Global Pharmaceutical Industry

Global Pharmaceutical Industry
Robert Agon – Industry Analysis Alex Luk – Bristol-Myers Squibb Jacky Lui – Pfizer Ray Li – Merck

Overall 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 Use “genetic engineering” 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
Central Nervous System 24% Cancers, endocrine system, & metabolic diseases 17% Digestive and genito-urinary system 13% Respiratory system Parasitic and infectious diseases 11% Cardiovascular agents 10% Vitamins and related items 6% Dermatological items 3% Veterinary products U.S. Department of Commerce 2002

2003 Top Selling Blockbuster Drugs
Source: IMS World Review 2004 **Figures have been adjusted by IMS to include drug sales from distribution agreements

Market Leaders Leaders by Market Capitalization ($ billion): Pfizer
$205.1 Johnson & Johnson $179.7 GlaxoKlineSmith PLC $122.2 Novartis AG $118.8 Roche Holding AG $87.4 Aventis SA $70.9 AstraZeneca PLC $66.8 Abbot Laboratories $66.6 Eli Lilly & Co $62.5 Merck & Co Inc $60.1 Retrieved from Yahoo Finance November 22, 2004

2003 Pharmaceutical Sales by Region
World Audited Market 2003 Sales ($ billion) % of Global sales ($) % Growth (constant $) North America 229.5 49% 11% European Union 115.4 25% 8% Rest of Europe 14.3 3% 14% Japan 52.4 Asia, Africa and Australasia 37.3 12% Latin America 17.4 4% 6% TOTAL $466.3 100% 9% Source: IMS World Review 2004

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 & Medicaid Medicare: 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 % 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: (2004)

Drug Approval Process Average of 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/Disapproval Source: (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

Domestic R&D (billions) Total R&D as a % of Total Sales
R&D Spending Year Domestic 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 1994 $11,102 $2,348 $13,449 17.3%

Growth in R&D

U.S. Marketing Expenses Source: http//: (2004)

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 $ 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 Rate U.S % United Kingdom 7% Germany % France % Japan % IMS and Standard & Poors 2003

1858 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 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 emphasis on 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 slightly down 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/Divestiture
Action Date Subsidiaries/Product Line Value Sold Dec 13, 2003 Mead Johnson Adult Nutrition $385 million cash 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 Expiration Pharmaceutical Product 2003 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 Sustiva 544 455 68 2013 Monopril 470 426 413 2003 Glucovance 424 246 269 Glucophage XR 395 297 230 Zerit/Zerit ER 354 443 515 2008 Coumadin 303 300 63 Abilify 283 25 --- 2009 Videx/Videx EC 267 262 240 2001 Tequin 208 2007 Glucophage IR 118 184 250 2000 Serzone 98 221 234 Reyataz 88 2017 Buspar 35 53 Erbitux

Selected Product Sales
Pharmaceutical Product % Change Change ($ million) 2004 3rdQ Sales ($ million) 2003 3rdQ Sales 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% 106 39 Erbitux N/A 84 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

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

Sales Breakdown by Business Segment
Source: 2003 Annual Report

Sales by Geographic Areas
Source: 2003 Annual Report

Cost Breakdown (2003)

R&D as a Percentage of Sales
$ million

Stock Price Summary Ticker Symbol: BMY (NYSE)
Price as of Nov. 19, 2004: $23.50 52 weeks low: $22.22 52 weeks high: $31.30 Average Daily Volume  5,149,227 Number 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 3.92% 2002 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
Acquisition / Divestiture Period Erbitux rejected by FDA

Five Years Stock Comparison

Financial Statements Summary
2004 (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 2,200 2,198 Operating Cash Flow 2,493 3,512 945 5,372 4,652 Dividend per share: 1.12 1.11 1.01 0.89

Financial Ratios 2004 (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

HOLD Recommendation Pros Cons 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 Purpose
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 dividends 37th 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 Warner-Lambert
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 Holders
Institution Name Shares Held Position Value (000) % Shares Outstanding 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% STATE STREET GLOBAL ADVISORS 238,527,803 $8,176,733.09 3.16% 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% ALLIANCE CAPITAL MANAGEMENT 133,272,306 $4,568,574.65 1.76% NORTHERN TRUST CO (CHICAGO) 115,212,146 $3,949,472.36 1.53% PUTNAM INVESTMENT MGMT 102,454,572 $3,512,142.73 1.36% SMITH BARNEY ASSET MANAGEMENT 86,040,999 $2,949,485.45 1.14% GOLDMAN SACHS ASSET MANAGEMENT 84,718,489 $2,904,149.80 1.12% STATE FARM INVESTMENT MGMT CORP 80,709,105 $2,766,708.12 1.07% DEUTSCHE BANK ALEX. BROWN 74,050,477 $2,538,450.35 0.98% CAPITAL RESEARCH & MANAGEMENT CO 69,650,780 $2,387,628.74 0.92% TIAA CREF INVESTMENT MANAGEMENT INC 73,608,756 $2,252,427.93 0.97% FAYEZ SAROFIM & CO 54,326,810 $1,862,323.05 0.72%

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 Name Principal 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 1,086,700 1,434,400 326,840 275,000 1,510,448 103,631 Mr. Schedlarz Executive V.P.; CFO 889,133 1,043,100 260,866 225,000 1,216,379 79,922 Mr. Kindler Senior V.P. of General Counsel 827,900 901,500 248,989 200,000 857,703 68,962 Dr. Corr Senior V.P. of Science and Technology 806,000 815,000 242,403 110,000 1,316,630 89,354

Major (Revenue) Markets – Geographic Breakdown (2003 figures)
% of total revenues United States 59% Japan % All other % 100%

Revenues Breakdown

Operating Segments (2003 figures)
% of total revenues Pharmaceutical % Consumer healthcare % Animal healthcare % Other % 100%

Major Product Areas Revenues % of total (billion $) revenues
Cardiovascular & Metabolic Diseases $ % Central Nervous Systems Disorders % Arthritis & Pain % Infectious & Respiratory Diseases % Urology % $ %

Major Revenue Drivers (2003 figures)
Lipitor (Cardiovascular) $9.23 billion Norvasc (Cardiovascular) billion Zoloft (Anti-depressant) billion Neurontin (Epilepsy) billion Zithromax (Infectious diseases) billion Celebrex (Arthritis) billion Viagra (Erectile dysfunction) 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 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 % 31.58% Bextra 687 - 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 & Development

Patent Expirations Drug 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 1,338 3.0% Aricept 2010 254 0.6% Lipitor 9,231 20.4% Xalatan 2011 623 1.4% Viagra 2012 1,879 4.2% Detrol 544 1.2% Celebrex 2013 1,883 Bextra 2015 687 1.5% Genotropin 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 Pipeline
MIDDLE 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 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 Oct. 15, 2004 Nov. 10, 2004
Merck withdrew arthritis drug Vioxx from the market Oct. 15, 2004 Pfizer 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 Chart 5year price chart

Stock chart with industry benchmark

Financial Highlights 2004 (ttm) 2003 2002 2001 Share price (e.o.p.)
(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 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 2003 Lower net income in 2003 due to merger-related in-process R&D charges => lower ROE

BUY 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: MRK Ray 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: $ 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 No major mergers Reputation very important; Between 95-01, MRK’s avg review time was < 11 months ~ PFE’s avg review time was more than 2 yrs

2003 Highlights Q4-03: Cut 4,400 positions, to be completed in 2004
Q4-03: Implemented new distribution program Lowered quantity limit of average purchases Withdrew 2 products from late-phase trials Diabetes 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 Next CEO probably from outside

Executive 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 Zetia estimated to peak at $4 billion per year

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 $ 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 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 % $ millions Atherosclerosis (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) 2,676.6 Repiratory (Singulair) 9% 2,009.4 84% 20,833.1

Revenues by Region $ million US 13,321.1 Eur, Mid East, Afr 5,341.3
Japan 1,600.9 Other 2,222.6 Total 22,485.9

Pipeline I Phase I Diabetes c-3347 Pain c-1246 Alzheimer's disease
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 II Phase II Obesity c-2735 c-2624 c-5093 Alzheimer's disease
Antherosclerosis c-8834 Respiratory disease c-3885 c-3193 Post-operative nausea and vomiting c-9280 Vaccines Pediatric 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

Patents

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 S&P credit rating is still AAA, but Moody’s downgraded from AAA to Aa2

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 1935 Pay out ratio of 40%-50%

2003 Cap Ex Breakdown Production facilities 788.3 R&D facilities 763.8
Millions of $ Production facilities 788.3 R&D facilities 763.8 Environmental projects 41.8 Admin, safety, general 322 1915.9

SELL Recommendation Pros Cons Strong balance sheet Lots of cash
May be cheap Cons Weak pipeline Key management are outsiders Vioxx uncertainty SELL

Quarterly Income Statements
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 1768.4 Basic Earnings per Common Share Continuing Operations 0.60 0.80 0.73 0.63 Discontinued Operations Earnings per Common Share Assuming Dilution 0.79 0.62

Global Pharmaceutical Industry

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