The Pharmaceutical Industry - Beedie School of Business · PPT file · Web viewGlobal...
Transcript of The Pharmaceutical Industry - Beedie School of Business · PPT file · Web viewGlobal...
Global Pharmaceutical
IndustryRobert Agon – Industry AnalysisAlex Luk – Bristol-Myers SquibbJacky Lui – PfizerRay Li – Merck
Overall Health Care Industry
For Profit Health Benefit Providers
a) Service Organizations
- Hospital management
- Long term care (nursing homes)
- Special services
- Organizations providing health care plans (HMOs)
b) Pharmaceutical Industry (product organizations)
- Diversified Companies
- Products & Supplies
- Drug Companies
Foreign Markets & Governments
Biotechnology Companies
Not-for-ProfitHealth Benefit Providers
Research Institutions - Universities - National Institutes of Health
U.S. Government - Regulatory Body (FDA)
- Public Health Care Programs- Medicare- Medicaid
U.S. Health Care Industry
Pharmaceutical vs. Biotech Two Distinctions:
1) Business model Biotech:
Much smaller and limited resources to market drug Just a research engine
Pharmaceutical Larger and market drug themselves
2) Field of Research Biotech:
Use “genetic engineering”
Pharmaceutical Use "empirical screening" to develop drugs
Pharmaceutical Industry Background
The U.S. is the leader in market share and has five of the ten largest companies
Global pharmaceutical sales grew 9% in 2003 to $466.3 billion
In 2003, 64 blockbuster drugs had sales over $1 billion Industry is less sensitive to swings in the business cycle
COGS, R&D and Marketing are the largest expenditures
Information from Phrma & Yahoo Finance November 2004
Industry Background (cont.) Patents are extremely important; they give a company exclusive
rights to produce a drug for 20 years
Many pharmaceutical companies attempt to extend their patents by significantly changing the nature of the drug
Future success of a drug company depends heavily on the number and quality of drugs in the pipeline
The industry has traditionally relied on the “blockbuster model”, where a few key drugs make up most of the company’s revenue
Potential New Business Strategies
The Diagnostic-Led Strategy based on the observation that even when there are established treatments,
significant numbers of patients are either not diagnosed in a timely manner or not diagnosed at all
The Single-Pill Strategy seeks to simplify the lives of those taking multiple medications
The Treatment Platform Strategy based on the assumption that various medical conditions share common
denominators and can be treated using the same therapeutic approach
Key Issues Affecting the Industry In August 2004, New York officials filed a lawsuit against 44 drug
makers, claiming they overcharged Medicaid for prescription drugs
Merck’s Vioxx drug was pulled due to risk of heart attacks and strokes
Possible legal action by various patient groups
May affect sales of Pfizer's CeIebrex & Bextra COX-2 pain reliever
U.S. citizens are increasingly angry over rising drug costs, which is fuelling political debate over Canadian imports
Online sales to the U.S. from Canadian pharmacies are expected to be $1.2 billion US in 2004
By 2005, over $50 billion of branded pharmaceuticals will have their patents expire
Ethical vs. Proprietary Drugs
Ethical: branded and generic drugs sold only through prescription
Proprietary: branded or generic drugs sold over the counter
After patent expiration, many of the prescription drugs can apply to the FDA for over-the-counter status.
Lower margins on over-the-counter products
FDA requirements are not as cumbersome for over-the-counter drugs
Product Focus Most ethical producers focus on 5 main therapeutic areas:
- Central nervous system- Cardiovascular- Gastrointestinal / metabolism agents- Anti-infective- Respiratory drugs
More concentrated on chronic rather than acute diseases with large patient populations (cancer, arthritis, CVD)
Ulcer medications, cholesterol treatments, and antidepressants are the top three drug categories
Two of the best-selling drugs are Pfizer's Lipitor and Merck’s Zocor for cholesterol
Breakdown of Sales Figures by Area
U.S. Department of Commerce 2002
Central Nervous System 24%
Cancers, endocrine system, & metabolic diseases 17%
Digestive and genito-urinary system 13%
Respiratory system 13%
Parasitic and infectious diseases 11%
Cardiovascular agents 10%
Vitamins and related items 6%
Dermatological items 3%
Veterinary products 3%
2003 Top Selling Blockbuster Drugs
Source: IMS World Review 2004
Drug Maker Purpose**Sales
($Billions)% Growth
RateLipitor Pfizer Cholesterol 10.3 14Zocor Merck Cholesterol 6.1 -4Zyprexa Eli Lilly Antipsychotic 4.8 13Norvasc Pfizer Hypertension 4.5 7Procrit/Eprex Johnson & Johnson Anemia 4 13Prevacid Abbott & Takeda Stomach acid 4 0Nexium AstraZeneca Stomach acid 3.8 62Plavix Bristol Myers Cardiovascular Disease 3.7 40Seretide/Advair GlaxoKlineSmith Asthma 3.7 40Zoloft Pfizer Antidepressant 3.4 11
$48.30 14%Total
**Figures have been adjusted by IMS to include drug sales from distribution agreements
Market Leaders
Pfizer $205.1Johnson & Johnson $179.7GlaxoKlineSmith PLC $122.2Novartis AG $118.8Roche Holding AG $87.4Aventis SA $70.9AstraZeneca PLC $66.8Abbot Laboratories $66.6Eli Lilly & Co $62.5Merck & Co Inc $60.1
Leaders by Market Capitalization ($ billion):
Retrieved from Yahoo Finance November 22, 2004
2003 Pharmaceutical Sales by Region
Source: IMS World Review 2004
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%
TOTAL $466.3 100% 9%
Customers Individual Patients
Pharmacies
Physicians
Large Scale Purchasers (Hospitals & Managed Care Providers)
Government Agencies (Medicare & Medicaid)
Large Scale Purchasing Companies
Health Maintenance Organizations (HMO)
Offers consumers a comprehensive range of benefits at one annual fee
Patients are assigned to a primary care doctor as a "gatekeeper" who decides what health services are needed and when.
They receive a discount from health care providers based upon their volume of patients
Pharmaceutical Benefits Management Companies (PBMs)
Intermediary distributor between drug companies and large scale purchasers
Process drug claims for managed care companies & large employers Immense buying power which allows saving to be passed to customers
Medicare & MedicaidMedicare: Government health insurance program designed to
subsidize health services for the elderly and disabled
Medicaid: Government health insurance program designed to subsidize health services for those living in poverty
These agencies buy in bulk to get a lower price, thus putting margin pressure on pharmaceutical companies
Medicaid programs have preferred drug lists of reimbursable medicines that doctors can prescribe
This decreases patients’ access to much needed medicines
Lowers the overall quality of care
Industry Politics & Government Pharmaceuticals spend millions of dollars on lobbying and
campaign contributions to influence government
Re-election of Bush is good for U.S. pharmaceuticals
Note: The AMEX Pharmaceutical Index increased by 2.74% the day after the election
Issue of importing cheaper drugs from Canada
Industry is subject to extensive government regulation (ie. FDA, foreign governments, environmental, & price constraints)
Food and Drug Administration
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
Only one out of five medicines that enter clinical trials is approved for patient use by the FDA
Source: www.fda.com (2004)
Drug Approval Process Average of 10 - 15 years and $800 million to nurture a drug
from initial discovery to market
Process: Academic and Laboratory Research
Testing done on animals
Phase 1: Drug given to a small number of healthy people to test its safety
Phase 2: Drug administered to 100 or more people with the disease that it was intended to treat
Phase 3: Rigorous testing done on larger groups of ill patients
FDA Review – Approval/DisapprovalSource: www.fda.com (2004)
Number of Drugs Approved by the FDA Each Year
Industry Trends
Globalization
Aging worldwide population
Longer life expectancy
Increasing demand from developing nations
Outsourcing more activities
Increase in Direct-to-Consumer Advertising
Industry Trends (cont.)
Increasing drug prices
Rising R&D costs
Increase in mergers, acquisitions, and alliances
Increasing size of the generics market
Increased buying power of insurance companies
Increase in licensing agreements with Biotech firms to improve drug pipelines
R&D Spending
YearDomestic R&D
(billions) R&D Abroad
(billions) Total R&D
(billions)
Total R&D as a % of Total Sales
2003 $27,407 $5,808 $33,215 15.6%
2002 $25,655 $5,357 $31,012 16.1%
2001 $23,502 $6,221 $29,773 16.7%
2000 $21,364 $4,667 $26,031 16.2%
1999 $18,471 $4,220 $22,691 16.5%
1998 $17,128 $3,839 $20,997 16.8%
1997 $15,466 $3,492 $18,958 17.1%
1996 $13,627 $3,279 $16,906 16.6%
1995 $11,874 $3,334 $15,207 16.7%
1994 $11,102 $2,348 $13,449 17.3%
Growth in R&D
U.S. Marketing Expenses
Source: http//:www.phrma.org (2004)
$13.9 $15.7$19.1
$25.3
$21.2
$0
$5
$10
$15
$20
$25
$30
1999 2000 2001 2002 2003
$ B
illion
s
Direct-to-consumer advertisingOffice, hospital, & journal promotionsRetail value of samplesTotal
Generics Market Generics now account for over 50% of all
prescription drugs
Americans spent over $182.7 billion dollars on prescription drugs in 2002
The average branded prescription cost four times as much as a generic drug
Generics save consumers $8 - 10 billion per year
Industry Financial Ratios
Market Capitalization: 1253 B
Price / Earnings: 20.1
Price / Book: 4.51
Quarterly Revenue Growth (YOY): 5.65%
Return on Equity: 24.10%
Total Debt / Equity: 0.4
Long-Term Debt to Equity 0.37
Dividend Yield: 2.64%
Source: Yahoo Finance 2004
Industry Performance (cont.)
AMEX pharmaceutical index is a market-capitalization weighted index
Comparison of Pharmaceutical Index and Economy
Amex (DRG)
S&P 500 (GSPC)
Dow Jones Industrial (DJI)
Nasdaq (IXIC)
Future Industry Growth Growth rates for 2005 are estimated by IMS to be:
Country Growth RateU.S. 12% United Kingdom 7% Germany 5% France 4%
Japan 1.5% IMS and Standard & Poors 2003
History - Squibb
Founded by Dr. Edward Squibb in 1858
Bought by Mathieson Chemical in 1952
Bought by Olin Industries in 1953
1858
History – Bristol-Myers William Bristol and John Myers
founded Clinton Pharmaceutical in 1887
Renamed to Bristol-Myers in 1900
Went public in 1929
Bought Squibb in 1989 and formed Bristol-Myers Squibb
1887
Mission
To extend and enhance human life by providing the highest-quality pharmaceuticals and health care products.
Company Statistics Employee: 44,000 in over 100 countries (2003)
Global Sales: $20.9 billion (2003)
Market Capitalization: $46.05 billion (Sep 30, 04)
Stock Price: $23.50 (Nov 19, 2004)
Number of Outstanding Shares: 2,201 million
Annual R&D expense as a percentage of sales: 10% -12%
Largest Market: U.S., Europe, Japan
Company Overview Bristol-Myers Squibb (BMS) is a diversified
worldwide health and personal care company that researches and manufactures medicines and other products.
The Company's products include therapies for various diseases and disorders, consumer medicines, wound management, nutritional supplements, infant formulas, and skin care products.
Management Team Peter R. Dolan (49) ($5.92 million ex. option)
CEO, Chairman of the Board Joined in 1988, became Chairman in 2000 and CEO in May 2001
Andrew R. J. Bonfield (42) ($3.80 million ex. option) Senior Vice President and Chief Financial Officer Joined in 2002
Elliot Sigal, M.D., Ph.D. (52) ($2.59 million ex. option: figures for previous CSO) Chief Scientific Officer and President of The Pharmaceutical Research Institute Joined in 1997
Donald J. Hayden Jr. (48) ($2.66 million ex. option) Executive Vice President and President, Americas Joined in 1993
John L. McGoldrick (63) ($1.92 million ex. option) Executive Vice President and General Counsel Joined in 1995
Recent Events March 2004 - BMS was found liable for damage
for “channel stuffing” between 1999 and 2001 – BMS was fined $150 million
May – BMS & Sanofi sued Apotex on patent infringement on Plavix
August – Investors sued BMS for $300 million claiming that BMS lied about its accounting and investment in ImClone
Key Elements of 5yr Strategy Focus on 10 Disease Areas
Increase Sales and Marketing emphasison specialists and high value Primary Care prescribers
Invest in R&D and R&D growth
Increase A&P spending behind growth drivers
Enter the biologics business
Target all other spending flat or slightlydown over the next several years
Successful Past Partnerships
Sanofi-Synthelabo Co-developed Avapro and Plavix
Otsuka Pharmaceutical Co-developed Abilify
ImClone Systems Co-developed Erbitux
Current Strategic Partnerships Merck & Co.
co-developing and co-promoting Muraglitazar
Corgentech co-developing E2F Decoy
Flamel Technologies S.A. co-developing Basulin
Solvay Pharmaceuticals co-developing SLV319
Pierre Fabre Médicament S.A. co-developing Javlor
Major Acquisition/DivestitureAction Date Subsidiaries/Product Line Value
Sold Dec 13, 2003 Mead Johnson Adult Nutrition $385 million cash
Sold Nov 15, 2001 Clairol $4.95 billion cash
Invested Nov 2001 ImClone 14.4 million share at $70 (19.9% of outstanding share)
Acquired Oct 1, 2001 DuPont Pharmaceuticals $7.8 billion cash partly financed by $1.5 billion commercial paper and $5 billion medium term note
Spin-off Aug 6, 2001 Zimmer (in tax free distribution) Paid $203 million in common share dividend
Patent ExpirationPharmaceutical Product
2003 Sales ($million)
2002 Sales ($million)
2001 Sales ($million)
Expiration Year in U.S.
Pravachol 2,827 2,266 2,101 2006
Plavix 2,467 1,890 1,171 2011
Taxol 934 857 1,112 1997
Paraplatin 905 727 592 2004
Avapro/Avalide 757 586 487 2011
Sustiva 544 455 68 2013
Monopril 470 426 413 2003
Glucovance 424 246 269 2004
Glucophage XR 395 297 230 2003
Zerit/Zerit ER 354 443 515 2008
Coumadin 303 300 63 1997
Abilify 283 25 --- 2009
Videx/Videx EC 267 262 240 2001
Tequin 208 262 240 2007
Glucophage IR 118 184 250 2000
Serzone 98 221 234 2003
Reyataz 88 --- --- 2017
Buspar 35 53 297 2001
Erbitux --- --- --- 2017
Selected Product SalesPharmaceutical Product % Change Change ($ million)
2004 3rdQ Sales ($ million)
2003 3rdQ Sales($ million)
Pravachol -24% -189 598 787
Plavix 30% 208 908 694
Taxol 2% 5 243 238
Paraplatin -28% -68 177 245
Avapro/Avalide 32% 59 241 182
Sustiva 65% 62 157 95
Glucophage -82% -193 43 236
Zerit 6% 4 69 65
Abilify 63% 64 165 101
Videx/Videx EC 18% 10 67 57
Reyataz 172% 67 106 39
Erbitux N/A 84 84 0
Total 4.13% 113 2,852 2,739
Selected Key Products
Pravachol Cholesterol lowering $2,827 million sales in 2003 (13.01% of total
company sales) Licensed patent to Sankyo Company for exclusive
distribution in four Asia countries Patent expires in U.S. in 2006
Selected Key Products
Plavix Cardiovascular product $2,467 million sales in 2003 (11.35% of total
company sales) Co-developed with Sanofi Patent expires in US in 2011
Selected Key Products
Taxol
Anti-cancer agent $934 million sales in 2003 (4.30% of total company
sales) Co-developed with U.S. Government Patent expired in U.S. in 1997 – no generic competition
until January 2002 Patent expired in EU and Japan in 2003
Recently Released Drugs
Abilify (schizophrenia)
Erbitux (cancer)
Reyataz (HIV/AIDS)
Compounds in Development
Number of Compound
0
2
4
6
8
10
Phase I Phase II Phase III
Number of Compound
Compounds Under Development Abatacept (phase III)
rheumatoid arthritis
Entecavir (phase III) hepatitis B
E2F Decoy (phase III) vein graft failure prevention
Ixabepilone (phase III) cancer
MDX-010 (phase III) metastatic melanoma
Muraglitazar (phase III) type 2 diabetes and other
metabolic disorder
LEA29Y (phase II) solid organ transplant
Razaxaban (phase II) deep vein thrombosis prevention
Javlor (phase II,III) phase III for bladder and non-
small cell lung cancer phase II for breast and ovarian
cancer
Other Business Segment Oncology Therapeutic Network (OTN)
Nutrition Mead Johnson
Other Healthcare ConvaTec Medical Imaging Consumer Medicine
71% 71% 75%
11% 10% 8%10% 10% 10%8% 9% 7%
0%
20%
40%
60%
80%
100%
2003 2002 2001
Other
Nutrition
OTN
Pharmaceuticals
Sales Breakdown by Business Segment
Source: 2003 Annual Report
Sales by Geographic Areas
Source: 2003 Annual Report
62% 63% 65%
24% 22% 20%
6% 7% 7%8% 8% 7%
0%
20%
40%
60%
80%
100%
2003 2002 2001
Pacific
Other WesternHemisphere
Europe, MiddleEast and Africa
United States
COGS46%
Marketing, S&A29%
A&P9%
R&D14%
Others2%
Cost Breakdown (2003)
R&D as a Percentage of Sales$ million
$0
$5,000
$10,000
$15,000
$20,000
$25,000
2004(ttm)
2003 2002 2001 2000 19990%
10%
20%
30%
40%
50%
Sales % R&D of Sales
Stock Price SummaryTicker Symbol: BMY (NYSE)Price as of Nov. 19, 2004: $23.5052 weeks low: $22.2252 weeks high: $31.30Average Daily Volume 5,149,227Number of Shares Outstanding: 2,201 million
Dividend Record
Year Ended Div per Quarter Total Div Dividend Yield
2004 (ttm) $ 0.28 $ 1.12 4.73%
2003 $ 0.28 $ 1.12 3.92%
2002 $ 0.28 $ 1.12 4.84%
2001 $ 0.275 $ 1.11 2.18%
2000 $ 0.245 $ 0.98 1.33%
One Year Stock History
Fined for Overstated Revenue
BMS sued Apotex for
Patent Infringement
BMS sued by Investors for
ImClone Scandal
Five Years Stock History
Erbitu
x reje
cted
by FDA
Acquisi
tion /
Divesti
ture
Period
Five Years Stock Comparison
Financial Statements Summary2004 (ttm) 2003 2002 2001 2000
Share Price (End of period): 23.67 28.60 23.15 51.00 73.94
Revenue ($ million): 21,703 20,894 18,106 18,044 17,695
Net Earnings ($ million): 2,249 3,106 2,067 1,871 3,686
EBIT ($ million) 3,614 4,971 3,125 2,445 5,355
Total Assets ($ million) 30,176 27,391 25,022 27,864 17,921
Total Liabilities ($ million): 19,513 17,605 16,266 18,737 8,398
Total Debt ($ million): 10,190 8,649 7,640 6,411 1,498
Interest Expense ($ million): 219 277 364 182 108
Stockholder’s Equity ($ million): 10,663 9,786 8,756 8,762 9,180
Shares Outstanding (million): 2,201 2,201 2,201 2,200 2,198
Operating Cash Flow ($ million): 2,493 3,512 945 5,372 4,652
Dividend per share: 1.12 1.12 1.11 1.01 0.89
Financial Ratios2004 (ttm)
2003 2002 2001 2000
Price to Book Ratio (P/B)
4.31 6.43 5.82 12.36 20.60
Debt/Equity Ratio 0.80 0.87 0.72 0.69 0.19
Return on Asset (ROA) 9.13% 11.31% 8.54% 16.76% 25.18%
Return on Equity (ROE)
25.84% 31.74% 24.41% 51.37% 56.68%
Earning per Share (EPS basic)
1.63 1.60 1.07 0.96 1.95
Price Earning (P/E) 16.67 17.88 21.64 53.13 37.92
Operating Margin 33.12% 34.58% 34.83% 40.29% 41.99%
Liquid Asset per share $ 5.50 $ 4.69 $ 3.84 $ 5.25 $ 3.78
Free Cash Flow ($ million)
$ 2,938 $ 2,575 $ (130) $ 4,192 $ 4,063
Recommendation Pros
Extremely strong pipeline
High dividend yield
Strong cash flow
Cons Patent expiration for key
products
Uncertain litigation outcome
Dividend payout sustainability in question
Financial statement accuracy in question
HOLD
Mission Statement
Mission We will become the world's most valued company to patients,
customers, colleagues, investors, business partners, and the communities where we work and live
Purpose We dedicate ourselves to humanity's quest for longer, healthier,
happier lives through innovation in pharmaceutical, consumer, and animal health products
Company Overview
A research-based, global pharmaceutical company that discovers, develops, manufactures and markets prescription medicines for humans and animals, and consumer healthcare products
Company Statistics
Market capitalization: US$205.07 billion
Employees (worldwide): 122,000
Annual R&D expenses as a % of revenues: 15-16%
Largest markets: North America, Europe and Japan
Stock symbol: PFE (NYSE)
Stock price: US$27.23 (as of November 19, 2004)
Number of outstanding common shares: 7.53 billion
Company Highlights in 2003 With the addition of Pharmacia in 2003, Pfizer
became the #1 pharmaceutical company in every region of the world
14 of the company’s prescription medicines were category leaders
In 2003:65th consecutive year of cash dividends37th consecutive year of dividend increases
Strategic Alliance
Has agreements to copromote pharmaceutical products discovered by other companies Alliance revenue is primarily based upon a percentage of
our copromotion partners’ net sales
Major Acquisitions Pharmacia
Deal completed in April, 2003 US$55.97 billion
Identifiable intangible assets: US$37.07 billion Goodwill: US$21.40 billion
Financing Issuance of 1.8 billion shares of Pfizer common stock (≈29%
dilution) 180 million options on Pfizer common stock 6,000 shares of Pfizer Series A convertible perpetual preferred
stock (convertible into approximately 15.5 million shares of Pfizer common stock)
Warner-Lambert Deal completed in June, 2000
Top Institutional HoldersInstitution Name Shares Held Position Value
(000)
% Shares Outstandi
ng
Portfolio Date
BARCLAYS GLOBAL INVESTORS INTL 317,165,142 $10,872,421.07 4.20% 6/30/2004
FIDELITY MANAGEMENT & RESEARCH CO 313,574,154 $10,749,322.00 4.15% 6/30/2004
STATE STREET GLOBAL ADVISORS 238,527,803 $8,176,733.09 3.16% 6/30/2004
VANGUARD GROUP 163,360,414 $4,998,828.67 2.16% 9/30/2004
WELLINGTON MANAGEMENT 144,173,354 $4,942,262.58 1.91% 6/30/2004
ALLIANCE CAPITAL MANAGEMENT 133,272,306 $4,568,574.65 1.76% 6/30/2004
NORTHERN TRUST CO (CHICAGO) 115,212,146 $3,949,472.36 1.53% 6/30/2004
PUTNAM INVESTMENT MGMT 102,454,572 $3,512,142.73 1.36% 6/30/2004
SMITH BARNEY ASSET MANAGEMENT 86,040,999 $2,949,485.45 1.14% 6/30/2004
GOLDMAN SACHS ASSET MANAGEMENT 84,718,489 $2,904,149.80 1.12% 6/30/2004
STATE FARM INVESTMENT MGMT CORP 80,709,105 $2,766,708.12 1.07% 6/30/2004
DEUTSCHE BANK ALEX. BROWN 74,050,477 $2,538,450.35 0.98% 6/30/2004
CAPITAL RESEARCH & MANAGEMENT CO 69,650,780 $2,387,628.74 0.92% 6/30/2004
TIAA CREF INVESTMENT MANAGEMENT INC
73,608,756 $2,252,427.93 0.97% 9/30/2004
FAYEZ SAROFIM & CO 54,326,810 $1,862,323.05 0.72% 6/30/2004
Officers Henry A. McKinnell (1970), Chief Executive Officer (12th CEO in Pfizer’s
history) David Shedlarz (1976), Chief Financial Officer, Executive Vice President Karen Katen (1974), Executive Vice President, President of Pfizer
Pharmaceuticals Group Nat Ricciardi (1974), President of Pfizer Global Manufacturing John LaMattina (1977), Senior Vice President, President of Pfizer Global
Research and Development Peter Corr (2000), Senior Vice President of Science and Technology (from
Warner-Lambert) Yvonne Jackson (2002), Senior Vice President of Human Resources (from
Compaq)
Executive Compensation
Annual Compensation Long-Term Compensation
NamePrincipal Position Year Salary ($) Bonus ($)
Restricted Stock Awards
($)
Securities Underlying Options (#)
LTIP Payouts ($)
All Other Compensation
($)
Dr. McKinnel
Chairman and CEO
2,003
2,042,700
4,607,400
-
1,000,000
2,786,978
249,390
Ms. Katen
Executive V.P.; President, Pfizer Global Pharmaceuticals
2,003
1,086,700
1,434,400
326,840
275,000
1,510,448
103,631
Mr. Schedlarz
Executive V.P.; CFO
2,003
889,133
1,043,100
260,866
225,000
1,216,379
79,922
Mr. Kindler
Senior V.P. of General Counsel
2,003
827,900
901,500
248,989
200,000
857,703
68,962
Dr. Corr
Senior V.P. of Science and Technology
2,003
806,000
815,000
242,403
110,000
1,316,630
89,354
Major (Revenue) Markets – Geographic Breakdown (2003 figures)
% of total revenuesUnited States 59%Japan 6%All other 35%
100%
Revenues BreakdownRevenues - Geographic Breakdown (2003 figures)
-5,000
10,00015,00020,00025,00030,00035,00040,00045,00050,000
2003 2002 2001
Year
Mill
ions
of D
olla
rs
All Other CountriesJapanUnited States
Operating Segments (2003 figures)
% of total revenues Pharmaceutical 87.7% Consumer healthcare 6.7% Animal healthcare 3.5% Other 2.1%
100%
Major Product Areas
Revenues % of total (billion $) revenues
Cardiovascular & Metabolic Diseases $16.17 35.8% Central Nervous Systems Disorders 7.38 16.3% Arthritis & Pain 3.05 6.7% Infectious & Respiratory Diseases 4.68 10.4% Urology 2.46 5.4%
$33.75 74.7%
Major Revenue Drivers (2003 figures)
Lipitor (Cardiovascular) $9.23 billion Norvasc (Cardiovascular) 4.34 billion Zoloft (Anti-depressant) 3.12 billion Neurontin (Epilepsy) 2.70 billion Zithromax (Infectious diseases) 2.01
billion Celebrex (Arthritis) 1.88 billion Viagra (Erectile dysfunction) 1.88 billion
$25.14 billion (≈55.6% of total revenues)
Major Products I Lipitor
Treatment for lowering cholesterol
#1 best-selling prescription drug in the world
Worldwide sales of $9.23 billion in 2003 20.43% of total company sales
10% growth in Sept. 2004 in U.S. Maintained a 43% total prescription share
Major Products II Norvasc
World’s most-prescribed branded antihypertensive therapy
4th best-selling drug in the world
Worldwide sales of $4.34 billion in 2003 9.60% of total company sales
Sales declined in the 3rd quarter of 2004 compared to the same period in 2003
Patent expirations in some EU countries
Major Products III Zoloft
World’s leading antidepressant
#10 best selling drug in the world
Worldwide sales of $3.12 billion in 2003 6.90% of total company sales
Sales declined in 3rd quarter of 2004 compared to same period in 2003
Overall market decline due to media coverage of the use of antidepressants in children and teenagers
Revenues Growth – Major Products Revenues % change
(millions of dollars) 2003 2002 2001 03/02 02/01
Cardiovascular:
Lipitor 9,231 7,972 6,448 15.79% 23.64%
Norvasc 4,336 3,846 3,581 12.74% 7.40%
Central Nervous System:
Zoloft 3,118 2,742 2,365 13.71% 15.94%
Neurontin 2,702 2,269 1,751 19.08% 29.58%
Arthritis and Pain:
Celebrex 1,883 100 76 1783.00% 31.58%
Bextra 687 - - N/A N/A
Infectious and Respiratory Diseases:
Zithromax 2,010 1,516 1,506 32.59% 0.66%
Diflucan 1,176 1,112 1,066 5.76% 4.32%
Urology:
Viagra 1,879 1,735 1,518 8.30% 14.30%
Others:
Zyrtec 1,338 1,115 990 20.00% 12.63%
Research & DevelopmentR&D Expenses
4.8 5.2
7.17.8
-1.02.03.04.05.06.07.08.09.0
2001 2002 2003 2004
Year
Bill
ions
of D
olla
rs
R&D Expenses
Patent ExpirationsDrug Expiration Year Annual Sales (2003) % of Total Sales
Zithromax 2005 2,010 4.4%
Zoloft 2006 3,118 6.9%
Norvasc 2007 4,336 9.6%
Zyrtec 2007 1,338 3.0%
Aricept 2010 254 0.6%
Lipitor 2010 9,231 20.4%
Xalatan 2011 623 1.4%
Viagra 2012 1,879 4.2%
Detrol 2012 544 1.2%
Celebrex 2013 1,883 4.2%
Bextra 2015 687 1.5%
Genotropin 2015 481 1.1%
Neurontin 2,702 6.0%
Total 29,086 64.4%
Total sales 45,188
20-in-5 Goal
Pfizer’s goal is to submit an unprecedented 20 new medicines for regulatory approval during the five-year period ending in 2006
Major Drugs in the PipelineMIDDLE STAGE (PHASE 2):
HIV/AIDS UK-427,857 a mechanistically unprecedented CCR-5 inhibitor
Organ Transplant Rejection CP-690,500 a Janus kinase-3 inhibitor for immunosuppression
Sleep Disorders PD-200,390 a novel alpha-2 delta compound
LATE STAGE (PHASE 3):
Atherosclerosis Lipitor/torcetrapib a combination to elevate HDL cholesterol and lower LDL
Cancer edotecarin a next-generation topoisomerse inhibitor for cancer
Cancer* SU-11,248 a novel angiogenesis inhibitor
COPD/ASTHMA roflumilast a novel anti-inflammatory agent distinct from existing treatments
Diabetes Exubera an inhaled insulin system
HIV/AIDS capravirine a novel antiviral compound active against resistant strains of HIV
Insomnia indiplon a unique non-benzodiazepine GABA modulator
Macular Degeneration* Macugen a novel anti-VEGF therapy
Neuropathic Pain/Epilepsy/Generalized Anxiety Disorder pregabalin a neurologic agent develoepd by Pfizer
Osteoporosis lasofoxifene a selective estrogen receptor modulator to maintain bone density
Parkinson's Disease sumanirole a novel leva-dopa-enhancing compound
Schizophrenia & Bipolar Disorder asenapine a 5HT2/D2 antagonist
Smoking cessation* varenicline a selective nicotine partial agonist
Recently Launched Products Geodon
Schizophrenia Competitor to Abilify (Bristol-Myers Squibb)
Spiriva Novel treatment for obstructive pulmomnary disease
Relpax Migraine headaches
Caduet Single-pill dual therapy of Lipitor and Norvasc
Inspra Post-myocardial-infarction (MI) heart failure
Recent News Sept. 30, 2004
Merck withdrew arthritis drug Vioxx from the market
Oct. 15, 2004Pfizer warns that Bextra “may raise heart attack
risk in high-risk bypass surgery patients” Nov. 10, 2004
Study by American Heart Association shows that Bextra has shown a high incidence of heart attacks and strokes among patients
1-year Stock Chart_1year price chart
5-year Stock Chart5year price chart
Stock chart with industry benchmark
Financial Highlights(millions of dollars, except share price and dividend) 2004 (ttm) 2003 2002 2001
Share price (e.o.p.) 27.23 35.33 30.57 39.85
Revenue 52,027 45,188 32,373 29,024
Net earnings 9,138 3,910 9,126 7,788
Total assets 122,229 116,775 46,356 39,153
Total liabilities 53,846 51,398 26,406 20,860
Total debt 7,956 5,755 3,140 2,609
Equity 68,383 65,377 19,950 18,293
Number of shares outstanding (e.o.p.) 7,554 8,702 6,829 6,792
Operating cash flow 14,746 11,725 9,864 8,861
Capital expenditures 2,305 2,641 1,758 2,105
Free cash flow (FCF) 12,441 9,084 8,106 6,756
Dividends per share 0.66 0.60 0.52 0.44
Price-to-book ratio 3.01 4.70 10.46 14.80
Earnings per share (EPS) 1.21 0.45 1.34 1.15
Price-to-earnings (P/E) 22.51 78.63 22.88 34.75
ROA 7.48% 3.35% 19.69% 19.89%
ROE 13.36% 5.98% 45.74% 42.57%
Debt-to-equity ratio 11.63% 8.80% 15.74% 14.26%
Dividend yield (based on purchase @ b.o.p.) 2.17% 1.96% 1.30% 0.96%
Market capitalization (e.o.p.) 205,687 307,442 208,763 270,661
Financial Statement Analysis (I)
Deferred taxes increased by $12.87 billion from 2003 to 2002 due to deferred taxes recorded in connection with the acquisition of Pharmacia
40% of revenue growth from 2002 to 2003 was mainly due to the acquisition of Pharmacia
Financial Statement Analysis (II)
ROE was very strong, above 40%, in 2001 & 2002
ROE in 2003 decreased dramatically to 5.98%Increase of $55.40 billion for additional paid-in
capital due to the Pharmacia deal in 2003Lower net income in 2003 due to merger-related
in-process R&D charges => lower ROE
Recommendation Excellent long-time management team Strong existing product lines Promising products in pipeline Market leader in 14 different prescription
drugs Extensive financial resources
BUY
Ticker: MRKRay Li
Mission Statement
“To provide society with superior products and services by developing innovations and solutions that improve the quality of life and satisfy customer needs, and to provide employees with meaningful work and advancement opportunities, and investors with a superior rate of return”
Company Statistics $22.5 billion in sales worldwide (2003) 2.22 billion shares outstanding
59.54% held by institutions Stock price (Nov. 19): $27.12 Market cap: $60.206 billion 63,200 employees worldwide
33,200 employees in US
Strategies Develop & launch novel medicines and vaccines at
competitive prices
Aggressively pursuing external alliances with smaller companies
Lowering cost structure
Maximizing in-line franchises
2003 Highlights Q4-03: Cut 4,400 positions, to be
completed in 2004
Q4-03: Implemented new distribution programLowered quantity limit of average purchases
Withdrew 2 products from late-phase trialsDiabetes and depression drug
Management R. Gilmartin, Chairman, President & CEO (1994)
Term ends 2006
D. Anstice, President, Human Health (1974)
M. Avedon, Senior VP, Human Resources (2002)
R. Clark, President, Manufacturing Division (1972)
K. Frazier, Senior VP, General Counsel (1992)
P. Kim, President, Research Laboratories (2001)
J. Lewent, Executive VP, CFO (1980)
P. Wold-Olsen, President Human Health, Europe, Mid-East, Africa
Executive CompensationLong-Term Compensation
Position Salary Bonus Other Options (#)
R. V. Gilmartin Chairman, President, CEO 1,583,340 1,375,000 527,495
J. C. Lewent
Executive VP, CFO, President, Human Health - Asia 720,000 615,000 137,149
P. Wold-Olsen
President, Human Health - Europe, Middle East, & Africa 585,004 550,000 137,149
D. W. Anstice President, Human Health 606,674 520,000 137,149
P. S. Kim President, Merck Research Labs 610,008 500,000 140,580 210,998
Annual Compensation
Joint Ventures
AstraZeneca LP (Nexium, Prilosec) $1.9 billion plus $391.5 million in preferential return
J&J (dev. & market non-prescription medicines in US) $445.8 million
Aventis Pasteur (dev. & market vaccines in Eur) $669.0 million
Merial (JV w/ Aventis; pharma/vaccines for animals) $1.84 billion
Schering-Plough (cholesterol mgmt – Zetia/Ezetrol) $469.4 million
Joint Ventures II
Bristol Myers Squibb (Apr. 04) Jointly develop clinical and marketing strategy for a
diabetes drug (muraglitazar ~Phase III) Development and commercialization costs to be
shared equally H. Lundbeck A/S (Feb. 04)
Exclusive development and commercialization of a sleep disorder drug (gaboxadol ~Phase III)
Recent Acquisitions & Divestitures
Increased ownership of Banyu from 51% to 99.4%, costing $1.5427 billion (2003) Banyu is one of Japan’s top 10 pharmaceutical companies Strengthens Merck’s position in Japan Took $101.8 million charge against useless products
Spun-off Medco Health (2003) Medco: high volume, low margin mail-order pharmacy Merck shareholders got 0.1206 share of Medco per Merck share
Recent Acquisitions & Divestitures II
Sold its 50% stake in J&J/MSD Europe (Mar. 04) Non-prescription joint venture For $244 million
Acquired Aton Pharma (Mar. 04) Privately-held biotech Anti-tumor agents
Major Product Areas
2003 % $ millionsAtherosclerosis (Zocor) 23% 5,077.9
Hypertension/hear failure (Cozaar, Hyzaar, Vasotec) 15% 3,421.6
Other (Maxalt, Propecia, Nexium, Prilosec) 13% 2,967.3
Anti-inflammatory/analgesics (Vioxx, Arcoxia) 12% 2,677.3
Osteoporosis (Fosamax) 12% 2,676.6
Repiratory (Singulair) 9% 2,009.4
84% 20,833.1
Revenues by Region
US 13,321.1
Eur, Mid East, Afr 5,341.3
Japan 1,600.9
Other 2,222.6
Total 22,485.9
$ million
Pipeline IPhase I
Diabetes c-3347
Pain c-1246
Alzheimer's disease c-7617
c-9138
Glaucoma c-3859
Osteoporosis c-3578
Multiple Sclerosis c-6448
AIDS c-1605
Vaccines HIV vaccine
Pipeline IIPhase II
Obesity c-2735
c-2624
c-5093
Alzheimer's disease c-9136
Antherosclerosis c-8834
Respiratory disease c-3885
c-3193
Post-operative nausea and vomiting c-9280
VaccinesPediatric
combination
Cancer SAHA
Psychiatric Disease c-9054
Arthritis c-5997
c-4462
Phase III
Rotavirus vaccine RotaTeq
Shingles Zoster vaccine
Human papillomavirus HPV vaccine
Diabetes MK-0431 (2Q04)
Muraglitazar*
Sleep disorders Gaboxadol
2003 U.S. Submissions
Pediatric combination vaccine ProQuad
2004 U.S. Submissions
Arthritis/Pain Arcoxcia
PatentsDrug Expiry Revenue (billions)Cancidas 2013 0.27Cosopt Expired 0.49Cozaar/Hyzaar 2009 2.5Crixivan 2012 0.29Emend 2012 0.03Fosamax 2008 2.7Invanz 2013 0.03Maxalt 2012 0.33Propecia 2006 0.24Proscar 2006 0.61Singulair 2012 2.0Vioxx 2013 2.6Zocor 2006 5.0
Zetia 2013 0.46
Zocor
$5 billion in annual revenues (2003) -13% Q3-04 (Wholesaler buy-in in 2003) +12% Q2-04 +10% Q1-04
#2 selling cholesterol drug in the world Zocor reduces cholesterol by blocking an enzyme in the
liver helps produce cholesterol Loses patent in US in 2006
Fosamax
$2.7 billion in annual revenues (2003) +13% Q3-04 +45% Q2-04 -4% Q1-04
Most prescribed osteoporosis medicine in the world Inhibits bone removal by osteoclasts (cells that break
down bone material)
Vioxx $2.5 billion in annual revenues
#1 arthritis and pain medicine outside US #2 in US
Sales grew by 2% in 2003 worldwide Recalled on Sep. 30, 2004
Regular use > 18 months increased cardiovascular risk On Sept. 29, MRK closed at $45.07, on Sept. 30 it was $33.00
Announcement wiped out $27 billion in market cap Took Q3 charge of $0.25 per share due to the recall
$491.6 million reduction in sales $93.2 million in inventory write-off $141.4 million in marketing and administrative expense
Analysts expect a further charge of $0.25-$0.30 per share in Q4
COX-2 Inhibitors
Enzyme: a protein that catalyzes a chemical reaction COX-2 is an enzyme that aids the production of chemical
messengers (prostaglandins) that cause the pain and swelling of arthritis
Vioxx works by blocking COX-2 Previous generation of arthritis drugs are called Nonsteroidal anti-
inflammatory drugs (NSAIDs) Aspirin, Motrin They inhibitor the COX enzyme but have gastrointestinal side effects Long-term NSAID usage could lead to stomach ulcers
There was some evidence that COX-2 inhibitors interfered with enzymes that help prevent cardiovascular disease
Arcoxia: launch possibly delayed until 2009
Litigation Over 20 million Americans have taken Vioxx Liability range is $4 billion-$18 billion
This will be spread over the decade Mostly for CV Event liability, not incl. punitive damage
Issues: Did Merck knowingly mislead consumers? 18 months usage? Proving causation Merck recall voluntary
Cozaar, Hyzaar Hypertension drug $2.5 billion in annual revenues (2003)
+14% and +15% Q3-04 +34% and +15% Q2-04 -1% Q1-04
Cozaar is a angiotensin II antagonists (AIIAs) Angiotensin is a hormone that causes blood vessels to
narrow Cozaar is 2nd most prescribed AIIA in US and the top-
seller in Europe Hyzaar combines Cozaar and a diuretic, removing water
from the blood and lessens blood pressure
1 Year Stock Performance
5 Years Stock Performance
5 Year Relative Performance
Ratios
Paid dividends since 1935Pay out ratio of 40%-50%
TTM 2003 2002 2001 2000ROA 14.63% 16.83% 15.02% 16.54% 16.99%ROE 36.95% 43.85% 39.26% 45.37% 45.99%
Debt/Equity 38.05% 43.63% 46.97% 55.24% 46.65%
P/E 9.91 15.25 18.03 18.73 32.28P/B 3.50 6.69 7.08 8.50 14.85
FCF ($ billion) 7,510 6,511 6,583 5,942 4,960R&D % of Sales 16.64% 14.13% 12.48% 11.59% 11.71%
Cash/sh. 0.82 0.54 1.00 0.94 1.10
Diluted EPS 2.74 3.03 3.14 3.14 2.90Dividends 1.49 1.46 1.42 1.38 1.26
Shares outstanding 2,217,584,609 2,221,763,509 2,244,983,250 2,272,729,321 2,307,599,179
2003 Cap Ex Breakdown
Production facilities 788.3
R&D facilities 763.8
Environmental projects 41.8
Admin, safety, general 322
1915.9
Millions of $
Recommendation
ProsStrong balance sheetLots of cashMay be cheap
ConsWeak pipelineKey management are outsidersVioxx uncertainty
SELL
Quarterly Income StatementsQ3-04 Q2-04 Q1-04 Q4-03
Sales 5538.1 6021.7 5630.8 5627.1
Costs, Expenses and Other
Materials and production 1364.2 1131.3 1115.8 1228.3
Marketing and administrative 1752.9 1616.2 1611.4 1794.1
Research and development 919.3 986.0 996.3 906.3
Equity income from affiliates (307.1) (220.5) (194.7) (6.0)
Other (income) expenses, net (4.2) 69.9 (240.9) (56.5)
3,725.1 3582.9 3287.9 3866.2
Income from Continuing Operations Before Taxes 1,813.0 2438.8 2342.9 1,760.9
Taxes on Income 487.4 670.7 724.3 365.7
Income from Continuing Operations 1325.6 1768.1 1618.6 1,395.2
Income from Discontinued Operations, Net of Taxes - - -
Net Income 1325.6 1768.4 1618.6 1,395.2
Basic Earnings per Common Share
Continuing Operations 0.60 0.80 0.73 0.63
Discontinued Operations - - - -
Net Income 0.60 0.80 0.73 0.63
Earnings per Common Share Assuming Dilution
Continuing Operations 0.60 0.79 0.73 0.62
Net Income 0.60 0.79 0.73 0.62