC

0.94 0.88 0.84 0.79 0.76 0.68 0.64 0.59 0.50 0.44

NPV DCF YR1

DCF YR2

DCF YR3

DCF YR4

DCF YR5

DCF YR6

DCF YR7

DCF YR8

DCF YR9

DCF Y10 + TV of DCF

PV flows to capital

$88627.77 $16321

$14827 $13690 $12692 $12217 $10903 $10062 $9174 $7642 $46157

Total Value of firm-FCFE¹

$230933

Value of Firm (FCFE) = FCFF/(WACC-G). FCFF = 17320. WACC = 8.5%. Gterm = 1 %.

atio 0.46

BETA 0.71

Firm's exishng D/E raho 0.46

Assumed Market Risk Premium 7.5%

Exishng WACC 5.0%

48 | P a g e

44

Value of Firm & Value of Equity at Various D/E

From the calculations above, one notices the value of the firm under the DCF model to be about

$230,933. Looking at the historical data of the firm, one will notice the D/E (debt to equity)

ratios varying at different stages, between 0.93, the lowest in 2008 and 1.37, the highest in 2009.

In 2008, the firm seemed to have lower leveraged. For example, the firm is more capable of

minimizing its losses and had less of a burden of debt. These values were used to determine the

optimistic and pessimistic approach. The DCF ranged for the optimistic and pessimistic approach

from $76843 and $230933 respectively.

DAE (discounted abnormal earnings) Model

The cost of equity for Pfizer, Inc,. was estimated to be 9.5%. The beginning book value was

estimated to be at $65627 since January of 2013. If one were to apply the cost of equity to the to

the book value amount, the normal earnings’ for 2013 were estimated to be at $$6234.57, which

gives the company expected abnormal earnings of $8335.47. Prior to the terminal year, the

abnormal earnings did decrease to $4450,88 respectively in the year of 2015.45 Pfizer Inc’s

44 http://www.wikiwealth.com/discounted-‐cash-‐flow-‐analysis:pfe

45 ¹ http://www.nasdaq.com/symbol/pfe/pe-‐ratio

Actual 2011 2010 2009 2008 D/E RATIO 1.29 1.29 1.22 1.37 0.93 WACC 8.5% 8.0% 6.8% 6.6% 6.5% TVF¹ $201974 $172634 $170353 $164821 $76843 FCFE² $230933

49 | P a g e

estimated value, based on looking at the present value of the abnormal earnings’ flow over the

period of 2013-2017, under the Discounted Abnormal Earnings’ model was calculated to be at

$91570.38, which is representative of the actual and optimistic value. The cost of equity for the

above prior 10 years (2012-2021) under the CAPM (Capital Asset Pricing Model) seemed to be

changing, but not above the norm.

Actual and Optimistic Approach

2013 2014 2015 2016 2017

Equity Book Value 65627 71125 64917 57483 89941

Cost of Equity Capital 9.5% 9.5% 9.5% 9.5% 9.5%

Normal Earnings 6234.57 6756.88 6167.12 5460.89 8544.40

Net Income 14570 11382 10618 11158 12450

Normal Earnings 6234.57 6756.88 6167.12 5460.89 8544.40

Abnormal Earnings 8335.47 4625.12 4450.88 5697.11 3905.60

Expected Abnormal

Earnings

8335.47 4625.12 4450.88 5697.11 3905.60

Discount factor at

8.50%

0.92 0.85 0.78 0.72 0.67

PV of each Abn.

Earnings

7778.63 3934.36 3477.43 7965.09 2787.87

Estimated Value $91570.38

Terminal Value evaluation Abnormal Earnings (after 2017) 3905.60 Cost of Equity Capital 9.5% Growth Rate 1% Terminal Value $23262

50 | P a g e

46

Pessimistic Approach-No Growth Expected

Abnormal earnings (after 2017) 3905.60 Cost of equity capital 9.5% Growth rate 0.00% Terminal Value $20322

2013 2014 2015 2016 2017

Expected Abnormal

Earnings

8335.47 4625.12 4450.88 5697.11 3905.60

Discount factor at

8.50%

0.92 0.85 0.78 0.72 0.67

PV of each Abn.

Earnings

7778.63 3934.36 3477.43 7965.09 2787.87

Estimated Value $25943.38

47,48

**The estimated value, if pessimistic approach is used, where there’s no growth over the next 5 years is calculated to be $25943.38

Discounted Abnormal Return on Equity (DOROE) Mode

46http://www.stock-analysis-on.net/NYSE/Company/Pfizer-Inc/DCF/Present-Value-of-FCFF 47 http://www.marketwatch.com/investing/Stock/PFE/financials/cash-flow 48 http://www.editgrid.com//publish/calc/user/wikiwealth/Stock-Research-Summarypfe?savebar=0&show=tb%2Cfb%2Crh%2Cch%2Cmb%2Csl%2C&bookid=6479487&version=2&frame_style=border%3A9px%20solid%20%23666%3Bheight%3A380px%3Bwidth%3A100%25&edit=1

51 | P a g e

Initial Cash Flow: $9,019,000,000

Years: 1-5 6-10 Growth Rate: 3.9% 3%

Terminal Growth Rate: 1% Discount Rate: 8.5%

Shares Outstanding: 6,620,300,000

Margin of Safety:

-28%

Debt Level: $44,934,000

Year Flows Growth Value 1 9,370,741,000 3.9% $8,636,627,650 2 9,736,199,899 3.9% $8,270,466,478 3 10,115,911,695 3.9% $7,919,829,189 4 10,510,432,251 3.9% $7,584,057,629 5 10,920,339,109 3.9% $7,262,521,545 6 11,247,949,282 3% $6,894,375,292 7 11,585,387,761 3% $6,544,890,830 8 11,932,949,394 3% $6,213,122,170 9 12,290,937,875 3% $5,898,171,277

10 12,659,666,012 3% $5,599,185,636

Terminal Year $12,786,262,672

PV of Year 1-10 Cash

Flows: $70,823,247,696 Terminal

Value: $75,402,366,567 Total PV of

Cash Flows: $146,225,614,23 Number of

Shares: 6,620,300,000 Intrinsic

Value (IV): $22.08 Margin of Safety IV: $28.26 What % of IV comes from terminal Value 52%

52 | P a g e

According to the data, one finds out that the stock price under the DOROE method is

calculated to be at approximately $24.33. Judging on the actual stock price of PFIZER¹ of

$28.80, there seems to be a devaluation of the price compared to the actual stock price. If

the DOROE model were used, the stock price for Pfizer is a buy.

According to the data, one finds out that the stock price under the DOROE method is

calculated to be at approximately $24.33. Judging on the actual stock price of PFIZER¹ of

$28.80, there seems to be a devaluation of the price compared to the actual stock price. If

the DOROE model were used, the stock price for Pfizer is a buy.

Looking at the data, one notices a steady increase in the value of Pfizer. Cash flows seem to be

decreasing over the years. There were two growth rate variations used, from years 1-5 & 6-10 a

rate of 3.9% and 3% were used respectively. 49

Buffet’s Model

Buffett Valuation Worksheet (January/February 1998, Computerized Investing, www.aaii.com)

49 http://www.advfn.com/exchanges/NYSE/PFE/financial

53 | P a g e

Enter values into shaded cells50

Date of Analysis: 9/10/2013

Current Stock Data

Seven Year Averages

Company:

Pfizer, INC

Return on Equity: 19.4%

Ticker: PFE

Payout Ratio: 25.0%

Price: $25.08

P/E Ratio-High: 23.3

EPS: $2.00

P/E Ratio-Low: 9.5

DPS: $0.36

P/E Ratio: 17.28

BVPS: $11.16

Sustainable Growth 14.5%

P/E: 17.1

(ROE * (1 - Payout Ratio))

Earnings Yield: 8.0%

Dividend Yield: 3.3%

P/BV: 1.9

Gv't Bond Yield: 3.0 %

Historical Company Data

Price P/E Ratio

Payout Year EPS DPS BVPS High Low High Low ROE Ratio

Year 8 1.03 0.76 8.90 25.20 20.27 24.5 19.7 11.6% 73.8% Year 7 1.52 0.96 9.88 28.60 22.16 18.8 14.6 15.4% 63.2% Year 6 1.18 1.16 9.51 27.73 22.24 23.5 18.8 12.4% 98.3% Year 5 1.20 1.28 8.52 24.24 14.26 20.2 11.9 14.1% 106.7% Year 4 1.23 0.80 11.15 18.99 11.62 15.4 9.4 11.0% 65.0% Year 3 1.02 0.72 10.95 20.36 14.00 20.0 13.7 9.3% 70.6% Year 2 1.27 0.80 10.84 21.90 16.63 17.2 13.1 11.7% 63.0% Year 1 1.94 0.90 11.16 26.09 20.75 13.4 10.7 17.4% 46.4%

EPS DPS BVPS High Price

Low Price

Annually Compounded Rates of Growth (7 year)

[(Year 1 / Year 8) ^ (1/7)] - 1 9.5% 2.4% 3.3% 0.5% 0.3%

Annually Compounded Rates of Growth (3 year)

[(Year 1 / Year 4) ^ (1/3)] - 1 16.4% 4.0% 0.0% 11.2% 21.3%

50 http://www.gurufocus.com/term/Dividends+Per+Share/PFE/Dividends%2BPer%2BShare/Pfizer%2BInc

54 | P a g e

Projected Company Data Using Historical Earnings Growth Rate

Year EPS DPS

Current $1.98 0.50

0.22 Earnings after 10 years

Year 1 1.94 0.49

3.51 Sum of dividends paid over 10 years

Year 2 1.27 0.32

Year 3 1.02 0.26

$3.80 Projected price (Average P/E * EPS)

Year 4 1.23 0.31

$7.31 Total gain (Projected Price + Dividends) Year 5 1.20 0.30

Year 6 1.18 0.30

-11.6% Projected return using historical EPS growth rate Year 7 1.52 0.38

[(Total Gain / Current Price) ^ (1/10)] - 1

Year 8 1.03 0.26

Year 9 1.44 0.36

Year 10 0.22 0.06

Projected Company Data Using Sustainable Growth Rate

Year BVPS EPS DPS

Current $0.00 32.00 8.00

1.66 Earnings after 10 years (BVPS * ROE)

Year 1 11.16 5.00 1.25

13.48 Sum of dividends paid over 10 years

Year 2 10.84 2.10 0.53

Year 3 10.95 2.12 0.53 $28.61 Projected price (Average P/E * EPS)

Year 4 11.15 2.16 0.54 $42.10 Total gain (Projected Price + Dividends)51

Year 5 8.52 1.65 0.41

Year 6 9.51 1.84 0.46 5.3% Projected return using sustainable growth rate

Year 7 9.88 1.92 0.48

[(Total Gain / Current Price) ^ (1/10)] - 1

Year 8 8.90 1.73 0.43

Year 9 9.04 1.75 0.44

Year 10 8.54 1.66 0.41

51 http://markets.ft.com/research/Markets/Tearsheets/Financials?s=PFE:NYQ

55 | P a g e

The actual price of Pfizer stock is $28.80, while the calculated price under the Buffet’s two

methods used is respectively, $3.80 and $28.61. If the Buffet model were applied, then the

company’s stock is a buy, because its calculated price under the Buffet model seems to be

devalued when compared to the real stock value price.

In order to use the Sustainable Earnings model, the historical data over a defined period of time

for the prediction of future earnings must be utilized. Pfizer Inc’s EPS grew at an annual

compound growth rate of 9.5% over a period of 7 years. Pfizer Inc’s current EPS stands at $2.0,

which is equal to $0.22 in 10 years when using the growth rate. Pfizer Inc’s P/E ratio was

between 9.5 (low) to 23.3 (high) with an average of 17.28. The projected share price in 10 years

is $3.80 which is calculated by multiplying the average P/E ratio by the company’s EPS. If Pfizer

Inc pays its dividend of $3.51, it is projected to earn approximately $7.31. Based on projected

return using historical EPS growth rate, the projected Rate of Return for Pfizer is going to be a

negative (-11.6 %).

Under the sustainable growth rate model, we notice a total gain of $42.10, with a projected price

of $28.61 and return of 5.3%. The fact that Government bond rate is pretty low, at 3.0%, which

makes Pfizer Inc’s stock look promising and a good candidate for investment which might

render a sizable return. In conclusion, the company’s (Pfizer) 3 year earnings growth rate

surpassed its 7 year earnings grow rate by almost double, therefore, that the model is suitable to

use in evaluating Pfizer. 52

52 http://stock2own.com/StockAnalysis/Stock/US/PFE

56 | P a g e

ASSESSMENT OF SOLVENCY

Calculation of Altman Z-Score Model

The Altman Z-score model is a financial model designed to predict the probability of financial

distress of companies; weighing five scores, this model computes a bankruptcy score.

Formula

The formula for calculating the Altman Z-score model is:

Z = 1.2(X1) + 1.4(X2) + 3.3(X3) + 0.6(X4) + 1.0(X5) 1

The Altman Z-Score Bankruptcy Range for predicting financial distress is outlined below:

Z > 2.99 - Safe Zone

Z < 2.99 - Grey Zone

Z < 1.81 - Distress Zone (Bankruptcy)

Estimate of Bond Rating

Using the Altman model, the score for PFE is 2.46. Based on the bankruptcy range for this

model, the bond rating for PFE is estimated in the ‘grey zone’.

57 | P a g e

PFE’s Z-score reflects its financial strength, with the company reporting an operating profit of

$14.5 billion, up 32% from 2011, even with revenue down 13%, during the same period, to $58.9

billion. PFE’s Earnings before Interest and Taxes (EBIT) to total assets score is 0.36. This is a

strong indication of how effectively, and efficiently, the company is converting money invested

into net income. PFE has positive working capital and, as it has substantial current assets, it is

practicable, and feasible to assume that there will be no obstacles to PFE meeting their short-

term obligations.

Altman Z-Score Bankruptcy Range

The company’s retained earnings to total assets score of 0.41 is satisfactory, indicating that it is

financing its capital expenditure not through retained earnings, but alternatively through

borrowings. Further, PFE’s score for this fact implies a favorable history of continuous and

sustained revenue, resulting in minimal chances of possible bankruptcy.PFE has a market value

of equity score of 1.38, indicating excellent financial leverage. This appraises what portion of the

company’s assets would decline in value before the liabilities exceed the assets, in the event that

the company became insolvent.

PFE’s market capitalization is strong, and is interpreted as the company having a solid financial

position. PFE’s sales to total assets score is 1.49, scoring the highest in this category than any

other, indicating that PFE is using its assets positively to generate robust sales. This score also

reveals that PFE is prosperous in a competitive market.

Based on the above factors, combined with a 2.46 based on the Z-score, it is estimated that the

company has a bond rating of ‘AA’, when compared to Standard and Poor debt rating.

58 | P a g e

Actual Bond Rating

As of December 31, 2012, PFE received an actual bond rating of A+2, with a positive outlook by

Standard & Poor’s and Fitch, respectively. Fitch's ratings on PFE reflect the inherent strength of

the company's prescription drug sales, good balance sheet fundamentals, very strong earnings

track record, and excellent cash flow, a material amount of which is generated by businesses

within its industry.

Debt Ratings: Median Financial Ratios by Category Median ratios for overall category in January 2012

(excludes financial terms)

S&P debt rating

Earnings before interest and and taxes to net capital

Pretax interest coverage

Cash flow from operations to total debt

Net debt to net capital

AAA 43.1% 103.2 291% -‐29% AA 28.80% 15.1 43% 28% A 24.20% 13.1 53% 20% BBB 17.10% 6 32% 30% BB 16.20% 3.2 29% 39% B 8.80% 1.8 12% 60% CCC -‐2.1 -‐0.2 >0.2% 88%

CONCLUSION

59 | P a g e

The analysis of Pfizer’s performance during the years of 2005-2012, has delivered mixed results.

However, it is clear that Pfizer demonstrates strong characteristics while outperforming

competitors in many circumstances.

The pharmaceutical industry is a $300 billion business which is expected to increase to $400

billion over the next three years. As a leader within this highly competitive industry, Pfizer Inc.

(Pfizer) boasts a portfolio of over 600 products and achieved revenues of 59 billion in 2012.

Although the pharmaceutical industry has experienced obstacles, Pfizer is still at the top of the

industry. Over the past five years, sales have increased significantly from $48 billion to $59

billion. Shareholders equity has also increased from $57 billion to $81 billion. From 2011 to

2012 return on equity has increased from 11.78 to 17.84. All of the indicators shed a very

positive light on the company from a financial perspective.

As one of the most established companies in the pharmaceutical industry, Pfizer manufactures

some of the most recognizable drugs on the market including Lipitor, Lyrica and Viagra. The

company gains a distinct competitive advantage by hiring some of the world’s most sought after

scientists to help them achieve their goal of creating new drugs. Research and development is

Pfizer’s largest expenditure and most of the strategic efforts are geared towards bringing new

product to the market.

Although Pfizer shows much strength financially, 2012 posed unique challenges as the company

attempted to overcome crucial patent expirations and losses. An important financial factor to

point out is that despite the patent losses, Pfizer’s price has continuously increased. This is due

heavily to its driven pipeline and ability to sustain even beyond patent losses.

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In addition, Pfizer has faced controversy in the recent years. Lawsuits have been filed for the

illegal marketing of the arthritis drug Bextra and an acquired company was charged with selling

asbestos-containing insulation products among others.

Industry threats are also present in the market. Brand name drug sales are forecasted to lose over

$227 billion in sales due to generic erosion following patent expirations. However, at the same

time the generic pharmaceutical industry will have an annual growth of 6.3 %. Pfizer will

experience patent expirations on 14 of its key drugs over the next five years, which account for

approximately 42 % of their yearly revenue. This coupled with the fact that Pfizer has a very low

stake in generic drugs poses a large threat for Pfizer.

On the flipside, great opportunities for the company have been identified. Because of Pfizer’s

vast resources they have the ability to acquire, merge and partner with new companies. In

addition, the Patient Protection and Affordable Care Act (PPACA) will soon be implemented.

The PPACA will expand coverage to 32 million Americans through state run Health Insurance

Exchanges, which is expected to increase drug sales in 2015, when the act is up and running.

The act should have a positive effect on the company’s revenues in the next five years.

Several valuations were performed and some of the most substantial growths were found under

the sustainable growth rate model. We notice a total gain of $42.10, with a projected price of

$28.61 and return of 5.3%. Also noticeable is the fact that government bond rate is low, at 3.0%.

This makes Pfizer stock promising and a good candidate for investment which might render a

sizable return. In addition the company’s three year earnings growth rate surpassed its seven year

earnings grow rate by almost double.

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The company possesses many assets which contribute to its performance and strategic

positioning within their market. Pfizer employs top scientists from around the world and has

seven research and development facilities where scientists develop some of the most sought after

drugs on the market. With the help of their 91,500 employees they maintain an established

portfolio of over 600 products including the most profitable drug in 2012, Lipitor. Pfizer’s new

drug, ofacinib, an autoimmune drug has been adapted as the recommended treatment for anyone

over the age of 19 with severe autoimmune problems. It was sanctioned by the CDC as the

required treatment and creates a monopoly for Pfizer in this particular market. In addition,

several rheumatoid arthritis and pneumonia drugs will help Pfizer regain market share lost with

the recent patent expirations of multiple blockbuster drugs. In a response to the loss of many

patent protections, Pfizer has announced reorganization where the company will divide into two

business segments. Once of the segments, the innovative business segment, will focus on

vaccines, oncology, and consumer healthcare but will also concentrate on mature drugs which

have either lost patent protection or will lose before 2015. This strategy will help Pfizer address

the patent expiration issue.

In conclusion, it is evident that Pfizer is the leader in the industry and they are making strategic

decisions to ensure that they maintain this position. Due to this fact, along with some strong

financial performance indicators, it is recommended that this stock be a BUY stock.

pfizer’’€¦ · the global pharmaceutical industry is compromised of three sub-industries;...

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