Pfi zer, lnc. - 2009 Vijaya Narapareddy University of Denver On May 9,2009, Japanese pharmaceutical manufacturer Eisai threatened Pfizer to termi- nate its long-standing partnership on the news of Pflzer's proposed acquisition of Wyeth. Eisai's venture with Pflzer dates back to the mid-1990s when Pfizer entered into an alliance to sell Eisai's Aricept, the world's leading medicine fur the treatment of Alzheimer's disease. Headquartered in New York City, Pfizer generated about $482 mil- lion in 2008 from the sale of Aricept, an increase of 20 percent fiom 2007, as shown in Exhibit l. Pflzer vows to fight back, claiming that Eisai lacks any legal basis for termina- tion of their alliance. Pfizer engages in the discovery, development, manufacture, and marketing of prescrip- tion medicines for humans and animals worldwide. Some of its well-known drugs are Lipitor, Viagra, Lyrica, Zeldox, and Aricept used for people, as well as Draxxin used fbr cattle. The proposed Ptizer acquisition of Wyeth, a company based in Madison, New Jersey, for a cash and stock purchase of $68 billion would enable Pflzer to diversity its product offer- ings and make further inroads into emerging markets. Exhibit 2 provides details of the ben- efits of the proposed Wyeth acquisition. Pfizer operates from three business segments, Pharmaceuticals, Animal Health, and a third one that contains "Corporate & Other." The Pharmaceuticals business offers human health products for the treatment of cardiovascular diseases, central nervous system disorders, arthritis and pain, infectious and respiratory diseases, urogenital conditions, cancer, eye disease, endocrine disorders, and allergies, among others. Pfizer is well known fbr its pre- scription medicines and the many over-the-counter medical products it offers. The over- the-counter self-medications range from oral care, upper respiratory health to tobacco dependence, skin and eye care, and hair growth. The Animal Health division offers medi- cines for livestock and pets. The company also manufactures empty gelatin capsules and engages in producing contract and bulk pharmaceuticals/chemicals, which it classifies under "Corporate/other" business. The company's revenues by segment are provided in Exhibit 3 and reveal that the Pharmaceuticals business dorninates the portfolio with over 90 percent of the revenues gen- erated each year, whereas the Animal Health division accounts for only 5 percent each year. The "Corporate/other" segment is the smallest of all, with less than 3 percent of total sales. Pfizer's international operations contributed $27.9 billion in revenues in 2008 as opposed to the $20.4 billion generated in the United States. Exhibit 4 provides detailed statistics of revenues by business segment and geographic region. This exhibit indicates that the dou- ble-digit declines in U.S. sales of Pharmaceuticals have been off'set by double-digit growth in international sales. From Case 25 of Strategic Management: Concepts and Cases.l3le. Fred R. David. Copyright O 201 I by Pearson Edr.rcation. Published by Prentice Hall. All rights reserved. ZY
Transcript
Pfi zer, lnc. - 2009Vijaya NarapareddyUniversity of Denver
On May 9,2009, Japanese pharmaceutical manufacturer Eisai threatened Pfizer to termi-nate its long-standing partnership on the news of Pflzer's proposed acquisition of Wyeth.Eisai's venture with Pflzer dates back to the mid-1990s when Pfizer entered into an
alliance to sell Eisai's Aricept, the world's leading medicine fur the treatment ofAlzheimer's disease. Headquartered in New York City, Pfizer generated about $482 mil-lion in 2008 from the sale of Aricept, an increase of 20 percent fiom 2007, as shown inExhibit l. Pflzer vows to fight back, claiming that Eisai lacks any legal basis for termina-tion of their alliance.
Pfizer engages in the discovery, development, manufacture, and marketing of prescrip-tion medicines for humans and animals worldwide. Some of its well-known drugs are Lipitor,Viagra, Lyrica, Zeldox, and Aricept used for people, as well as Draxxin used fbr cattle.
The proposed Ptizer acquisition of Wyeth, a company based in Madison, New Jersey, for acash and stock purchase of $68 billion would enable Pflzer to diversity its product offer-ings and make further inroads into emerging markets. Exhibit 2 provides details of the ben-efits of the proposed Wyeth acquisition.
Pfizer operates from three business segments, Pharmaceuticals, Animal Health, and a thirdone that contains "Corporate & Other." The Pharmaceuticals business offers human healthproducts for the treatment of cardiovascular diseases, central nervous system disorders,arthritis and pain, infectious and respiratory diseases, urogenital conditions, cancer, eyedisease, endocrine disorders, and allergies, among others. Pfizer is well known fbr its pre-scription medicines and the many over-the-counter medical products it offers. The over-the-counter self-medications range from oral care, upper respiratory health to tobaccodependence, skin and eye care, and hair growth. The Animal Health division offers medi-cines for livestock and pets. The company also manufactures empty gelatin capsules andengages in producing contract and bulk pharmaceuticals/chemicals, which it classifiesunder "Corporate/other" business.
The company's revenues by segment are provided in Exhibit 3 and reveal that the
Pharmaceuticals business dorninates the portfolio with over 90 percent of the revenues gen-
erated each year, whereas the Animal Health division accounts for only 5 percent each year.
The "Corporate/other" segment is the smallest of all, with less than 3 percent of total sales.
Pfizer's international operations contributed $27.9 billion in revenues in 2008 as opposedto the $20.4 billion generated in the United States. Exhibit 4 provides detailed statistics ofrevenues by business segment and geographic region. This exhibit indicates that the dou-ble-digit declines in U.S. sales of Pharmaceuticals have been off'set by double-digit growthin international sales.
From Case 25 of Strategic Management: Concepts and Cases.l3le. Fred R. David.Copyright O 201 I by Pearson Edr.rcation. Published by Prentice Hall. All rights reserved. ZY
Revenues
PRODUCT
PFtZER. rNC. - 2009
by Key Products ($ in millions)-continued
PRIMARY INDICATIONS YEAR ENDED DECEMBER 31 % CHANGE
(a) Represents direct sales under license agrcement with Eisai Co., Ltd. Certain amounts and percentages may reflect rounding adjustments
Sottrce: Pfrzer's2008 Fctnn 10k,
The Proposed
Wyeth diversifies offering
Pharmaceuticals. Primary care. Specialty Care. Oncology. Established Products
Research. Pf lizer Global R&D
Market presence. Significant in Emerging
lvlarkets
Soirrce. www.phzer.com
Wyeth Merger Benefits to Pfizer
and expands presence in EMS
Biopha rmaceutica ls. Primary care. Soecialtv Care
F - VaccinesF - BioloqicsO . arnrntnav
7- Diversified businesses
, . Animal Healthtr ' Lapsugel
. Consumer Healthb . Nutritional Health
.N RacorrrhE .';;;;; Therapeutics Research Group
. Bio Therapeutics Research Group
Market presence. Enhanced in Emerging Markets
2006
Total Revenues by Business Segment
20072008
Pharmaceuticals
Animal Health
Corporate Other
TOTAL REVENUES
91.57c
5.87o
2.7%
100.jVc
91.8Vo
5.47o
2.87o
l00.j7o
93.2Vo
4.8Vo
2.070
100.OVa
Sor.trce: Pfrzer AnnuaL Report (2008'1.
Operating a global business is associated with complex challenges. In addition to multi-ple and diverse regulatory environments to contend with, global companies like Pfizer are
subject to unexpected changes in revenues and profits resulting from unpredictable cunencyfluctuations. Pfizer's income statement is provided in Exhibit 5. Note that Pfizer's sales in 2006,200'7,afi 2008 were approximately $48.37 billion, $48.42 billion, and $48.3 billion, respec-
tively. During the same time period, Pfizer's net income was $19.34 billion, 118.14 billion,and $8.10 billion, respectively. Note that Pfizer's Research & Development expenditures rose
$7.6 billion in 2006 to $7.9 billion in 2008, whereas Selling, General, and Administrative(SG&A) expenses declined from $15.59 billion in 2006 to $14.54 billion in 2008.
21
PFTZER, tNC, - 2009
Pfizer's consolidated Balance Sheet in Exhibit 6 reveals that total assets shrunk
fiom $114.84 billion in 2006 ro $111.15 billion in 2008, and total liabilities increased
lrom $43.48 billion in 2006 to $53.59 billion in 2008. Note that total stockholders' equity
iell 19.34 percenr, from $71 .36 billion in 2006 to Xi57.56 billion in 2008.
Pfizer faces high competition in all its business segments due to the presence of many play-
ers, large and small, in the industry. Bayer AG, Merck & Co., and Novartis AG are Pfizer's
direct competitors in the pharmaceutical industry. Of the four maior players in the pharma-
ceutical industry, Ptizer and Merck are American companies Bayer is German, and
Novartis is Swiss. A comparison of key indicators included in Exhibit 7 shows that Pfizer
leads the pack, with Novarlis trailing closely behind.
With $97.13 billion in market capitalization, Pfizer is the largest company in this
strategic group. It has 80,250 employees, second to Novarlis, but it is the leader in revenues
($1'7.32 biilion), gross margins (85.86 percent), operating margins (36.13 percent), and net
income of $7.96 billion. However, note that Pfizer has the lowest earnings per share
($1.23) and price-earnings (PlE) ratio among its direct competitors.
The Wyeth acquisition is fraught with potential risks. First and foremost, there are severai
regulatory hurdles to overcome not only from regulators in the United States, but also over-
seas. Some of these approvals include the expiration or termination of the waiting period
under the Hart-Scott-Rodino Act, a decision to be issued by the European Commission
under the EC Merger Regulation declaring that the proposed merger is compatible with the
Common Market, and the approval of the proposed acquisition under the China Anti-Monopoly Law and by regulators in Canada and Australia as well'
The acquisition would also increase Pfizer's debt because it is set to take on about
$i22.5 billion of debt in addition to assuming Wyeth's debt. Servicing this much additional
debt is a risky move for Pfizer, which experienced a decline of revenues from $48.42 billiontn2007 to $48.3 billion in 2008.
Assuming the merger agreement moves forward unencumbered, Pfizer will assume
all responsibilities for pending litigation facing Wyeth. Like other companies in the indus-
try, Wyeth is currently facing various iawsuits and litigation claims related to patents,
product liability, consumers, commercial, securities, environmental and tax laws, and
government investigations. Outcomes of these pending claims can overburden Pfizer and
mitigate potential benefits fiom the Wyeth acquisition.Pfizer also faces iitigation in several courts around the world. For example, Pfizer is
in a contentious battle in a Jamaican court to protect its patented medication amlodipine(Norvasc) used for treating high biood pressure to avoid complications of severe conges-
tive healt failure, stroke, renal failure, and other vascular complications due to hyperten-
sion. The company is fighting the Jamaican court's decision that Pfizer's patent on its drug
expired in Jamaica as it had expired in other countries.
At home, Pfizer spent about $900 million in June 2008 to settle pending U.S.
consumer fraud-related class action lawsuits and personal injury claims involving
Celebrex and Bextra. Several ofPfizer's key products are slated to expire in the near future,
as indicared in Exhibit 8.
As shown in Exhibit 9, Pfrzer is determined to become the leading biopharmaceutical com-
pany in emerging markets through bold and innovative parlnerships.
In addition to traditional partnerships, alliances, mergers and acquisitions, Pfizer
recently partnered with world-c1ass foundations and nonprofit organizations like the
Grammeen Foundation in Bangladesh, whose founder is Mohammad Yunus, the recipient
of the Nobel Peace Prize in 2006 for his efforts in alleviating poverty through micro-financing. Pfizer recently entered into a partnership with Grammeen Health, an affiliateof Grammeen Foundation, to bring sustainable health-care delivery models that address
PFTZER, rNC. - 2009
Overview of Direct Competitors
Pf izer Merck Novartis Industry
Market Cap
Employees
Revenue
Gross Margin
Operat. Margins
Net Income
EPS
91.138
80,250
41.328
85,8670
36.l37a
79681.193
52.31B
54,1 00
23.418
76.03Vo
25.53V0
5.93B
2.185
86.79B
98,000
42.298
73.107o
2l.60Vo
1.'798
J.+J
13.99l0rl
33s
253.49M
7l.00Vo
5.89V0
NiAN/A
Source: Cornpany Form l0kReports
Drug
Pfizer's Product Patent Expirationlnformation
U.5. Basic Product PatentExpiration Year
Aricept
LipitorXalatan
Geodon
Viagra
Detrol
Celebrex
Zyvox
Lyrica
Chantix
Seizentry
Sutent
Source: SEC Form l0K, February 21,2009
20lo20 t02011
2012
20t22012
20r42015
2018
2020
2021
202r
Pfizer's Mission and Vision inEmerging Markets
ffi 1;; ; ; ;;;";;;;;;;;;;;;- --lffi]H n*"0* of patrents In Emerging lvlarkeis rround the r,vorld in
{
ffi$ on innovative. socially resFansibie and c*mtnercialiy i
the needs o1'4 billion people worldwide with incomes of less than $3,000 a year. Anotherinnovative partnership involves Pflzer and PlaNet Finance, which is examining ways inwhich health-care access mav be exoanded in China.
In May 2009,Pfizer announced it was giving away more than 70 of its most widely pre-scribed drugs, including Lipitor and Viagra, tbr up to a year to people who have lost jobsin calendar 2009 and had been taking the drug for three months or more. "Everybodyknows now a neighbor, a relative who has lost their job and is losing their insurance.People are definitely hurting out there," Dr. Jorge Puente, Pfizer's head of pharmaceuticalsoutside the United States and Europe, told the Associated Press in an exclusive interview."Our aim is to help people bridge this point."
The 70-plus drugs covered in the new Pfizer program include several diabetes drugsas well as some of Pflzer's top money makers, from cholesterol fighter Lipitor topainkiller Celebrex. Also included are fibromyalgia treatment Lyrica and also Viagra,used lbr male erectile dysfunction. The new Pfizer program includes some antibiotics,antidepressants, heart medications, contraceptives, and smokin-e cessation products.Cheaper generic versions are available for most of the drugs. The new program will likelyhelp prevent patients from switching to cheaper brands or generics through the worst ofthe recession and could help retain those taking top-seller Lipitor, which will begin com-peting wlth generic versions in 2010. Many analysts contend that the giveaway is a bril-liant marketing move that will generate low-cost publicity, build consumer loyalty, andkeep inventory from piling up.
In September 2009,Pftzer agreed to pay a record $2.3 billion to settle civil and criminalcharges over marketing of its recalled Bextra arthritis drug and three other medicines. Thecharges involved representatives ofPfizer promoting dlugs for conditions that they had notbeen approved for and giving doctors kickbacks to encourage them to prescribe the med-ications. This is the largest such settlement in the United States for claims o1'off-label drugpromotion, topping the $ I .42 billion Eli Lilly (LLY) agreed to pay earlier in 2009 for off-lable sales of its Zyprexa schizophrenia drug. Moreover, the $1.3 billion criminal penaltyrelated only to Bextra is "the largest criminal fine ever imposed in the United States for any
matter," according to the U.S. Department of Justice. The settlement also involves pain
management pill Lyrica, the schizophrenia treatment Geodon, and the anti-infection drugZyvox, as well as nine other medicines.
The world's biggest drugmaker, Pfizer spent nearly $5.6 million lobbying the U.S.government in the second quarter of 2009 on health-care reform, government spending onmedication, and patent and trade issues, according to a recent disclosure report. Pfizernearly doubled its lobbying spending from the $3.1 million in the year-ago period. Thecompany lobbied on legislation on numerous health refbrm provisions, including healthinsurance, information technology, electronic prescriptions, drug pricing, allowing genericversions of expensive biologic drugs, and requiring research comparing the effectivenessof medications and other types of treatment as well as on U.S. patent reform and on inter-national patent, market access, and regulatory issues involving at least 20 countries.
Drug firms are reducing, not adding, to their sales forces. By the end of 2008, the numberof pharmaceutical sales representatives in the United States had decreased to 90,000 froma high of about i 06,000 in 2006. In early 2009, Amylin Pharmaceuticals cut 35 percent ofits sales force, or 200 representatives.
For the tlrst time in fifty years, sales of prescription drugs in the United States
declined in 2009 fbr a variety of reasons. The United States has historically been the indus-
try's largest and most profitable area, but now drug companies are looking more and more
to developing countries such as Venezuela. Sales of prescription drugs in developing or
emerging markets increased to $152.7 billion in 2008, up fiom $67.2 billion in 2003. This
