Pfizer (PFE) EQUITY RESEARCH AMERICAS. Oncology AND Restructuring Under One Roof; Upgrade to Buy

Transcription

1 USA Healthcare Pharmaceuticals Pfizer () Oncology AND Restructuring Under One Roof; Upgrade to Buy Key Takeaway Oncology and restructuring are key themes for the Pharma sector. Pfizer has both with palbociclib looking like it could launch before year end, whilst management look to give increased visibility on a new organizational structure from Q1'14. We have upgraded the shares to Buy as we expect the market will soon reflect incremental value in the shares for these drivers. Palbociclib looks misunderstood and under-appreciated: We think that many commentators are overly obsessed with a potential need for Overall Survival data from the PALOMA-1 study to gain accelerated approval for palbociclib in breast cancer. We believe that the strength and magnitude of the PFS data from this study will be sufficient for filing and potential approval by year-end 2014, especially when considering that it already has Breakthrough Therapy designation from the FDA. We now fully discount a launch from 2015 in our estimates with peak sales of $6bn and include c$4.2bn of revenues by 2018E versus consensus of $1.8bn. Restructuring looks increasingly likely as visibility increases: The strategic options being potentially pursued could result in a number of different future structures and timelines attached to them. We expect that the increased visibility, operational efficiency and improved taxation structure that may come with a reorganization will result in increased shareholder value. Pfizer will release further details on the revenue and margin profile of these businesses at the Q1'14 results. We have made a "first-pass" down to the level of EPS for each business (Innovation 1, 2 and Value) in this report. SOTP valuation looks positive; Innovation 2 is the star asset: We have performed separate SOTP valuations for each operating division based on Revenues, EBITDA and EPS. Whilst the Value business carries the highest mean valuation at $14.62 per share, Innovation 1 ($11.46 per share) and Innovation 2 ($13.11) in particular look most attractive from a longer term growth and margin expansion potential. Upgrade to Buy; Raising PT to $38: We have raised our EPS estimates by 1-11% in this report and have increased our PT to $38 from $33 as we see significant upside from palbociclib and restructuring with visibility on these increasing through Valuation/Risks Valuation: Our $38 PT is derived from SOTP analysis and is supported by PE relative valuation using a 5-10% PE US market premium on our 2015E EPS estimate. Risks: LOEs; efficiency gains; R&D; manufacturing; reimbursement; Business Development. Financial Summary BUY (from HOLD) Price target $38.00 (from $33.00) Price $30.60 Net Debt (MM): $4,579.0 Market Data 52 Week Range: $ $26.79 Total Entprs. Value (MM): $201,734.8 Market Cap. (MM): $197,155.8 Insider Ownership: 0.1% Institutional Ownership: 75.2% Shares Out. (MM): 6,443.0 Float (MM): 6,476.7 Avg. Daily Vol.: 24,894,342 Jeffrey Holford, PhD, ACA * Equity Analyst (212) jholford@jefferies.com Swayampakula Ramakanth, PhD, MBA * Equity Associate (212) sramakanth@jefferies.com David Gu, PhD * Equity Associate (212) dgu@jefferies.com Ian Hilliker Equity Analyst 44 (0) ihilliker@jefferies.com Terence McManus, PhD Equity Analyst 44 (0) tmcmanus@jefferies.com * Jefferies LLC Jefferies International Limited EQUITY RESEARCH AMERICAS USD Prev. 2013A Prev. 2014E Prev. 2015E Prev. 2016E Rev. (B) EV/Rev 3.9x 4.0x 4.0x 4.1x EBITDA (B) EV/EBITDA 8.6x 9.2x 9.0x 9.4x Dividend Div. Yield 3.14% 3.40% 3.66% 3.66% PE Relative to Local Market -- 80% -- 87% 94% 93% 105% 102% Cons. EPS EPS FY Dec FY P/E 13.8x 13.5x 12.9x 13.3x Price Performance FEB-13 JUN-13 OCT-13 FEB-14 Jefferies does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Jefferies may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see analyst certifications, important disclosure information, and information regarding the status of non-us analysts on pages 28 to 32 of this report.

2 Pfizer Buy: $38.00 Price Target Scenarios Target Investment Thesis Palbociclib under-appreciated. Restructuring visibility increasing. We expect shares to trade on a c15% premium to the 2015 US market PE multiple with a corresponding value of $ Upside Scenario Positive readouts from key pipeline drugs Major restructuring of the Pharma business earlier than expected and disposal of the Value business at a c30% premium If this scenario is achieved shares are expected to trade on a c30% premium to the 2015 US market PE multiple with a corresponding value of $ Downside Scenario Failure of palbociclib to reach the market. No tax synergies achieved from restructuring If this scenario is achieved we expect on a c20% discount to the 2015 US market PE multiple with a corresponding value of $ THE LONG VIEW Long Term Analysis 1 Year Forward P/E Long Term Financial Model Drivers Other Considerations 2013E-18E Revenues CAGR -0.1% 2013E-18E Earnings CAGR +3.9% The restructuring and divestment of Nutrition and Animal Health segments along with capital allocation provided growth for the stock during With palbociclib not fully appreciated and increasing visibility on restructuring we see further upside to the stock price. Source: FactSet, Jefferies estimates Peer Group Group P/Es Earnings Growth vs P/E Recommendation / Price Target Ticker Rec. PT Buy $38.00 ABT Buy $49.00 BMY Hold $50.00 ABBV Buy $68.00 LLY Underperform $40.00 JNJ Buy $ MRK Hold $54.00 Source: FactSet, Jefferies estimates Source: FactSet, Jefferies estimates Catalysts Palbociclib full Phase II breast cancer data (AACR 5 th 9 th April) Prevnar-13 CAPiTA data (Q1 14) Eliquis PDUFA for VTE prevention (15 th March) Xeljanz Phase III data in psoriasis (Q2 14) Company Description Pfizer was founded in 1849 by Charles Pfizer and Charles Erhart as a fine-chemicals business. From the company s early exploits in the field of antibiotics, anti-inflammatory medicines, diabetes, cardiovascular disease amongst others, combined with a series of significant mergers and acquisitions, it is now the largest Pharmaceutical company in the world with household brand names including Lipitor and Viagra. With acquisition of Wyeth in 2009, Pfizer became one of world s largest pharmaceutical companies. Pfizer recorded circa $55bn in revenues in page 2 of 32

3 Revenue By Business ($m) EBITDA By Business ($m) EPS By Business Critical H1 Catalysts Provide Upside Asymmetry We see two significant catalysts for Pfizer in 2014: The presentation of mature PFS data (as well as potentially preliminary OS data) for palbociclib in breast cancer at the American Association for Cancer Research (AACR) Annual Meeting 2014 scheduled for April 5-9th in San Diego, which we believe has a high probability of accelerated approval during 2014, and The first publication of a segmental reporting structure along the lines of Innovation 1: Primary care business with 2015E revenues of c$15.2bn, EBITDA of c$5.8bn (c38% margin) and EPS of c$0.63 per share, Innovation 2: Oncology, Vaccines and Consumer Health business with 2015E revenues of c$11.1bn, EBITDA of c$3.9bn (c35% margin), and EPS of c$0.40 per share, Value: Established Pharmaceuticals business with 2015E revenues of c$23.9bn, EBITDA of c$13.4bn (c56% margin), and EPS of c$1.48 per share, and Corporate: Reporting general corporate expenses as well as some shared functions in R&D. We have also included the majority of other income/ expenses in this segment (2015E EPS c-$0.14). We have summarized our first cut of how we believe these divisions might look from a sales, EBITDA and EPS perspective in Exhibit 1, Exhibit 2 and Exhibit 3. Exhibit 1: Sales by new businesses ($m) 60,000 50,000 40,000 30,000 20,000 10, E 2014E 2015E 2016E 2017E 2018E Innovation 1 Innovation 2 Value Corporate Exhibit 2: EBITDA by new businesses ($m) 30,000 25,000 20,000 15,000 10,000 5,000 0 (5,000) 2013E 2014E 2015E 2016E 2017E 2018E Innovation 1 Innovation 2 Value Corporate Exhibit 3: Non-GAAP EPS by new businesses ($ per share) (0.50) 2013E 2014E 2015E 2016E 2017E 2018E Innovation 1 Innovation 2 Value Corporate Bottom-up approach and more bullish outlook on palbociclib raise our estimates Whilst simply moving to a bottom-up modelling approach itself does not change our earnings estimates materially, a more bullish outlook on palbociclib has had a positive impact on our estimates. Furthermore, 2014 margin guidance and management commentary on recent calls has given us some scope to be more optimistic on incremental operational and tax efficiencies in the mid to long term. page 3 of 32

4 As a result of these updates, we have raised our revenue estimates by 1-3% and our EPS estimates by 1-11% during our forecast period 2014E-18E (Exhibit 4). Exhibit 4: Pfizer key changes to forecasts ($) millions 2013A 2014E 2015E 2016E 2017E 2018E CAGR '13A-'18E Net sales Prior estimates 51,452 49,955 50,290 48,646 49,267 49, % New estimates 51,452 49,955 50,500 49,276 50,317 51, % Change 0% 0% 0% 1% 2% 3% Sales growth (%) Prior estimates -6% -3% 1% -3% 1% 1% New estimates -6% -3% 1% -2% 2% 2% JEFe vs. Cons. Cons. Sales est. 51,584 49,908 49,422 48,598 49,337 49,803 JEFe vs. Cons. 0% 0% 2% 1% 2% 3% DILUTED EPS Prior estimates $2.22 $2.24 $2.33 $2.20 $2.32 $ % New estimates $2.22 $2.27 $2.37 $2.30 $2.50 $ % Change 0% 1% 2% 4% 8% 11% EPS growth (%) Prior estimates 6% 1% 4% -5% 5% 4% New estimates 6% 2% 4% -3% 9% 8% JEFe vs. Cons. Cons. EPS est. $2.22 $2.27 $2.37 $2.40 $2.51 $2.60 JEFe vs. Cons. 0% 0% 0% -4% -1% 4% Source: : Jefferies estimates, company data Exhibit 5: Jefferies estimates versus management guidance for 2014 Metric Guidance/Goal JEF Estimate Revenues $49.2bn-$51.2bn $50.0bn COGS 19.0%-20.0% 19.1% SI&A $13.5bn-$14.5bn $13.9bn R&D $6.4bn-$6.9bn $6.6bn Other income c$100m $136m Tax rate Approx. 27% 27% Non-GAAP EPS $ $2.30 $2.27 page 4 of 32

5 Revenues (US$ millions) Revenues (US$ millions) Non-GAAP EPS (US$) Non-GAAP EPS (US$) Exhibit 6: Jefferies revenue estimates versus consensus for Pfizer, 2013A-2018E 80,000 Exhibit 7: Jefferies EPS estimates versus consensus for Pfizer, 2013A-2018E ,000 60,000 50,000 40,000 30,000 20,000 10, A 2014E 2015E 2016E 2017E 2018E A 2014E 2015E 2016E 2017E 2018E Consensus JEF estimate Consensus JEF estimate Source: Jefferies estimates, FactSet Source: Jefferies estimates, FactSet Exhibit 8: Pfizer quarterly total sales, 2013A vs. 2014E 15,000 Exhibit 9: Pfizer quarterly earnings, 2013A vs. 2014E , , Q1 Q2 Q3 Q4 2013A 2014E 0.00 Q1 Q2 Q3 Q4 2013A 2014E page 5 of 32

6 2015 Premium to US Market PE Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Implied valuation per share (US$) Dec-13 Consensus US$ 2015 Earnings PE Relative to US MSCI Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Upgrade To Buy; PT Raised to $38 (from $33) As part of this update we have upgraded Pfizer to Buy (from Hold) to reflect our more optimistic views both around key pipeline assets, such as palbociclib, as well as the additional potential from restructuring of the business in the future. Exhibit 10 summarises our key valuation approaches, which now increasingly rely on SOTP evaluations as we believe that potential corporate reorganisation will be the ultimate driver of the share price in the near to mid term. Exhibit 10: Summary of share price evaluation ($ per share) $40 $37.90 $38.01 $38.11 $36.00 $30 $26.22 $20 $15.08 $10 $0 Market PE rel. EV/Sales EV/EBITDA P/E multiple DCF DDM Source: Jefferies estimates PE-relative metrics drive valuation of $36 per share We see decent upside on Pfizer shares based on PE relative based valuation methodologies alone, with c17% upside versus the current stock price. Our PE relative valuation looks for a 5-10% PE on our 2015E estimates. However, we now drive our target price of $38 by primarily focusing on SOTP analysis, though it is reassuring to see that PE relative based valuations still supports substantial upside to the share price. Exhibit 11: Consensus 2014 Earnings and PE premium relative to US market for Pfizer 10% 3.00 Exhibit 12: Historical PE relative to US Market on 1-year forward consensus earnings for Pfizer 160% 5% % 0% -5% -10% -15% % 100% 80% 60% 40% Premium to US Market PE Consensus earnings (USD) Source: FactSet, Jefferies research Source: FactSet, Jefferies research page 6 of 32

7 EBITDA margin (2015E) Sum of the parts valuations yield additional upside and drives PT of $38 We are increasingly focusing on SOTP-based valuation as the primary driver of our target price as we believe that multiple options may exist for Pfizer to divest, reorganise or JV/ partner the Value business in particular. Exhibit 13 summarises our SOTP based valuations driven out of our new bottom-up divisional modelling approach. Exhibit 13: Summary of share price evaluation by different valuation methodologies ($ per share) EV/Sales EV/EBITDA P/E SOTP Mean Valuation Value at Group Multiple Multiple Arbitrage/ share Innovation 1 $11.80 $11.28 $11.28 $11.46 $8.04 $3.42 Innovation 2 $13.81 $13.44 $12.08 $13.11 $5.16 -$5.92 Value $13.00 $14.54 $16.32 $14.62 $19.03 $9.46 Corporate $0.00 -$0.55 -$0.86 -$0.47 NA NA Non-operating income/(expense) NA NA NA NA ($1.83) NA Net cash/ (debt) E ($0.71) ($0.71) ($0.71) ($0.71) NA NA Group $37.90 $38.01 $38.11 $38.01 $30.40 $6.96 Exhibit 14 provides an alternative way to view the company from the perspective of EBITDA margins and growth between 2015E-18E based on our new estimates, whilst Exhibit 15 lays out the multiples used by us to generate our SOTP-based valuations as well as absolute values for each of the identified business segments. Exhibit 14: 2015E EBITDA margin versus growth (2015E-18E) by division 70% 60% 50% 40% Value $13,386m 30% 20% Innovation 1 $5,816m Innovation 2 $3,936m 10% 0% -30% -20% -10% 0% 10% 20% 30% 40% EBITDA CAGR (2015E-2018E) Source: Jefferies estimates Exhibit 15: SOTP Multiples and Valuations for the Innovation 1, Innovation 2 and Value businesses of Pfizer Mean SOTP Valuation ($bn) Mean SOTP Valuation ($/share) Implied 2015E Sales Multiple Implied 2015E EBITDA Multiple Implied 2015E PE Multiple Innovation 1 $73.8 $ x 12.7 x 19.3 x Innovation 2 $84.5 $ x 21.5 x 34.5 x Value $94.2 $ x 7.0 x 10.4 x Corporate -$3.0 -$0.47 NA NA NA Net cash/ (debt) E -$4.6 ($0.71) NA NA NA Group $244.9 $ x 10.9 x 17.0 x Source: Jefferies estimates page 7 of 32

8 Key catalysts for 2014: The key clinical/ regulatory catalysts for Pfizer in 2014 primarily revolve around the oncology franchise, Eliquis, and Prevnar-13 and are summarised in Exhibit 16. Palbociclib: We anticipate release of the mature PFS and interim OS data from the Phase II PALOMA-1 study with palbociclib at AACR during 5th-9th April We believe the data will be good enough for accelerated approval before the completion of the Phase III PALOMA program. We expect launch in 2015 with a peak sales potential of c$6bn. Prevnar-13: The 84,000 patient phase IV CAPiTA study in 65 years of age and older adults should be released during Q1 14. Once available, the data will likely be submitted to the ACIP, potentially resulting a recommendation for use in adults during the June or October 2014 meetings. We assume Prevnar-13 reaches worldwide sales of circa $5bn by 2018E. Eliquis: We expect two regulatory decisions for Eliquis during The PDUFA date for approval of VTE prevention indication is 15 th March 2014 and for approval of VTE treatment indication is 25 th August We believe the peak revenues attributable to Pfizer, including the current approved stroke prevention in atrial fibrillation indication, could be circa $1.9bn. Note that Pfizer receives circa 50% of the gross margin from the partnership, whilst Bristol-Myer s books the sales of the product. Inotuzumab: Phase III data for intozumab for the treatment of relapsed or refractory ALL are expected during mid We expect the drug to be filed in 2015 and peak sales of $500m. Tofacitinib: Phase III data for tofacitinib for the treatment of psoriasis is expected during Q2 14. We expect the psoriasis-indication filing in 2014 and peak sales of $750m in this indication. Exhibit 16: Summary catalyst calendar for Pfizer 1Q 14 2Q 14 3Q 14 4Q 14 Q4 results Bacocizumab Phase IIb data at ACC (29 th 31 st March) Palbociclib Prevnar-13 Data from CAPiTA study Eliquis PDUFA for VTE Prevention 15 th March PF Phase II data in SLE Source: Jefferies research, company data Q1 results (April) Tofacitinib Phase III data in psoriasis Full Phase II (PALOMA-1) data in breast cancer at AACR (5 th 9 th April) Axitinib Phase II data in HCC PF (Staph. aureus) Phase IIa data Q2 results (July) Bosutinib Phase II data in PKD Dacomitinib Phase II data (ARCHER 1042) in advanced NSCLC Bosutinib Phase II data in recurrent glioblastoma Eliquis PDUFA for VTE treatment 25 th August MnB rlp2086 Phase II data in adolescents and young adults Inotuzumab Phase III data in relapsed or refractory ALL Xalkori Phase III data in non-squamous lung cancer (ALK-positive) Q3 results (October) PF Phase II data in Crohn s disease PF Phase II data in diabetic nephropathy page 8 of 32

9 Revenue By Business (US $m) Reorganizing To Release Further Shareholder Value We have been strong supporters of Pfizer in the past whilst it reorganized its Nutrition and Animal Health businesses. We see the evolution of further restructuring as positive for the shares and aim to preview our thoughts on how this might look in the future for investors. Reorganizing into three business segments Management plans to divide the current organizational structure broadly into two groups, Innovation and Value. All current marketed products that are expected to lose exclusivity by December 31 st 2015 in addition to products that have already lost exclusivity will be placed in the Value group. The Innovation business will be further subdivided with Innovation 1 focusing on Primary Care and Specialty businesses whilst Innovation 2 will encompass the Vaccines, Oncology, and Consumer Health businesses. Exhibit 17 summarizes the distribution of the group s revenue lines between the three business segments based on the above criteria through to 2020E. Innovation 2 will be the fastest growing segment with an estimated CAGR of c13% (2013A-18E) whilst the Value segment is expected to decline during the same period with an estimated CAGR of c-10%. Innovation 1 is expected to grow at a CAGR of c5% (2013A-18E CAGR). Exhibit 17: Segmental revenue analysis, 2013A-2020E 60,000 50,000 40,000 30,000 20,000 10,000 0 Innovation 1 Innovation 2 Value Corporate Timeline for release of financials of the new business segments should help to drive near term re-rating The new organizational structure will start functioning from January 1 st Management expects to provide revenues, COGS and operational expenses from each business segment in addition to some directional guidance regarding their portion of corporate costs as of the Q1 14 results to help model their individual operating margins. From January 1 st 2015, investors could expect some information regarding the contribution of the three business segments to the group balance sheet. page 9 of 32

10 We believe that the release of segmental financials for Pfizer should have two positive impacts on sentiment/ the shares: Investors will likely become increasingly focused on a bottom-up analysis of the company, which should help them to understand where margin improvement possibilities lie both in terms of operational and taxation efficiencies, and The availability of the information itself could stimulate the interest of other companies into potentially acquiring certain divisions of the business. We believe that several options are open to management, though understanding the potential timelines of these is more complex: Sale of Value to a specialty/ generics player: We believe that certain specialty and generics players may have interest in the Value business, being able to reap significant synergies on operational costs and from a taxation basis, Buy and Build: Pfizer itself may wish to acquire a generics business to enable it to improve the long term margins and help to expedite its pipeline in biosimilars and other difficult-to-make products, Joint venture with a specialty/ generics player to improve the long term margins and help to expedite its pipeline in biosimilars and other difficult-tomake products, and Partial or full spin of any of the divisions. Innovation 1 To Focus on Primary & Specialty Care The Innovation 1 division will contain many of the current key products for Pfizer such as, Enbrel (ex-us), Viagra, Lyrica, and Chantix. We have also allocated pipeline products that could be marketed in the Primary and non-oncology specialty care segments to Innovation 1. The base business will see its first patent loss in Enbrel in the EU in August 2015 and in Japan in September More meaningful LOEs will impact the business in 2017 with the loss of US market exclusivity in December 2017 for Viagra and another step down in 2019 with the expiry of the US Lyrica patent in December 2018 (Exhibit 18). Exhibit 18: Expected loss of patents for key drugs in major geographies Product US EU Japan Enbrel August 2015 September 2015 Viagra *April 2020 Lyrica December 2018 Chantix May 2020 September 2021 August 2022 * LOE expected in December 2017 following settlement with Teva Source: Jefferies, company data Base business revenues during 2014E are expected to be approximately $13.6bn, falling to c$8.1bn by 2020E (Exhibit 19) However, the pipeline contribution is expected to become meaningful, growing to circa $8.9bn by 2020E. Whilst our 2018 estimates are conservative for some key drivers such as Chantix, Viagra, and Enbrel, our estimates are above consensus for Lyrica, Xeljanz and Eliquis (Exhibit 20). page 10 of 32

11 Revenues (US $ m) 2018E sales ($m) Exhibit 19: Estimated revenues from launched products and pipeline, 2012A-2020E 20,000 Exhibit 20: Jefferies versus consensus estimates for key drivers of Innovation 1, 2018E 5,000 15,000 4,000 10,000 3,000 5, ,000 1,000 0 Chantix Lyrica Enbrel Viagra Xeljanz Eliquis Launched Products Pipeline Cons. JEFe Source: Jefferies estimates, EvaluatePharma Innovation 1 pipeline contains a strong set of recently launched and upcoming blockbuster potential drugs The Innovation 1 pipeline includes several key growth drivers both within the base business (Lyrica), recently launched products (Eliquis and Xeljanz) and mid to late stage pipeline (Viviant/ Duavee, Remoxy, tanezumab, ertugliflozin, bococizumab and ALO-02). In total we expected these assets to drive c$8.9bn of revenues on a risk-adjusted basis by 2020E (Exhibit 21). Xeljanz (JAK inhibitor) was approved in 2012 for the treatment of rheumatoid arthritis and is being tested for ulcerative colitis, psoriasis and psoriatic arthritis. We expect approval of Xeljanz for psoriasis in 2015 and for psoriatic arthritis in We believe Xeljanz could achieve peak sales of c$4.8bn for all indications, though our model contains sales of just $2.6bn on a risk adjusted basis by 2020E. By 2020E, Xeljanz is expected to be the largest contributor from the pipeline followed by Eliquis, for which we estimate sales of $1.5bn across all indications by 2020E. page 11 of 32

12 Sales (US$m) Exhibit 21: Estimated revenues from pipeline, 2013A-20E 7,000 Viviant Tanezumab (cancer pain) 6,000 Tanezumab (OA pain) PF ,000 PH PF ,000 Xeljanz (autoimmune) Xeljanz (Psoriatic Arthritis) 3,000 Xeljanz (Psoriasis) Xeljanz (UC) 2,000 Aprela Vyndaqel 1,000 Bosutinib (PKD) Remoxy A 2014E 2015E 2016E 2017E 2018E 2019E 2020E Other pipeline Exhibit 22: Distribution of pipeline revenues, 2018E ALO- Oxycodonenaltrexone 10% Tanezumab 5% PF % Other 24% PH % PF % Viviant 13% Xeljanz 27% Remoxy 5% Bosutinib (PKD) 2% Vyndaqel 2% Aprela 7% Strong growth outlook, but hampered by Lyrica in 2018 Aside from the step down in Alliance Revenues in 2014 (Spiriva) and loss of Lyrica in December 2018, Innovation 1 is likely to lay down decent top line growth throughout our forecast period with underlying growth of around 6-7%. Net of these negative impacts to sales we estimate a c5% revenue CAGR between 2013A-18E. Whilst we expect gross margins for the business to remain largely flat over this period, we would expect some operational leverage and efficiencies at the SI&A and R&D levels, with operating margins increasing from 33.4% to 38.6%. This results in an 8% operating income CAGR between 2013E-18E. Assumed improvements in the tax rate for this division as a result of downstream restructuring and ongoing share repurchases drive an EPS CAGR of 14% between 2013E- 18E (Exhibit 23). page 12 of 32

13 Exhibit 23: Annual income statement for Innovation 1, 2013E-2018E (US$) 2013E 2014E 2015E 2016E 2017E 2018E Incr. abs. '13E-'18E CAGR '13E-'18E Net sales 13,972 14,307 15,209 16,155 17,320 17,912 3,940 5% COGS 2,395 2,497 2,649 2,800 2,970 3, Gross profit 11,577 11,811 12,560 13,356 14,350 14,806 3,229 5% SI&A 3,984 4,150 4,274 4,445 4,623 4, R&D 2,931 2,956 3,015 3,075 3,137 3, Operating income 4,662 4,705 5,271 5,835 6,591 6,912 2,250 8% EBITDA 5,178 5,228 5,816 6,414 7,195 7,532 2,354 8% Adjusted non. Op. (inc.)/exp Pretax income 4,627 4,667 5,229 5,787 6,539 6,859 2,233 8% Taxes 1,273 1,260 1,412 1,562 1,635 1, Tax rate 27.5% 27.0% 27.0% 27.0% 25.0% 24.0% -351bps Minority interest and d/c ops Net income 3,354 3,407 3,817 4,224 4,904 5,213 1,859 DILUTED EPS % Diluted shares outstanding 27,253 24,929 24,301 23,709 23,151 22,625 Weighted no. shares outstanding 27,575 25,065 24,377 23,781 23,219 22,690 Margin Analysis 2013E 2014E 2015E 2016E 2017E 2018E COGS 17.1% 17.4% 17.4% 17.3% 17.1% 17.3% +20bps Gross margin 82.9% 82.6% 82.6% 82.7% 82.9% 82.7% -20bps SI&A 28.5% 29.0% 28.1% 27.5% 26.7% 26.6% -196bps R&D 21.0% 20.7% 19.8% 19.0% 18.1% 17.5% -347bps Operating margin 33.4% 32.9% 34.7% 36.1% 38.1% 38.6% +522bps EBITDA margin 37.1% 36.5% 38.2% 39.7% 41.5% 42.1% +499bps Pretax margin 33.1% 32.6% 34.4% 35.8% 37.8% 38.3% +518bps Net margin 24.0% 23.8% 25.1% 26.1% 28.3% 29.1% +510bps YOY % Change 2013E 2014E 2015E 2016E 2017E 2018E Net sales 0.1% 2.4% 6.3% 6.2% 7.2% 3.4% COGS 2% 4% 6% 6% 6% 5% Gross profit -0.2% 2.0% 6.3% 6.3% 7.4% 3.2% SI&A 2.0% 4.2% 3.0% 4.0% 4.0% 2.9% R&D -3.2% 0.8% 2.0% 2.0% 2.0% 0.0% Operating income -0.2% 0.9% 12.0% 10.7% 12.9% 4.9% EBITDA 0.2% 1.0% 11.2% 10.3% 12.2% 4.7% Pretax income -0.1% 0.9% 12.0% 10.7% 13.0% 4.9% Net income 2.1% 1.6% 12.0% 10.7% 16.1% 6.3% Diluted EPS 11.1% 11.8% 15.2% 13.5% 18.9% 8.8% Diluted shares outstanding -8.9% -8.5% -2.5% -2.4% -2.4% -2.3% page 13 of 32

14 Sales (US $ m) Sales (US$m) Innovation 2 Potentially The Most Exciting Asset Innovation 2 will contain three segments, Vaccines, Oncology, and Consumer Health. Whilst these have few synergies to our minds, they all share a common theme of sustainable growth throughout our forecast period. Innovation 2 growth likely to be supercharged by oncology After allocating all oncology and vaccine pipeline products to the Innovation 2 business segment on top of the current base assets, we look for a c13% revenue CAGR between 2013A-18E. We expect Prevnar-13, within the Vaccines business, to grow from its current base of c$4bn to c$5.3bn by 2020E. Data from the CAPiTA study are expected to be released in Q1 2014, which should lead to a positive ACIP recommendation later on in The Oncology business is currently made up of Sutent, Inlyta and Xalkori, which collectively contributed c$1.8bn in However we expect the rate of revenue growth in Oncology to accelerate with the launch of palbociclib for breast cancer by By our estimate this will lead to a revenue CAGR of c32% for the oncology business (2013A-18E). We model Consumer Health to grow steadily with a revenue CAGR of c5% (2013A-18E) off the base of c$3.4bn in 2013A, with the potential launch of OTC Nexium being a key driver. Overall we model a revenue CAGR of 13% for Innovation 2 between 2013A-18E with the base business growing from c$9.2bn in 2013A to c$12.3bn by 2020E. This is expected to be augmented by a further c$7.6bn of revenues from the pipeline (c$6bn from palbociclib) reaching a total of c$19.9bn by 2020E. Exhibit 24: Estimated revenues from launched products and pipeline, 2012A-2020E 25,000 Exhibit 25: Revenue contribution of Vaccines, Oncology, and Consumer Health, 2012A-2020E 25,000 20,000 15,000 10,000 5, ,000 15,000 10,000 5,000 0 Launched Products Pipeline Vaccines Oncology Consumer page 14 of 32

15 Sales (US$m) Pipeline contribution largely rests on palbociclib Palbociclib is currently being evaluated in a Phase III trial for the treatment of ER-positive HER2-negative breast cancer patients. The drug is an oral inhibitor of Cyclin Dependent Kinases (CDK) 4 and 6. Interim Phase II data showed a significant increase in progression free survival of 26.1 months versus 7.5 months for placebo (HR: 0.37, p<0.001). The final analysis potentially including overall survival data are expected at the AACR Annual Meeting in April. We expect palbociclib to be launched in 2015 with peak revenues of circa $6bn (Exhibit 26). Based on our current financial model palbociclib revenues will make up a significant part of the future revenue base for Innovation 2. By 2020E, palbociclib is expected to make up c30% of total Innovation 2 revenues. Exhibit 26: Estimated revenues from pipeline, 2013E-2020E Exhibit 27: Distribution of pipeline revenues, 2018E 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 PF PF MnB rlp2086 Palbociclib (breast) Dacomitinib (cancer) Dacomitinib (1st NSCLC) Inotuzumab (ALL) Inlyta (Hepatocellular) Inlyta (GBM, Carcinoid) Bosutinib (CML) Palbociclib (breast) 82.0% MnB rlp % PF % PF % Inlyta (HCC) 1.0% Inotuzumab (ALL) 3.2% Dacomitinib (1st NSCLC) 3.8% Palbociclib offers surprise upside to near-term sales Whilst we expect positive results, due to be presented at the American Association for Cancer Research (AACR) Annual Meeting 2014 scheduled for April 5-9th in San Diego to be a catalyst for the stock, we also see it as extremely likely that Pfizer will announce an early filing through the accelerated approval pathway. Given that palbociclib received Breakthrough Therapy designation from the FDA back in April 2013, we believe the FDA will be open to an accelerated approval and priority review process. Approval could even occur in 2014 in our opinion. Interim Phase II data presented at the 2012 San Antonio Breast Cancer Symposium (SABCS) showed that in women with HER2-/ER+ advanced breast cancer who were treated with the combination of palbociclib plus letrozole achieved a statistically significant improvement in median PFS, compared to women who received letrozole alone (26.1 months vs. 7.5 months, HR: 0.37, p<0.001). Neutropenia and leukopenia appeared to be the only serious adverse events observed more frequently in the palbociclib + letrozole arm of the study. This interim analysis had a cut-off point of 50% of total events, which occurred in July 2012 (114 PFS events are needed for the final analysis). The final analysis was completed by February 3 rd 2014, when Pfizer issued a press release announcing that the primary endpoint was met by a statistically significant and clinically meaningful improvement in PFS for the combination of palbociclib and letrozole page 15 of 32

16 compared with letrozole alone. In this press release it was emphasized that Pfizer will discuss these results with the FDA and other regulatory authorities to determine next steps, with the goal of bringing a much needed new medicine to patients. We note the use of different capsule formulations between the Phase II, Phase III and the commercial capsule. An equivalence study was initiated in mid-2013 to compare these three formulations, and marked as complete on clinicaltrials.gov on January 17 th 2014 (NCT ). A subsequent second recently posted bioavailability study comparing specifically the Phase II capsule with the commercial capsule has not started recruitment yet, but has a primary completion of February 2014 (NCT ). Pfizer has also initiated a series of Phase III studies investigating palbociclib in HER2-/ER+ breast cancer, with the first study expected to readout in mid-2015 (PALOMA-3). Other tumor types are also being explored, although we attribute no value to these at present. Exhibit 28: Palbociclib clinical program to date Phase Tumor type Study name Combination No of patients Primary completion Phase III Phase III Phase I/II 1st-line treatment of advanced HR+/ HER2- breast cancer 2nd-line HR+/ HER2- metastatic breast cancer patients after endocrine failure KRAS mutant NSCLC and Solid tumors PALOMA-2 (NCT ) Letrozole 450 Mar-15 PALOMA-3 (NCT ) fulvestrant 417 Jul-15 NCT PD (MEK Inhibitor) 139 Apr-17 Phase II HR+ breast cancer patients NCT Aromatase inhibitor 120 Oct-17 Phase III Phase III 2nd-line HR+/ HER2- metastatic breast cancer after aromatase inhibitors HR+/ HER2- breast cancer. Post-neoadjuvant treatment Source: Jefferies research, clinicaltrials.gov PEARL (NCT ) Exemestane 348 Jan-18 PENELOPE0-B (NCT ) Background standard antihormonal therapy 800 Dec-19 In addition to the studies posted on clinicaltrials.gov highlighted in the above Exhibit, Pfizer and GlaxoSmithKline (GSK LN, 1571p, Hold) are expected to start recruitment for a Phase II study investigating palbociclib in combination with the MEK inhibitor Mekinist (trametinib) in melanoma in H A Phase I/II study conducted by the National Cancer Institute of France investigating the combination of palbociclib with Roche s (ROG VX, CHF248, Buy) MEK inhibitor Zelboraf in melanoma is also ongoing. Many commentators appear to misunderstand the early filing strategy Our take from recent investor calls with Pfizer management is that many commentators believe that an early filing and accelerated approval is contingent upon statistically significant overall survival data being achieved along with the primary completion of the PFS analysis in Q1 14. We believe that the FDA will be supportive of (and management plan) a filing based on PFS data alone. We believe that the following quote from Ian Read (Chairman and CEO, Pfizer) implies that management were not expecting to have mature or statistically significant Overall Survival data at the time of filing given that they knew at the time that PFS data were imminent, but did not know at what point OS data would be available: on palbo, I don't think we can assume anything on the path forward until we see the results, and then we will be in conversations with the FDA. And as you say, overall survival is event-driven and may take a longer time, but we'll just have to wait for the results and have in-depth discussions with the FDA. page 16 of 32

17 Whilst many commentators believe that the negative final review of Avastin in metastatic breast cancer portends poorly for approvals based on PFS, we believe that this is far from the case. The FDA pointed out many times in that review that they were looking for a clinically meaningful PFS benefit in terms of the absolute number of months (which ultimately Avastin did not show), rather than a statistically significant hazard ratio. Furthermore, we do not expect that palbociclib will carry many of the significant and lifethreatening toxicities encountered with Avastin. With interim PFS data showing a placebo-adjusted benefit of c18 months and past experience with the FDA implying that a clinically meaningful PFS benefit is around 4-6 months, we are highly confident that palbociclib can see early approval based on PFS data alone. Competition is coming, but an early filing will keep Pfizer ahead of the pack Given the potential threat to Afinitor second-line HER2-/ER+ advanced breast cancer sales presented by palbociclib (delaying progression to second-line therapy by c.2 years), Novartis (NOVN VX, CHF71.50, Hold) has been quick to follow Pfizer into Phase III with another CDK 4/6 inhibitor, LEE011, moving straight from Phase I to Phase III. Phase I results in solid tumours were presented at the AACR-NCI-EORTC Conference on Molecular Targets and Cancer Therapeutics in October Novartis claim that it has the most selective (for CDK 4/ 6) inhibitor to date, as indicated by William Sellers, Global Head of Oncology, Novartis (Investor day, November 2013): "to our knowledge, is the most selective CDK4/6 inhibitor to date." However, our review of the literature would suggest that palbociclib and LEE011 have similar potency and selectivity for CDK 4/ 6. We present the LEE011 clinical program to date in the following Exhibit. Exhibit 29: LEE011 clinical program Phase Tumor type Study name Combination No of patients Primary completion Phase I/II BRAF solid tumours NCT LGX818 and MEK Mar-15 Phase II Pharmacodynamics study in early breast cancer MONALEESA-1 (NCT ) Letrozole 120 Apr-14 Phase I/II NRAS mutant melanoma NCT MEK162 (MEK inhibitor) 58 Apr-15 Phase I/II BRAF Mutant Melanoma NCT LGX818 (BRAF inhibitor) 150 Jan-16 Phase I/II Advanced ER+ breast cancer NCT BYL719 (PI3K-alpha inhibitor) 300 May-16 Phase I/II HR+/ HER2- advanced breast cancer NCT Afinitor + exemestane 185 Jul-16 Phase III 1st-line treatment of advanced HR+/ HER2- breast cancer Source: Jefferies research, clinicaltrials.gov MONALEESA-2 (NCT ) Letrozole 500 Jan-17 Palbociclib could also face additional competition from LY , a CDK 4/6 in Phase I for multiple tumour types being developed by Eli Lilly (LLY, $53.37, Underperform). A significant commercial opportunity of more than $6bn Novartis has described the commercial opportunity for Afinitor in refractory breast cancer as being $2bn. As described by David R. Epstein, Division Head, Novartis Pharmaceuticals (FY 13 financial results, January 2014): It looks like a CD 4/6 inhibitors are used in earlier stages of disease, so first line. And it looks like based upon the Pfizer data and our data as well that the duration of use will actually be page 17 of 32

18 Palbociclib sales ($millions) 2018E Cons. sales over time ($m) fairly lengthy, which is a good thing. I've already told you that I expect Afinitor to be $2B product or more. So given that these products will be used earlier and for longer duration, it starts to set up what the opportunity is in the space. Based on Novartis Afinitor expectations with its shorter PFS (7.8 months vs months for palbociclib), this would suggest a market opportunity of circa $6.7bn assuming similar pricing and patient penetration, though we note that the treated patient population in 1 st -line treatment is likely an even larger opportunity than this. Furthermore, the greater potential utility of palbociclib in extending survival could also result in stronger pricing. Consensus underestimates palbociclib: We are more cautious on Prevnar-13 As seen in Exhibit 30 our 2018E palbociclib revenue estimate is circa $2.4bn higher than consensus. However, we note that the consensus 2018E palbociclib estimate has considerably risen from c$100m in December 2012 to c$1.8bn (Exhibit 31) since the release of the interim Phase II data at the 2012 San Antonio Breast Cancer Conference. We believe that the market will continue to raise its peak sales expectations for palbociclib as the market de-risks the program and brings the filing timeline forward. An update on filing or final PFS analysis of the Phase II data due to be presented at the American Association for Cancer Research (AACR) Annual Meeting 2014 scheduled for April 5-9th in San Diego may act as additional catalysts. Exhibit 30: Jefferies versus consensus estimates for Palbociclib, 2014E-18E Exhibit 31: 2018E consensus Palbociclib revenue estimates over time 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, E 2015E 2016E 2017E 2018E 2,000 1,800 1,600 1,400 1,200 1, Cons. JEFe Source: Jefferies estimates, EvaluatePharma Source: Jefferies research, EvaluatePharma page 18 of 32

19 Prevnar-13 sales ($millions) 2018E Cons. sales over time ($m) However, our current estimates for Prevnar-13 are conservative compared to consensus as we believe that the CAPiTA data may not support as strong use in the elderly US population as some commentators hope for. Exhibit 32: Jefferies versus consensus estimates for Prevnar- 13, 2013A-18E Exhibit 33: 2018E consensus Prevnar-13 revenue estimates over time 6,000 5,000 7,000 6,800 6,600 4,000 3,000 6,400 6,200 6,000 2,000 5,800 5,600 1,000 5, A 2014E 2015E 2016E 2017E 2018E 5,200 Cons. JEFe Source: Jefferies estimates, EvaluatePharma Source: Jefferies research, EvaluatePharma Strong growth and massive margin expansion expected in Innovation 2 Innovation 2 has the luxury of both a strong base business with long-duration assets, as well as pipeline strength, though primarily through one asset (palbociclib), which raises its risk profile. In aggregate, we estimate a c13% revenue CAGR between 2013E-18E for Innovation 2. We expect the launch of palbociclib to drive both gross margin expansion as well as strong operational leverage at the SI&A and R&D levels. As a result we expect operating margins to expand from 23.9% in 2013E to 44.9% in 2018E. This results in a 28% operating income CAGR between 2013E-18E. Assumed improvements in the tax rate for this division as a result of downstream restructuring and ongoing share repurchases drive an EPS CAGR of 34% between 2013E- 18E (Exhibit 34). page 19 of 32

20 Exhibit 34: Annual income statement for Innovation 2, 2013E-2018E (US$) 2013E 2014E 2015E 2016E 2017E 2018E Incr. abs. '13E-'18E CAGR '13E-'18E Net sales 9,203 9,810 11,119 12,971 14,933 16,887 7,684 13% COGS 2,321 2,445 2,683 2,993 3,269 3,532 1,210 9% Gross profit 6,881 7,365 8,436 9,978 11,664 13,355 6,474 14% SI&A 2,393 2,521 2,647 2,779 2,946 3, % R&D 2,291 2,334 2,404 2,476 2,551 2, % Operating income 2,197 2,510 3,385 4,722 6,168 7,580 5,383 28% EBITDA 2,697 3,021 3,936 5,340 6,832 8,285 5,588 25% Adj. non-op. (inc.)/exp % Pretax income 2,181 2,489 3,358 4,683 6,119 7,522 5,341 28% Taxes ,264 1,530 1,805 1,205 25% Tax rate 28% 27% 27% 27% 25% 24% Net income 1,580 1,817 2,452 3,419 4,589 5,717 4,137 29% DILUTED EPS % Diluted shares outstanding 6,443 6,172 6,018 5,874 5,737 5,609 Wt. no. shares outstanding 6,894 6,266 6,094 5,945 5,805 5,672 Margin Analysis 2013E 2014E 2015E 2016E 2017E 2018E COGS 25.2% 24.9% 24.1% 23.1% 21.9% 20.9% -431bps Gross margin 74.8% 75.1% 75.9% 76.9% 78.1% 79.1% +431bps SI&A 26.0% 25.7% 23.8% 21.4% 19.7% 18.5% -751bps R&D 24.9% 23.8% 21.6% 19.1% 17.1% 15.7% -919bps Operating margin 23.9% 25.6% 30.4% 36.4% 41.3% 44.9% +2101bps EBITDA margin 29.3% 30.8% 35.4% 41.2% 45.8% 49.1% +1975bps Pretax margin 23.7% 25.4% 30.2% 36.1% 41.0% 44.5% +2085bps Net margin 17.2% 18.5% 22.0% 26.4% 30.7% 33.9% +1668bps YOY % Change 2013E 2014E 2015E 2016E 2017E 2018E Net sales 3.9% 6.6% 13.3% 16.7% 15.1% 13.1% COGS 1.3% 5.3% 9.7% 11.6% 9.2% 8.0% Gross profit 4.8% 7.0% 14.5% 18.3% 16.9% 14.5% SI&A 3.9% 5.4% 5.0% 5.0% 6.0% 6.0% R&D -0.6% 1.9% 3.0% 3.0% 3.0% 4.0% Operating income 12.2% 14.2% 34.9% 39.5% 30.6% 22.9% EBITDA 10.5% 12.0% 30.3% 35.7% 27.9% 21.3% Pretax income 12.2% 14.1% 34.9% 39.4% 30.7% 22.9% Net income 14.7% 15.0% 34.9% 39.4% 34.2% 24.6% Diluted EPS 25.3% 26.1% 38.6% 42.9% 37.5% 27.5% Diluted shares outstanding -12.9% -4.2% -2.5% -2.4% -2.3% -2.2% page 20 of 32

21 Sales (US $m) Value Business Holds Restructuring Potential Management is planning to place all drugs that will lose patent exclusivity by the end of 2015, in addition to Alliance revenue, in the Value business segment. The business contains products such as Lipitor, Norvasc, Celebrex, and Zyvox, which have been major drivers for Pfizer in the past. However, their revenues are expected to decline rapidly during our forecast period as generics and incremental price pressure take their toll. Further LOEs will add incremental pressure Pfizer will see several new LOEs for several key products in the US, EU and in Japan between 2014 and 2016 (Exhibit 35). In 2014, both Lyrica and Celebrex will lose their patent exclusivity in Europe. US exclusivity for Zyvox and Celebrex will end in EU exclusivity for Zyvox and Vfend as well as exclusivity for Vfend in Japan will be lost in Additionally, alliance revenues are expected to decline with the end of copromotion for US Enbrel in October Exhibit 35: Expected loss of patents for key drugs in major geographies Product US EU Japan Lyrica July 2014 April 2022 Zyvox May 2015 January 2016 August 2019 Celebrex December 2015 November 2014 November 2019 Vfend January 2016 January 2016 Source: Jefferies, company data As highlighted above with various key drivers losing exclusivity over different geographies between 2014 and 2016, we expect a sustained decline in revenues from c$28.0bn in 2013A to $13.5bn in 2020E with a negative CAGR of -10% CAGR between 2013A-2018E (Exhibit 36). Exhibit 36: Estimated revenues from Value business segment, 2012A-2020E 35,000 30,000 25,000 20,000 15,000 10,000 5, A 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E Source: Jefferies, company data page 21 of 32

22 Maximizing the potential of Value may require major corporate surgery We can envisage many different future directions for the Value business including both building through acquisitions, adding further generics and biosimilar capabilities, as well as divestment to, or Joint Venture with another generics/ specialty player. We suspect that the most practical solution might be to set up a Joint Venture for the Value business with another player as this would allow for a more practical way to continue to pass assets that have lost (or will soon lose) market exclusivity into a more suitable structure. However, this may lower the potential achievable valuation unless a partial spin was also to happen later down the line. We can also envisage the divestment of the Value business to a generics/ specialty pharma player such as Valeant [VRX, Buy, $ ], Teva [TEVA, Hold, $44.63], Mylan [MYL, NC, $44.22] or Actavis [ACT, Hold, $183.32]. We believe that this might create the most immediate value, though may not be optimal for Pfizer investors in the long run. A partial, followed by a full spin of the business as it is, could also be achieved, though we think this is less likely as the business needs further critical mass and expertise in certain areas (generics, biosimilars) and may not reach an optimal operating model taxation structure via this mechanism. Regardless of the actual strategy decided upon as well as the timing impact that this might have (see comments from Frank D Amelio [CFO, Pfizer] from the Q4 13 results call below), we believe that a reorganization of the Value core will have three likely positive impacts: Increase the operational efficiency of the business by increasing focus on cost management, Optimise the taxation structure of the entire group, by potentially lowering the tax rate for the Value business as well as lowering the extent of repatriation of cash for the Innovation 1 & 2 businesses, and Increase valuation of the entire group by crystallizing the value of the Value business as well as removing its drag on the growth on the rest of the group. it depends on the type of transaction. So if it's a public transaction...a partial spin, a complete spin, a Reverse Morris Trust, a partial IPO, a partial IPO followed by a spin or a split, three years of audited financials are required.. If it's a private transaction, a partial sale of the business, a complete sale of the business, formation of a joint venture where we have a minority interest or where we have a majority interest, no audited financials are required. However, a significance test is required, the results of which may require audited financials Let me rip through the significance test. There are three tests that make up the significance test. There's an asset test, an income test, and an investment test. And basically it's the target's results for each of those tests as a percentage of the acquirer's results. So think about income would be the target's income as a percentage versus the acquirer's income. Now, the way the results work or the tests work is if all three tests are less than 20%, no audited financials are required. If any one test is greater than 20% and lower than 40%, between 20% and 40%, one year of audited financials is required. Between 40% and 50% any one test, two years of audited financials; and in any one test greater than 50%, two years of audited balance sheets, three years of audited P&Ls, cash flows, other comprehensive income and shareholders equity statements. So that's basically what's required and why it's required. page 22 of 32