辉瑞制药研究报告2010年

Please see important disclosure information on pages 68 - 70 of this report.JIL is Authorised and Regulated by the Financial Services Authority.EventInitiating coverage with Buy rating and an $17.80 price target.Key Points Not too big to fail: Post acquiring Wyeth, Pfizer looks more likethe overall Pharmaceuticals sector than ever before, beset withpatent expiries, historically poor R&D productivity, pricingpressure, etc. However, it also holds many of the sectorspositive attributes in abundance, such as extraordinarycashflow, low expectations and a cheap valuation. R&Dsuccess will be required to break the destructive M&A cycle onwhich the company has embarked for many years now. Base Business may beat expectations: We see a number ofopportunities for the base business to surprise: First, throughbetter than expected ex-US performances of mature assets withpatent expiries, such as Lipitor, where we anticipate moreresilient revenues than consensus. Second, through a strongeroperational performance as management wrings better thanexpected efficiencies out of the enlarged Group. Strong R&D catalysts may surprise, but lack leverage:Pfizers pipeline has not progressed well since the Wyethacquisition with setbacks and delays to numerous projects.Although the circa $68bn revenue line needs several newblockbuster products just to replace exclusivity losses duringthe next five years, we see a strong stable of late-stageopportunities in apixaban (thrombosis/$6bn peak), tanezumab(pain/$3bn peak) and tasocitinib (rheumatoid arthritis/$3bnpeak). Whilst largely written off by financial markets,bapineuzumab (Alzheimers/$4bn peak) could also offer asignificant opportunity in the future. Financial flexibility underappreciated: Pfizer has enormouscapacity to drive earnings through cost-saving, in-licensing,acquisitions and share buy-backs, which put our EPS estimatescirca 6% ahead of consensus by 2014E. It also has a fairdegree of ability to support the share price through a moreaggressive dividend policy, and we see yields rising to almost8.3% by 2014E at the current share price. End game is uncertain: Ultimately we would prefer to seeR&D success encouraging more ViiV-like transactions to giveinvestors more leverage to the pipeline, should productivityincrease. Failure will surely see more large-scale acquisitions. Earnings synthesis power assured - Initiating coveragewith Buy rating: We believe that the market underestimatesthe financial flexibility and optionality provided by the enlargedgroup structure, which will likely surprise on earnings anddeliver better dividend yields than expected.Valuation/RisksValuation: We have set our target price for Pfizer of $17.80based on a 30% discount to the 2011E US market PE. Risks:Patent expiries/challenges； cost-saving； acquisitions； R&D risk；manufacturing； reimbursement； product litigation/withdrawal.May 21, 2010HealthcarePharmaceuticalsUnited States of AmericaInitiating CoveragePfizer (NYSE: PFE)Synthesising Earnings - Initiating Coverage withBuy RatingInvestment SummaryPfizers size has become a hindrance to organic growth, thoughwe see several promising late-stage pipeline assets and massiveoptionality for earnings surprise through cost saving and financialengineering. Excess cash will likely be deployed ontoacquisitions, share buybacks and increased dividend yields.Rating: BUYPrice: $15.23Price Target: $17.80Bloomberg: NYSE: PFEMarket Data52-Week Range: $20.36-$13.94Total Entprs. Value (MM): $149,962.7Market Cap. (MM): $122,846.7Institutional Ownership: 74.6%Shares Out. (MM): 8,066.1Float (MM): 8,066.1Avg. Daily Vol.: 74,957,760Financial SummaryNet Debt (MM): $27116.0USD 2009A 2010E 2011E 2012ERev. (B) 49.9 68.1 66.3 63.3EV/ Rev. 3.0x 2.2x 2.3x 2.4xEPSFY Dec 2.02 2.17 2.23 2.25FY P/E 7.5x 7.0x 6.8x 6.8xDividend 0.80 0.72 0.83 0.95Implied Yield 5.3% 4.7% 5.4% 6.2%EBITDA (B) 24.6 33.5 34.4 32.0EV/ EBITDA 6.1x 4.5x 4.4x 4.7xPE Relative toLocal Market42% 53% 60% 68%Jeffrey Holford, Equity Analyst44 (0) 20 7029 8673, jholfordJSwayampakula Ramakanth, Equity Analyst(212) 336-7054, sramakanthJTerence McManus, Equity Analyst44 (0) 20 7029 8274, tmcmanusJIan Hilliker, Marketing Analyst44 (0) 20 7029 8672, ihillikerJJames Dodwell, Equity Analyst44 (0) 20 7029 8675, jdodwellJSonal Sagar, Equity Analyst44 (0) 20 7029 8679, ssagarJPlease see important disclosure information on pages 68 - 70 of thisreport.Jeffrey Holford, Equity Analyst, jholfordJ, 44 (0) 20 7029 8673 Page 2 of 70Executive Summary Synthesising Earnings Pfizer was founded in 1849 by Charles Pfizer and Charles Erhart as a fine-chemicals business. From the companys 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. Wyeth acquisition has given more breadth, bulk and breathing space The acquisition of Wyeth in 2009 has given Pfizer a greater degree of diversification than previously as well as bulking up both the base business and pipeline ahead of key losses of market exclusivity, such as Lipitor (2011), Viagra (2012) and Celebrex (2014). The resulting entity should now provide the scale and financial firepower needed to deliver low to mid-single digit earnings growth (JEF est +4.1%) through our forecast period without significant reliance on new product launches, whilst the current pipeline matures. Fundamental issues have not been addressed by the Wyeth acquisition Nevertheless, we are adamant that scaling-up is not the correct approach for a company the size of Pfizer (even prior to the acquisition of Wyeth). Our view is that the Pharmaceutical industry will continue to face significant pressures over the next five to 10 years as the regulatory environment continues to worsen along with Global pricing pressures and an increasingly aggressive generics industry. The larger Pfizer becomes, the more it reflects the overall industry in our view and increasingly loses leverage to its pipeline successes, which have been few and far between in recent years. Only supernormal R&D productivity can break the M&A cycle We see the next few years of pipeline execution as being critical to determining the next step in Pfizers overall strategy. Above-average success rates will allow management to maintain the current structure without further M&A activity, or give them confidence to explore breaking the Group into smaller units where the delivery of new products will give greater leverage to employee and investor stakeholders. Failure to deliver will ultimately see further consolidation in our view plenty of bite-size targets will likely exist in a few years time as the patent cliff claims its victims and could include AstraZeneca (AZN LN, 2863p, Underperform), Bristol-Myers (BMY, $23.09, Hold), Eli Lilly (LLY, $33.34, Buy) and Bayers (BAYN GR, 46.19, Buy) Healthcare division. In the near-term, we expect to get further significant visibility on the progress of the pipeline though a number of key catalysts, including: Tanezumab Phase III data in osteoarthritic knee pain at EULAR (16-19 June) with further Phase III data through 2010, Phase III data for Sutent in NSCLC (Q3 2010), Phase III data for bosutinib in 1st line CML versus Glivec (Q3 2010), Axitinib Phase III data in 2nd-line RCC (Q3 2010), Apixaban Phase III ADVANCE data in VTE prevention (Q3 2010)/ Phase III AVERROES data in SPAF (Q4 2010) and ADOPT data in medically ill expected Q1 2011, Tasocitinib (JAK inhibitor) Phase III data in rheumatoid arthritis (Q4 2010). In the mid-term, other key development programs in Alzheimers disease, Oncology, Pain/Inflammation and Psychiatry should also be evident in terms of delivery allowing management and investors to decide on the next appropriate steps for the business. Financial flexibility and base business likely to provide some earnings and valuation upside We believe that the market is currently underestimating the optionality of the cost-saving capacity and financial firepower that the Pharmaceutical industry has at its disposal. We expect Pfizer to generate $23.2bn of cumulative free cash flow (post-dividend payments and share buy-backs) during our forecast period (2010E-14E) on top of its current net debt position of $28.8bn. We have currently apportioned $10.9bn of cash flow towards share buy-backs and have implied a dividend yield of 4.7% in 2010E rising to 8.3% in 2014E. However, our end 2014E estimated gross cash position of $32.5bn in our financial model suggests significant remaining funds for additional share buy-backs, a higher dividend yield or acquisitions. Higher earnings or dividend yields than currently anticipated by the market should drive some share price appreciation in our view. We note that Pfizers 2012 management targets call for revenues of at least $65.2bn, which our estimate of $63.3bn falls short of implying potential acquisition costs in the range of $6-12bn, assuming multiples of between three to four times revenues to deliver the $2-3bn shortfall. PFEPlease see important disclosure information on pages 68 - 70 of thisreport.Jeffrey Holford, Equity Analyst, jholfordJ, 44 (0) 20 7029 8673 Page 3 of 70PE multiple likely to remain compressed due to poor earnings quality We do not doubt the ability of management to beat consensus earnings expectations and at least meet their guidance due to the sheer size of the organisation and the financial flexibility at its disposal. Whilst we do not see the contribution of the pipeline towards the 2012 revenue base as being material ($1bn (1.7%) of our $63.3bn estimate), it is difficult to envisage the market offering a higher earnings multiple for the company unless more consistent execution of the pipeline is evident. Earnings from cost savings can only be made once and therefore should not get a multiple. History shows that acquisitions are generally best for the targets shareholders in the Pharmaceutical industry； it is unlikely that Pfizer shareholders will be in this position in the next round of industry consolidation. Dividend lever could be pulled harder, offering more upside One feature of our financial modelling is that we have endeavoured to reflect managements stated intention of meeting specific revenue and earnings targets by 2012, whilst delivering improved returns for shareholders. Therefore we have been aggressive with our dividend payout assumptions, which we see as a key tool for management to return cash to shareholders, whilst also supporting the share price through an improved yield. At the same time our financial model provides for the circa $6-12bn war chest that we estimate management may require to “plug” the revenue gap between our 2012E estimate and the guidance range assuming an acquisition multiple of 3 to 4 times revenues. Valuation Our primary method for valuing Pharmaceutical stocks is by setting a premium/discount to the local market PE, dependent upon the relative growth rate and earnings security of the company as we believe this more accurately reflects the traded value of a stock rather than other methods such as DCF and sum of the parts, which better reflect the industrial value of an asset in our view. Accordingly we have set our target price for Pfizer of $17.80 based on a 30% discount to the 2011E US market PE. We have chosen to use a 30% discount to reflect the over-sized structure of Pfizers operations, which will likely rely on financial flexibility and cost-savings to deliver earnings growth for investors and may not be sustainable in the longer term. EXHIBIT 1: US LARGE-CAP PHARMACEUTICALS COMP SHEET Company Ticker Rating MV MV Price Target Up/dow n Dividend Total EPS PEG Local Market PEGL.C. $m 20-May-10 price side Yield Return CAGR 09A-14E EPS GAGR PEG 09-14E RelativeL.C. L.C. 2010E (%) 09A-14E 2010 PE 09A-14E 2010 PE to LMAbbott Labs* ABT N/A $72,167m $72,167m $46.48 N/A N/A 3.7% N/A 9.2% 1.21 15.1% 0.89 137Bristol Myers Squibb BMY HOLD $39,580m $39,580m $23.09 $27.00 16.9% 5.5% 22.5% 2.4% 4.22 15.1% 0.89 476Johnson & Johnson* JNJ N/A $166,629m $166,629m $60.55 N/A N/A 3.4% N/A 8.1% 1.49 15.1% 0.89 169Eli Lilly LLY BUY $36,642m $36,642m $33.34 $41.00 23.0% 5.9% 28.9% -5.4% -1.35 15.1% 0.89 -152Merck* MRK N/A $99,129m $99,129m $31.82 N/A N/A 4.9% N/A 6.6% 1.35 15.1% 0.89 153Pfizer PFE BUY $122,912m $122,912m $15.23 $17.80 16.9% 4.7% 21.6% 4.5% 1.57 15.1% 0.89 178*Based on Thomson consensusCompany P/E P/E P/E P/E P/E P/E P/E Dividend Dividend Dividend Dividend Dividend Dividend Dividend 2009A 2010E 2011E 2012E 2013E 2014E 2015E Yield Yield Yield Yield Yield Yield Yield(x) (x) (x) (x) (x) (x) (x) 2009A 2010E 2011E 2012E 2013E 2014E 2015EAbbott Labs* 12.5 11.1 9.9 9.1 8.4 8.1 7.7 3.4% 3.7% 4.1% 4.4% 4.7% 4.9% 5.0%Bristol Myers Squibb 12.5 10.2 9.4 10.5 11.7 11.1 10.9 5.4% 5.5% 5.7% 5.9% 6.0% 6.1% 6.2%Bristol Myers Squibb - Abilify 12.5 10.9 11.1 12.8 13.5 12.9 12.2 3.2% 3.4% 3.6% 3.9% 4.2% 4.5% 4.7%Johnson & Johnson* 13.2 12.1 11.3 10.2 9.6 9.0 8.4 3.2% 3.4% 3.6% 3.9% 4.2% 4.5% 4.7%Eli Lilly 7.5 7.3 7.2 8.3 8.0 10.0 8.3 5.9% 5.9% 5.9% 5.9% 5.9% 5.9% 5.9%Eli Lilly - Alimta 7.5 7.3 7.4 9.2 9.0 11.9 9.7 4.9% 4.9% 4.9% 4.9% 4.9% 4.9% 4.9%Merck* 9.8 8.9 8.2 7.8 7.6 7.1 6.8 4.9% 4.9% 4.9% 4.9% 4.9% 4.9% 4.9%Pfizer 7.6 7.1 6.8 6.8 6.5 6.1 5.6 5.3% 4.7% 5.4% 6.3% 7.2% 8.3% 9.5%Company PE rel to PE rel to PE rel to PE rel to PE rel to PE rel to PE rel to PE rel to PE rel to PE rel to PE rel to PE rel to PE rel to PE rel toLocal Mkt Local Mkt Local Mkt Local Mkt Local Mkt Local Mkt Local Mkt Sector Sector Sector Sector Sector Sector Sector2009A (%) 2010E (%) 2011E (%) 2012E (%) 2013E (%) 2014E (%) 2015E (%) 2009A (%) 2010E (%) 2011E (%) 2012E (%) 2013E (%) 2014E (%) 2015E (%)Abbott Labs* 70 83 88 91 90 92 93 116 114 110 105 100 100 102Bristol Myers Squibb 70 76 82 105 126 126 131 116 104 103 120 139 138 144 Bristol Myers Squibb - Abilify 70 82 98 128 145 147 147 116 112 122 147 161 160 161 Johnson & Johnson* 74 91 99 102 103 102 102 123 124 124 117 114 111 112Eli Lilly 42 55 63 83 86 113 100 70 75 79 95 95 124 110 Eli Lilly - Alimta 42 55 65 92 96 135 117 70 75 81 106 107 147 129 Merck* 55 67 72 78 81 81 82 91 91 90 89 90 88 90Pfizer 42 53 60 68 70 69 67 70 73 75 77 78 75 74 Company EV/EBITDA EV/EBITDA EV/EBITDA EV/EBITDA EV/EBITDA EV/EBITDA EV/EBITDA EV/Sales EV/Sales EV/Sales EV/Sales EV/Sales EV/Sales EV/Sales2009A 2010A 2011E 2012E 2013E 2014E 2015E 2009A 2010A 2011E 2012E 2013E 2014E 2015E(X) (X) (X) (X) (X) (X) (X) (X) (X) (X) (X) (X) (X) (X)Abbott Labs* 8.5 7.5 6.4 5.1 4.4 3.7 3.3 2.6 2.2 1.9 1.6 1.4 1.3 1.2Bristol Myers Squibb 5.9 5.1 4.6 5.6 7.1 7.2 7.2 2.0 1.8 1.7 1.8 2.0 1.8 1.8Bristol Myers Squibb - Abilify na na na na na na na na na na na na na naJohnson & Johnson* 8.2 7.4 6.7 5.8 5.2 4.6 4.2 2.6 2.4 2.3 2.0 1.8 1.6 1.5Eli Lilly 5.1 4.6 4.1 4.3 3.9 4.4 3.6 1.8 1.6 1.4 1.4 1.2 1.2 1.1Eli Lilly - Alimta na na na na na na na na na na na na na naMerck* 12.0 6.5 5.4 4.7 4.5 4.5 4.2 4.1 2.4 2.3 2.2 2.1 2.1 2.0Pfizer 5.9 4.5 4.1 4.1 4.1 3.9 3.5 2.9 2.2 2.1 2.1 2.0 1.9 1.8 Note: JEF estimates for Pfizer, Bristol-Myers and Eli Lilly. All other estimates are consensus from DataStream Source: Company data, DataStream, Jefferies International Ltd. estimates PFEPlease see important disclosure information on pages 68 - 70 of thisreport.Jeffrey Holford, Equity Analyst, jholfordJ, 44 (0) 20 7029 8673 Page 4 of 70Initiating Coverage with a Buy Rating and $17.80 PT We forecast a five-year earnings CAGR (09A14E) of 4.1% for Pfizer versus a weighted average of 4.2% for the sector across the same period. Pfizer currently trades on a 2011E PE of 6.8x, a 25% discount versus its US Pharma peers and at a 40% discount to the US market based on our estimates. We forecast that Pfizer will deliver better than expected earnings growth compared to consensus estimates over the next five years, driven by better than expected (ex-US) base business performance, cost-saving and share buy-backs. Furthermore we see the ability of the company to drive improvements in the current dividend yield of 4.7% as being attractive in the long-term even if it is unable to drive organic top-line growth. Risks Pfizer is highly dependent on its chemical and biologic manufacturing plants, which are highly complex operations and may either encounter production difficulties and/or face regulatory action for non-compliance with local regulations. The company is also dependent upon both public and private payors for its products and could face pricing pressure that could cause sales to fall below expectations. Other important risk factors include the potential for product withdrawals and R&D catalysts, which can be difficult to predict. Pfizer could also face fines and/or product withdrawals if it is found to have marketed products with material, undisclosed safety issues. Regulators could also choose at any time to remove any of Pfizers pharmaceutical products from the market if they are found to cause unacceptable adverse events in patients. Pfizer also has a number of products which could lose market exclusivity due to patent expiries or challenges. Some of these products are complex in nature and the timing of generic/ biosimilar entries could differ materially from our estimates. PFEPlease see important disclosure information on pages 68 - 70 of thisreport.Jeffrey Holford, Equity Analyst, jholfordJ, 44 (0) 20 7029 8673 Page 5 of 70Investment Thesis: Patent Expiries Are Forcing Strategic Change in the Pharmaceuticals Industry Like many of its peers, Pfizer is faced with a number of significant patent expiries and challenges over the next few years, the most significant of which are the US hard patent expiries of Aricept (November 2010), Xalatan (March 2011), Lipitor/Caduet (November 2011), Viagra (September 2012) and Celebrex (May 2014). In aggregate we calculate that 33% of the companys 2010E product revenues will have lost their US market exclusivity by 2014E. Furthermore a number of patent challenges could potentially exacerbate the situation with the most significant of these being against Lyrica, which recorded US revenues of $1.5bn in 2009A. However, given the relatively recent ANDA filings (during 2009 by multiple generic companies) we would not anticipate any generic incursions before 2011. Exhibit 2 lists the most significant patent expiries for Pfizer during our forecast period as well as potential timelines for early generic incursions for selected products versus our own base case assumptions. EXHIBIT 2: SUMMARY OF KEY HARD PATENT EXPIRIES AND POSSIBLE TIMELINES OF EARLY LOSS OF EXCLUSIVITY AS WELL AS JEFFERIES MODELLING ASSUMPTION Product Hard Patent Expiry date Earliest generic date JEF Model Generic date Comment Aricept Nov-10 imminent Nov-10 Aricept is co promoted in the US by Pfizer. Eisai is the patent holder. Teva filed an ANDA in 2005 challenging the basic November 2010 patent and Eisai sued. Teva has received final FDA approval but remains subject to an injunction, pending the outcome of litigation. Effexor XR 2013 imminent Jul-10 The listed Orange book patents are just for the extended release capsules. The basic venlafaxine patent expired in 2008. In 2005, Wyeth settled with Teva allowing it to launch Effexor XR tablets in the US from 1 July 2010. Vfend Aug-09 Q1 2011 Q1 2011 A patent challenge from Mylan (Matrix) was settled, allowing the generics to launch in the US from Q1 2011. Xalatan Mar-11 Mar-11 Mar-11 Xalatans basic product patent is listed in Pfizers 2009 10-K as expiring in 2011 Aromasin Apr-11 Apr-11 Apr-11 Aromasins only Orange Book listed patent expires April 2011 Lipitor/ Caduet Mar-10 Nov-11 Nov-11 The Basic patent expires in March 2010, the enantiomer patent expires Jun 2011. Pfizer settled worldwide litigation with Ranbaxy, allowing it to launch generic Lipitor and Caduet in the US from Nov 2011. Watson is to sell an authorized generic. The EU Lipitor patents expire between Sept and Nov 2011. BeneFIX 2011 2011 none The BeneFIX patent expires in 2011. However, being a biologic product we have no expectations for a substitutable generic to be launched in the foreseeable future. Lyrica Dec-18 Mar-12 Dec-18 Lyricas basic product patent expires in 2018. It also has NCE exclusivity to Dec 30 2009. Several generic companies have challenged and Pfizer has sued. A 30 month stay should run to around March 2012. Viagra/ Revatio Mar-12 Mar-12 Sep-12 Viagras basic patent expires in 2012 March. Pfizer has sued Teva for infringement of the 2019 use patent. Teva has not challenged the 2012 patent. A 30 month stay should run to September 2012. Tygacil Apr-16 Apr-12 Apr-16 Tygacil has NCE exclusivity expiring on Jun 15 2010. Sandoz filed an ANDA in October 2009. Pfizer sued. A 30 month stay should run to Apr 2012 Zyvox May-15 May-12 May-15 Zyvox basic patent expires in 2015. Teva filed an ANDA and Pfizer has sued. A 30 month stay should run to May 2012 Geodon Sep-12 Sep-12 Sep-12 Geodons basic product patent expires in September 2012 Detrol LA Sep-12 Sep-12 Sep-12 Detrols patent expires 2012. Teva and Impax filed ANDAs. Pfizer sued and won, preventing Teva selling copies of Detrol/LA before Sep 2012 Rapamune 2014 Sep-12 Jan-14 In March 2010, Watson and Ranbaxy filed ANDAs challenging the 2014 and 2018 patents. Pfizer sued for infringement of the 2014 use patent. A 30 month stay should run to September 2012 Enbrel Oct-12 Oct-12 none Pfizer co-promotes Enbrel with Amgen in the US and has exclusive rights outside the US. As a biologic we have no expectations for a substitutable generic to be launched in the foreseeable future. Sutent 2021 Nov-12 2021 Sutents basic patent expirers in 2021 with NCE exclusivity to Jan 2011. Mylan has filed an ANDA. If Pfizer sues, a 30 month stay should run to Nov 2012. Rebif 2013 2013 none Rebif is covered by a number of patents out to 2013 (US) and 2012 (EU). Novartis Extavia (own brand of Betaseron) may have some impact on sales. As a biologic we do not expect a substitutable generic to be launched in the foreseeable future. Celebrex May-14 May-14 May-14 Celebrex basic product patent is listed in Pfizers 2009 10-K as expiring in 2014 Source: Company data, Jefferies International Ltd. research PFEPlease see important disclosure information on pages 68 - 70 of thisreport.Jeffrey Holford, Equity Analyst, jholfordJ, 44 (0) 20 7029 8673 Page 6 of 70Numerous approaches being taken to address poor underlying fundamentals We are currently witnessing a number of different approaches to address the issue of “short asset duration” in the Pharmaceuticals industry, where the combination of payor pressure coupled with a more aggressive generics industry and broad base of effective generic medicines in some therapeutic areas has made the age old practice of “evergreening” products (via reformulation) now almost obsolete. A number of companies recognized this issue some time ago and have proactively sought to build out more diversified operations, which have largely shielded them from their US market patent cliffs (e.g., Novartis NOVN VX, CHF51.85, Buy, GlaxoSmithKline GSK LN, 1172p, Hold, Johnson & Johnson JNJ, $60.55, NC and Abbott ABT, $46.48, NC). Other companies have recently changed strategy to emulate some of the above companies (e.g., Sanofi-aventis SAN FP, 47.47, Hold), though off a base of operations which already held non-prescription Pharmaceutical activities, such as Vaccines, Consumer Health, Animal Health, etc. We have also seen some significant consolidation in the US Pharmaceuticals sector including the Pfizer/Wyeth and Merck/Schering-Plough MRK GR, 61.09, Hold) transactions, where co-location of assets and a US-centric investor base has made M&A easier to execute than in Europe. Whilst these transactions have changed the business mix for the acquirers (adds biologics, vaccines, consumer and nutritionals to Pfizer； animal health and biologics for Merck), they were still focused around the Pharmaceuticals operations in our view, providing cost-saving opportunities and adding further depth and breadth to R&D pipelines. The last main industry grouping (which arguably Roche is also part of) is the focused prescription Pharmaceutical companies, which we see as including AstraZeneca, Eli Lilly and Bristol-Myers. Whilst a lack of strategic diversification options has kept AstraZeneca, Lilly and Roche locked on their present course, Bristol-Myers has purposefully divested its non-prescription Pharmaceuticals assets and used the resulting cash inflows to acquire more Biotechnology and Pharmaceuticals assets (e.g. Medarex, Kosan Bioscience and Adnexus Therapeutics). Similarly we have seen AstraZeneca and Eli Lilly build-out their current in-line and pipeline portfolios through the acquisition of significant biotech assets such as MedImmune and ImClone, respectively. Roche (ROG VX, CHF160.10, Buy) has been the only Large-Cap Pharmaceuticals company to forgo any specific strategy change though we see the Genentech minority acquisition as more of a financial transaction (akin to a share repurchase program) and did not change the business mix of the company. We believe that its steady course is mostly due to superior fundamentals, heavy weighting towards biologic products and lack of any significant patent expiry period in the near to mid-term. EXHIBIT 3: SUMMARY OF CURRENT BUSINESS ACTIVITIES AND STRATEGIC INTENTIONS IN VARIOUS SUB-SECTORS OF HEALTHCARE FOR SELECTED PHARMACEUTICAL COMPANIES Existing exposure Increasing exposure No exposure Decreasing exposure Source: Company data, Jefferies International Ltd. research Time will tell which approach is most successful Whilst many of these strategies are in their infancy and still have to face the real test of significant patent expiries throughout the industry over the next five years, we believe that the market has generally rewarded those companies with the best mid-term earnings growth as shown in Exhibit 4. Furthermore we note that the “pure play” PFEPlease see important disclosure information on pages 68 - 70 of thisreport.Jeffrey Holford, Equity Analyst, jholfordJ, 44 (0) 20 7029 8673 Page 7 of 70Pharmaceutical companies (Roche excluded) have generally been awarded some of the lowest PE ratings and have the lowest five-year growth rates amongst the industry. EXHIBIT 4: KEY INDUSTRY GROUPINGS BASED ON STRATEGY, VALUATION, GROWTH AND SIZE OF BUSINESS (2010E) 1.11.2-15% -10% -5% 0% 5% 10% 15% 20%Local market PE Relative(2011EEPS)2009A-14E EPS CAGRGSKBMYAZNLLYNOVNSASYROGMRKPFEPharma-focused Diversified Mega-mergerABTJNJNote: Bubble size is relative to 2010E revenues in $ based on average 2009 exchange rates Source: DataStream (consensus estimates for ABT, JNJ, MRK), Jefferies International Ltd. estimates Pfizer gets bigger, but not necessarily better We see Pfizers acquisition of Wyeth during 2009 as being one of the few strategies that it could have taken to present an acceptable earnings profile to investors over the next few years. However, because the transaction has not addressed the key underlying issues within Pfizer, the company has not been rewarded for it in terms of its share price performance either versus the broader market (Exhibit 5) nor the US Pharma sector (Exhibit 6). EXHIBIT 5: REBASED SHARE PRICE PERFORMANCE OF PFIZER VS THE US MARKET (26 JANUARY TO DATE) EXHIBIT 6: REBASED SHARE PRICE PERFORMANCE OF PFIZER VS THE US PHARMA SECTOR (26 JANUARY TO DATE) 60708090100110120130140150Jan-09Feb-09Mar-09Apr-09May-09Jun-09Jul-09Aug-09Sep-09Oct-09Nov-09Dec-09Jan-10Feb-10Mar-10Apr-10PFE Dow Jones 60708090100110120130Jan-09Feb-09Mar-09Apr-09May-09Jun-09Jul-09Aug-09Sep-09Oct-09Nov-09Dec-09Jan-10Feb-10Mar-10Apr-10PFE US Dow Jones Pharma Source: Thomson One, Jefferies International Ltd. Source: Thomson One, Jefferies International Ltd. Still overly dependent on Pharmaceuticals Following the acquisition of Wyeth, Pfizer remains one of the most exposed companies in the sector to small molecule and biologic Pharmaceuticals based on 2009 revenues. Whilst this comparison across the sector is somewhat unfair given that it only includes a partial contribution from Wyeth (the transaction completed on October 15, 2009), Pfizers own projections through to 2012 still call for 70% of the revenues to come from small molecule drugs with the remainder supplied by longer duration assets including Biologics (11%), Animal Health (6%), Vaccines (5%), Consumer health (4%), Nutrition (3%) and the Capsugel business (1%). PFEPlease see important disclosure information on pages 68 - 70 of thisreport.Jeffrey Holford, Equity Analyst, jholfordJ, 44 (0) 20 7029 8673 Page 8 of 70EXHIBIT 7: REVENUE DIVERSIFICATION SPLIT AS OF 2009 FOR MAJOR PHARMACEUTICALS COMPANIES 0%10%20%30%40%50%60%70%80%90%100%BMY NOVOb LLY AZN PFE MRK SASY ROG GSK MRCG NOVN ABT JNJ BAYGPharma Vaccines Generics Diagnostics OTC Other Healthcare Chemicals/otherSource: Company data, Jefferies International Ltd. research Strong positioning in biologics and vaccines An increased focus on Biopharmaceutical assets is an industry-wide phenomenon along with increased asset allocation towards higher growth Emerging Markets (and Japan) and away from more mature Western markets. We believe that the key drivers behind the focus on Biopharmaceuticals are tied to higher barriers to entry for generics (or “biosimilars/biobetters” as they are also known) as well as the ability to develop targeted products with higher efficacy and lower side effects. We believe that many biologic medicines will not be subject to significant generic/biosimilar incursions due to the complex regulatory requirements, manufacturing difficulties and lower gross margin structures in force versus those for small molecule (“white pill”) products. Furthermore, we expect that biologic products with associated administration devices will also likely have higher barriers to entry from generics. Many of the industrys recent success stories have been biologic medicines (e.g., Avastin, Humira, etc.) and in 2009, four out of the top 10 selling global prescription medicines were biologics (Exhibit 8). EXHIBIT 8: TOP 10 PRESCRIPTION MEDICINES IN 2009 (US$M) Company Product Indication Molecule Class Global 2009 Sales (US$m) YOY Growth % Pfizer Lipitor Statin Small molecule 11,434 -8% Bristol-Myers/Sanofi Plavix Thromboembolism, CAD Small molecule 9,455 +6% GlaxoSmithKline Seretide/Advair Asthma/COPD Small molecule 7,764 +5% Novartis Diovan Hypertension Small molecule 6,013 +6% Roche Avastin Cancer Monoclonal antibody 5,730 +21% Roche Rituxan CLL/ NHL, RA Monoclonal antibody 5,606 +6% Abbott Laboratories Humira RA, psoriasis, ankylosing spondylitis Monoclonal antibody 5,488 +28% AstraZeneca Nexium GERD Small molecule 4,959 -1% Eli Lilly Zyprexa Schizophrenia, bipolar disorder Small molecule 4,916 +6% Roche Herceptin Breast cancer Monoclonal antibody 4,850 +8% Source: Company data, EvaluatePharma, Jefferies estimates PFEPlease see important disclosure information on pages 68 - 70 of thisreport.Jeffrey Holford, Equity Analyst, jholfordJ, 44 (0) 20 7029 8673 Page 9 of 70Therefore it is hardly surprising that Pfizer chooses to focus investor attention on its portfolio of biologic and vaccine products, given its significant “white pill” patent cliff in the United States. Exhibit 9 helps to illustrate the relative exposure of Pfizer to biologics and vaccines within its Pharmaceuticals business compared to other companies in the sector. Key in-line biologic and vaccine brands for Pfizer include Enbrel (ex-US), Refacto, Benefix and Prevnar. Pfizer has additional exposure to biologic medicines through its Alliance Revenue income, which is driven by sales of biologic products such as Rebif (multiple sclerosis) and US Enbrel (rheumatoid arthritis, psoriasis, ankylosing spondylitis, psoriatic arthritis, polyarticular juvenile idiopathic arthritis). Furthermore, we would expect the contribution of biologic and vaccine products to sales to proportionally increase in the future if a number of late-stage biologic pipeline projects such as bapineuzumab (Alzheimers disease), tanezumab (osteoarthritic pain, back pain), Uplyso (Gauchers disease), figitumumab (lung cancer). etc., are successfully developed. EXHIBIT 9: BIOLOGIC PRODUCTS AS A PERCENTAGE OF TOTAL PHARMACEUTICAL REVENUES 2009A VERSUS 2014E 64%20% 18% 17%8% 8% 7% 7%2%81%25% 27% 27%9% 13%20%14%24%0%10%20%30%40%50%60%70%80%90%Biologicsalesasa percent ofpharmaceuticals2009A 2014ENote: Includes Vaccines Source: Company data, Jefferies International Ltd. estimates. Poor track record in R&D does not reassure One of the critical underpinning arguments against Pfizers strategy of further consolidation to boost its revenue and earnings base through the Lipitor patent expiry is that it has not proven itself in terms of its ability to internally replace revenues lost to patent expirations through R&D in recent years. Whilst every Pharmaceutical pipeline inevitably sees major levels of attrition, Pfizer has delivered few new medicines to market over the past 5 to 10 years. Notable successes within the R&D function would include Sutent (launched in 2006 for renal cell cancer) and Lyrica (launched in 2005 for neuropathic pain). We have summarised the key product launches and pipeline setbacks at Pfizer over the past 5-10 years in exhibits 10 and 11. PFEPlease see important disclosure information on pages 68 - 70 of thisreport.Jeffrey Holford, Equity Analyst, jholfordJ, 44 (0) 20 7029 8673 Page 10 of 70EXHIBIT 10: PFIZER SELECTED PRODUCT LAUNCHES, 2001 THROUGH TO 2010 Date Product Indication Current Sales 2009 (US$)Com m ent2006 Sutent RCC and GIST 0.9bn2006 Chantix Smoking cessation 0.7bn Black box w arning for suicidality hit US grow th2005 Lyrica Neuropathic Pain 2.8bn 2004 Caduet cholesterol/ Hypertension 0.6bn Combination of Lipitor and Norvasc2002 Vfend Antifungal 0.8bn Triazole antifungal2001 Geodon Schizophrenia 1.0bn The fifth US atypical antipsychotic approved Source: Company data, EvaluatePharma, Jefferies International Ltd. Research EXHIBIT 11: PFIZER SELECTED PIPELINE SETBACKS, 2005 THROUGH TO 2010 Date Product Indication Event Com m entMar-10 Dimebon Alzheimers DiseasePhase III study fails Also leads to Pfizer / Medivation discontinuing tw o other studies in moderate to severe Alzheimers disease. Continues in mild to moderateApr-10 Sutent Hepatocellular carcinomaPhase III study fails Study discontinued after failing to show superiority/ non-inferiority to sorafenibMar-10 Sutent Breast Cancer Phase III studies fail Tw o phase III breast cancer studies in 1st and 2nd line treatment, fail Mar-10 Figitumumab NSCLC Phase III study fails Phase III study in 2nd/3rd line NSCLC is terminated for futility after DSMC says it is unlikely to show a benefitJan-10 Lyrica GAD Filing w ithdraw n FDA filing is w ithdraw n for the adjunctive treatment of GADDec-09 Figitumumab NSCLC Phase III study fails Phase III study in 1st line NSCLC is terminated for futilityH1-09 Sutent Breast Cancer and CRCPhase III studies fail Tw o phase III breast cancer studies are discontinued in March and June 2009, due to futility (tw o further studies continued, failing in March 2010) In June 2009, a phase III study in 1st line metastatic colorectal cancer w as also discontinued due to futility.Feb-09 PD-332334 GAD development terminated Development terminated as it w as unlikely it w ould provide a meaningful benefit beyond the current standard of careFeb-09 esreboxetine Fibromyalgia development terminated Development terminated as it w as unlikely it w ould provide a meaningful benefit beyond the current standard of careJan-09 axitinib Pancreatic cancer development terminated Development terminated in the treatment of pancreatic cancer as data show it is unlikely to provide a meaningful benefit beyond the current standard of careJan-09 Fablyn Osteoporosis Company exploring options Follow ing tw o not approvable letters, data w as resubmitted in Dec 2007 for the treatment of osteoporosis. A CRL w as subsequently issued in January 2009, after w hich Pfizer said it w as exploring strategic options, including licensing out or a sale.Nov-08 CP-945598 Obesitty development terminated Development of this CB-1 receptor antagonist w as terminated in the treatment of obesity due to changing regulatory perspectives on the classSep-08 Dalbavancin cSSSI Filing w ithdraw n Announced the global w ithdraw al of marketing applications for dalbavancin in the treatment of complicated skin and skin structure gram positive bacterial infections in adults, having previously received three approvable letters.Apr-08 tremelimumab Advanced melanomaPhase III studies fail Development in advanced melanoma terminated after interim data show s it w ill not demonstrate superiority to current standard of careQ3-07 Exubera Diabetes Dropped to lack of viability Follow ing an assessment of the financial performance of Exubera and its lack of acceptance by the patient, physician and payor community Pfizer exited the productDec-06 torcetrapib Cholesterol development terminated In the interest of public safety all clinical trials w ere stopped follow ing DSMB recommendations due to an imbalance of mortality and cardiovascular events. The development program w as terminated.Apr-05 Bextra Anti inflammatory Withdraw n to risk/rew ard profile The FDA decided that although Bextras CV risk could not be differentiated from other NSAIDs, the increased risk of rare, but serious skin reactions w arranted its w ithdraw al from the market. Source: Company data, EvaluatePharma, Jefferies International Ltd. research The key issue for us is that scale has not shown itself to be a good correlate for R&D productivity in the Pharmaceutical industry (Exhibit 12). This is best exemplified by the industry in aggregate, which continues to demonstrate slowing branded prescription drug volume in the US as generic medicines increasingly commoditize major therapeutic areas such as hypertension, lipid lowering, etc. Therefore, we believe that the larger Pfizer gets, the more it represents the industry in aggregate producing a self-perpetuating shortfall in revenue replacement and an accelerating requirement for large-scale consolidation to maintain a relatively flat earnings stream. PFEPlease see important disclosure information on pages 68 - 70 of thisreport.Jeffrey Holford, Equity Analyst, jholfordJ, 44 (0) 20 7029 8673 Page 11 of 70EXHIBIT 12: PHARMA INDUSTRY R&D SPEND ($BN) AND PRODUCTIVITY CHART (NMES APPROVED), 1996-2007 EXHIBIT 13: BRANDED PHARMACEUTICAL VOLUMES AND TOTAL PRESCRIPTION GROWTH -15%-10%-5%0%5%10%Q207Q307Q407Q108Q208Q308Q408Q109Q209Q309Q409Q110Year onyear Growth %Branded TRx Growth Branded Sales Growth Source: Roche Source: IMS, Jefferies International Ltd. research One positive feature of Pfizer as an investment is that we believe that market expectations for many of its mid to late-stage products are relatively low, particularly within some of the higher-risk areas of the portfolio, such as Alzheimers disease. Furthermore the scale of the base business is such that individual products within the pipeline carry little leverage on earnings (positive or negative) hence we see limited downside risk from an R&D delivery standpoint during our forecast period. EXHIBIT 14: BASE BUSINESS AND PIPELINE CONTRIBUTION, 2009A-14E ($M) EXHIBIT 15: PIPELINE COMPONENT REVENUES, 2009A-14E ($M) -10,000 20,000 30,000 40,000 50,000 60,000 70,000 2009A 2010E 2011E 2012E 2013E 2014ERevenues($millions)Launched Products Pipeline Products 01,0002,0003,0004,0005,0002009A 2010E 2011E 2012E 2013E 2014ERevenues(US$millions)BapineuzumabAprelaBosutinibTasocitinibTanezumabApixabanOtherViviantSource: Thomson One, Jefferies International Ltd. estimates Source: Thomson One, Jefferies International Ltd. estimates Strong Emerging Market positioning likely to be crucial in providing upside surprise versus consensus As the largest company within the major Pharmaceuticals segment it is hardly surprising to see that Pfizer has a leading position within many of the key Emerging Market territories. Exhibit 16 illustrates that although Pfizer may have leading market shares within Asia, Japan, Latin America and Eastern Europe, it still falls lower down in the league tables when compared to some of its smaller peers, which have even higher relative concentrations of their business in Emerging Markets and therefore greater leverage to their growth. PFEPlease see important disclosure information on pages 68 - 70 of thisreport.Jeffrey Holford, Equity Analyst, jholfordJ, 44 (0) 20 7029 8673 Page 12 of 70EXHIBIT 16: PERCENTAGE OF REVENUES ATTRIBUTED TO EMERGING MARKETS (COMPANYS OWN DEFINITION) 25%21%20% 19%14% 13%10% 9%4%0%5%10%15%20%25%30%SAN GSK ROG BAY PFE AZN NOVN LLY BMYEmergingmarketsrevenuesasa % of salesNote: BMS (BRICT)； Pfizer (EM unit includes revs from all human Rx pharma products sold in EMs including Asia (excluding Japan), LatAM, ME, Africa, Central and Eastern Europe, Russia and Turkey)； Eli Lilly (As of 9M to Sep09 includes all countries but US, EU, Japan, Australia and New Zealand)； AZN (EM Europe + China + EM Asia Pac + Other Emerging ROW)； Sanofi-aventis (World excluding the U.S., Canada, Western Europe, Japan, Australia and New Zealand)； Novartis (BRICT + S Korea)； GSK (Includes Asia Pacific (ex Japan, Australia, NZ), Eastern and Central Europe； Pharma and consumer healthcare sales)； Roche (Includes international operations (ex US, Europe, Japan) for pharma division and E7 (BRICT, S Korea, Mexico) for diagnostics)； Bayer (BRIC + Mexico, Turkey, South Korea). Source: Company data, Jefferies estimates. We believe that Pfizers strong positioning in these markets, coupled with ongoing investment in these regions will likely result in better than expected revenues for many of Pfizers mature products, with slower revenue “ramp-down” rates once loss of exclusivity in the US has occurred. This could be particularly important for Pfizers largest products due to lose US exclusivity, such as Lipitor and Viagra, where we believe that consensus is overly conservative on the ex-US revenue prospects for the drug during our forecast period. Pfizers management also point to brands such as Enbrel, Norvasc and Prevnar as being important opportunities within Emerging Markets. We estimate 2014E sales of $3.4bn for Lipitor versus consensus estimates of $2.8bn, the vast majority of which is tied to markets outside of the US. EXHIBIT 17: JEFFERIES VERSUS CONSENSUS 2012E REVENUE ESTIMATES FOR KEY PRODUCTS LOSING PATENT EXCLUSIVITY ($M) DURING FORECAST PERIOD EXHIBIT 18: JEFFERIES VERSUS CONSENSUS 2014E REVENUE ESTIMATES FOR KEY PRODUCTS LOSING PATENT EXCLUSIVITY ($M) DURING FORECAST PERIOD -1,000 2,000 3,000 4,000 5,000 6,000 Lipitor Zyvox Prevnar Fr. Enbrel Sutent Celebrex Lyrica Viagra2012WorldwideRevenuesConsensus JEF -1,000 2,000 3,000 4,000 5,000 6,000 Lipitor Lyrica Prevnar Fr. Enbrel Sutent Celebrex Viagra2014WorldwideRevenuesConsensus JEF Source: EvaluatePharma, Jefferies International Ltd. estimates Source: EvaluatePharma, Jefferies International Ltd. estimates PFEPlease see important disclosure information on pages 68 - 70 of thisreport.Jeffrey Holford, Equity Analyst, jholfordJ, 44 (0) 20 7029 8673 Page 13 of 70Key Issues Opportunities and Threats Pfizer has set out its strategy for the next few years through the acquisition of Wyeth. Much of the strategy is relatively straightforward to execute (cost-savings) and does not appear to heavily rely on pipeline launches or exceptional performances from products within the base business. However, we like many other commentators struggle to see how the base business and pipeline will deliver the anticipated 2012 strategic targets without some significant acquisitions. This is well recognised by management and we anticipate that up to 5% of the 2012 revenue range target ($65.2bn-$67.7bn) may be met through acquisitions. Exhibit 19 lays out the key opportunities and threats to the business and strategy during our forecast period. EXHIBIT 19: PFIZER SUMMARY OF KEY OPPORTUNITIES AND THREATS Opportunity Importance Comment Base business High Few mid-term growth drivers during forecast period due to generics. Continued strong performance expected from Lyrica, Enbrel, Sutent , Prevnar/Prevnar-13 franchise and product tail. Ex-US run-off on Lipitor slower than expected attrition rate versus consensus. Pipeline delivery High Apixaban/ SPAF ($6bn peak), bapineuzumab/ Alzheimers ($4bn peak), axitinib/ renal cancer ($3.3bn), figitumumab/ lung cancer ($1bn), tasocitinib/ rheumatoid arthritis ($3bn)； tanezumab/ osteoarthritic pain ($2bn peak), bosutinib/ CML ($500m peak), neratinib ($500m) Cost saving/ margin improvement High $2bn in ongoing cost-savings expected to be achieved from 2009-2011 with a further $4bn of deal-related savings planned post close of the Wyeth acquisition (by 2012). Significant reinvestment of savings in Emerging markets, Established product portfolio and late-stage development portfolio anticipated. Acquisitions High Anticipate further mid-sized and bolt-on acquisitions to boost revenues and earnings to achieve 2012 revenue goals Financial flexibility Medium Options for share buy-backs, increased dividends and more significant acquisitions through increased leverage and existing resources Emerging Markets Medium Strong positioning in Asia, Latin America and Japan Threat Importance Comment Generics/ gross margin High Aricept (Nov-10), Vfend (Q111), Xalatan (Mar-11), Aromasin (Apr-11), Lipitor (Nov-11), Caduet (Nov-11), BeneFIX (2011), Viagra (Sep-12), Geodon (Sep-12), Detrol/ Detrol LA (Sep-12)； Celebrex (May-14), Torisel (May-14), Enbrel alliance (2013) Patent challenges High Protonix (generic launched at risk), Tygcil (Sandoz filed ANDA Oct-09), Zyvox (Teva filed ANDA Dec09), Lyrica (multiple challenges； Pfizer sued Oct09), Effexor XR (settled to allow generic from Jul-10； other challenges/ settlements ongoing), Healthcare reform Low Management has fully communicated 2010 and 2012 revenue/ EPS impact are relatively immaterial within the context of the Group and are included in current guidance Source: Company data, Jefferies International Ltd. research Guidance is achievable, but doesnt fully capture financial rewards for shareholders We believe that Pfizer has reached such a scale now that investors have to think a little differently about its future growth prospects and returns. It is clear to us that without a paradigm change in R&D productivity, it is unlikely that Pfizer will achieve consistent organic double digit earnings growth driven by the Pharmaceuticals business. Instead we expect an increasing reliance on financial engineering to synthesise additional earnings growth and returns to investors. In terms of earnings growth, we see bolt-on acquisitions of longer-duration assets (vaccines, biologics, animal health, consumer health, etc) as being more commonplace for the company and expect increased efforts with regards to both efficiency measures (transfer of fixed to variable costs and cost-saving) and cash generation through a tighter focus on working capital. We see investor returns likely to be increasingly driven by the return of cash via dividends as well as more consistent delivery of steady earnings growth aided by share buy backs. Our financial model and cash flow analysis leads us to believe that management should be able to service and reduce net debt (from $22.7bn net debt in 2009A to $2.5bn net cash in 2014E), buy back circa $11.0bn of shares and improve the yield from 4.7% in 2010E to 8.3% by 2014E, whilst still retaining up to $32.5bn of gross cash on the balance sheet to allow for acquisitions to meet 2012 revenue guidance. PFEPlease see important disclosure information on pages 68 - 70 of thisreport.Jeffrey Holford, Equity Analyst, jholfordJ, 44 (0) 20 7029 8673 Page 14 of 70EXHIBIT 20: GROSS CASH AND NET DEBT ESTIMATES FOR PFIZER, 2008A-14E EXHIBIT 21: DIVIDEND YIELD FOR PFIZER BASED ON JEF ESTIMATES 2010E-14E -5,00005,00010,00015,00020,00025,00030,00035,0002009A 2010E 2011E 2012E 2013E 2014E$ (millions)Gross cash Net debt 0%2%4%6%8%10%12%2010E 2011E 2012E 2013E 2014EDividend yield (percent)Source: Company data, Jefferies International Ltd. estimates Source: Company data, Jefferies International Ltd. estimates Exhibit 22 compares management guidance for 2010 and 2012 versus our current estimates and consensus where applicable. EXHIBIT 22: COMPARISON OF MANAGEMENT 2010 AND 2012 GUIDANCE VERSUS JEFFERIES ESTIMATES Metric Guidance/Goal Amount JEF Estimate2010 GuidanceRevenues $67.0 - $69.0bn $68.1bnHealthcare reform impact $300mCost of sales (% of revenues) 19.0% - 20.0% 19.4%SI&A $19.0 - $20.0bn $19.3bnR&D $9.1 - $9.6bn $9.2bnOther income/(deductions) $1.2 - $1.4bn $1.3bnTax rate Approx. 30% 30%Non-GAAP EPS $2.10 - $2.20 $2.172012 GuidanceRevenues $65.2 - $67.7bn $63.3bnHealthcare reform impact $800mR&D $8.0 - $8.5bn $8.1bnOther income/(deductions) $1.0 - $1.2bn $1.6bnTax rate Approx. 30% 30%Operating margin High 30%s - low 40%s 42.4%Non-GAAP EPS $2.25 - $2.35 $2.25Cash flow from operations At least $19.0bn $20.1bn Source: Company data, Jefferies International Ltd. research PFEPlease see important disclosure information on pages 68 - 70 of thisreport.Jeffrey Holford, Equity Analyst, jholfordJ, 44 (0) 20 7029 8673 Page 15 of 70Key R&D catalysts As already described in the Investment Thesis of this report, we believe that the execution of Pfizers broad and deep pipeline is critical to making sure that another major acquisition is not required in a few years time. We applaud the focus on areas of high unmet need including Alzheimers disease, oncology, neuroscience, pain/inflammation and infectious diseases. Whilst these are inevitably higher risk areas, we believe that in many of these areas Pfizer has taken the necessary broad and deep approaches conducive to success. The key R&D catalysts in our view during the next 12 months are likely to include: Tanezumab Phase III data in osteoarthritic knee pain at EULAR (16-19 June) with further Phase III data through 2010, Phase III data for Sutent in NSCLC (Q3 2010), Phase III data for bosutinib in 1st line CML versus Glivec (Q3 2010), Axitinib Phase III data in 2nd-line RCC (Q3 2010), Apixaban Phase III ADVANCE data in VTE prevention (Q3 2010)/ Phase III AVERROES data in SPAF (Q4 2010) and ADOPT data in medically ill expected Q1 2011, Tasocitinib (JAK inhibitor) Phase III data in rheumatoid arthritis (Q4 2010). Exhibits 23 further highlights some of the key catalysts for Pfizer over the next 12 months. EXHIBIT 23: PFIZER SELECTED KEY CATALYSTS IN 2010 Effexor XRUS generics launch 1 JulyFollowing Teva settlementApixabanPhase III data in hip surgery VTE prevention at ICT, 6-9 JulyMoxidectinPhase III data in river blindnessBosutinibPhase III data in CMLHead to head with GlivecTanezumabPhase III data in osteoarthritis RindopepimutPhase II data inGlioblastoma multiformeAxitinibPhase III data in 2nd line RCC4Q103Q102Q10 1Q11PristiqCV safety study data for FDA resubmission in VMSVfend & EraxisPhase III data in AspergillosisViviantReply to approvable letters / Ad Com for prevention / treatment of post menopausal osteoporosis AriceptPossible US generic launch Teva currently injunctedBasic patent expires 25 Nov.Q3 results(19 October TBC)Q4 results(3 February TBC)Q2 results(21 July TBC)ApixabanCompetitor data Xareltoheadline phase III data in DVT and SPAF due anytimeTasocitinibRheumatoid Arthritis phase III study results XalatanPossible generics basic patent expires 22 March 2011ApixabanPhase III data in prevention of thrombosis related events in medically ill (ADOPT)VfendSettlement with Mylan will see US generics launch Q1 2011AprelaPhase III data and filing in post menopausal VMSUplysoUS Approval decision in Gauchers disease, following request for additional dataTanezumabPhase III data in osteoarthriticknee pain (June 16-19) SutentPhase III in NSCLCAxitinibPhase II data in 1st line mRCCat ASCOBosutinibPhase II data in 3rd line CML at ASCOApixabanPhase III data in SPAF (AVARROES)Source: Company data, Jefferies International Ltd. Estimates JEF Estimates Ahead of Consensus, with Significant Mid-term Upside We model 4.4% and 4.1% revenue and earnings CAGRs through our forecast period (2009A14E) for Pfizer, which compare well with the US Pharma sector averages of 5.0% and 4.2%, respectively. However, this analysis is somewhat flattering to Pfizer as it does not adjust for the acquisition effect of Wyeth in Q4 2009. Using a 2010E-14E forecast period reduces these growth rates to -2.3% and 3.3% for revenue and earnings versus US Pharma sector averages of 1.2% and 2.8% respectively. PFEPlease see important disclosure information on pages 68 - 70 of thisreport.Jeffrey Holford, Equity Analyst, jholfordJ, 44 (0) 20 7029 8673 Page 16 of 70EXHIBIT 24: PFIZER AND US PHARMA SECTOR REVENUE GROWTH REBASED TO 2009A THROUGH TO 2014E 60801001201401601802008A 2009A 2010E 2011E 2012E 2013E 2014E 2015EAbbott Labs Bristol Myers Squibb Johnson & Johnson Eli Lilly Merck PfizerSource: Company data, Jefferies International Ltd. estimates. EXHIBIT 25: PFIZER AND US PHARMA SECTOR EPS GROWTH REBASED TO 2009A THROUGH TO 2014E 60801001201401601802007A 2008A 2009A 2010E 2011E 2012E 2013E 2014E 2015EABT BMY JNJ LLY MRK PFE LLY (Alimta) BMY (Abilify)Source: Company data, Jefferies International Ltd. estimates. PFEPlease see important disclosure information on pages 68 - 70 of thisreport.Jeffrey Holford, Equity Analyst, jholfordJ, 44 (0) 20 7029 8673 Page 17 of 70Our EPS estimates are generally ahead of consensus during our forecast period of 2009A14E, though the difference is most pronounced in the outer years (2012E14E), when our EPS estimates are ahead by as much as 6%, respectively. Our analysis indicates that key drivers of our higher EPS estimates are product mix effects (differential Ex-US modelling of Lipitor and Enbrel) as well as higher operating margins (cost-savings) and use of cash (buy-backs, debt-repayment, working capital management) than consensus. EXHIBIT 26: JEFFERIES REVENUE ESTIMATES VERSUS CONSENSUS FOR PFIZER, 2009A-14E ($M) EXHIBIT 27: JEFFERIES NON-GAAP EPS ESTIMATES VERSUS CONSENSUS FOR PFIZER, 2009A-14E ($M) 30,000 40,000 50,000 60,000 70,000 80,000 2009A 2010E 2011E 2012E 2013E 2014ERevenues(US $, M)PFE Consensus JEF Estimate $0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 2009A 2010E 2011E 2012E 2013E 2014EEarnings pershare(US $)PFE Consensus JEF Estimate Source: Thomson One, Jefferies International Ltd. estimates Source: Thomson One, Jefferies International Ltd. estimates PFEPlease see important disclosure information on pages 68 - 70 of thisreport.Jeffrey Holford, Equity Analyst, jholfordJ, 44 (0) 20 7029 8673 Page 18 of 70EXHIBIT 28: SUMMARY INCOME STATEMENT FOR PFIZER, 2009A-14E (US$M) ($) millions 2009A 2010E 2011E 2012E 2013E 2014EIncrement absolute(09A-14E)CAGR (09A-14E)Pharmaceuticals 45,448 58,437 56,013 52,486 50,469 50,064 4,616 2%Consumer Healthcare 494 2,829 3,041 3,225 3,386 3,555 3,061 48%Animal Health 2,764 3,862 4,055 4,258 4,471 4,695 1,931 11%Other (Capsugel+Nutrition+Other) 1,303 2,992 3,202 3,362 3,530 3,706 2,403 23%Net sales 49,934 68,113 66,311 63,331 61,856 62,020 12,086 4.4%COGS 7,673 13,209 12,768 12,742 12,706 12,702 5,029Gross profit 42,261 54,904 53,543 50,589 49,149 49,318 7,057SI&A 14,667 19,267 17,725 15,598 14,350 13,633 -1,034R&D 7,739 9,226 8,488 8,148 8,148 8,148 409Operating income 19,855 26,412 27,330 26,843 26,651 27,537 7,682 7%Adjusted non-operating (income)/ex pense (230) 1,448 1,986 1,684 1,464 1,205 1,435Pretax income 20,085 24,964 25,345 25,159 25,187 26,332 6,247 6%Tax es 5,925 7,409 7,603 7,548 7,556 7,900 1,975Tax rate 29.5% 29.7% 30.0% 30.0% 30.0% 30.0% 5Minority interest and d/c ops 9 19 19 19 19 19 10Net income 14,201 17,536 17,722 17,592 17,612 18,414 4,213 5%DILUTED EPS $2.02 $2.17 $2.23 $2.25 $2.30 $2.47 4.1%Diluted shares outstanding 7,045 8,074 7,952 7,829 7,645 7,459 Dividends per share $0.80 $0.72 $0.83 $0.95 $1.10 $1.26 9%Margin Analysis 2009A 2010E 2011E 2012E 2013E 2014ECOGS 15.4% 19.4% 19.3% 20.1% 20.5% 20.5%Gross margin 84.6% 80.6% 80.7% 79.9% 79.5% 79.5% -511bpsSI&A 29.4% 28.3% 26.7% 24.6% 23.2% 22.0% -739bpsR&D 15.5% 13.5% 12.8% 12.9% 13.2% 13.1% -236bpsOperating margin 39.8% 38.8% 41.2% 42.4% 43.1% 44.4% 464bpsPretax margin 40.2% 36.7% 38.2% 39.7% 40.7% 42.5% 223bpsNet margin 28.4% 25.7% 26.7% 27.8% 28.5% 29.7% 125bpsYOY % Change 2009A 2010E 2011E 2012E 2013E 2014ENet sales 3% 36% -3% -4% -2% 0%COGS 9% 72% -3% 0% 0% 0%Gross profit 2% 30% -2% -6% -3% 0%SI&A 4% 31% -8% -12% -8% -5%R&D 3% 19% -8% -4% 0% 0%Operating income 0% 33% 3% -2% -1% 3%Pretax income -4% 24% 2% -1% 0% 5%Net income -13% 23% 1% -1% 0% 5%Diluted EPS -17% 8% 3% 1% 3% 7%Diluted shares outstanding 4% 15% -2% -2% -2% -2% Source: Company data, Jefferies International Ltd. estimates. Valuation Our primary method for valuing Pharmaceutical stocks is by setting a premium/discount to the local market PE, dependent upon the relative growth rate and earnings security of the company as we believe this more accurately reflects the traded value of a stock rather than other methods such as DCF and sum of the parts, which better reflect the industrial value of an asset in our view. In special circumstances, where a company may lose an important revenue/earnings stream during our forecast period and there may be increased visibility on the likelihood of such an event during the next 12 months, we tend to calculate a weighted average target price based on our base case and downside scenario valuations. We PFEPlease see important disclosure information on pages 68 - 70 of thisreport.Jeffrey Holford, Equity Analyst, jholfordJ, 44 (0) 20 7029 8673 Page 19 of 70routinely use this methodology for AstraZeneca (Crestor early LOE), Eli Lilly (Alimta early LOE), Bristol-Myers (Abilify “at-risk” launch) and Sanofi-aventis (US Lovenox generics launch). For Pfizer we see no such critical catalysts in terms of patent challenges, etc and have set a single valuation derived from our base case scenario. Base case scenario sets a valuation of US$17.80 in our view We have set our target price for Pfizer of $17.80 based on a 30% discount to the 2011E US market PE. We have chosen to use a 30% discount to reflect the over-sized structure of Pfizers operations, which will likely rely on financial flexibility and cost-savings to deliver earnings growth for investors and may not be sustainable in the longer term. Initiating Coverage with a Buy Rating and US$17.80 Price Target Our PT of $17.80 represents 21.6% upside versus the current price of $15.23, inclusive of a prospective 4.7% dividend yield in 2010E. As a result we rate the shares Buy. We forecast a five-year earnings CAGR (09A14E) of 4.1% for Pfizer versus a weighted average of 4.2% for the sector across the same period. Pfizer currently trades on a 2011E PE of 6.8x, at a 25% discount to its US Pharma peers and at a 40% discount to the US market based on our estimates. We forecast that Pfizer will deliver better than expected earnings growth compared to consensus estimates over the next five years, driven by better than expected (ex-US) base business performance, cost-saving and share buy-backs. Furthermore we see the ability of the company to drive improvements in the current dividend yield of 4.7% as being attractive in the long-term even if it is unable to drive organic top-line growth. EXHIBIT 29: CONSENSUS 2011 EARNINGS AND PE PREMIUM RELATIVE TO US MARKET FOR PFIZER 00.511.522.53-50%-45%-40%-35%-30%-25%-20%-15%-10%-5%0%Jun-09Jul-09Aug-09Sep-09Oct-09Nov-09Dec-09Jan-10Feb-10Mar-10Apr-10Consensus US 2011earnings2011premiumtoUS market PEPremium to US Market PE Consensus Earnings (USD)Source: DataStream, Jefferies International Ltd. research EXHIBIT 30: LONG-TERM HISTORICAL PE-RELATIVE RATING OF PFIZER VERSUS THE US MARKET, 1995-PRESENT 50%70%90%110%130%150%170%190%210%230%250%Jan-95Jun-95Nov-95Apr-96Sep-96Feb-97Jul-97Dec-97May-98Oct-98Mar-99Aug-99Jan-00Jun-00Nov-00Apr-01Sep-01Feb-02Jul-02Dec-02May-03Oct-03Mar-04Aug-04Jan-05Jun-05Nov-05Apr-06Sep-06Feb-07Jul-07Dec-07May-08Oct-08Mar-09Aug-09Jan-10PFE PERelative toUS MSCIMarketSource: DataStream, Jefferies International Ltd. research PFEPlease see important disclosure information on pages 68 - 70 of thisreport.Jeffrey Holford, Equity Analyst, jholfordJ, 44 (0) 20 7029 8673 Page 20 of 70Business Overview & Management Corporate history Pfizer was founded in 1849 by Charles Pfizer and Charles Erhart as a fine-chemicals business. In the 1880s, using citrus fruit concentrate, it became a major producer of citric acid. In the 1920s it made a breakthrough with the development of a fermentation process for producing citric acid. Then in 1941 it developed the same process for the mass production of penicillin and by 1944 Pfizer had become the worlds largest producer of penicillin. In 1950 it made a significant advance over penicillin, with the launch of the broad spectrum Terramycin which also heralded the launch of the Pfizer pharmaceutical sales force. By the mid 50s tetracycline was launched as the first purely synthetic broad spectrum anti-biotic. During the 1950s Pfizer established an agricultural division and also acquires JB Roerig & Co. a producer of nutritional supplements. Meanwhile, geographical expansion took place within its pharmaceutical operations and in the late 1960s Pfizer launched Vibramycin, a once daily broad spectrum anti-biotic, which quickly became a best seller. The next milestone in the companys history was the launch of Feldene in 1980, which became one of the largest selling anti-inflammatory drugs in the world and Pfizers first product to reach $1bn in sales. The following decade saw it move into a range of new treatment areas, with major product launches to treat diabetes, hypertension, angina, fungal infection and depression. In 1996 Pfizer entered into a co-marketing agreement with Warner-Lambert to promote a new cholesterol reduction treatment, Lipitor. The product was launched in 1997 and strong head to head data was to see it eventually become the worlds largest drug with sales of around $13bn. However, in 1999 WarnerLambert agreed to a proposed merger with American Home Products (later to become Wyeth). Pfizer responded with a hostile bid and eventually acquired the company in 2000 for $90bn. In 1998, Pfizer launched its most famous drug, Viagra. In April 2003, Pfizer merged with Pharmacia to create the worlds leading research based pharmaceutical company with an annual R&D budget of over $7bn. Over the ensuing years a number of significant products have been launched, including Lyrica (neuropathic pain), Sutent (cancer), Chantix (smoking cessation) and Selzentry for HIV. The end of the decade culminated with Pfizer acquiring Wyeth in October 2009 to become the new enlarged Group that we see today. Current activities focused on Biopharmaceuticals Following the Wyeth acquisition, Pfizer is now the largest global pharmaceutical company measured by sales, with over $70bn of pro forma annual revenues at the time of the deal. The addition of Wyeth has significantly expanded Pfizers portfolio of specialty products with the expectation by management that it will reduce its exposure to small molecule products from around 90% of sales prior to the deal, to around 70% by 2012. The company is split into two business segments, Biopharmaceutical and Diversified products. Biopharmaceuticals includes the Primary Care, Specialty Care, Established Products, Emerging Markets and Oncology business units. Diversified includes Animal Health, Consumer Healthcare, Nutritional and Capsugel, the gelatin capsule business. In 2009 the Biopharmaceuticals area contributed just over 90% of Pfizers total group revenues. Pfizers largest product remains the cholesterol lowering drug, Lipitor. The effects of therapeutic substitution particularly from generic Zocor (simvastatin), has seen Lipitor sales retreat from the peak of $12.9bn generated in 2006. Nevertheless, in 2009 it still contributed $11.4bn of revenues, representing a quarter of the Biopharmaceutical division revenues last year. The next two products, Lyrica (neuropathic pain and epilepsy) and Celebrex (arthritis/pain) together accounted for more than another 10% of the divisional revenues, generating $2.8bn and $2.4bn respectively, in 2009. Beyond these three leading products, Pfizer had a further six legacy products that generated over $1bn of sales in 2009. These are Norvasc (hypertension), Viagra (erectile dysfunction), Xalatan (glaucoma/ocular hypertension), Detrol/LA (overactive bladder), Zyvox (bacterial infections) and Geodon (schizophrenia/bipolar). Together these other blockbuster products accounted for a further 20% of 2009 divisional revenues, meaning that in aggregate, the top 9 products by 2009 sales accounted for around 56% of Biopharmaceutical sales. Prior to its acquisition by Pfizer, Wyeths largest product was the anti-depressant Effexor which generated over $3.9bn of revenues in 2008. The Enbrel franchise, for rheumatoid arthritis/ psoriasis, accounted for $3.8bn (split $2.6bn from outside the US and $1.2bn from alliance revenues in US and Canada) and Prevnar (pneumococcal vaccine) another $2.7bn. Together these three products accounted for 55% of Wyeths 2008 Pharmaceutical revenues. The other Wyeth blockbuster product areas were the antibiotic, Zosyn/Tazocin with 2008 sales of $1.3bn, the Premarin franchise (HRT) which accounted for $1.1bn and the Nutrition area which contributed $1.6bn. Overall, PFEPlease see important disclosure information on pages 68 - 70 of thisreport.Jeffrey Holford, Equity Analyst, jholfordJ, 44 (0) 20 7029 8673 Page 21 of 70these six product areas accounted for around three quarters of the 2008 Wyeth pharmaceutical revenues. Going forward, Nutritional will be split out as a separate unit within the Diversified division. Pfizers Diversified division accounts for the remaining 10% of group sales. Within it, the largest business unit is Animal Health, which produces over half of the divisions sales. In 2009 Animal Health generated sales of $2.8bn, although this will be further boosted by the full inclusion of Wyeths Animal health business (2008 revenues of $1.1bn) in 2010 and beyond, after allowing for some modest anti-trust related disposals. Wyeth also contributes a Consumer Health operation which produces a typical range of OTC healthcare products from Centrum to Chapstick. Whilst Consumer only contributed $494m of sales in 2009, going forward the full year inclusion of this division will see its contribution increase significantly. In 2008 it had sales of $2.7bn. Exhibits 31 and 32 serve to illustrate the revenue mix by product/grouping of Pfizer before and after the acquisition of Wyeth, in 2008A and 2010E respectively EXHIBIT 31: PFIZER 2008A SALES SPLIT BY PRODUCT ($M) EXHIBIT 32: PFIZER 2010E SALES SPLIT BY PRODUCT ($M) Lipitor$12,401mNorvasc$2,244mLyrica$2,573mGeodon/Zeldox$1,007mCelebrex$2,489mZyvox$1,115mViagra$1,934mDetrol LA$1,214mXalatan$1,745mOther $15,201mAlliance Rev. $2,251mAnimal Health, $2,825mCapsugel/Nutr.$1,297mLipitor$10,708mNorvasc$1,417mLyrica$3,129mEffexor XR$2,043mCelebrex$2,407mEnbrel $3,301mPrevnar Fr.$3,583mZyvox $1,162mViagra$1,916mSutent$1,126mXalatan$1,513mOther $22,083mAlliance Rev. $4,049mAnimal Health$3,862mConsumer Health$2,829mCapsugel/Nutr. $2,992mSource: Company data, Jefferies International Ltd. research Source: Company data, Jefferies International Ltd. Research estimates In 2009, the geographic split of the sales was weighted towards the US which accounted for 43% of the group. However, this appears relatively low compared to the likes of Bristol-Myers Squibb (63%) and Eli Lilly (56%). Europe accounts for 29% of group sales, with Japan & Other Asia and Canada, Latin America, Africa and Middle East another 16% and 11% respectively. Within this split, approximately 13% of sales are classified as coming from Emerging Markets. Management Pfizers leadership team is headed up by Jeff Kindler (CEO and Chairman) and Frank DAmelio (CFO). Beneath them, the research operation is split into two distinct organizations - PharmaTherapeutics Research & Development, which focuses on small molecules and BioTherapeutics Research & Development, which is focussed on large molecule and vaccines research. At the commercial level, Pfizer is now organized into nine diverse healthcare businesses: Primary Care, Specialty Care, Oncology, Emerging Markets, Established Products, Consumer Healthcare, Nutrition, Animal Health and Capsugel. Jeffrey B. Kindler - Chairman and Chief Executive Officer: Jeff Kindler was appointed CEO in 2006. Jeffs original background was in law, having previously been a Vice President of Litigation and Legal Policy at General Electric and an Executive Vice President and General Counsel at McDonalds Corporation. It was whilst at McDonalds that he moved into line management, becoming the President of Partner Brands. He joined Pfizer in 2001 as Executive Vice President and General Counsel, prior to becoming Vice Chairman in 2005. He also serves on the Board of the Federal Reserve Bank of New York, Tufts University and Ronald McDonald House Charities. Frank DAmelio Senior Vice President and Chief Financial Officer: Frank DAmelio joined Pfizer in 2007. Frank started his career in 1979 at Bell Labs, then moving within AT&T, he held a number of different financial and accounting positions. When Lucent was spun out of AT&T in 1996, he was appointed CFO of Lucents Network Systems Business, before being promoted to Executive Vice President and CFO of Lucent in 2001. He then became COO of Lucent Technologies, prior to the merger of Lucent and Alcatel in 2006, at which time he was made Senior Executive Vice President of Integration and Chief Administrative Officer of Alcatel-Lucent. PFEPlease see important disclosure information on pages 68 - 70 of thisreport.Jeffrey Holford, Equity Analyst, jholfordJ, 44 (0) 20 7029 8673 Page 22 of 70Ian Read Senior Vice President & Group President, Pfizer Biopharmaceuticals Businesses: Ian Read took up this position in 2006. In this role he heads up the worldwide biopharmaceutical business, which comprises five business units: Primary Care, Specialty Care, Oncology, Established Products and Emerging Markets, which together account for about 85% of Group revenues. Ian started his career at Pfizer in 1978 as an operational auditor. In 1996 he was appointed President of the International Pharmaceutical Group, with responsibility for Latin America and Canada, before becoming Executive Vice President, Europe in 2000. The following year he was made Executive Vice President, taking on the additional responsibility of Canada. Cavan Redmond Senior Vice President & Group President, Pfizer Diversified Businesses: As Group President of Pfizer Diversified Businesses, Cavan Redmond is responsible for overseeing the other four business units: Animal Health, Capsugel, Consumer Health and Nutrition. Cavan has over 20 years experience in the Pharmaceuticals, Biotechnology and Consumer Health. Prior to joining Pfizer, he was President of Wyeth Consumer Healthcare and Animal Healthcare businesses. Prior to this he was Senior Vice President of Global Strategic Marketing for Wyeth. His early years in the industry were spent at Sandoz. Dr. Mikael Dolsten Senior Vice President & President, BioTherapeutics Research & Development: As President of BioTherapeutics Research & Development, Mikael heads up a unit combining biotech with core platform research to focus on biotherapeutic, vaccine and small molecule development. Prior to joining Pfizer, Mikael was Senior Vice President, Wyeth Inc. and President of Wyeth Research, where he led the global R&D operation. Before this, he had been Executive Vice President in pharmaceutical R&D at Boehringer Ingelheim. During the previous 15 year period, he experienced a variety of senior positions at both AstraZeneca and Pharmacia & Upjohn. Martin Mackay President, PharmaTherapeutics Research & Development: Martin Mackay was appointed to this role in 2009. The division is focused on developing medicines in the areas of: Allergy & respiratory, Antibacterials, Antivirals, Cardiovascular & Metabolic Diseases, Genitourinary, Neuroscience, Oncology, Pain, Indications Discovery and Regenerative medicine. Martin started his career at Pfizer in 1995, as Director of Discovery Biology. After several promotions he eventually became Senior Vice President, head of Worldwide Discovery in 1999. In 2003 he was made Head of Worldwide Research & Technology, before being named Head of Worldwide Development in 2007. Later the same year he was appointed President of Pfizer Global Research and Development. EXHIBIT 33: PFIZER MANAGEMENT ORGANISATION CHART CEO & ChairmanJeffrey KindlerCFOFrank DAmelioBioTherapeutics R&DMikael DolstenChief Medical OfficerFreda C. Lewis-HallPharmaTherapeuticsR&DMartin MackayBiopharmaceutical BusinessesIan ReadDiversified BusinessesCavan RedmondGlobal ManufacturingNatale RicciardiSource: Company data, Jefferies International Ltd. Research Corporate activity In 2000 Pfizer acquired Warner-Lambert in a $90bn hostile bid, after WarnerLambert had attempted to merge with American Home Products (renamed Wyeth in 2002). The deal gave Pfizer full control of the cholesterol lowering drug, Lipitor which went on to become the most successful drug in history. In the years following the Warner Lambert acquisition, the companys focus was on further building out its biopharmaceutical product portfolio and pipeline, through both acquisitions and licensing deals, possibly in recognition that it would one day have to replace the loss of Lipitor when it eventually became generic. PFEPlease see important disclosure information on pages 68 - 70 of thisreport.Jeffrey Holford, Equity Analyst, jholfordJ, 44 (0) 20 7029 8673 Page 23 of 70Below we have listed the major strategic acquisitions (Exhibit 34) and disposals (Exhibit 35). Three years after completing the Warner-Lambert deal, Pfizer acquired another of its US peers, Pharmacia, for $56bn. It is notable that Pfizer sold some of its key consumer related businesses (Adams and Schick-Wilkinson Sword), ahead of completing the Pharmacia transaction, as it focused on its pharmaceutical operations, whilst also raising $5bn to help finance Pharmacia. The concentration on its branded pharmaceutical portfolio continued over the following couple of years as it went on to dispose of the Diagnostics, Opthalmics and Generics businesses that were acquired with Pharmacia. At the end of 2006, Pfizer then sold its Consumer Segment for $16.6bn, to focus on other growth opportunities. It was around this time that many CEOs in the industry were starting to recognize the value of well managed brands versus patents, as well as the relative security of healthcare related assets outside the small molecule area. The Consumer Segment sale was the last major disposal by Pfizer. During the post Pharmacia period, Pfizer also continued to acquire a number of pharmaceutical products and biotech companies. What is now clear is that the acquisition and disposal tack has changed with the completion of the Wyeth acquisition. Pfizer highlights that the deal will enable it to be transformed into a more diversified healthcare company, with products spanning both human and animal health, including biologics and vaccines and across developed and emerging markets. It also once again brings in a significant Consumer Health operation, along with a Nutrition business. EXHIBIT 34: PFIZER STRATEGIC ACQUISITIONS Name Date Subsector Last full years salesValue (US$) RationaleWyeth Oct-09 Biopharma $22.8bn $68bn Transforms Pfizer into a more diversified healthcare company, with product offerings in human and animal health, including vaccines and biologics across developed and emerging markets.Animal Health Lines Q4-08 Animal health NA $170m A number of animal health lines were acquired from Schering PloughEncysive Q2-08 Biopharma $11m $200m Acquisition of Encysive brings Thelin, a treatment for PAH.Coley Q1-08 Biopharma NA $230m Acquired all the outstanding shares of Coley, a company specializing in vaccines and drug candidate for cancer, allergy/asthma and autoimmune diseasesPowderMed & Rinat Dec-06 Biopharma NA $880m Powdermed is a specialist in DNA based vaccines and Rinat is a biologics company with several CNS product candidatesExubera Feb-06 Biopharma NA $1.4bn Pfizer acquires the worldwide rights to inhaled insulin Exubera from its co-development partner, sanofi-aventisVicuron Pharmaceuticals Sep-05 Biopharma $1.9bn Vicuron is focussed on the development of novel anti-infectivesIdun Pharmaceuticals & BiorenApr-05 Biopharma NA $340m The companies focus on the development of therapies to control apoptosis and technology for optimising antibodies, respectively.Camptosar (irinotecan) Sep-04 Biopharma 264m $525m The cancer treatment was acquired from sanofi-aventis for a cash consideration of $525m. Additional payments of up to $63m were payable upon approval in a number of indicationsEsperion Therapeutics Feb-04 Biopharma NA $1.3bn Focussed on HDL targeted therapies for CV diseasePharmacia Apr-03 Biopharma NA $56bn The Pharmacia merger brought in a number of products and provided rationalisation opportunities, creating one of the worlds fastest growing research based pharmaceutical companiesSource: Company data, Jefferies International Ltd. research PFEPlease see important disclosure information on pages 68 - 70 of thisreport.Jeffrey Holford, Equity Analyst, jholfordJ, 44 (0) 20 7029 8673 Page 24 of 70EXHIBIT 35: PFIZER STRATEGIC DISPOSALS Name Date Subsector Last full years salesValue (US$) RationalePfizer European Animal Health productsMar-10 Animal Health NA Undisclosed Pfizer sells a portfolio of European animal health products and an animal vaccines plant in Ireland to Eli Lilly for an undisclosed sum. The EU Commission required Pfizer to dispose of the assets to complete the Wyeth acquisition.ViiV Apr-09 Biopharma $160m NA Pfizer contributed a number of marketed and pipeline products, including Selzentry to the GlaxoSmithKline JV in return for an initial 15% equity stake.Consumer Healthcare Q4-06 Consumer NA $16.6bn Pfizer sells its Consumer Healthcare segment as it focuses on other growth opportunities Generic businesses 2004/2005 Generics NA $164m Between Q4 2004 and Q3 2005, Pfizer sold three European generics companies that it had acquired as part of the Pharmacia dealConsumer Products Q3-04 Consumer NA $163m Disposed of certain non-core European consumer product lines Opthalmics business Q2-04 Biopharma NA $450m Disposed of the surgical opthalmics business, which was acquired as part of the Pharmacia dealDiagnostics business Q2-04 Diagnostics NA $575m The in-vitro allergy and auto immune diagnostics testing business is sold. Originally acquired as part of the Pharmacia dealOral contraceptives Q1-03 Biopharma NA $197m The oral contraceptives Estrostep and Loestrin were sold, with a right to receive up to $47m contingent upon retaining market exclusivity until patent expiry.Adams Confectionery Q1-03 Consumer NA $4.2bn The Adams confectionery products business was sold Schick-Wilkinson SwordQ1-03 Consumer NA $930m The Schick-Wilkinson Sword shaving products business was disposed of for just under $1bn.Source: Company data, Jefferies International Ltd. research Ownership and shareholder structure During 2009, the company had one class of common stock, with a weighted average total of 7,007m shares in issue and 7,045m on a fully diluted basis, listed on the New York stock exchange. The stock is also listed on the London and Swiss stock exchanges. The 38m difference between the underlying and diluted number of shares arises from stock options, stock issuable under employee compensation plans and convertible preferred stock. The 2009 10-K lists a further 400m shares issuable under employee compensation stock options that are not included in the diluted calculation as their exercise prices are out of the money and inclusion would have had an anti-dilutive effect. As at February 18, 2010, the number of outstanding shares is quoted as 8,070m, predominantly as a result of the issue of approximately 1,318m shares, previously held in treasury, for the acquisition of Wyeth in October 2009. EXHIBIT 36: PFIZERS STOCK OWNERSHIP BY GEOGRAPHY EXHIBIT 37: PFIZERS STOCK OWNERSHIP BY INVESTOR TYPE US61%UK4%Canada2%Japan1%Others32%Investment Managers, 70%Brokerage firms, 2%Others, 28%Source: Thomson One, Jefferies International Ltd. research Source: Thomson One, Jefferies International Ltd. research Dividend policy and share buy-backs Having cut the 2009 dividend payout, Pfizers latest 10-K states: Our dividends are funded from operating cash flows, our financial asset portfolio and short term commercial paper borrowings and are not restricted by debt covenants.While the dividend level remains a decision of Pfizers Board of Directors and will continue to be evaluated in the context of future business performance, we currently believe that we can support future annual dividend increases, barring significant unforeseen events. PFEPlease see important disclosure information on pages 68 - 70 of thisreport.Jeffrey Holford, Equity Analyst, jholfordJ, 44 (0) 20 7029 8673 Page 25 of 70In 2005 the company announced a $5bn share buy-back program that was expanded to $18bn the following year. In January 2008, the company announced a further $5bn plan. As of 4 April 2010, Pfizer had purchased around 710m shares for approximately $18bn, effectively completing the expanded 2005 program. Whilst no shares were purchased in either 2009 or the first quarter of 2010, 26m and 395m shares were purchased in 2008 and 2007, respectively. On 4 May 2010, the company announced it will purchase shares as market conditions warrant. EXHIBIT 38: PFIZER DIVIDEND HISTORY AND FORECASTS 0.440.520.600.680.760.961.161.280.800.720.830.951.101.260.000.200.400.600.801.001.201.402001A 2002A 2003A 2004A 2005A 2006A 2007A 2008A 2009A 2010E 2011E 2012E 2013E 2014EUS$Source: Company data, Jefferies International Ltd. estimates Recent stock performance and key drivers Overall, Pfizers recent share price performance has been significantly influenced by economically driven market gyrations, with Pharmaceuticals companies being used as a general source of cash by investors during 2009 to fund redemptions, rights issues and higher beta investments as markets generally began to rise from the second quarter. During the calendar year 2009, Pfizer rose 2.7% in absolute terms, but significantly underperformed both the Dow Jones Industrials index (by 13%) and the Dow Jones US Pharmaceuticals index (by 10%) as markets eventually started to recover following the initial impact of the credit crunch. This underperformance was predominantly caused by one event: In the latter half of 2008, Pfizer had been closely tracking in line with the sector, with both outperforming the wider market. However, on January 26th 2009, Pfizer announced at its 2008 results, the Wyeth acquisition and a future dividend cut. This resulted in the shares falling nearly 19% over the following two weeks, underperforming the Pharmaceuticals index by 15%. Then, dragged down by a further market fall the shares then hit a low of $11.66 on March 2. After this, the stock rallied during the remainder of 2009, performing broadly in line with the Dow Jones US Pharmaceuticals index. From the start of 2010, the shares have once again underperformed the market and its peers, despite remaining relatively stable in the recent market set back. Pfizer initially followed the sector trends, but started to significantly underperform following its full year 2009 results on 3 February 2010, where it revised down its 2012 revenue targets. Whilst the sector initially participated in the ensuing market rally, Pfizer came under continued pressure as cash rotated into more cyclically exposed stocks. By the end of March, the sector was also starting to succumb to rotational pressures and started to underperform the wider market, whilst Pfizer continued to fall, broadly in line with the sector. By mid May the shares had fallen around 7% since the start of 2010, underperforming the sector by almost 4% and the Dow Jones Industrials by 11%. PFEPlease see important disclosure information on pages 68 - 70 of thisreport.Jeffrey Holford, Equity Analyst, jholfordJ, 44 (0) 20 7029 8673 Page 26 of 70EXHIBIT 39: SHARE PRICE PERFORMANCE FOR PFIZER VERSUS DOW JONES REBASED TO 100 EXHIBIT 40: SHARE PRICE PERFORMANCE FOR PFIZER REBASED TO 100 VERSUS US PHARMA 60708090100110120130Jan-09Feb-09Mar-09Apr-09May-09Jun-09Jul-09Aug-09Sep-09Oct-09Nov-09Dec-09Jan-10Feb-10Mar-10Apr-10May-10PFE Dow Jones 60708090100110120130Jan-09Feb-09Mar-09Apr-09May-09Jun-09Jul-09Aug-09Sep-09Oct-09Nov-09Dec-09Jan-10Feb-10Mar-10Apr-10May-10PFE US Dow Jones Pharma Source: Jefferies International Ltd. research, Datastream Source: Jefferies International Ltd. research, Datastream PFEPlease see important disclosure information on pages 68 - 70 of thisreport.Jeffrey Holford, Equity Analyst, jholfordJ, 44 (0) 20 7029 8673 Page 27 of 70Base Business Review Broad base business to succumb to patent expiries Pfizer currently has a broad product base with nine products recording greater than $1bn in revenues (Exhibit 41). Products, such as Lipitor, Norvasc, Lyrica, Celebrex, Viagra, Detrol/Detrol LA, Xalatan/Xalacom, Geodon, and Zyvox accounted for 56% of 2009 revenues. However, except for Lyrica and Zyvox, all of the above key drivers will lose exclusivity by the end of our forecast period (2014). Although Norvasc lost US exclusivity in 2007, the drug has been able to generate circa $2bn during the years 2008 and 2009 mainly due to ex-US revenues. We believe Norvasc revenues would decline from 2010 onwards as EU exclusivities come to an end. Lipitor, a major driver of revenues, representing circa 25% of 2009 revenues, is set to lose exclusivity in November, 2011. By end of 2012, three major drivers, Detrol, Geodon, and Viagra will lose exclusivity. Finally, Celebrex will lose US exclusivity in 2014. Whilst Pfizer management has made a significant impact on improving mid-term revenue growth via the acquisition of Wyeth to supplement base business with key drugs, such as Enbrel and Prevnar 13 in addition to supplementing the companys pipeline, there still appears to be a significant revenue gap based on our estimates. We estimate that 2010 will be the last year of revenue growth before the top-line declines some 9% before reaching a nadir in 2013. At this point, the contribution of pipeline assets towards the total sales is expected to be circa 4%, implying some reliance on R&D execution to return the company to long-term growth (Exhibit 42). EXHIBIT 41: BASE BUSINESS KEY PRODUCTS, 2009A-2014E (US$M) 0%20%40%60%80%100%2009A 2010E 2011E 2012E 2013E 2014EPercent of RevenuesLipitor Norvasc Lyrica Geodon EnbrelVfend Prevnar-13 Zyvox Viagra Detrol LASutent Xalatan Pipeline Alliance EXHIBIT 42: ESTIMATED REVENUES FOR THE PHARMACEUTICALS BASE BUSINESS AND R&D PIPELINE -10,000 20,000 30,000 40,000 50,000 60,000 70,000 2009A 2010E 2011E 2012E 2013E 2014ERevenues($millions)Launched Products Pipeline Products Source: Company data, Jefferies International Ltd. estimates Source: Company data, Jefferies International Ltd. estimates Lipitor revenues to trail well beyond 2011, the year of patent exclusivity loss Lipitor is the most widely prescribed treatment for lowering cholesterol and recorded worldwide revenues of $11.4bn in 2009. Pfizer entered into an agreement with the generic manufacturer, Ranbaxy in June 2008 licensing the right to sell generic versions of Lipitor and Caduet in the US from November 30, 2011. Additionally, the agreement also provided for Ranbaxy to market the generic versions in seven countries, Canada, Belgium, Netherlands, Germany, Sweden, Italy, and Australia on varying dates. Furthermore, Pfizer had entered into agreement with five additional generic manufacturers to launch authorized generics from May 19, 2010, two months ahead of July 19, 2010 loss of exclusivity in Canada. Lipitor revenues have been declining since it reached its zenith of $12.9bn in 2006 and we expect the decline to continue to an estimate of c$9.2bn in 2011, the last year before losing patent exclusivity. However, we do not expect Lipitor revenues to completely drop-off as Pfizer could continue to market the product through its established drugs business unit. Lyrica to maintain growth through label expansion Lyrica, an oral drug currently approved for epilepsy, post-herpetic neuralgia, diabetic peripheral neuropathy, and fibromyalgia has been a growth driver with 2009 revenues of $2.8bn. Pfizer is currently conducting numerous Phase III studies with Lyrica as a treatment for post-operative pain, restless legs syndrome, central neuropathic pain, as well as peripheral neuropathic pain. The company received a complete response letter from the FDA on its application for Lyrica as a monotherapy to treat epilepsy in December 2009. Pfizer is currently in discussions with the regulatory agency and is expected to file its reply in the near future. We expect Lyrica to grow at a CAGR of 9% during our forecast period (2009A-14E) with 2014E revenues of c$4.5bn. PFEPlease see important disclosure information on pages 68 - 70 of thisreport.Jeffrey Holford, Equity Analyst, jholfordJ, 44 (0) 20 7029 8673 Page 28 of 70EXHIBIT 43: OVERVIEW OF SPECIFIC IN-LINE PRODUCTS Product 2010E revenues ($M)Increment absolute ($M)10E-14ECAGR (%)10E-14ECommentsLipitor 10,708 (7,336) -25% US generics ex pected Nov . 2011； EU generics ex pected H2 2011； Assume partial sales from Nov . 2011 through established products business unitNorv asc 1,417 (606) -13% Genericized in 2007； 97% of 09 rev enues is ex -US； declined 6% CER ex -US in 2009Caduet 531 (408) -31% Mirrors Lipitor profile (Lipitor/Norv asc combo)Cardura 407 (90) -6% Genericized in 2008； 98% of 09 rev enues is ex -USChantix /Champix 736 (52) -2% US sales decline of 21% in 2009； could be ameliorated through low er ex -US sales declineBenefix 622 65 3% Recombinant product； assume limited generic incursion (US LOE 2011)Refacto/Xy ntha 380 95 6% Recombinant productRev atio 486 135 6% Steady grow th in an increasingly crow ded marketZoloft 526 (88) -4% US and ex -US ex clusiv ities ex pired； slow erosion of rev enues from genericsLy rica 3,129 1,330 9% US sales impacted by therapeutic substitution； label ex pansion activ ities ongoing (US GAD； Japan DPN & neuropathic pain)Geodon/Zeldox 1,094 (951) -40% Assume US generic incursion in Sep. 2012； limited ex -US salesAricept 455 (164) -11% PFE records ex -US rev enues； assume gradual decline in ex -US salesEffex or XR 2,043 (1,830) -43% Tev a permitted to launch generic v ersion in the US starting July 1, 2010Celebrex 2,407 (740) -9% Declining grow th in US & ex -US until LOE in May 2014Enbrel 3,301 1,273 8% Increasing competition； ex -us label ex pansion in 2009 for psoriasis indicationsZithromax + Zmax 450 63 3% Genericized in 2005； 96% of 09 rev enues is ex -US； gained 5% CER ex -US in 2009Vfend 839 (107) -3% US genericization to start at end of Q1 2011, Ex -US LOE -Jan 2016； 70% of 2009 sales in Ex -US Prev nar/Prev nar-13 3,583 1,568 9% Introduction of Prev nar-13 stimulates fresh grow th, premium pricing (c30%), and gain market shareZy v ox 1,162 129 3% US & ex -US therapeutic substition offset by emerging market grow thZosy n/Tazocin 1,082 (545) -16% Ongoing US & ex -US therapeutic substition Viagra 1,916 (1,179) -21% US LOE Sep. 2012； EU LOE Jun. 2013Detrol LA 1,091 (881) -34% Branded competition； US & ex -US LOE Sep. 2012Aromasin 522 (336) -23% US LOE Apr. 2011； gradual decline in ex -US anticipatedSutent 1,126 535 10% Limited label ex pansion anticipatedXalatan 1,741 (1,124) -23% US LOE Mar. 2011； Major EU LOE Jul. 2011Genotropin 908 (408) -14% US LOE Apr. 2013； Major EU LOE assumed 2013Premarin group 1,022 (66) -2% Assume slow therapeutic substitution Source: Company data, Jefferies International Ltd. Research Zyvox to grow due to Emerging Markets despite pressures Zyvox is a synthetic antibacterial that was an addition to Pfizers portfolio through the Pharmacia acquisition and is approved for treating gram-positive bacteria including methicilin-resistant staphylococcus aureus (MRSA). Zyvox sales have been growing well since its launch resulting in revenues of $1.1bn in 2009. However, reports of drug resistance and the availability of generic vancomycin has led to a decline in sales in the US and other developed markets that could continue through our forecast period. However, we believe penetration of Zyvox in Emerging Markets could fuel the growth of this drug and we estimate 2014E sales of $1.3bn. Zyvox enjoys US patent exclusivity until May 2015, although a generic challenge has been filed, with a 30 month stay to May 2012. Sutent to grow into a blockbuster but tumour type expansion looks uncertain Sutent (sunitinib, multi-kinase inhibitor) is currently approved for renal cell carcinoma (advanced and metastatic, RCC) and gastrointestinal stromal tumours (GIST) after disease progression on or intolerant to Gleevec. The company claims that Sutent was the best-selling medicine in the world for the treatment of first-line mRCC as of Q1 2010. Recent discontinuation of Phase III trials in advanced hepatocellular carcinoma (HCC, April 2010) and metastatic colorectal cancer (June 2009), and failure to show benefit in advanced breast cancer patients (March 2010), puts doubt on the ability of Pfizer to aggregate a large number of tumour types with Sutent. Pfizer filed Sutent for pancreatic neuroendocrine (pNET) cancer with the FDA in January 2009, with a decision expected in Q4 2010. Data supporting this application was presented at the 11th World Congress on Gastrointestinal Cancer in June 2009 (Exhibit 44). The FDA requested that Pfizer revise the product labelling for Sutent to include information regarding the risk of hepatotoxicity as a boxed warning and convert the existing patient package insert to a Medication Guide for distribution to patients who are dispensed Sutent from April, 2010. The FDA also requested a risk mitigation, assessment, and communication plan to ensure that the benefits of Sutent treatment continue to outweigh the risks. PFEPlease see important disclosure information on pages 68 - 70 of thisreport.Jeffrey Holford, Equity Analyst, jholfordJ, 44 (0) 20 7029 8673 Page 29 of 70EXHIBIT 44: PIII PFS DATA IN PANCREATIC NEURO-ENDOCRINE TUMOURS EXHIBIT 45: SUTENT PHASE II/ III CLINICAL TRIAL PROGRAM 024681012Sutent PlaceboProgression-free survival (months)Tumour type Arms of study Stage of developmentNumber of ptsEst. primary completion dateNSCLC Sutent + Tarceva vs. Tarceva alonePhase III 956 Jul-10Prostate cancer Sutent + prednisone vs. prednisone alonePhase III 819 Sep-11Source: Company data, Jefferies International Ltd. research Source: C, Jefferies International Ltd. research By our estimates, Sutent is currently on track to become a $1bn drug in 2010E, though through the potential addition of further indications, we believe the drug has potential to grow at an estimated CAGR of 11% (2009A2014E) to 2014E revenues of c$1.7bn. Chantix stabilized by ex-US sales Chantix, a novel therapy for smoking cessation has been under regulatory pressure in the US recently as seen by the 21% decline in 2009 revenues just three years after launch. In 2009, a boxed warning was added to the label warning of neuropsychiatric symptoms and suicidality in addition to allergic and serious skin reactions. However, the label change also included additional data that showed Chantixs ability to increase the length of smoking cessation to one year compared to placebo. Pfizer plans to use this additional information and direct to consumer advertising to rejuvenate sales growth. However, Chantix US sales are yet to show growth as it recorded a 5% decline in Q110. Outside the US, Chantix has maintained its growth (c15% CER growth recorded in Q110). Hence we believe ex-US sales will help stabilize Chantix through our forecast period. Celebrex to face continued therapeutic substitution pressure Celebrex, a non steroidal anti-inflammatory drug (NSAID) is approved for treatment of symptoms of osteoarthritis and rheumatoid arthritis. The drug came under pressure early in its launch with withdrawal of Vioxx in 2004 due to increased risk of heart attack and stroke. Celebrex carries a boxed warning highlighting cardiovascular and gastrointestinal risks. Despite all these regulatory pressures, Celebrex has been growing from its nadir of $1.7bn in 2005 to a peak of $2.5bn in 2008. Recently, generic NSAIDs have placed pressure on Celebrex that has led to a 4% decline in sales to $2.4bn in 2009. We believe the therapeutic substitution pressure will continue during our forecast period resulting in 2014E estimated sales of $1.7bn albeit the drug will not lose patent exclusivity until May 2014. Viagra nearing the end of its patent life Viagra is the most recognized branded drug for treatment of erectile dysfunction that has maintained sales of c$1.6-$1.9bn despite introduction of competing drugs in this indication. The drug recorded its first negative growth year in 2009, which management believes is due to the impact of adverse foreign exchange impacts. We estimate that Viagra will lose its US exclusivity in September 2012 and in most of Europe in June 2013. Due to the market potential of this indication, we believe generic incursion will be rapid and hence estimate Viagra revenues to drop to $737m by 2014E. PFEPlease see important disclosure information on pages 68 - 70 of thisreport.Jeffrey Holford, Equity Analyst, jholfordJ, 44 (0) 20 7029 8673 Page 30 of 70Pristiq for VMS Pfizers Effexor follow-on antidepressant Pristiq (desvenlafaxine) is in development for vasomotor symptoms (VMS), associated with menopause such as hot flushes. The FDA issued an approvable letter in 2007, requesting a 1-year trial to address the potential for serious adverse CV and hepatic effects before the drug can be approved. The subsequent trial was due for primary completion in December 2009 and is currently recorded as ongoing but not recruiting participants on . Pfizer has indicated that it will report the data from this trial in H2 2010. Follow-on product with inferior profile In depression, Pfizer have struggled to gain traction with Pristiq. A high incidence of nausea (22%) compared to Effexor XR (4%) and other antidepressants has hampered prescription ramp-up in our opinion. In head-to-head studies between the two compounds efficacy has been shown to be the same. The only marginal advantage Pfizer offers with Pristiq is that the drug is approved at a once-daily 50mg dose that does not require titration. Effexor XRs label recommends dose titration in some patients. Potential in VMS As a non-hormonal drug, Pristiq potentially offers an alternative for women suffering menopausal symptoms who had abandoned hormone replacement therapy in the wake of health scares associated with enhanced incidence of cancer. We view this as a $500m opportunity, and estimate peak sales for Pristiq of $1bn across all indications. Prevnar 13 six more serotypes covered Prevnar 13 is a 13-valent version of Pfizers established pneumococcal conjugate vaccine Prevnar ($2.7bn, 2009). Approved for use in infants and young children in the US (Feb 2010) and EU (Dec 09), submission for an indication expansion to cover adult patients is expected in H2 2010. Prevnar 13 is indicated for the prevention of streptococcus pneumoniae (S. pneumoniae) serotypes 1, 3, 4, 5, 6A, 6B, 7F, 9V, 14, 18C, 19A, 19F, and 23F, and the prevention of otitis media caused by serotypes 4, 6B, 9V, 14, 18C, 19F, and 23F. Prevnar 13 includes six additional serotypes (1, 3, 5, 6A, 7F, and 19A) than Prevnar. Despite the almost doubling of serotype coverage, this only equates to a modest increase in terms of disease prevention, in our view. The original 7-valent Prevnar already covers the serotypes accounting for around 80% of invasive pneumococcal disease (IPD) in the US. Pfizer state that the additional coverage of serotype 19A is of particular importance given that this is now one of the most common invasive disease-causing serotype in young children. Although serotype 19A has increased in importance, we believe this is due to widespread vaccination decreasing the incidence of the seven serotypes covered by Prevnar 7. One study found that IPD caused by penicillin-resistant strains targeted by Prevnar 7 decreased by 87% after introduction of the vaccine. The Centres for Disease Control and Preventions (CDC) Advisory Committee on Immunisation Practices support the use of Prevnar 13 in children, along with a recommendation that children who have begun a four-dose immunization series with Prevnar be switched at any time to Prevnar 13. In addition, the committee also recommended a single supplemental dose of Prevnar 13 for those children younger than 59 months who have completed the standard Prevnar series. The launch of Prevnar 13 will help stave off competition from GlaxoSmithKlines 10-valent pneumococcal vaccine Synflorix in the EU (approved March 09). Clearly Prevnar 13 will cannibalize Prevnar sales, but we also see continued single digit growth of the Prevnar franchise supported by the additional serotypes and price increases. We expect sales of $5.2bn in 2014E. PFEPlease see important disclosure information on pages 68 - 70 of thisreport.Jeffrey Holford, Equity Analyst, jholfordJ, 44 (0) 20 7029 8673 Page 31 of 70EXHIBIT 46: SUMMARY OF KEY HARD PATENT EXPIRIES AND POSSIBLE TIMELINES OF EARLY LOSS OF EXCLUSIVITY AS WELL AS JEF MODELLING ASSUMPTION Product Hard Patent Expiry date Earliest generic date JEF Model Generic date Comment Aricept Nov-10 imminent Nov-10 Aricept is co promoted in the US by Pfizer. Eisai is the patent holder. Teva filed an ANDA in 2005 challenging the basic November 2010 patent and Eisai sued. Teva has received final FDA approval but remains subject to an injunction, pending the outcome of litigation. Effexor XR 2013 imminent Jul-10 The listed Orange book patents are just for the extended release capsules. The basic venlafaxine patent expired in 2008. In 2005, Wyeth settled with Teva allowing it to launch Effexor XR tablets in the US from 1 July 2010. Vfend Aug-09 Q1 2011 Q1 2011 A patent challenge from Mylan (Matrix) was settled, allowing the generics to launch in the US from Q1 2011. Xalatan Mar-11 Mar-11 Mar-11 Xalatans basic product patent is listed in Pfizers 2009 10-K as expiring in 2011 Aromasin Apr-11 Apr-11 Apr-11 Aromasins only Orange Book listed patent expires April 2011 Lipitor/ Caduet Mar-10 Nov-11 Nov-11 The Basic patent expires in March 2010, the enantiomer patent expires Jun 2011. Pfizer settled worldwide litigation with Ranbaxy, allowing it to launch generic Lipitor and Caduet in the US from Nov 2011. Watson is to sell an authorized generic. The EU Lipitor patents expire between Sept and Nov 2011. BeneFIX 2011 2011 none The BeneFIX patent expires in 2011. However, being a biologic product we have no expectations for a substitutable generic to be launched in the foreseeable future. Lyrica Dec-18 Mar-12 Dec-18 Lyricas basic product patent expires in 2018. It also has NCE exclusivity to Dec 30 2009. Several generic companies have challenged and Pfizer has sued. A 30 month stay should run to around March 2012. Viagra/ Revatio Mar-12 Mar-12 Sep-12 Viagras basic patent expires in 2012 March. Pfizer has sued Teva for infringement of the 2019 use patent. Teva has not challenged the 2012 patent. A 30 month stay should run to September 2012. Tygacil Apr-16 Apr-12 Apr-16 Tygacil has NCE exclusivity expiring on Jun 15 2010. Sandoz filed an ANDA in October 2009. Pfizer sued. A 30 month stay should run to Apr 2012 Zyvox May-15 May-12 May-15 Zyvox basic patent expires in 2015. Teva filed an ANDA and Pfizer has sued. A 30 month stay should run to May 2012 Geodon Sep-12 Sep-12 Sep-12 Geodons basic product patent expires in September 2012 Detrol LA Sep-12 Sep-12 Sep-12 Detrols patent expires 2012. Teva and Impax filed ANDAs. Pfizer sued and won, preventing Teva selling copies of Detrol/LA before Sep 2012 Rapamune 2014 Sep-12 Jan-14 In March 2010, Watson and Ranbaxy filed ANDAs challenging the 2014 and 2018 patents. Pfizer sued for infringement of the 2014 use patent. A 30 month stay should run to September 2012 Enbrel Oct-12 Oct-12 none Pfizer co-promotes Enbrel with Amgen in the US and has exclusive rights outside the US. As a biologic we have no expectations for a substitutable generic to be launched in the foreseeable future. Sutent 2021 Nov-12 2021 Sutents basic patent expires in 2021 with NCE exclusivity to Jan 2011. Mylan has filed an ANDA. If Pfizer sues, a 30 month stay should run to Nov 2012. Rebif 2013 2013 none Rebif is covered by a number of patents out to 2013 (US) and 2012 (EU). Novartis Extavia (own brand of Betaseron) may have some impact on sales. As a biologic we do not expect a substitutable generic to be launched in the foreseeable future. Celebrex May-14 May-14 May-14 Celebrex basic product patent is listed in Pfizers 2009 10-K as expiring in 2014 Source: Company data, Jefferies International Ltd. research Key Pipeline Assets Pfizer intends to focus research on six therapy areas it has identified as “Invest to Win” areas of research: oncology； pain； inflammation； Alzheimers disease； psychoses； and diabetes. We see this as a bold move (in-line with the “Invest to Win” sentiment) with each area being classified as either high risk (Alzheimers disease, oncology) or highly competitive (pain, psychoses, diabetes, inflammation). Failure to deliver on three key studies (Dimebon CONNECTION, Sutent in breast and HCC) since the start of 2010 has depressed investor sentiment for Pfizer pipeline catalysts in our opinion. PFEPlease see important disclosure information on pages 68 - 70 of thisreport.Jeffrey Holford, Equity Analyst, jholfordJ, 44 (0) 20 7029 8673 Page 32 of 70Apixaban Apixiban is an oral Factor Xa inhibitor being developed in a broad range of cardiovascular indications including venous thromboebolism (VTE), atrial fibrillation and acute coronary syndromes with an applicable target patient population in excess of 40 million in the developed world according to our estimates. Pfizer has access to apixaban as part of a co-development and commercialization agreement with Bristol Myers Squibb. EXHIBIT 47: APIXABAN DEVELOPMENT PROGRAM Indication Trial program Status Expected completion dateVTE prevention after orthopedic surgery ADVANCE-1, -2, -3 ADVANCE-3 is ongoing July 2010 (ICT congress)VTE prevention in medically ill patients ADOPT Recruiting patients Dec-10Recurrent VTE treatment (DVT + PE) AMPLIFY Recruiting patients Jul-11VTE secondary prevention (DVT + PE) AMPLIFY-EXT Recruiting patients May-11Stroke prevention in atrial fibrillation AVERROES (vs. aspirin) Ongoing, but not recruiting Aug-10ARISTOTLE (vs. warfarin) Recruiting patients Apr-11Secondary prevention ACS APPRAISE-2 Recruiting patients Nov-11VTE in cancer patients In planning In planning Post-2012 Source: Company data, Jefferies International Ltd. research Pfizer/Bristol-Myers submitted apixaban for European approval in Q1 2010 for VTE prevention post-orthopaedic surgery. Due to disappointing clinical trial results against the US dosing regime of the comparator therapy (Lovenox), we do not expect US approval for this indication (see below), with the first expected realistic US filing being for VTE prevention in the medically ill in Q2 2011. In stroke prevention in AF patients, top-line data from the AVERROES trial in this indication will be a key catalyst for the stock in 2010 (study due for completion in August 2010). We expect non-risk adjusted global total brand sales of $2.5bn ($6bn at peak) for apixaban in 2014E (of which Pfizer will record 50% of gross profits as “Alliance Revenues”) with the majority of sales being generated from the chronic indication of stroke prevention in AF (circa 65%) in our model. We highlight to investors the potential risk of regulatory failure for apixaban (or any other drug in this class) due to liver toxicity and/or bleeding risks, which are difficult to assess based on Phase II and acute usage data. Competitive future oral anticoagulant class Pfizer and Bristol-Myers are not alone in identifying the potential of selective oral anticoagulants five other large Phase III development programs are currently under way (Exhibit 48). In a broad sense, most developers in this class are seeking to position themselves as replacements for subcutaneous Lovenox (enoxaparin), or difficult to manage oral warfarin (Vitamin K antagonist). Boehringer Ingelheim (Pradaxa, direct thrombin inhibitor) and Bayer (Xarelto, Factor Xa inhibitor) entered a number ex-US markets in 2008 and 2009, respectively, through the approval in VTE prevention post-orthopedic surgery. PFEPlease see important disclosure information on pages 68 - 70 of thisreport.Jeffrey Holford, Equity Analyst, jholfordJ, 44 (0) 20 7029 8673 Page 33 of 70EXHIBIT 48: SELECTED LATE-STAGE ORAL ANTICOAGULANT DEVELOPMENT PROGRAMS Molecule (brand) Development Stage Mechanism Expected first US filing dateCompany Target indicationXarelto (rivaroxaban) Marketed Factor Xa inhibitor 2008 Bayer, J&J Approved in Europe for VTE prevention post-orthopaedic surgery. Development for stroke prevention in AF, recurrent VTE (primary and secondary) prevention, VTE in medically ill, and secondary prevention in ACSPradaxa (Dabigatran etexilate) Marketed Direct Thrombin Inhibitor (DTI)2010 Boehringer Ingelheim Approved in Europe for VTE prevention post-orthopaedic surgery. Development for stroke prevention in AF, recurrent VTE (primary and secondary) prevention, and secondary prevention in ACSApixaban Phase III Factor Xa inhibitor 2011 Bristol-Myers Squibb, Pfizer VTE prevention post-orthopaedic surgery, recurrent VTE (primary and secondary) prevention, stroke prevention in AF, secondary prevention in ACS, VTE prevention in cancer patientsEdoxaban (DU-176b) Phase III Factor Xa inhibitor 2012 Daiichi Sankyo VTE prevention post-orthopaedic surgery (Japan only, filed in Arpil 2010), stroke prevention in AF (international), recurrent VTE (international)YM150 Phase III Factor Xa inhibitor 2012 Astellas Pharma VTE prevention post-orthopaedic surgery, VTE in medically ill, recurrent VTE prevention, VTE prevention post-major abdominal surgery, VTE prevention post-hip fracture surgery or surgery in the lower extremitiesBetrixaban Phase II Factor Xa inhibitor 2014 Merck & Co VTE prevention post-orthopaedic surgery, Stroke prevention in AFTAK-442 Phase II Factor Xa inhibitor 2014 Takeda ACSNote. US launch dates are based on our assumption that apixaban and Pradaxa will not be filed for the acute VTE prevention post-orthopedic surgery indication in the US. Source: Company data, Jefferies International Ltd. research Replacement of difficult to manage warfarin Warfarin is the standard of care anticoagulant in chronic settings, with the revenue potential for new entrants in replacing heavily genericised warfarin representing a large potential market opportunity. While US sales stood at only $277m in 2009 (IMS), if all warfarin prescriptions were converted into a branded price point (we estimate circa $7 per day), $7.5 billion could have been generated in the US alone. The narrow therapeutic index (Exhibit 49) and associated difficult monitoring requirements of warfarin limits uptake and treatment length across settings, therefore the true potential of replacing warfarin is likely to be higher. EXHIBIT 49: ODDS RATIO FOR STROKE AND BLEEDING WITH WARFARIN EXHIBIT 50: PHARMACOKINETIC PROFILES OF APIXABAN AND XARELTO Narrow therapeutic window0501001500 5 10 15 20 25Concentration (ng/ml) Xarelto Apixaban Source: Turpie, 2008 Source: Adapted from company data (Bristol Myers Squibb). Jefferies International Ltd. research $20 billion market potential for new class of oral anticoagulants Our modelling suggests a global market value of nearly $20bn at peak for the new oral Factor Xa inhibitor/Direct Thrombin Inhibitor class across indications (Exhibit 52). PFEPlease see important disclosure information on pages 68 - 70 of thisreport.Jeffrey Holford, Equity Analyst, jholfordJ, 44 (0) 20 7029 8673 Page 34 of 70EXHIBIT 51: APPLICABLE GLOBAL PATIENT POPULATION, 2014E EXHIBIT 52: PEAK GLOBAL MARKET SALES ESTIMATES (US$) 3.2m 1.5m6.3m29.5mVTE prevention post-orthopaedic surgery Recurrent VTEStroke prevention in AF VTE prevention in medically ill $600m VTE prevention post-orthopaedic surgery Recurrent VTE Stroke prevention in AF VTE prevention in medically ill$13.1bn$3.4bn $2.7bnSource: Jefferies International Ltd. estimates Source: Jefferies International Ltd. estimates Atrial fibrillation newsflow during 2010/11 likely the most significant driver of mid-term estimates With a disproportionately high percentage of apixiabans potential derived from the stroke prevention in AF indication in our model (circa 65%), results from the AVERROES (Q4 2010) and ARISTOTLE (Q2 2011) clinical trials will be pivotal for market sentiment in our view. Also pivotal will be competitor newsflow/data, such as the regulatory approval of Pradaxa and ROCKET-AF data from Bayer/J&J (due from mid-2010) in this indication. Unlike other developers in this drug class, Pfizer and Bristol-Myers have compared apixaban to both warfarin (ARISTOTLE) and aspirin (AVERROES). The AVERROES trial is not investigating the use of apixaban in low-risk patients (in which guidelines recommend aspirin alone), but instead in moderate and high risks patients who have either discontinued, or are not suitable for Vitamin K antagonist (warfarin) treatment. Although results from AVERROES (Q4 2010) will help evaluate the potential of apixaban in this indication, the later ARISTOTLE trial results will be key for benchmarking apixaban against other drugs in this class (e.g., Pradaxa from RE-LY trial program, Bayer/J&Js ROCKET-AF data). US launch unlikely in VTE prevention post-orthopaedic surgery setting Apixaban has produced mixed results in the first two trials for the prevention of VTE post-orthopaedic surgery, the most advanced development program. In the one trial investigating apixaban against the US dosing regime of Lovenox (30mg bid, ADVANCE-1), the prespecified noninferiority criteria were not met for the primary efficacy endpoint, a composite of any VTE plus death from any cause. It is difficult to believe that the results of ADVANCE-2 (Exhibit 54), or potentially ADVANCE-3 will offset failure of ADVANCE-1 in the eyes of the FDA. We also note a higher rate of major VTE plus all cause death with apixiban (2.1%) than Lovenox (1.6%) in ADVANCE-1 which may also impede US approval. While ADVANCE-1 was disappointing, uptake ex-US is supported by impressive ADVANCE-2 results. The ideal antithrombotic in this setting would demonstrate both a reduction in VTE events, and reduced incidence of major bleeding when compared to standard of care Lovenox. In ADVANCE-2, apixaban was the first oral antithrombotic of this class to demonstrate these criteria in a large scale trial. As with Pradaxa and Xarelto which are recommended by the UKs NICE, uptake in the EU for acute indications will be supported by the drugs likely cost-effectiveness versus subcutaneous Lovenox. The next catalyst for investors in this development program will be ADVANCE-3 trial results due for publication at the ICT congress in July 2010. Comparing apixaban to the European dosing regimen for Lovenox (40mg qd), positive results for ADVANCE-3 should support approval outside the United States. PFEPlease see important disclosure information on pages 68 - 70 of thisreport.Jeffrey Holford, Equity Analyst, jholfordJ, 44 (0) 20 7029 8673 Page 35 of 70EXHIBIT 53: VTE POST-KNEE SURGERY, ADVANCE-1 EXHIBIT 54: VTE POST-KNEE SURGERY, ADVANCE-2 0%1%2%3%4%5%6%7%8%9%10%VTE and death from any causeMajor VTE and death from any causeMajor or clinically relevant non-major bleeding Major bleedingIncidenceApixaban (2.5mg bid) ADVANCE-1 Lovenox (30mg bid) ADVANCE-1 0%5%10%15%20%25%30%VTE and death from any causeMajor VTE Major or clinically relevant non-major bleeding Major bleedingIncidenceApixaban (2.5mg bid) ADVANCE-2 Lovenox (40mg) ADVANCE-2p0.0001Source: Company data, Jefferies International Ltd. research Source: Company data, Jefferies International Ltd. research In a cross trial relative risk analysis of oral Factor Xa inhibitors/Direct Thrombin Inhibitors, apixaban compares favourably in the ADVANCE-2 study investigating the drugs efficacy versus the European dose of Lovenox (40 mg QD, Exhibit 55). EXHIBIT 55: CROSS TRIAL COMPARISON POST-KNEE SURGERY EXHIBIT 56: INCIDENCE OF MAJOR BLEEDING, DEATH, MI, STROKE, OR SEVERE RECURRENT ISCHAEMIA -60%-50%-40%-30%-20%-10%0%10%20%30%Xarelto (10mg QD) vs. Lovenox (40mg QD)Pradaxa (220mg QD) vs. Lovenox (40mg QD)Pradaxa (150mg QD) vs. Lovenox (40mg QD)Apixaban (2.5mg bid) vs. Lovenox (40mg QD)RelativeriskPrimary efficacy (Total VTE or composite) Major bleedingp0.001p2xULN, without initial findings of cholestasis (elevated serum ALP), No other reason can be found to explain the combination of increased AT and TBL, such as viral hepatitis A, B, or C； preexisting or acute liver disease； or another drug capable of causing the observed injury. Cases of Hys law were observed with AstraZenecas oral Factor Xa inhibitor Exanta leading to the drugs failure to reach the US market and subsequent withdrawal in international markets. The no other reason criteria is clearly a little subjective in our opinion, and requires careful assessment by more than one specialist to determine whether the presence of ALT3xULN and TBL2xULN is associated with another underlying factor, or caused by the drug itself. Seven cases of possible Hys law were observed in the Xarelto arm of the RECORD trial program according to the sponsors Liver Advisory Panel (9 cases of ALT3xULN and TBL2xULN). We note that pharmacokinetic data indicates that liver metabolism is not a key route of excretion for apixaban, suggesting that the risk of liver toxicity may be comparatively low with apixaban versus key competitor Xarelto (Exhibit 58). While no cases of ALT3xULN and TBL2xULN were observed in the ADVANCE-1 trial for apixaban, 3 cases were observed in ADVANCE-2. Therefore, the risk of Hys law cases being observed in the large ongoing clinical trial program remains a concern in our view. PFEPlease see important disclosure information on pages 68 - 70 of thisreport.Jeffrey Holford, Equity Anal