Sterling Pfizer Inc. Biotech Limited. 03 June 2009 Initiation Report. Wyeth acquisition to support Pfizer after losing patent for Lipitor RATING: BUY

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1 Initiation Report Wyeth acquisition to support Pfizer after losing patent for Lipitor RATING: BUY Target price (6-24 month): US$18.76 Reuters ticker: PFE Bloomberg ticker: PFE US Analyst: Nishith Sanghvi Supervising Analyst: Ujwal Shah Editor: Adil Bahar, PhD Global Research Director: Satish Betadpur, CFA Stock data as of 02 June 2009 Price US$ week range US$ US$18.99 Shares outstanding (mn) Market capitalization (US$ mn) Average daily volumes N/A Dividend yield N/A Face value US$0.05 Shareholding pattern Investment advisor 69.71% Bank 14.95% Hedge fund 5.64% Pension fund 4.44% Insurance company 3.04% Others 2.22% Company facts Sector Health Care Country of incorporation Head office location Principal areas of operation Company website Next news due United States New York Americas, Europe, Africa, Asia, Australia 2Q 09 results, July 2009 Stock performance 3 M 6 M 12 M Pfizer 27.7% (6.9%) (16.5%) NYSE Index 42.6% 14.4% (33.6%) Source: Bloomberg, company data Investment Summary Loss of exclusivity (LOE) of Lipitor to be partially offset by the acquisition of Wyeth: LOE for Lipitor will subject the company to intense generic competition (e.g. Ranbaxy Laboratories Limited, India, will receive 180 days exclusivity to market a generic version of Lipitor) which is expected to significantly erode Lipitor s revenues. We believe the acquisition of Wyeth Inc. (Wyeth) will partially offset the revenue loss over the medium term. Wyeth acquisition allows Pfizer access to the biopharma and vaccine markets: Biopharmaceuticals have emerged as one of the fastest growing sectors in the pharmaceutical market, expected to increase at a CAGR of 9.4% between FY FY 2012, while the global vaccine market is expected to increase at a CAGR of 16.5% between FY 2007-FY Pfizer is likely to become a significant company in the above markets after the acquisition of Wyeth. Wyeth s complementary product portfolio to further strengthen Pfizer s current offerings: Pfizer has a strong product portfolio to treat CVS, CNS and urology disorders, while Wyeth commands a strong presence in biologics, vaccines and women s health products. According to Pfizer, Pfizer-Wyeth will be the largest player in the cardiovascular (CVS) market and the second largest in the central nervous system (CNS) market. Wyeth expected to impact margins over the short term after integration: Pfizer expects cost savings of US$4,000 mn to be accretive 3 years after integration with Wyeth. Cost savings are expected primarily due to synergies of General and Administrative (G&A) expenses. Pharmaceutical sector immune to economic downturns: The pharmaceutical industry has traditionally been viewed as a defensive sector, as the demand for drugs remains immune to economic downturns. Although global GDP is expected to decline in FY 2009, IMS Health expects the global pharmaceutical market to expand in FY Initiating coverage with a BUY: We initiate coverage on Pfizer Inc with a BUY based on a weighted average target price of US$ Our DCF valuation is based on a WACC of 8.58% and perpetual growth rate of 3.0%, while our relative valuation discounts FY 2010 E sales by an EV/Sales multiple of 2.9x and EPS by a P/E multiple of 12.0x. Page 1

2 Company Profile Pfizer Inc. (Pfizer) is the world s largest research based pharmaceutical company by revenues, based in New York, USA. The company was founded in 1849 by Mr. Charles Pfizer and Mr. Charles Erhart. The first product launched was an anti-parasitic called santonin, used in the treatment of intestinal worms. The company has been a pioneer in the mass production of penicillin. Pfizer holds the patent rights to the worlds largest selling pharmaceutical product; Lipitor. However, the company has been recently impacted by competition from generic companies. On 26 January 2009, Pfizer acquired Wyeth Inc. (Wyeth) to offset the revenue decline associated with patent expiry of Lipitor and its other blockbuster products. Investment Thesis Acquisition to address revenue decline associated with LOE of Lipitor Loss of exclusivity (LOE) of Lipitor to be partially offset by the acquisition of Wyeth Lipitor is the largest global selling drug with FY 2008 revenues of US$12,400 mn, contributing 25.7% of Pfizer s revenues (Source: Espicom; a market research agency). Lipitor s patent is set to expire in March FY 2010 and paediatric exclusivity will expire in June 2011, resulting in a significant negative impact on Pfizer's revenues. LOE for Lipitor will subject the company to intense generic competition (e.g. Ranbaxy Laboratories Limited, India, will receive 180 days exclusivity to market a generic version of Lipitor) which is expected to significantly erode Lipitor s revenues. Pfizer s key products, namely; Geodon, Aricept, Celebrex, Zyvox, Viagra, Detrol and Xalatan, are also expected to lose patent protection between FY 2010 FY 2015.We believe the acquisition of Wyeth will partially offset the revenue decline over the medium term. Product name Therapeutic Usage Expiry % share in 2008 revenue Lipitor CVS % Chantix/Champix CVS % Caduet CVS % Lyrica CNS % Geodon CNS % Aricept CNS % Celebrex Arthritis % Viagra Urology % Detrol Urology % Sutent Oncology % Xalatan Opthalmology % Source: Company Pfizer to secure a significant presence in the biopharmaceutical market with Wyeth acquisition Pfizer s Phase III development pipeline comprises expanded indications (extensions) of the company's current products, such as; Geodon, Lyrica, Sutent and Celebrex. Although we hold a positive outlook for the extension of Sutent, we hold a cautious outlook over the prospects of other drug extensions, as they will lose patent protection over the medium term. Pfizer relies significantly on blockbuster drugs, as demonstrated by their revenue contribution, which was 48.4% of total revenues in Therefore, with its key drugs on the verge of losing patent protection, the US Food and Drug Administration's (FDA) stringent regulations for the approval of new products, a weak Research and Development (R&D) pipeline and significant cash reserves, Pfizer has proceeded to seek big-ticket acquisitions to support its future revenue growth and shield the company from the expected revenue loss associated with the LOE of Lipitor and other blockbuster drugs over the next 5 years. Pfizer eventually acquired Wyeth Inc. (Wyeth), the world s 9 th largest pharmaceutical company, on 26 January 2009, and the combined entity will be world s largest pharmaceutical company. This acquisition provides Pfizer with direct access to Wyeth s key blockbuster brands, e.g. Enbrel (the world's best selling biologic drug for Rheumatoid Arthritis and the 5 th largest selling drug in the world) and Prevnar; the world's largest selling vaccine by sales. Moreover, with Wyeth s drug portfolio, Pfizer will also secure a significant presence in the biopharmaceutical and vaccine market, going forward. Page 2

3 The US biotechnology market is expected to expand at a CAGR of 9.4% between FY 2007-FY 2012 Wyeth acquisition allows Pfizer access to the biopharma and vaccine markets Historically, Pfizer is renowned for its dominant position in chemical based drugs, while Wyeth has a diverse portfolio comprising biopharmaceuticals and vaccines. Pfizer s main therapeutic areas of focus are Cardiovascular (CVS) and Central Nervous System (CNS) disorders. Wyeth s acquisition marks Pfizer s entry into the high growth markets of biopharmaceuticals and vaccines. Biopharmaceuticals, once prescribed to treat only rare genetic diseases, are now increasingly gaining acceptance for treating common conditions. Consequently, biopharmaceuticals have emerged as one of the fastest growing sectors in the pharmaceutical market. According to Datamonitor, the US biotechnology market was valued at US$84,760 mn in FY 2007 and is expected to reach US$132,917 mn by FY 2012, increasing at a CAGR of 9.4% between FY 2007-FY Wyeth has a strong portfolio of biopharmaceutical products, particularly Enbrel, and products to treat haemophilia. Enbrel (last patent expiry in 2013), is expected to continue delivering strong growth over the next 2 years. Currently, Biopharmaceuticals are almost immune to generic threat as the FDA has not laid down procedural formalities for the approval of bio-generics. Moreover, according to the current FDA status on biogenerics (bio-generics are currently not allowed in the US and are very difficult to imitate), even post patent expiry of some of the biopharmaceutical drugs of Wyeth, we do not expect significant erosion in market share (for example Enbrel). However, in response to the current economic weakness and rising healthcare costs, the US government aims to drastically reduce its healthcare spending by allowing the greater use of bio-generics. Although the threat from bio-generics is likely to impact the market over the long term, over the medium term, Pfizer will benefit from Wyeth s biopharmaceutical product portfolio. Considering Wyeth's strong biopharmaceutical portfolio comprising some of the top selling drugs, we believe Wyeth s portfolio will offset the revenue loss of Pfizer from the patent expiry of its blockbuster drugs over the long term. According to IMS Health, the combined Pfizer-Wyeth entity will be the leader in terms of biopharmaceutical revenues in the US, with an approximately 12% market share, while in Europe it will command approximately 10% market share. Key therapeutic portfolio integration Pfizer Inc. Pfizer's key therapeutic portfolios Common portfolios New therapeutic portfolios from Wyeth Cardiovascular (CVS) Others Central Nervous System (CNS) Animal Health Central Nervous System (CNS) Others Biologic Consumer Health Vaccines Nutritional Health Women Health Source: Company data Pfizer will have a presence in almost every therapeutic area after integration In addition to its Biopharmaceutical products, Wyeth boasts a strong vaccine portfolio which includes the pneumococcal vaccine Prevnar, used to protect infants from pneumococcal bacteria, which is the highest selling vaccine in the world. Moreover, Wyeth has a line extension for Prevnar (Prevnar 13) in Phase III development for expanded usage; allowing the treatment of infants and adults, which we believe will further support revenue growth, going forward. According to Sanofi-Aventis SA, the global vaccine market is expected to double in FY 2016 to US$34.0 bn. We believe Pfizer will increasingly benefit from Wyeth s vaccine portfolio, going forward. According to Researchandmarkets.com, the global vaccine market is expected to expand at a CAGR of 16.5% between FY 2007-FY 2012 and is expected to reach US$21,000 mn by FY Wyeth s complementary product portfolio to further strengthen Pfizer s current offerings Pfizer has a strong portfolio of products to treat CVS, CNS and urology disorders, while Wyeth commands a strong presence in biologics, vaccines and women s health products. The combined Page 3

4 entity (Pfizer-Wyeth) will have a significant presence in all major therapeutic areas. According to Pfizer, Pfizer-Wyeth will be the largest player in the CVS market and the second largest in the CNS market. Pfizer-Wyeth will also rank second in the specialty care markets, namely; oncology, ophthalmology, inflammation, immunology, psychosis, infectious diseases and vaccines. Furthermore, the Pfizer-Wyeth company will be ranked 4 th largest in the vaccines business globally. According to an article by the Agency for Healthcare Research and Quality, dated April 2008, the top 5 therapeutic classes globally were Metabolic, CVS, CNS, Psychotherapeutics and Gastrointestinal in The combined Pfizer- Wyeth company has its presence across all the abovementioned therapeutic classes, which will benefit Pfizer, going forward. We expect Pfizer-Wyeth to further enhance its presence in the high growth emerging markets, such as Latin America, the Middle East and China. In emerging markets, Wyeth is recognized as a strong player in the infant nutritional market, while Pfizer is the leader in traditional pharmaceuticals. In these markets, Pfizer-Wyeth will have the opportunity to save costs due to relatively lower operating costs. Moreover, we expect the integration of manufacturing techniques and facilities, particularly for these complimentary products, to result in operational cost savings, going forward. Sutent expected to be a major medication in the high growth cancer market We hold a positive outlook for Sutent s (sunitinib mesylate) Phase III clinical trials. Sutent, which is registered as a treatment for renal cell carcinoma and gastrointestinal stromal tumours, is in Phase III clinical trials for breast cancer, colorectal cancer and lung cancer, and is expected to be a leading oncology drug given the wide range of target indications. According to (a market research agency), the global market for oncology products is expected to increase at a CAGR of 12.3% between FY 2007-FY 2012 and is expected to reach US$78,000 mn by FY Currently in Phase III trials for expanded indications, Sutent is expected to be launched in 2012 and anticipated to gain significant market share of the high growth cancer market over the long term. According to Pfizer, its animal health product portfolio is ranked number 1 in the world, while Wyeth also has a strong portfolio of products in the animal health sector. We anticipate Pfizer Wyeth to secure a significant market share in the animal health market. According to (a market research agency), the global market for animal health products is expected to reach US$8,600 mn in FY The nutritional care and consumer healthcare business of Wyeth will provide Pfizer with a presence in the lucrative global Over the Counter (OTC) market. Pfizer anticipates cost savings of US$4.0 bn as synergies accrue over 3 years post integration According to IMS, the global pharmaceutical market is expected to increase by 4.5%- 5.5% in FY 2009 Wyeth expected to impact margins over the short term after integration We anticipate significant cost savings at the operational level, particularly in terms of General and Administrative (G&A) expenses, after consolidation of Wyeth from FY 2010 onwards, in line with the expectations of Pfizer s Management. Pfizer expects synergistic benefits of approximately US$4.0 bn after integrating Wyeth, which will be accretive over a period on 3 years, and plans to scale down the combined workforce by 15% over the near term. Wyeth recorded an adjusted operating margin of 25.8%, compared to Pfizer s 35.3% in FY Consequently, we believe Wyeth will negatively impact Pfizer s operating margin in the initial years of operation. Moreover, the LOE of Lipitor is also expected to impact margins from FY However, we believe the decline in operating margin will be partially offset by cost savings associated with some early synergistic benefits, in addition to the cost savings program initiated by Pfizer. We also anticipate net margin to contract based on operating weakness and the anticipated higher interest expense for the additional debt (US$22,500 mn) procured to fund the Wyeth acquisition, coupled with the anticipated lower interest income associated with the anticipated dilution of short term investments to fund the cash portion of the deal. However, the long term margin outlook remains positive for Pfizer-Wyeth. Pharmaceutical sector immune to economic downturns The pharmaceutical market has traditionally been viewed as a relatively stable market. The industry is non-cyclical in nature as demand for drugs remains unaffected by the economic downturns. Consequently, although the global economy is experiencing a significant slowdown, the pharmaceutical industry is expected to report growth in This is demonstrated by the fact that the International Monetary Fund (IMF) has reduced its forecast for 2009 global growth to 0.5% from 2.2% in November 2008, while according to IMS health Inc (IMS Health), the global Pharmaceutical market is expected to increase by 4.5%-5.5% y-o-y in Developing markets are expected to experience double digit growth, partially offsetting the slow growth of established markets. With its presence across the globe, Pfizer is expected to remain broadly unaffected by the current economic downturn. Page 4

5 The US pharmaceutical market (the largest pharmaceutical market in the world), is expected to grow by 1%-2%, while major European markets are expected to grow by 3%-4% and Japan expected to grow by 4%-5% in In contrast, emerging markets such as India, China and Brazil, are expected to grow at a combined rate of 14%-15% in 2009, driven by higher government expenditure on healthcare and increasing awareness amongst the broader population (Source: IMS health). SWOT Analysis Strengths Strong product portfolio covering major therapeutic areas Large scale of operations with significant geographic reach Strong presence in the US and European markets Weaknesses Significant dependence on major blockbuster products Weak Research and Development (R&D) pipeline Opportunities Defensive nature of pharmaceutical market augurs well in economic downturns Biopharmaceuticals continue to offer robust growth opportunities Focus on emerging markets, a good long term factor Threats Declining growth of pharmaceutical products in developed countries Failure to integrate Wyeth Rising generic threat to patented products Financial Projections According to IMS, the global pharmaceutical market is expected to increase by 4.5%- 5.5% in FY 2009 Strong revenue growth led by Wyeth s integration, going forward We expect strong revenue growth in FY 2010 driven by Wyeth s portfolio, which will be partially offset by the patent expiry of Lipitor. We have integrated Wyeth's revenues into Pfizer from 1Q 10 onwards. Pfizer s blockbuster drugs, such as Lipitor and Viagra, are expected to lose their patent protection over FY 2010-FY 2015, which will negatively impact Pfizer s standalone revenues, going forward. However, we believe the abovementioned negatives will partially offset the expected robust perfomance of Wyeth s vaccines and biopharmaceutical product portfolio, going forward. Moreover, we maintain our positive outlook for the Phase III trials of Sutent and Prevnar, which will enter the markets over the next 2-3 years. Consequently, we expect a CAGR of 4.4% from Pfizer-Wyeth over next 10 years. Page 5

6 EBIT margin expected to decline, going forward Revenue and EBIT performance (FY 2008 A FY 2011 E) (in US$ Mn) 70,000 60,000 50,000 40,000 30,000 20,000 10,000 45% 40% 35% 30% 25% 20% 15% 10% 5% 0 FY 2008A FY 2009E FY 2010E FY 2011E Revenues EBIT EBIT Margin 0% Source: Company data, IIIR estimates Pfizer anticipates cost savings of US$4.0 bn as integration synergies accrue over 3 years, post integration Margin dilution expected over the near to medium term EBIT margin is expected to remain under pressure over the next 2 to 3 years due to consolidation and synergy benefits expected to be accretive at the gross margin level only after FY Pfizer has announced cost saving initiatives amounting US$4.0 bn until FY We expect Research & Development (R&D) and Selling, General & Administrative (SG&A) expenses to reduce over the next 2 years, in line with the company s cost cutting and restructuring plans. Consequently, we expect operating margin to expand from FY 2012 onwards. Pfizer is partly financing the Wyeth acquisition by raising long term debt, resulting in higher interest expenses. In addition, Pfizer will be diluting its short term liquid investments to fund the acquisition, resulting in lower interest income over the next 2 years. Considering these factors, we expect net margin to experience pressure over the next few years. Forecast profit and loss statement, FY 2008A - FY 2012E All figures in US$ mn, unless specified FY2008A* 1Q 09A 2Q 09E 3Q 09E 4Q 09E FY2009E 1Q 10E 2Q 10E 3Q 10E 4Q 10E FY2010E FY2011E FY2012E Total revenues 48,341 10,845 11,520 11,245 11,651 45,261 16,768 15,726 15,268 15,087 62,850 61,968 60,595 y-o-y change (0.3%) (8.1%) (4.6%) (7.5%) (5.4%) (6.4%) 54.6% 36.5% 35.8% 29.5% 38.9% (1.4%) (2.2%) Cost of sales 7,040 1,314 1,728 1,574 1,398 6,014 3,354 3,224 3,283 3,168 13,028 12,641 12,119 Gross profit 41,301 9,531 9,792 9,670 10,253 39,246 13,414 12,502 11,986 11,919 49,821 49,327 48,476 Margin 85.4% 87.9% 85.0% 86.0% 88.0% 86.7% 80.0% 79.5% 78.5% 79.0% 79.3% 79.6% 80.0% Operating and other expenses 21,548 4,498 4,758 4,768 5,045 19,068 7,545 7,171 6,932 6,940 28,589 28,195 27,571 Amortization expenses 5,976 1, , ,611 2,596 2,360 EBIT 17,085 4,455 4,354 4,222 4,527 17,558 5,216 4,678 4,401 4,326 18,622 18,535 18,545 Margin 35.3% 41.1% 37.8% 37.5% 38.9% 38.8% 31.1% 29.7% 28.8% 28.7% 29.6% 29.9% 30.6% Interest and finance charges (1,381) (116) (33) (33) (33) (216) 1,043 1,043 1,043 1,043 4,171 3,913 3,735 Income before tax 18,466 4,571 4,387 4,255 4,561 17,774 4,173 3,636 3,358 3,283 14,451 14,622 14,810 Provision for income tax 3,883 1,551 1,489 1,444 1,548 6,031 1,416 1,234 1,140 1,114 4,903 4,961 5,025 Net income 14,560 3,019 2,897 2,810 3,012 11,739 2,756 2,401 2,217 2,168 9,542 9,655 9,779 Margin 30.1% 27.8% 25.2% 25.0% 25.9% 25.9% 16.4% 15.3% 14.5% 14.4% 15.2% 15.6% 16.1% Diluted EPS (US$) * Company adjusted for non-recurring items Source: Company data, IIIR estimates Page 6

7 Forecast balance sheet, FY 2008E - FY 2013E All figures in US$ mn, unless specified FY 2008E* FY 2009E FY 2010E FY 2011E FY 2012E FY 2013E Assets Cash and cash equivalents 1,265 2,961 3,292 3,417 3,712 1,246 Accounts receivables 9,901 10,168 14,636 15,280 15,273 16,233 Inventories 4,788 4,119 9,102 9,178 9,131 9,091 Other current assets 32,273 20,780 27,463 30,179 29,817 30,996 Total current assets 48,227 38,028 54,493 58,054 57,932 57,566 Investments and other assets 52,690 54,139 50,033 47,514 45,238 44,183 Investment in Wyeth 0 68,000 68,000 68,000 68,000 68,000 Property plant and equipment, net 14,332 14,727 17,859 20,286 22,235 24,092 Total non-current assets 67, , , , , ,275 Total Assets 115, , , , , ,841 Liabilities and Stockholders Equity Short term debt 9,193 19,308 20,262 21,228 16,654 11,080 Trade payables 1,649 1,401 3,034 2,771 2,656 2,532 Income tax payable Other current liabilities 9,926 9,035 13,700 12,204 10,242 11,143 Total current liabilities 21,503 30,632 37,719 36,933 30,145 25,434 Long term debt 7,152 28,707 32,419 31,841 33,308 32,073 Other liabilities 19,103 18,861 18,780 18,786 18,770 19,548 Total non-current liabilities 26,255 47,568 51,200 50,627 52,078 51,621 Minority Interest Stockholders Equity 67,335 96, , , , ,630 Total Liabilities and Stockholders Equity 115, , , , , ,841 * Company has not provided balance sheet in its FY 2008 result Source: Company data, IIIR estimates Page 7

8 Forecast cash flow statement, FY 2008E - FY 2013E FY 2008E* FY 2009E FY 2010E FY 2011E FY 2012E FY 2013E All figures in US$ mn, unless specified Net income 7,838 11,739 9,542 9,655 9,779 11,205 Depreciation and amortization 3,912 1,189 1,897 2,220 2,475 2,696 Others 2,059 (1,691) 4,026 2,524 2,259 1,834 Changes in working capital (1,544) (701) (4,891) (3,506) (1,742) (1,590) Net cash from operating activities 12,265 10,535 10,573 10,894 12,771 14,146 Additions to property, plant and equipment (1,312) (1,584) (5,028) (4,648) (4,423) (4,553) Purchase of Wyeth 0 (68,000) Others (8,743) 10,665 (4,170) (2,211) 472 (610) Net cash from investing activities (10,055) (58,919) (9,198) (6,858) (3,951) (5,163) Proceeds from issuance of long term debt 31,035 10, (4,573) (5,574) Dividends paid (6,409) (5,869) (4,771) (4,827) (4,890) (5,603) Others (28,933) 45,835 2,773 (48) 937 (271) Net cash from financing activities (4,307) 50,080 (1,043) (3,910) (8,526) (11,448) Effect of exchange rate fluctuations (44) Net increase/(decrease) in cash and cash (2,141) 1, (2,465) equivalents Cash balance at the beginning of period 3,406 1,265 2,961 3,292 3,417 3,712 Cash balance at the end of period 1,265 2,961 3,292 3,417 3,712 1,246 *Companny has not provided cashflow with FY2008 results Source: Company data, IIIR estimates Valuation Our weighted average target price for Pfizer's NYSE common stock is US$18.76 In our DCF model, we have derived explicit free cash flow projections until FY 2018, after which we have assumed a terminal value. Based on a WACC of 8.58% and a perpetual growth rate of 3%, we derive a DCF fair value of US$18.99 for Pfizer s NYSE common stock. Over the past 3 years, the company s EV/Sales multiple has traded between the range of 1.77x to 4.07x. We expect Pfizer to experience strong revenue growth in FY 2010, driven by the acquisition of Wyeth. Therefore, to value Pfizer s NYSE common stock in this report, we are assigning an EV/Sales multiple of 2.90x. Employing this target multiple on our FY 2010 sales estimate of US$62,850 mn, we derive a target price of US$18.38 for Pfizer s NYSE common stock. We have assigned a target P/E multiple of 12.00x to value the NYSE common stock. Employing this target multiple on our FY 2010 earnings estimate of US$1.18, we derive a target price of US$17.72 for Pfizer s NYSE common stock. With a weighted average 6-24 month target price of US$18.76, indicating a potential upside of 25.2% from current levels, we rate Pfizer s NYSE common stock a BUY. Page 8

9 Relative valuation EV/Sales Forward FY Company 3 yr EV/Sales trading range TTM EV/Sales trading range TTM EV/Sales average Current EV/Sales 2010 EV/Sales Current EV Forward Sales Pfizer Inc* , Sanofi-Aventis SA , GlaxoSmithkline PLC , Novartis AG , Merck & Co Inc, , , Peer group average * We have taken ratios for combined entity Source: Bloomberg, IIIR estimates Relative valuation P/E Company 3 yr P/E trading range TTM P/E trading range TTM P/E average Current P/E Forward FY 2010 P/E Current Price Forward Earning Pfizer Inc* Sanofi-Aventis SA GlaxoSmithkline PLC Novartis AG Merck & Co Inc, Peer group average * We have taken ratios for combined entity Source: Bloomberg, IIIR estimates NYSE Common stock (PFE): Target price (US$) Methodologies Weight assigned Target price Weighted average price DCF approach 75.0% EV/Sales approach 12.5% P/E approach 12.5% Weighted average NYSE common target price Current NYSE common stock price Upside/(downside) from current levels 25.21% Source: IIIR estimates Key Risks to Rating If Phase III drugs in the pipeline do not progress as anticipated, it may negatively impact our estimates Governments across the world are trying to curtail their healthcare expenditure. In the US, the Obama administration has a strong inclination towards the promotion of generics in order to reduce healthcare expenditure. Pfizer does not have a separate generic division unlike its competitors, such as Novartis, and hence stands to lose if government efforts are targeted towards the promotion of generics. Some key products of Pfizer, such as Lyrica, Xalatan, Celebrex and Zyvox, are expected to lose patent protection over the medium term. Any unanticipated launch of a generic version of these key products before its patent expiry may lead to significant loss of revenues for Pfizer, going forward. Page 9

10 Our expectation of revenue growth for Pfizer and Wyeth are based on certain potential products in the combined product pipeline, aimed at Alzheimer's disease and oncology therapeutics. However, if these products do not progress through the pipeline as anticipated, the company will incur a negative impact on revenue growth, going forward. The significantly large size of both Pfizer and Wyeth make their successful integration a challenging task. Both companies have diverse product portfolios and a large number of human resources. Successful integration is the primary requirement for Pfizer to achieve synergistic benefit over the longer term. There are multiple examples where companies are not able to successfully integrate the acquired target and, consequently, have suffered significant losses. If Pfizer fails to integrate Wyeth with adequate success, it may significantly impact Pfizer s profitability, going forward. This space has been intentionally left blank Page 10

11 Guide to IIIR s research approach Valuation methodologies We apply one absolute valuation methodology and two relative valuation methodologies to triangulate the fair value for the stock assessed fundamentally. The following are the most frequently used valuation methodologies in our research: DCF: The Discounted Cash Flow (DCF) method values an estimated stream of future free cash flows discounted to the present day, using a company s WACC or cost of equity. This method is used to estimate the attractiveness of an investment opportunity and as such provides a good measure of the company s value in absolute terms. There are several approaches to discounted cash flow analysis, including Free Cash Flow to Firm (FCFF), Free Cash Flow to Equity (FCFE) and the Dividend Discount Model (DDM). The selection of a particular approach depends on the particular company being researched and valued. ERE: The Excess Return to Equity (ERE) method takes into consideration the absolute value of a company s return to equity in excess of its cost of equity discounted to the present day using the cost of equity. This methodology is more appropriate for valuing banking stocks than FCFF or FCFE methodologies. Relative valuation: In relative valuation, various comparative multiples or ratios including Price/Earnings, Price/Sales, EV/Sales, EV/EBITDA, Price/Book Value are used to assess the relative worth of companies which operate in the same industry/industries and are thereby in the same peer group. Generally our approach involves the use of two multiples to estimate the relative valuation of a stock. Other methodologies such as DuPont Analysis, CFROI, NAV and Sum-of-the-Parts (SOTP) are applied where appropriate. The target price derived from each methodology is then weighted, based on industry characteristics, to provide a weighted average target or fair value for the stock. Stock ratings Buy recommendations are expected to improve, based on consideration of the fundamental view and the currency impact (where applicable) by at least 10%. Hold recommendations assume that value is fully reflected in the current share price or that the overall view on the stock is fully compensated by the currency impact (where applicable). Sell recommendations are expected to deteriorate, based on consideration of the fundamental view and the currency impact (where applicable) by at least 10%. Currency impact and premium/discount Our fundamental analysis is always conducted on the security which is traded in the company s reporting currency. For global equities coverage, we also factor in any currency impact on the target price of the derivative security. In most cases, the derivative security will be the ADR, but in cases where the company reports in US dollars, we assume the company s major trading currency is the US dollar and therefore, since the impact of US dollar fluctuations will be minimized, the currency impact is applied to the non-us issue. We assume that fluctuations in the exchange rate linking the two securities will always impact the derivative security which may result in higher or lower returns compared to the base security and therefore may result in a different rating compared to the fundamentally assessed security. IIIR forecasts forward exchange rates for all major currency pairs utilizing its proprietary methodology. The forward exchange rates are overlaid on the target price for the fundamental stock over the defined investment horizon to derive the target price for the derivative security, helping investors to identify additional opportunities and risks associated with investing in a stock in US dollars or local currency. Note that under some circumstances the currency impact alone can be responsible for driving a buy or sell rating on an otherwise fundamentally neutral conclusion. In certain cases, the two issues under coverage may trade at a premium or discount which is not explained by the exchange rate impact. Typically this will be a premium or discount of the derivative stock relative to the base security. Our approach factors in the 12-month average premium or discount to our forecast target price. However, to forecast the price based only on currency impact for investors, we factor in the current premium/discount in order to clearly isolate the upside/downside purely attributable to currency impact. Disclaimer Independent International Investment Research PLC supplies this research via Pronet Analytics.com Ltd. ('Pronet'). Pronet is Authorized by the Financial Services Authority (FSA) and registered with the Securities Exchange Commission (SEC). You are reminded that investment advice provided by Pronet is for your general information and use and is not intended to address your particular requirements. Any advice or recommendations contained in this report may not be suitable for you and are not intended to be relied upon by you in the making (or refraining from making) any specific investment or other decision. Such decisions should only be made on the basis of independent advice from an appropriately qualified adviser. Pronet Analytics.com Ltd. and Independent Financial Markets Research Ltd. are subsidiaries of Independent International Investment Research PLC (the 'Group'). Research analysts working for the Group are subject to stringent confidentiality and security policies and are located in secure-access premises which may be in the proximity of professionals conducting similar work for other firms. The Group is not nor has been nor will be engaged in investment banking and does not make markets in any of the securities covered in this report or have any investment banking relationship with the firm whose security is covered in this report. No employee or contractor of the Group is permitted to personally buy or sell stock in the company covered in this report, and neither the analysts responsible for this report nor any related household members are officers, directors, or advisory board members of any covered company. No one at a covered company is on the Board of Directors of the Group or any of its affiliates. This report is not a solicitation to buy or sell any security and past performance is no guarantee of future results. Copyright 2009 Independent International Investment Research PLC. All rights reserved. Page 11