Pfizer Equity Analysis & Valuation

Pfizer Equity Analysis and Valuation
Valuation Date: April 1, 2005
Rusty Klein – rusty.d.klein@ttu.edu
Justin Kime – justin.kime@us.army.mil
Rene Jimenez – lucio.r.jimenez@ttu.edu
Todd Johnson – todd.m.johnson@ttu.edu
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Pfizer Equity Analysis & Valuation
Table of Contents
Executive Summary……………………….….….2
Business and Industry Analysis…….…………..7
Industry Overview………………………...7
Five Forces Model………………….……..8
Key Success Factors……………………..10
Firm & Industry Conclusions……………11
Accounting Analysis……………………………13
Key Accounting Policies………………...13
Degree of Flexibility...........................…...16
Actual Accounting Strategy……………...17
Quality of Disclosure…………………….19
Ratio Analysis & Forecast Financials…………25
Financial Ratio Analysis…………………25
Financial Statement Forecasts……………37
Valuation Analysis……………………………...39
Cost of Capital…………………………...39
Intrinsic Valuation Methods……………..41
Method of Comparables…………………46
Appendix………………………………………..49
References………………………………………71
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Pfizer, Inc.
Mo Money
Rusty Klein
Justin Kime
Rene Jimenez
Todd Johnson
Investment Recommendation Under-Valued Date of Valuation 4/1/2005
PFE - NYSE (4/13/2005) $27.28 EPS Forecast
52 week price range $21.99 - 37.90 FYE 12/31 2004(A) 2005(E) 2006(E) 2007(E)
Revenue(2004 $52.5B EPS $1.87 $1.70 $1.93 $2.09
Market Capitalization
$203.53B
Industry
Shares Outstanding 7.46B Valuation Ratio Comparison Pfizer Average
Trailing P/E 31.30 20.90
Dividend Yield 2.80% Forward P/E 16.40 20.23
3-Month Avg. Daily Trading Volume 28.65M Forward PEG 1.08 1.82
Percent Institutional Ownership 65% M/B 2.66 3.85
D/E 4.00 0.57
Book Value Per Share (mrq) $9.37 Valuation Estimates
ROE(2004) 17% Actual Current Price (4/1/2005) $
26.15
ROA(2004) 9%
Est. 5 year EPS growth rate 12% Ratio Based Valuations
Trailing P/E $
39.08
Cost of Capital Estimations R Squared Beta Ke Forward P/E $
37.84
Forward PEG $
21.84
5-Year Regression 0.132 0.458 4.58% D/E $
44.98
3-Year Regression 0.234 0.595 4.99% M/B $
35.58
2-Year Regression 0.061 0.436 4.52% Ford Epic Valuation $
62.16
Published 0.393
Intrinsic Valuations
Kd 3.45% Discounted Dividends $
35.58
WACC(bt) 4.07% Free Cash Flows $
58.27
Residual Income $
55.52
Abnormal Earnings Growth $
55.52
Long-Run Residual Income Perpetuity $
99.42
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Executive Summary
Recommendation – Undervalued Security
A
fter thorough forecasting and evaluations, we have recommended to
investors to buy market shares of Pfizer due to their continual
growth of price share with no signs of decreasing. With the recent
acquisition of Pharmacia, Pfizer has continued to maintain their dominant position in the
pharmaceutical industry.
Even though many companies are in the pharmaceutical industry, competition is
limited to the handful of major drug manufacturers. Pfizer has now grown to be the top
pharmaceutical company in the United States and one of the top 10 in the world with
$52.5 billion in revenues in 2004.
Industry Demand Drivers
With new drug innovations serving as the driving force in the industry, companies
are forced to allocate larger amounts of capital each year to research and development. In
2004 Pfizer invested $7.7 billion on research and development which was almost twice
the amount of its nearest competitor, Novartis. Realizing this necessity of discovering
the next “big drug,” Pfizer plans to further increase R&D spending to over $8 billion in
2005.
One of the largest threats to any drug company, including Pfizer, is the
competition imposed by generic drug companies after patents have expired on highly
profitable prescription drugs, such as Viagra.
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Pfizer’s Industry Standing
Pfizer’s main competitors are Abbot Laboratories, Bristol-Meyers Squibb,
Novartis, and Merck. Pfizer expects to sustain long-term growth driven by innovative
products, strong research and development pipeline and operating efficiencies. Pfizer has
grown to be the industry leader, but doesn’t settle for simply being the best. They are
constantly seeking to improve, and making the necessary changes to become more
effective, in order to further separate themselves from the competition. For example,
Pfizer is targeting $4 billion in total annualized cost savings by 2008, representing the
other 12% of their total current cost base. Pfizer continually strives to be the leader in the
innovation of new pharmaceutical products, such as the completion of 13 new drug
applications resulting in 20 filings with the FDA in the next five years.
Margin Expansion
In the pharmaceutical industry, mergers and acquisitions are increasing in
popularity as a means to capture a greater percentage of the market share. Evidence of
this trend is Pfizer’s acquisition of Warner-Lambert in 2001 and Pharmacia in 2003.
Another margin expansion method used by our company is competing in more than one
market such as: pharmaceuticals, consumer health, and animal health. The use of
modern technology, the internet, is yet another way to capture market share.
Financials
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The financials for Pfizer the last few years have fluctuated dramatically, due to
the acquisition of Pharmacia, in 2003. This proves to be true in the results of operating
income dropping from $9.1 billion in 2002 to $1.6 billion in 2003. Pfizer had shown a
relatively constant growth since initially going public until the Pharmacia acquisition, the
post acquisition years and the forecasts show continual growth in years to come. The
forecasted earning per share also confirms our expectations of Pfizer’s future growth.
Valuations
Based upon our valuations, Pfizer’s stock price is currently undervalued. Using
the three intrinsic valuation methods that we feel most confident in; free cash flows,
residual income, and abnormal earnings growth we arrived at the conclusion that the
stocks should be valued at a price in the vicinity of $50. Also, all five intrinsic valuations
used showed that the current stock price of $26.15 is lower than it should be, which only
increases our confidence that Pfizer’s stock price is undervalued.
Risks
The first mover advantage is huge in the pharmaceutical industry. The company
to first discover and patent a breakthrough drug will be the only company selling a drug
of that type for the next 8-10 years. While that company is raking in the cash, the other
companies in the industry can only sit idly by and wait for the patent to expire. The risk
in this situation comes from not being the first mover on one of these breakthrough drugs.
Legal risk also plays a very large role for companies such as Pfizer. If a drug is sent to
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market and side effects become apparent, legal fees and settlement costs can cost a
company millions of dollars.
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Business & Industry Analysis
P
fizer Inc. is a research-based, global pharmaceutical company that
discovers, develops, manufactures, and markets prescription medicines
for humans and animals, as well as consumer healthcare products.
Pfizer, whose corporate headquarters are located in New York, NY, got its start in 1862
by producing antacids. Pfizer has now grown to be the top pharmaceutical in the United
States and one of the top 10 in the world. In 2004 Pfizer had revenues of 52.5 billion and
spent 7.7 billion on Research and Development.
Industry Overview
The pharmaceutical industry covers a broad base of segments that allows
companies to specialize and create a competitive advantage. The US has the largest
market share with five of the top ten Drug Companies in the world. Europe has the
second largest market share and the other five top ten companies. Internet pharmacies,
along with Canadian drug suppliers continue to increase competition in an already highly
competitive market. Generic Drug Manufacturers also diversify the industry by
providing lower cost drugs than the big name pharmaceutical companies. Patents which
do not last forever can create a temporary monopoly for a company that develops a new
drug. Regulation by the FDA and lawsuits also increase costs and draw out the process
of bringing a drug to market.
Trends
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As research and development costs continue to sky rocket pharmaceutical
companies tend to focus on products for chronic rather than acute diseases with large
patient populations such as cancer, arthritis, and cardiovascular conditions. The potential
benefit of pooling research and development has lead to large mergers such as Pfizer with
Pharmacia along with Glaxo Wellcome with SmithKline Beecham. Drug manufactures
are continuing to make their drugs available online which helps them further penetrate
the market and keep up with technology. Advertising decreases the drug companies
reliance on physicians and further educates the general population on new and innovative
drugs.
Five Forces
Current Competitors
Even though many companies are in the pharmaceutical industry competition is
limited to the handful of major drug manufacturers. Leaders in market capitalization
include companies such as Pfizer Inc, Johnson & Johnson, Glaxo SmithKline, and Merck
Co. Generic drugs are one of the most prevalent sources of competition for the major
drug companies. Companies providing consumers with low cost generic drugs take away
profitability from the major players in the industry. First mover advantage is huge in the
industry because of the protection offered by a patent.
New Entrants
The threat of new competitors in the pharmaceutical industry is relatively low
because of the amount of capital needed along with the high cost of research and
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development. Smaller firms attempting to enter the industry are often bought out by the
huge drug companies trying to protect themselves from competition. FDA regulations
and the threat of lawsuits discourage potential firms from entering the market.
Substitute Products
There is a high volume of substitute products between the leaders in the industry.
Competitive pricing and product marketing are essential factors that determine who leads
in a particular sector. Generic companies pose the largest threat to the major companies
because of low cost which sways consumers from name brand drugs. The increasing
popularity of herbal remedies continues to threaten the profitability of the large
companies.
Customer Bargaining Power
The bargaining power of buyers is low since products are differentiated and made
to meet specific consumer needs. Generic drugs are often unavailable to consumers for a
period of time because of patent restrictions. These patent restrictions allow the
developing company to dictate prices until the patent expires.
Supplier Bargaining Power
Suppliers are limited in their bargaining leverage due to the pharmaceutical
companies ability to dictate what products are to be made. Another way that companies
keep supplier bargaining power low is by easily being able to find an alternate supplier.
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Classification of Industry
Pfizer operates in the three particular segments of the pharmaceutical industry.
They separate themselves from competition by producing pharmaceutical, consumer
health care, and animal health products.
Key Success Factors
Global research and development have helped Pfizer maintain a competitive
advantage in the major drug industry. Also contributing to Pfizer’s advantage is
operating worldwide with a multi-domestic strategy. Pfizer further set itself apart from
competition by merging with Pharmacia in 2003. Because of these advantages Pfizer was
able to generate 52.5 billion dollars in revenue for 2004.
Drug companies focus on the baby boomer generation because people over the
age of 65 consume three times as many drugs as younger populations. Pfizer continues to
cater to its customers by offering its drugs online and accepting discount cards. In
addition to providing drugs online Pfizer distributes its drugs with various vendors and
wholesalers.
Pfizer is lead by CEO Henry McKinnell and a board of directors with 16
members. Also managing Pfizer is CFO, Alan Levin. Management focus is concentrated
on maintaining performance while creating an inclusive environment.
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Pfizer operates research and development facilities in a several US states as well
as England, Japan, and France. Its consumer health care branch is based out of New
Jersey. With facilities strategically located around the globe Pfizer is able to stay
competitive in the market.
Pfizer is prone to several risks. One of the principal concerns is lawsuits
stemming from side affects caused by medication. Merck, one of Pfizer’s largest rivals,
is constantly being investigated on its popular painkiller, Vioxx. This will cost Merck
millions of dollars and take focus away from innovating and developing new drugs.
Another risk Pfizer has to be aware of is time. With companies in a race to develop the
cure for certain diseases such as cancer and diabetes anybody who isn’t on pace with the
industry could be left out and lose a huge portion of their market share. Patents also
correspond to the time risk involved in pharmaceuticals. A patent lasts for 20 years but
with the numerous FDA regulations and testing involved, a drug could be eight to ten
years into the patent by the time it is ready to distribute. This cuts back on the length of
time the company is able to exclusively produce the drug.
Firm & Industry Conclusions
Pfizer is able to maintain its position as a market leader in the pharmaceutical industry by
exploiting its competitive advantage, key success factors, and by being diversified within
the industry. Pfizer’s size plays to its advantage by creating the ability to invest huge
quantities of money in research and development.
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With the threat of substitute products extremely high coupled with the huge cost
of research and development the industry is highly competitive. Companies must keep
up with competition and produce and vital innovative drugs to be successful. Low
bargaining power of suppliers and customers and low power of shareholders plays in
favor of the drug companies. As the world population becomes increasingly dependant
on pharmaceutical products the industry will continue to grow and stay competitive as
companies seek to generate the next wonder drug.
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Accounting Analysis
T
o properly evaluate the performance of Pfizer it is necessary to
evaluate certain qualitative and quantitative measures.
After
evaluating Pfizer’s financial statements it is apparent that Pfizer is
transparent and discloses all relevant information that is pertinent to investors and
regulators.
Key Accounting Policies
Pfizer competes on a strategy that is designed to differentiate itself from
competitors, but also competes on cost leadership once a patent expires and they no
longer exclusively control production rights for that drug. It is necessary to identify key
accounting policies that are used in operation and in material disclosure in financial
statements. The more significant accounting policies are outlined below.
Consolidation and Basis of Presentation
The consolidated financial statements include Pfizer’s parents company along
with all subsidiaries operated in the US and internationally. Financial information
included for companies operated internationally is included as of November 30 th of each
year. Also, all remitted earnings of international subsidiaries are free of legal and
contractual restrictions.
On April 16, 2003 Pfizer purchases Pharmacia Corporation in a stock for stock
transaction which was accounted for using the purchase method of accounting. Assets
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acquired and liabilities assumed as a result of the transaction are included in the
consolidated financials. Also included in the consolidated financial statements ending
December 31, 2003 are the results of seven months of international operations along with
the results of eight months of US operations of the former company, Pharmacia.
Business Acquisitions
Pfizer uses the purchase method of accounting when acquiring other businesses.
This requires the assets acquired and liabilities assumed to be stated at fair value by the
date of acquisition. The transaction costs and other related costs when acquiring another
company are allocated to the underlying assets of that company in proportion to the
related values. If purchase price is above the fair value of net assets, any difference is
recorded as goodwill.
Revenues
Pfizer revenue recognition policy records revenue when the products are shipped
and legal title is transferred to the customer. This type of policy prevents the
accumulation of unearned revenues.
Estimates and assumption are used in the process of preparing the financial
statements. These estimates include values used to account for sales discounts and
allowances, and incentives. The estimates used have the potential to affect the reported
numbers and quality of disclosure.
Pfizer helps co-promote other pharmaceutical companies products in exchange for
additional revenue. Pfizer earns revenue when the co-promotion partners ship the good
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and the title is passed to their customer. The revenue received from the alliance is
included in revenues and is based upon a percentage of the partner’s net sales. Expenses
related to the alliance are recorded in selling, informational, and administrative expenses.
Research and Development Expenses
Costs associates with Research and Development are expenses as they are
incurred. Pfizer’s own R&D costs as well as those of associated third parties are
included. Milestone payments received from third parties are expensed when the specific
milestone is achieved. Pfizer has no R&D arrangement that results in recognition of
revenue (Pfizer 10-K, 2003).
Inventories
Inventories are valued at the lower of the two either cost of fair value. Costs for
work in process and finished goods are determined by average actual cost. Cost for
supplies and raw materials are calculated at average or latest actual cost.
Long Lived Assets
Included under long lived assets are property, plant, and equipment, which are
recorded at original cost and then adjusted for any improvements made. Also recorded
under long lived assets are goodwill and other intangible assets such as deferred taxes and
deferred charges.
Stock Based Compensation
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Compensation of employees with the issuance of stock options is accounted for
using Accounting Principle Board(APB) Opinion No. 251, Accounting for Stock Issued to
Employees. This is in accordance with SFAS No. 123, Accounting for Stock Based
Compensation. The market price on the day the stock option is issued is the exercise
price of the option. The grants of stock options incur no related expenses. (Pfizer 2004
10-K)
Degree of Potential Accounting Flexibility
Pfizer has a moderate degree of flexibility when disclosing financial reports. One
of the key accounting policies Pfizer has relates to inventory. Pfizer determines the value
of work in process and finished goods inventory by average actual cost. This
conservatively states the value of inventory, as the market value of this inventory is
noticeably bigger than the stated value. Costs for supplies and raw materials is calculated
by average costs or latest actual costs which helps keep costs stable and helps prevent
large fluctuations in the cost level.
Estimates are used when calculating values that account for sales discounts and
allowances, as well as customer incentives. The values Pfizer uses to calculate these
values have the ability to distort the actual underlying reality of the company.
Pfizer is required by GAAP to record Research and Development expenditures as
an expense and not allowed to classify this as an asset. This limits the degree of
flexibility that the company has. Because Pfizer spends large quantities of money on
R&D which is a large part of the pharmaceutical industry this has a significant impact on
their bottom line.
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Actual Accounting Strategy
Pfizer’s accounting strategy and policies are conservative in nature and reflect the
underlying economic reality of the company. Pfizer’s policy is in accordance with
generally accepted accounting procedures as set forth by the Financial Accounting
Standards Board. GAAP is subject to choices and multiple methods of valuation. Pfizer
has chosen a policy that accurately reflects the situation of the company and does not
capitalize on the accounting flexibility offered by GAAP to manipulate its financial
statements to look more appealing to investors. Overall, Pfizer is conservative in nature
with its financials and discloses all pertinent information.
The pharmaceutical industry is dominated by large companies in the US and
Europe. Merck & Co. along with Bristol-Meyers Squibb are two of Pfizer’s competitors
in the US. Pfizer and Merck do a good job in disclosing financial information while
Bristol-Meyers is slightly more hesitant isn’t as transparent as the other two companies.
The three companies’ accounting policies are similar in regard to the key accounting
policies such as revenue recognition, inventory, principles of consolidation, etc. with no
major differences. Bristol-Meyers is more aggressive in its accounting policies and
because of this has to restate its consolidated balance sheet at December 31, 2002. Also
restated were consolidated earnings, cash flows, comprehensive income, and retained
earnings for 2002, 2001, and its financial statements for the first three quarters of 2003.
Revenue Recognition
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Pfizer has adopted a revenue recognition policy that is simple and is in
accordance with GAAP. It records revenues when the products are shipped and title
passes to the customer. This method is the norm for the industry since there are no
alternative ways to record revenue under GAAP.
Research and Development
Research and Development is one of the key investments in the pharmaceutical
industry. In 2004 Pfizer spent 7.7 billion on R&D and brought in 52.5 billion in
revenues. Pfizer records Research and Development costs as expenses when they are
incurred. These costs also include related of costs of third parties. When milestone
agreements are made and Pfizer receives payments, these are expensed when the specific
milestone is achieved. Pfizer is conservative in regard to R&D in that they have no R&D
arrangements that result in recognition of revenue.
Business Acquisition
Pfizer uses the purchase method of accounting which states that the assets
acquired and liabilities assumed be recorded at their respective fair values on the date of
acquisition. For valuing the value of significant items Pfizer gets assistance from
independent valuation specialists.
When determining the fair value of assets and liabilities obtained through an
acquisition Pfizer uses the income method. This method forecasts the expected future net
cash flows and then adjusts this to present value with an appropriate discount rate, which
reflects the risks associated with these cash flows.
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Quality of Disclosure
While other firms in the industry aren’t as transparent and don’t fully disclose the
actual situation Pfizer goes beyond GAAP requirements and makes the effort to disclose
all information relevant to investors and regulators. In a portion of the 2003 10-K Pfizer
discloses the adjusted net income. This is the state the company would have been in prior
to the Pharmacia acquisition. Pfizer is committed to showing the true economic situation
of the company by choosing an accounting strategy that accurately depicts the
circumstances at the time of disclosure.
The footnotes provided in the 10-K discloses the revenue recognition, and
inventory calculation methods. They also provide information on other key policies and
give further insight to the company’s management activities. Also in the management
discussion and analysis Pfizer gives clear insight to the formal structure of the financial
reports. Given the extensive level of disclosure of internal controls and recollection of
independent Certified Public Accountants that audited the reports, Pfizer took the
recommendations made by auditing firm KPMG LLP and their own internal auditors.
Management claims,” We believe that our system of internal control is effective and
adequate to accomplish the objectives discussed.” (Pfizer 10-K 2003)
Sales Manipulation Diagnostics
2003 2002 2001 2000 1999
Net Sales / Cash
From Sales 1.00 1.10 1.02 0.99 1.00
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Net Sales /Accounts
Receivable 5.15 5.60 5.44 5.39 5.10
Net Sale / Inventory 7.74 12.09 10.59 10.95 10.58
Appendix A: Sales Manipulation Diagnostics
These ratios remained steady throughout the five year observation period with the
exception of net sales to inventory. Net sales to inventory showed a noticeable increase
in 2002 which can be explained by an increase in sales. The next year net sales to
inventory decreases by a substantial amount. This is explained by an increase in
inventory due to the acquisition of Pharmacia. The net sales to unearned revenues ratio is
not applicable to Pfizer because of Pfizer’s revenue recognition policy. Pfizer’s revenue
recognition policy is set up to record revenue after products have been shipped to
consumers, which results in zero unearned revenues. Net sales to warranty liabilities are
also not applicable to Pfizer because Pfizer does not produce products which are subject
to warranties. The FDA may force Pfizer to recall a certain drug to do health concerns
but this will result in an extraordinary loss, and not a warranty liability.
Expense Manipulation Diagnostics
2003 2002 2001 2000 1999
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Asset Turnover 0.39 0.70 0.74 0.88 0.87
CFFO/OI 7.15 1.07 1.18 1.67 1.10
CFFO/NOA 0.26 0.64 0.59 0.45 0.72
Total Accruals /
Change in Sales 1.28 0.43 -2.79 0.70 0.23
Pension Expense /
SG&A 0.01 0.01 0.01 0.01 0.01
Appendix B: Expense Manipulation Diagnostics
The ratios were relatively constant for the five years of observation with a few
exceptions. In 2000 Pfizer acquired Warner-Lambert and thus affecting certain ratios
such as cash flow from operations to operating income as well as total accruals to change
in sales. Also, the acquisition of Pharmacia affected nearly all ratios for 2003. From
2002 to 2003 the CFFO/OI income ratio jumped from 1.07 to 7.15. This large of an
increase should be investigated to determine any manipulation by Pfizer’s management.
The Pharmacia merger had drastic affects on Pfizer’s financial statements. The Cash
Flow From Operations increases from $9.9 billion to $11.7 billion. Operating Income
decreased from $9.2 billion to $1.6 billion. This is the reason that the change in
CFFO/OI was so drastic.
After evaluating a company’s sales and expense manipulation ratios, it is also
necessary to compare the company to its competitors as an additional check. Because of
the increasing number of mergers and acquisitions it is hard to directly compare these
manipulation ratios to do the volatility and fluctuations.
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The net sales to cash from sales ratios for all companies stayed very closely to 1.
There were no large fluctuations in Pfizer or any other company which would suggest
foul play. The net sales to accounts receivable ratio was prone to large fluctuations.
Pfizer was the most stable of all companies in regard to this ratio which suggests sound
management and no creation of false sales. Net sales to inventory was another ratio
which large variances from year to year. Pfizer had noticeable increase and decreases
like all companies due to the acquisitions of Warner Lambert and Pharmacia. This was
consistent for all companies in the industry and did not raise any red flags.
The expense manipulation diagnostics had the same patterns as the sales
manipulation ratios with large fluctuations. Pfizer’s asset turnover ratio was constant
until 2003 when it had a noticeable drop. This was due to the large and sudden increase
in assets due to the acquisition of Pharmacia. CFFO/OI had the same degree of
fluctuation as most ratios with Pfizer again having a large rise in 2003 due primarily to
the decrease in operating income. This also did not raise any red flags because the
material increase was due again to the acquisition of Pharmacia. Total accruals to change
in sales were relatively constant for Pfizer when compared to other companies in the
industry. Merck for example, increased from -.35 to 42.72 in one year. Pfizer’s largest
fluctuation was .7 to -2.79 which suggests that Pfizer’s management is doing a good job
of preventing large swings in this ratio when compared to other companies in the
industry. Pension expense to SG&A is a ratio which should be carefully looked into
because of the rising cost of health care. Pfizer’s ratio was consistently around 1% while
other companies had fluctuations as large as around 80%. Pension expense is hard to not
explicitly listen on most income statements, with Pfizer being no exception. To
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accurately compute this ratio, the footnotes of the income statement must carefully be
examined to determine actual expenses as well as discount rates used.
Percentage Change in Ratios
2000 2001 2002 2003
Net Sales / Cash
From Sales -0.95% 2.09% 8.48% -9.24%
Net Sales /Accounts
Receivable 5.65% 0.94% 2.90% -7.98%
Net Sale / Inventory 3.47% -3.26% 14.16% -35.96%
Asset Turnover 1.14% -16.00% -5.79% -44.59%
CFFO/OI 50.82% -29.44% -8.61% 565.84%
CFFO/NOA -37.36% 31.76% 7.59% -58.65%
Total Accruals /
Change in Sales 198.42% -499.64% -115.49% 195.86%
Pension Expense /
SG&A 45.86% 0.36% 21.84% 8.83%
Potential Red Flags
As explained earlier Pfizer maintains transparent records in its financial
disclosure. Although there have been some potential discrepancies in the raw data, the
causes of these have been well explained by mergers, acquisitions, and supplemental data
in the footnotes. For example, the acquisitions of Warner-Lambert and Pharmacia caused
fluctuations in inventory levels, sales, and accruals, which affected many of the
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diagnostic ratios. Although these changes might raise concerns of revenue and expense
manipulation, Pfizer’s quality of disclosure and reporting justified all causes of variation.
Because Pfizer is the world’s leading pharmaceutical company with 14 drugs that
are the high sellers in their respective categories, this lowers the level of concern because
the company continues to improve and dominate the industry.
Accounting Distortions
After reviewing five years of financial statements for Pfizer, there appears to be
no symptoms of accounting distortions. The financial statements were in accord with the
supplemental data disclosed in the footnotes. While Pfizer had a moderate degree of
accounting flexibility within GAAP regulations, it did not use this to manipulate its
financial position. All methods of accounting used were well explained in the footnotes.
As there were no distortions in the financial statements, there is no need to correct for
accounting misrepresentation.
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Ratio Analysis & Forecast Financials
T
he financial ratio analysis and forecasting methods are essential to
understanding potential performance based on a company’s past and
present operations. The financial ratio analysis utilizes a variety of
methods, using past financial data to evaluate past performances. Methods used, such as
liquidity, profitability, capital structure, and others are used to help show the history of
overall success.
Not only does the financial ratio analysis take the financial data of the company at
focus, but as well of that of the competitors and industry. Financial statement forecasting
methods are used to give insight on possible future performances. Forecasting methods
used for Pfizer will take into account of the recent acquisition of Pharmacia. The forecast
will span a ten year period because, a longer forecast period shows possible trends over
time. The purpose of the financial ratio analysis and forecasting methods is to provide
the company as well as investors a picture of what the future may hold.
Financial Ratio Analysis
The Financial ratio analysis section covers the past five years of financial data;
with this data such ratios used will help determine liquidity, profitability, and capital
structure. Other ratios will be used to help show past performances of Pfizer that is
crucial to this particular company and it success. The sustainable growth rate (SGR) will
25

e used, which says that the increase in sales must be below the SGR in order to grow.
All the information presented in the financial ratio analysis will be vital to accurately
forecast future performance of Pfizer.
Pfizer Financial Ratios
1999 2000 2001 2002 2003 2004
Liquidity Analysis
Current Ratio 1.37 1.43 1.40 1.34 1.26 1.50
Quick Asset Ratio 0.99 1.03 0.98 0.99 0.88 1.11
Inventory Turnover(Days) 172.88 200.98 237.25 241.65 216.69 322.36
Accounts Receivable Turnover(Days) 71.57 67.74 60.34 65.22 70.88 65.10
Profitability Analysis
Gross Profit Margin 0.80 0.83 0.87 0.88 0.78 0.86
Operating Profit Margin 0.25 0.20 0.34 0.36 0.07 0.27
Net Profit Margin 0.18 0.13 0.27 0.28 0.09 0.22
Asset Turnover 0.87 0.88 0.74 0.70 0.39 0.42
Return on Assets 0.16 0.11 0.20 0.20 0.03 0.09
Return on Equity 0.35 0.23 0.43 0.46 0.06 0.17
Capital Structure Analysis
Total Liabilities/Total Equity 1.25 1.08 1.14 1.32 0.79 0.81
Times Interest Earned 18.32 12.57 34.31 46.08 9.32 28.24
Debt Service Margin 2.91 3.60 6.28 6.09 4.51 6.12
Sustainable growth rate
22.45% 9.51% 27.73% 29.86% -0.68% 9.20%
Pfizer’s sustainable growth rate is very volatile. This is due in large parts to
sizeable acquisitions. Pfizer’s return on equity ratio fluctuates largely from year to year
because of these mergers which causes a large part of the volatility in the sustainable
growth rate. Pfizer’s sustainable growth rate is probably around 9%, which is drawn
26

from the 2 years of observation where conditions were favorable enough to let the SGR
smooth out to realistic levels. This implies that Pfizer will be able to grow at roughly
nine percent per year without becoming constrained.
.
Liquidity Analysis
Pfizer’s liquidity has improved over the past 5 years. The current ratio and quick
asset ratio showed constant improvement from 1999 through 2004. The inventory
turnover decreased slightly over the same five year period, making Pfizer slightly less
efficient. Some of this is attributable to large acquisitions in 2000 and 2003. Pfizer’s
inventory turnover while fluctuating between years has increased marginally over the five
year period. This also shows Pfizer becoming less efficient. Even though the liquidity
ratios yield mixed results, Pfizer continues to expand and remain liquid in respect to
competitors.
Profitability Analysis
Pfizer’s gross profit margin has fluctuated slightly for the analysis period but ends
up six percent higher at 86%. While this rate of gross profit is likely to fall slightly in the
future because of regulation and public attitude toward pharmaceutical companies Pfizer
is in position to maintain its market power. Operating profit had varied it is up slightly
higher, showing a slight increase in operating efficiency. Net profit has had a range of
almost 20 percent but ends up 4 percent higher in 2004 than 1999. The dramatic
variation is due to acquisitions of large firms such as Pharmacia. Asset turnover has been
cut roughly in half because the acquisition of Pharmacia caused Pfizer’s asset base to
double. As Pfizer sells off some of Pharmacia’s assets this ratio will improve but will
27

probably not reach the level it was at prior to the acquisition. Return on assets and equity
has also dropped noticeably during the period of observation. It stayed relatively
constant but was also affected by the acquisition. Pfizer has experienced surges and
drops in its profitability over the past six years due in large part to its level of assets. It
remains a leader in almost every profitability ratio except for asset turnover proving that
it is able to continue its domination of other firms.
Capital Structure
Pfizer has constantly improved its capital structure over the past five years. It is
now twenty percent lower than its nearest competitor, Abbot, in the debt to equity ratio.
While Pfizer’s times interest earned ratio is low compared to competitors it has a
favorable debt service margin. It is the leader in the industry in debt service margin.
Pfizer is able to generate six dollars of operating income for every dollar of current notes
payable.
Cross Sectional (Benchmark) Analysis
The following ratios were calculated for Pfizer, Pfizer’s main competitors, and the
industry average. The industry average was calculated from Pfizer’s three main
competitors. Merck Company’s 10-K was not released at the time of analysis, therefore
its numbers for 2004 are labeled N/A.
Financial Ratios
Appendix C: Financial Ratio Analysis
28

Current Ratio
1.80
1.70
1.60
1.50
1.40
1.30
1.20
1.10
1.00
2000 2001 2002 2003 2004
Pfizer Abbot Bristol Meyers Merck Industry Average
Quick Asset Ratio
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
2000 2001 2002 2003 2004
Pf izer Abbot Bristol Meyers Merck Industry Average
29

Accounts Recievable Turnover
9.00
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
2000 2001 2002 2003 2004
Pf iz er Abbot Bristol Meyers Merck Industry Average
Days Supply of Recievables
300.00
250.00
200.00
150.00
100.00
50.00
0.00
2000 2001 2002 2003 2004
Pf izer Abbot Bristol Meyers Merck Industry Average
30

Inventory Turnover
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
2000 2001 2002 2003 2004
Pf izer Abbot Bristol Meyers Merck Industry Average
Days Supply of Inventory
1000.00
900.00
800.00
700.00
600.00
500.00
400.00
300.00
200.00
100.00
0.00
2000 2001 2002 2003 2004
Pf izer Abbot Bristol Meyers Merck Industry Average
31

Gross Profit Margin
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2000 2001 2002 2003 2004
Pfizer Abbot Bristol Meyers Merck Industry Average
Operating Profit Margin
60%
50%
40%
30%
20%
10%
0%
2000 2001 2002 2003 2004
Pf iz er Abbot Bristol Meyers Merck Industry Average
32

Net Profit Margin
40%
35%
30%
25%
20%
15%
10%
5%
0%
2000 2001 2002 2003 2004
Pfizer Abbot Bristol Meyers Merck Industry Average
Asset Turnover
1.20
1.00
0.80
0.60
0.40
0.20
0.00
2000 2001 2002 2003 2004
Pfizer Abbot Bristol Meyers Merck Industry Average
33

Return on Assets
30%
25%
20%
15%
10%
5%
0%
2000 2001 2002 2003 2004
Pfizer Abbot Bristol Meyers Merck Industry Average
Return on Equity
60%
50%
40%
30%
20%
10%
0%
2000 2001 2002 2003 2004
Pfizer Abbot Bristol Meyers Merck Industry Average
34

Debt to Equity
2.50
2.00
1.50
1.00
0.50
0.00
2000 2001 2002 2003 2004
Pfizer Abbot Bristol Meyers Merck Industry Average
Times Interest Earned
95.00
85.00
75.00
65.00
55.00
45.00
35.00
25.00
15.00
5.00
-5.00
2000 2001 2002 2003 2004
Pfizer Abbot Bristol Meyers Merck Industry Average
35

Debt Service Margin
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00
2000 2001 2002 2003 2004
Pfizer Abbot Bristol Meyers Merck Industry Average
Operating Cash Flow as a Percentage of Operating Income
400%
350%
300%
250%
200%
150%
100%
50%
0%
2000 2001 2002 2003 2004
Pfizer Abbot Bristol Meyers Merck Industry Average
36

Financial Statement Forecasting
To accurately forecast financial statements needed to perform intrinsic valuations,
considerable effort, time, and care is needed. All the financial ratios must be calculated
and analyzed for a period of five years. Pro-forma financial statements are also a tool
used to forecast the financial statements. These are created by stating everything in
percentages of the biggest number on the financial statement or section of the financial
statements. Once this is completed future values can be computed by looking at
historical patterns and impacts of current market conditions.
When forecasting the income statement, balance sheet, and statement of cash
flows the acquisition of Pharmacia played a key role. This acquisition caused drastic
fluctuations in Pfizer’s ratios in 2003 as compared to 2002. When taking this into
account, historical patterns of past acquisitions were used to provide a basis for future
predictions. The acquisition of Warner Lambert in 2001 showed increases in sales,
inventory, and assets. This acquisition also showed decreases in operating cash flows
and net income. After a year these numbers and financial ratios were at levels slightly
higher than before the acquisition. These cyclical impacts were used in forecasting
Pfizer’s financial reports for the future ten years which are used in the intrinsic valuation
models.
Although many percentage based growth rates are used, some drive many key
aspects of forecasts. In 2005, a 5% growth rate in sales is used. This number is increased
to 6.5% in 2006 and then to 8% in 2007. For the remaining years, Pfizer’s growth rate in
sales is estimated to be 10%. Another key number used in calculations is the gross profit
37

margin. Pfizer’s growth profit margin at the end of 2004 was 86%. With the hostile
attitude towards drug manufacturers for charging high prices, Pfizer’s gross profit margin
in our models is 83% in 2005 and 80% for the remaining years. With many growth rates
and assumptions used in the models, these are two of the most important numbers which
carry through to all the financial statements.
Appendix D: Forecasted Financial Statements
38

Valuation Analysis
A
fter financial statements and ratios have been forecast, in this case
for ten years, valuation methods can be performed. Different
valuation methods have different underlying theoretical support
which will provide different suggested share prices. One method alone cannot provide a
sound basis for a firm valuation. Many intrinsic methods along with comparable ratios
from firms in the same industry are necessary to get a complete feel for the firm. Also,
sensitivity analysis must be performed to ensure that misestimating costs of capital and
growth rates will not provide unreliable results. Accurate and believable costs of capital
along with the forecasted financial statements are necessary before any valuations can be
performed. The following sections provide detailed methods of cost of capital estimation
and the implementation of those numbers in the various intrinsic valuation methods.
Methods of comparables are also included to value firms against industry averages.
Cost of Capital Estimation
To properly value Pfizer using intrinsic valuation models, the cost of debt, equity,
and weighted average cost of capital must first be estimated. This in itself requires
considerable work and attention to detail.
The cost of debt is the easiest to estimate and also the most reliable. In the notes
of its 10-K Pfizer explained its short and long term borrowings in detail to allow easy
estimation of its cost of debt. The cost of debt for short term borrowings was given in the
10-K at 2.5%. The cost of long term borrowings had to be calculated from a list of
borrowings including bonds, debentures, and mortgages. The cost of long term debt was
39

estimated at 4.38%. These percentages were then used to compute a weighted average
cost of debt from the liabilities section from the 2004 Balance Sheet. The Balance Sheet
debt was calculated to be 3.45%. This calculation was performed by excluding deferred
taxes on income because the number has been staying at a constant level, without
material increases or decreases. This implies that it will continue to stay at a constant
level and is not needed in determining Pfizer’s weighted average cost of debt.
The beta (β) for Pfizer was calculated using three different time periods. Used in
the calculations were the firm’s monthly returns, and the Standard and Poor’s index fund
monthly returns from 2000 to 2005. Also used in calculating the risk free rate was the
monthly yield on the five year US treasury bonds. The risk free rate was estimated to be
3.21% and was used in the calculations of Pfizer’s cost of equity. The long run average
market risk premium since 2002 and used in the calculations was 3%. The beta which
showed the highest degree of explanation by the R-Squared measure was for the time
period 2002-2005. The R-squared variable for this time period was .234 and computed
the beta to be .59. This was used to compute a cost of equity at 4.99%. The implied cost
of equity which supports Pfizer’s current share price was 4.56%.
Appendix E: Cost of Debt Calculations
Time
Period Beta Estimate R-Squared
Estimated
Ke
2002-2005 0.594927185 0.233958482 4.99%
2003-2005 0.435905178 0.060637378 4.52%
2000-2005 0.458094958 0.131888494 4.58%
Implied 4.56%
40

The estimated costs of debt and equity are consistent with a company of Pfizer’s
size and organization. A large corporation such as Pfizer that has operations
internationally is able to borrow money from many different sources and keep their costs
of capital down to reasonable levels.
Time
Period
Estimated
Ke
Estimated
WACCbt
Estimated
WACCat
2002-2005 4.99% 4.07% 3.78%
2003-2005 4.52% 4.04% 3.74%
2000-2005 4.58% 4.30% 4.01%
Implied 4.56% 4.06% 3.77%
The weighted average cost of capital (WACC) before tax consideration was
calculated to be 4.07%. A 4.99 % cost of equity was used in this calculation. The after
tax WACC was estimated to be 3.78%.
Appendix F: Regression Analysis
The values used in the intrinsic valuations are as follows:
Beta(β) 0.595
Cost of Equity(Ke) 4.99%
Cost of Debt(Kd) 3.45%
WACCbt 4.07%
WACCat 3.78%
Intrinsic Valuation Methods
Various intrinsic valuation methods are needed to accurately value a company’s
stock price. The different methods used take into account different variables and
41

different discount rates. Once each model has been worked out an accurate investment
recommendation can be made.
Appendix G: Intrinsic Valuation Methods
Discounted Dividends
The discounted dividend model uses forecasted dividends per share, cost of
equity, and an estimated growth rate to discount the nominal amounts back to the current
year.
PPS t
=
⎛
∞ ⎜
⎝
∑ E d ~
t
t = k
+ 1
⎞
⎠
⎟
( + )
1 1
e
t
This model relies on assumptions and the accuracy of the discount rate. Pfizer
has an estimated cost of equity of 4.99% and a growth rate of 2%. This model gives
Pfizer an estimated price per share of $36.02. When assuming a growth rate of zero for
the terminal year perpetuity the model yields an intrinsic valuation of $23.76 a share.
The model is limited by the accuracy of the forecasted dividends and the growth rate in
the terminal year. This model shows Pfizer to be undervalued.
Sensitivity Analysis
g
0 0.015 0.03 0.045
Ke 0.03 $35.48 $64.88 N/A N/A
0.04 $28.13 $41.36 $94.29 N/A
0.05 $23.72 $31.28 $50.18 $182.50
0.06 $20.78 $25.68 $35.48 $64.88
0.07 $18.68 $22.12 $28.13 $41.36
42

Discounted Free Cash Flows
The discounted free cash flow model uses the free cash flows to the firm to
estimate a price per share. The free cash flows to the firm include cash flows from
operations and investing. It does not include cash flows from financing activities. The
free cash flows to the firm are then discounted to the current year using the firms before
tax WACC.
V E, t
=
∞
∑ E t
t = 0 1
~
( FCF )
( + k )
e
t + 1
t + 1
In Pfizer’s case this before tax WACC is estimated to be 4.07%. Assuming a 2%
growth rate this model yields an intrinsic valuation of 58.98. Using a growth rate of 0%
yields a value of $29.50 which is closer to the firms actual share price. This model takes
more data into consideration than the discounted dividend model does. This model is
also prone to the limitations of forecast accuracy and growth rate estimation.
Sensitivity Analysis
g
0 0.015 0.03 0.045
WACC 0.03 $44.50 $88.83 N/A N/A
0.04 $30.23 $48.52 $121.68 N/A
0.05 $21.75 $31.34 $55.31 $223.10
0.06 $16.14 $21.85 $33.26 $67.50
0.07 $12.18 $15.86 $22.29 $36.45
Discounted Residual Income
43

This model uses beginning equity per share, forecasted earnings per share, and
dividends per share to determine normal and residual income. Normal income is the
beginning book value of equity multiplied by the firms cost of equity. Residual income is
equal to earnings per share minus normal income. The residual income values are then
discounted back to the current year to give an intrinsic valuation.
V E, t
= BVE +
t
∞
∑
⎛⎜
⎝
~
E ( NI ) − k ( BVE )
⎞⎟
⎠
t t + 1 e t
t = 0 1
( + k )
e
t + 1
In Pfizer’s case, using a cost of equity of 4.99% and a growth rate of 0% this
model yields an intrinsic valuation of $56.20 per share. For this model a zero percent
growth rate was used because residual income is more likely to fluctuate and a aggressive
growth rate is likely to over-value the firm.
Sensitivity Analysis
g
0 0.015 0.03 0.045
Ke 0.03 $103.17 $180.52 N/A N/A
0.04 $73.13 $102.67 $220.84 N/A
0.05 $55.37 $69.62 $105.24 $354.58
0.06 $43.75 $51.49 $66.97 $113.42
0.07 $35.60 $40.12 $48.01 $65.39
Abnormal Earnings Growth
The abnormal earnings growth model is a more complicated model that uses
earnings per share and dividends per share along with the firm’s cost of equity. It
assumes that dividends are reinvested at the cost of equity. The abnormal earnings
growth is the difference between the cumulative dividend earnings and normal earnings.
44

Cumulative dividend earnings are equal to the beginning price per share plus the
percentage earned off of the reinvested dividends.
V
E
0
Earn ⎡
⎤
1
1 AEG2
AEG3
AEG4
= + ⎢ + + + L
2
3 ⎥
ρE
−1 ρE
−1
⎣ ρE
ρE
ρE
⎦
1 ⎡ AEG
⎤
2
AEG3
AEG4
= ⎢Earn1
+ + + + L
2
3 ⎥
ρE
−1
⎣ ρE
ρE
ρE
⎦
This model yields a price per share of $56.20 for Pfizer. This model assumes no
terminal year perpetuity because of the volatility on earnings per share. Because of this
the growth rate is not a factor in the intrinsic valuation.
Sensitivity Analysis
g
0 0.015 0.03 0.045
Ke 0.03 $62.03 $62.03 $62.03 $62.03
0.04 $59.20 $59.20 $59.20 $59.20
0.05 $55.49 $55.49 $55.49 $55.49
0.06 $52.60 $52.60 $52.60 $52.60
0.07 $50.80 $50.80 $50.80 $50.80
Long Run Average Residual Income Perpetuity
The long run average residual income perpetuity is based on the price to book
ratio. This valuation method is performed by multiplying the book value of equity times
(the long run ROE minus the cost of equity) divided by (the cost of equity minus the
expected growth rate). This value is then added back to the book value of equity.
Assuming a 2% growth rate, this method of valuation yield an expected price per share of
$99.42, which is greatly higher than that current share price. If a 0% growth rate is
45

substituted into the formula the model then yields a price per share of $63.33 which is
closer to the other valuation models.
Sensitivity Analysis
g
0 0.015 0.03 0.045
Ke 0.03 $105.34 $201.30 N/A N/A
0.04 $79.00 $120.78 $287.90 N/A
0.05 $63.20 $86.27 $143.95 $547.69
0.06 $52.66 $67.10 $95.97 $182.56
0.07 $45.14 $54.90 $71.98 $109.54
Method of Comparables
This method utilizes ratios from the firm’s competitors to find an industry average
and an expected share price for the company. Pfizer’s main competitors which were used
in this valuation are Abbot Laboratories, Bristol-Meyers Squibb, Glaxo-Smith Kline, and
Merck. These companies provide a solid basis for performing the ratio based valuations.
PPS assessed, t
=
⎛
E( EPS
t + 1)*
⎜
⎝
average
P
E
⎞
⎟
⎠
comparable firms
The actual firm being valued is not included when calculating the industry
average to prevent bias. It may also be necessary to eliminate firms with an outlying
ratio from the average to provide a stronger basis of valuation.
Appendix H: Method of Comparables
46

The average P/E trailing ratio for Pfizer’s competitors was 20.9. There were no
outliers for this ratio. When multiplied by Pfizer’s earnings per share of $1.87, this gives
a valuation of $39.08. This is higher than Pfizer’s actual share price of $26.15
The forward looking P/E average ratio was 18.125. When eliminating Merck’s
outlying value of 11.8 a more reliable average of 23.23 is attained. When this is
multiplied by Pfizer’s earnings per share this gives a valuation of $37.84 which is always
over the actual price per share.
It was necessary to take out Abbot Lab’s P/B ratio of 5.27 from the industry
average to get a more accurate and reliable average of 3.85 as compared to 4.20. When
the 3.85 is multiplied by Pfizer’s book value of equity this yields a valuation of $35.58.
When evaluating the dividend yield ratio it was necessary to eliminate both Abbot
Labs and Novartis from the average. The remaining two firms had an average dividend
yield percentage of 4.8. When this was multiplied by Pfizer’s book value of equity it
gives a suggested price per share of $44.40. This number indicated that Pfizer is an
undervalued security.
The price to sales ratio industry average after excluding Bristol-Meyers Squibb
outlying value was 3.53. When multiplied by Pfizer’s sales per share of 7.21 gives a
suggested price per share of $25.43. This is only $.72 lower than Pfizer’s actual share
price which suggests Pfizer is just slightly undervalued.
After excluding Bristol-Meyers Squibb outlying value of 2.82 the industry
average was 1.82. When this average is multiplied by Pfizer’s projected growth rate of
12% gives a share price of $21.84 which suggests that Pfizer is undervalued by $4.31.
47

Conclusions
After analyzing the results of the intrinsic valuations and comparables suggested
valuations, Pfizer appears to be overvalued. Every intrinsic valuation method provides a
suggested share price above the actual price of $26.15. Four out of the six comparable
ratios also suggest a share price higher than Pfizer’s actual price. The other two
comparable ratios are just slightly under Pfizer’s actual price per share. Even after
looking at the sensitivity analysis performed for every intrinsic valuation model, Pfizer’s
cost of capital would have to be over-estimated by a large amount for Pfizer’s stock price
to be undervalued.
48

References
United States. Securities and Exchange Commission. Edgar Database. Retrieved
February 1, 2005 from the World Wide Web:
http://sec.gov/edgar/searchedgar/webusers.htm
Pricewaterhouse Coopers. Edgarscan. Retrieved February 1, 2005 from the World Wide
Web:
http://edgarscan.pwcglobal.com/servlets/edgarscan
Yahoo Finance. Retrieved February 1, 2005 from the World Wide Web:
http://finance.yahoo.com/
Wilde Mathews, A. & Hensly S. (2005, April 8). FDA Stiffens Painkiller Warnings,
Pushed Pfizer to Suspend Bextra. TheWall Street Journal, p. A1
Hensly, S. (2005 February 11). Pfizer Plans $2 Billion In Cost Cuts. The Wall Street
Journal, p. A3
Pfizer, Inc. Retrieved February 1, 2005 from the World Wide Web:
http://pfizer.com/main.html
49

Moore, M. Chapter 7 – Prospective Analysis: Valuation Theory Basics. Retrieved
February 1, 2005 from the World Wide Web: http://mmoore.ba.ttu.edu/Fin3321-
Spring-05/Lecture_Notes/Chapter-7.doc
Moore, M. Chapter 8 – Prospective Analysis: Valuation. Retrieved February 1, 2005
From the World Wide Web: http://mmoore.ba.ttu.edu/Fin3321-Spring-
05/Lecture_Notes/Chapter-8.doc
50

Appendix
Appendix A: Sales Manipulation Diagnostics
Net Sales/Cash From Sales 2003 2002 2001 2000
Pfizer 1.00 1.10 1.02 0.99
Abbot Labs 1.00 1.03 1.03 1.22
Bristol Meyers Squibb 1.00 1.04 0.95 1.02
Merck 1.00 0.94 1.01 1.00
Industry Average 1.00 1.00 1.00 1.08
Net Sales/Accounts Recievable 2003 2002 2001 2000
Pfizer 5.15 5.60 5.44 5.39
Abbot Labs 5.22 5.22 1.35 1.62
Bristol Meyers Squibb 5.10 5.46 4.51 4.76
Merck 5.59 3.95 4.06 7.67
Industry Average 5.30 4.88 3.31 4.69
Net Sales/Inventory 2003 2002 2001 2000
Pfizer 7.74 12.09 10.59 10.95
Abbot Labs 6.31 6.26 1.71 2.03
Bristol Meyers Squibb 11.65 10.30 10.59 9.09
Merck 8.80 7.23 5.92 13.36
Industry Average 8.92 7.93 6.07 8.16
Appendix B: Expense Manipulation Diagnostics
Asset Turnover 2003 2002 2001 2000
Pfizer 0.39 0.70 0.74 0.88
Abbot Labs 0.66 0.65 0.16 0.23
Bristol Meyers Squibb 0.68 0.65 0.65 0.99
Merck 0.55 0.45 0.48 1.01
Industry Average 0.63 0.58 0.43 0.74
CFFO/OI 2003 2002 2001 2000
Pfizer 7.15 1.07 1.18 1.67
Abbot Labs 1.35 1.43 3.09 2.34
Bristol Meyers Squibb 1.13 0.46 2.64 1.21
Merck 1.28 1.28 1.18 0.81
Industry Average 1.25 1.06 2.31 1.46
CFFO/NOA 2003 2002 2001 2000
Pfizer 0.26 0.64 0.59 0.45
Abbot Labs 0.19 0.23 0.25 0.29
Bristol Meyers Squibb 0.33 0.09 0.54 0.79
Merck 0.38 0.35 0.32 0.32
Industry Average 0.30 0.22 0.37 0.46
51

Total Accruals/Change in Sales 2003 2002 2001 2000
Pfizer 1.28 0.43 -2.79 0.70
Abbot Labs 1.40 0.24 11.45 0.55
Bristol Meyers Squibb 1.64 -1.67 7.07 N/A
Merck 9.81 42.72 -0.35 N/A
Industry Average 4.28 13.76 6.06 0.55
Pension Expense/SG&A 2003 2002 2001 2000
Pfizer 0.01 0.01 0.01 0.01
Abbot Labs 0.53 0.62 1.35 1.22
Bristol Meyers Squibb N/A N/A N/A N/A
Merck N/A N/A N/A N/A
Industry Average 0.53 0.62 1.35 1.22
Appendix C: Financial Ratio Analysis
Current Ratio
2000 2001 2002 2003 2004
Pfizer 1.43 1.40 1.34 1.26 1.50
Abbot 1.72 1.06 1.33 1.38 1.57
Bristol Meyers 1.44 1.19 1.21 1.61 1.50
Merck 1.37 1.12 1.16 1.20 N/A
Industry Average 1.51 1.13 1.24 1.40 1.54
Quick Asset Ratio
2000 2001 2002 2003 2004
Pfizer 1.03 0.98 0.99 0.88 1.11
Abbot 0.78 0.44 0.61 0.66 0.84
Bristol Meyers 1.00 0.87 0.85 1.24 1.20
Merck 0.96 0.74 0.84 0.86 N/A
Industry Average 0.91 0.68 0.77 0.92 1.02
Accounts Receivable Turnover
2000 2001 2002 2003 2004
Pfizer 5.39 6.05 5.60 5.15 5.61
Abbot 1.62 1.35 5.22 5.22 5.32
Bristol Meyers 4.76 4.51 5.46 5.10 4.43
Merck 7.67 4.06 3.95 5.59 N/A
Industry Average 4.69 3.31 4.88 5.30 4.88
52

Days Supply of Receivables
2000 2001 2002 2003 2004
Pfizer 67.74 60.34 65.22 70.88 65.10
Abbot 224.79 271.08 69.93 69.99 68.55
Bristol Meyers 76.63 81.01 66.84 71.62 82.36
Merck 47.59 89.80 92.30 65.31 N/A
Industry Average 77.90 110.42 74.82 68.87 74.82
Inventory Turnover
2000 2001 2002 2003 2004
Pfizer 1.82 1.54 1.51 1.68 1.13
Abbot 0.51 0.42 2.79 2.84 3.39
Bristol Meyers 2.45 3.21 2.98 3.18 3.81
Merck 7.43 1.01 1.32 1.69 N/A
Industry Average 3.46 1.55 2.36 2.57 3.60
Days Supply of Inventory
2000 2001 2002 2003 2004
Pfizer 200.98 237.25 241.65 216.69 322.36
Abbot 721.06 860.22 130.65 128.57 107.66
Bristol Meyers 148.93 113.72 122.39 114.71 95.87
Merck 49.14 360.42 276.92 216.08 N/A
Industry Average 105.44 235.66 154.35 142.02 101.42
Gross Profit Margin
2000 2001 2002 2003 2004
Pfizer 83% 87% 88% 78% 86%
Abbot 75% 75% 55% 55% 55%
Bristol Meyers 73% 70% 71% 71% 69%
Merck 44% 83% 82% 81% N/A
Industry Average 64% 76% 69% 69% 62%
Operating Profit Margin
2000 2001 2002 2003 2004
53

Pfizer 20% 34% 36% 7% 27%
Abbot 30% 51% 22% 20% 21%
Bristol Meyers 30% 12% 17% 25% 23%
Merck 24% 47% 45% 40% N/A
Industry Average 28% 37% 28% 28% 22%
Net Profit Margin
2000 2001 2002 2003 2004
Pfizer 13% 27% 28% 9% 22%
Abbot 26% 18% 18% 16% 16%
Bristol Meyers 25% 27% 13% 17% 12%
Merck 17% 34% 33% 30% N/A
Industry Average 23% 26% 22% 21% 14%
Asset Turnover
2000 2001 2002 2003 2004
Pfizer 0.88 0.74 0.70 0.39 0.42
Abbot 0.23 0.16 0.65 0.66 0.68
Bristol Meyers 0.99 0.65 0.65 0.68 0.64
Merck 1.01 0.48 0.45 0.55 N/A
Industry Average 0.74 0.43 0.58 0.63 0.66
Return on Assets
2000 2001 2002 2003 2004
Pfizer 11% 20% 20% 3% 9%
Abbot 6% 3% 12% 11% 11%
Bristol Meyers 25% 17% 9% 11% 8%
Merck 17% 17% 15% 17% N/A
Industry Average 16% 12% 12% 13% 10%
Return on Equity
2000 2001 2002 2003 2004
Pfizer 23% 43% 46% 6% 17%
Abbot 11% 7% 26% 21% 23%
Bristol Meyers 57% 53% 24% 32% 23%
54

Merck 46% 45% 39% 44% N/A
Industry Average 38% 35% 30% 32% 23%
Debt to Equity Ratio
2000 2001 2002 2003 2004
Pfizer 1.08 1.14 1.32 0.79 0.81
Abbot 0.78 1.57 1.21 0.99 1.01
Bristol Meyers 1.25 2.06 1.77 1.80 1.98
Merck 1.71 1.74 1.61 1.61 N/A
Industry Average 1.25 1.79 1.53 1.47 1.50
Times Interest Earned
2000 2001 2002 2003 2004
Pfizer 12.57 34.31 46.08 9.32 28.24
Abbot N/A N/A 16.16 23.14 27.67
Bristol Meyers 48.58 12.19 6.46 26.15 84.96
Merck 0.32 0.88 0.82 0.67 N/A
Industry Average 24.45 6.54 7.81 16.65 56.32
Debt Service Margin
2000 2001 2002 2003 2004
Pfizer 3.60 6.28 6.09 4.51 6.12
Abbot 2.29 2.34 3.67 3.14 4.08
Bristol Meyers 2.79 3.65 0.61 1.86 1.49
Merck 1.67 1.63 3.61 11.46 N/A
Industry Average 2.25 2.54 2.63 5.49 2.79
55

Appendix D: Forecasted Financial Statements
Income Statement
Actuals(Millions)
Forecasts(Millions)
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Revenues $27,376 $29,574 $29,024 $32,373 $45,188 $52,516 $55,142 $58,726 $63,424 $69,767 $76,743 $84,417 $92,859 $102,145 $112,360 $123,596
Cost of sales $5,464 $4,907 $3,823 $4,045 $9,832 $7,541 $11,028 $11,745 $12,685 $13,953 $15,349 $16,883 $18,572 $20,429 $22,472 $24,719
Gross Profit $21,912 $24,667 $25,201 $28,328 $35,356 $44,975 $44,113 $46,981 $50,739 $55,813 $61,395 $67,534 $74,287 $81,716 $89,888 $98,877
Operating Expenses:
Selling, informational and administrative
expenses $10,810 $11,442 $9,717 $10,846 $15,242 $16,903 $17,645 $17,094 $16,543 $16,543 $16,543 $16,543 $16,543 $16,543 $16,543 $16,543
Research and development expenses $4,036 $4,435 $4,776 $5,176 $7,131 $7,684 $8,271 $8,271 $8,271 $8,271 $8,271 $8,271 $8,271 $8,271 $8,271 $8,271
Merger-related costs $33 $3,257 $819 $630 $1,058 $1,193 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Merger-related in-process research and
development charge
Other (income)/deductions-net $88 ($248) ($95) ($120) $3,610 $753 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Income from continuing operations before
provision for taxes on income and minority
interests $6,945 $5,781 $9,984 $11,796 $3,263 $14,007 $15,440 $17,618 $19,661 $21,628 $23,790 $26,169 $28,786 $31,665 $34,831 $38,315
Provision for taxes on income $1,968 $2,049 $2,433 $2,609 $1,621 $2,665 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Minority interests $5 $14 $14 $6 $3 $10 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Income from continuing operations $4,972 $3,718 $7,537 $9,181 $1,639 $11,332 $13,234 $15,562 $16,807 $18,488 $20,337 $22,371 $24,608 $27,068 $29,775 $32,753
Discontinued operations:
$0 $0 $251 $278 $16 ($22) $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
$0 $0 $0 $77 $2,285 $51 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Discontinued operations-net of tax ($20) $8 $251 $355 $2,301 $29 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
$0 $0 $7,788 $9,536 $3,940 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
$0 $0 $0 ($410) ($30) $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Net income $4,952 $3,726 $7,788 $9,126 $3,910 $11,361 $12,407 $14,094 $15,222 $16,744 $18,418 $20,260 $22,286 $24,515 $26,966 $29,663
56

Pro-forma Income Statement
Actuals
Forecasts
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Revenues 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Cost of sales 19.96% 16.59% 13.17% 12.49% 21.76% 14.36% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00%
Gross Profit 80.04% 83.41% 86.83% 87.51% 78.24% 85.64% 80.00% 80.00% 80.00% 80.00% 80.00% 80.00% 80.00% 80.00% 80.00% 80.00%
Operating Expenses: 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Selling, informational and administrative
expenses 39.49% 38.69% 33.48% 33.50% 33.73% 32.19% 32.00% 31.00% 30.00% 30.00% 30.00% 30.00% 30.00% 30.00% 30.00% 30.00%
Research and development expenses 14.74% 15.00% 16.46% 15.99% 15.78% 14.63% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00%
Merger-related costs 0.12% 11.01% 2.82% 1.95% 2.34% 2.27%
Merger-related in-process research and
development charge 0.00% 0.00% 0.00% 0.00% 11.18% 2.04%
Other (income)/deductions-net 0.32% -0.84% -0.33% -0.37% 7.99% 1.43%
Income from continuing operations before
provision for taxes on income and minority
interests 25.37% 19.55% 34.40% 36.44% 7.22% 26.67% 28.00% 30.00% 31.00% 31.00% 31.00% 31.00% 31.00% 31.00% 31.00% 31.00%
Provision for taxes on income 7.19% 6.93% 8.38% 8.06% 3.59% 5.07%
Minority interests 0.02% 0.05% 0.05% 0.02% 0.01% 0.02%
Income from continuing operations 18.16% 12.57% 25.97% 28.36% 3.63% 21.58% 24.00% 26.50% 26.50% 26.50% 26.50% 26.50% 26.50% 26.50% 26.50% 26.50%
Discontinued operations: 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
0.00% 0.00% 0.86% 0.86% 0.04% -0.04%
0.00% 0.00% 0.00% 0.24% 5.06% 0.10%
Discontinued operations-net of tax -0.07% 0.03% 0.86% 1.10% 5.09% 0.06%
0.00% 0.00% 26.83% 29.46% 8.72% 0.00%
0.00% 0.00% 0.00% -1.27% -0.07% 0.00%
Net income 18.09% 12.60% 26.83% 28.19% 8.65% 21.63% 22.50% 24.00% 24.00% 24.00% 24.00% 24.00% 24.00% 24.00% 24.00% 24.00%
57

Balance Sheet
Actuals(Millions) Forecasts(Millions) FORECASTS
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Assets
Current Assets
Cash and cash equivalents $2,358 $1,099 $1,036 $1,878 $1,520 $1,808 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Short-term investments $4,028 $5,764 $7,579 $10,673 $10,432 $18,085 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Accounts receivable, less allowance for
doubtful accounts: $5,368 $5,489 $4,798 $5,785 $8,775 $9,367 $9,803 $11,623 $12,685 $13,953 $15,349 $15,477 $17,024 $18,727 $20,599 $22,659
Short-term loans $273 $140 $269 $399 $391 $653 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Inventories $0 $0 $1,011 $1,133 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Finished goods $1,147 $1,195 $0 $0 $2,308 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Work in process $977 $1,074 $1,062 $1,142 $2,219 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Raw materials and supplies $464 $433 $412 $403 $1,310 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Total inventories $2,588 $2,702 $2,485 $2,678 $5,837 $6,660 $6,740 $6,729 $6,977 $6,977 $7,674 $7,738 $8,512 $9,363 $10,300 $11,330
Prepaid expenses and taxes $1,696 $1,993 $1,418 $1,797 $2,786 $2,939 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Assets of discontinued businesses
held for sale $0 $0 $1,627 $1,571 $0 $182 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Total current assets $16,311 $17,187 $19,212 $24,781 $29,741 $39,694 $46,564 $53,832 $63,424 $63,424 $69,767 $70,348 $77,383 $85,121 $93,633 $102,996
Long-term loans and investments $1,764 $2,529 $5,724 $5,161 $6,142 $3,873 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Property, plant and equipment, less
accumulated depreciation $8,685 $9,425 $9,783 $10,712 $18,287 $18,385 $18,381 $18,352 $19,027 $19,027 $20,930 $21,104 $23,215 $25,536 $28,090 $30,899
Goodwill, less accumulated
amortization: 2000-$300; 1999-$256 $1,870 $1,791 $1,689 $1,200 $22,306 $23,756 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Identifiable intangible assets, less
accumulated amortization $0 $0 $0 $0 $36,350 $33,251 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Other assets, deferred taxes and
deferred charges $2,742 $2,578 $2,745 $4,502 $3,949 $4,725 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Total non-current assets $15,061 $16,323 $19,941 $21,575 $87,034 $83,990 $75,973 $68,514 $63,424 $63,424 $69,767 $70,348 $77,383 $85,121 $93,633 $102,996
Total assets $31,372 $33,510 $39,153 $46,356 $116,775 $123,684 $122,537 $122,346 $126,848 $126,848 $139,533 $140,696 $154,765 $170,242 $187,266 $205,993
Liabilities and Shareholders Equity
Current Liabilities
Short-term borrowings, including
current portion of long-term debt $5,299 $4,289 $6,263 $8,669 $8,818 $11,266 $14,924 $18,098 $19,373 $19,732 $21,705 $21,886 $24,075 $26,482 $29,130 $32,043
Accounts payable $1,889 $1,719 $1,411 $1,620 $2,601 $2,672 $2,985 $3,232 $3,459 $3,524 $3,876 $3,908 $4,299 $4,729 $5,202 $5,722
Dividends payable $349 $696 $819 $926 $1,300 $1,418 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Income taxes payable $748 $850 $775 $2,231 $1,919 $1,963 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Accrued compensation and related
items $905 $982 $1,026 $1,084 $1,753 $1,939 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Accrued litigation settlements $0 $0 $0 $0 $1,402 $264 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Other current liabilities $2,706 $3,445 $2,866 $3,448 $5,864 $6,872 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Liabilities of discontinued businesses
held for sale $0 $0 $569 $577 $0 $64 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Total current liabilities $11,896 $11,981 $13,729 $18,555 $23,657 $26,458 $29,849 $36,196 $42,898 $45,806 $50,387 $50,807 $55,887 $61,476 $67,624 $74,386
Long-term debt $1,774 $1,123 $2,609 $3,140 $5,755 $7,279 $6,567 $7,110 $7,611 $7,752 $8,527 $8,598 $9,458 $10,404 $11,444 $12,588
Pension benefit obligations $0 $0 $0 $0 $2,861 $2,821 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Postretirement benefit obligation other
than pension plans $515 $564 $587 $623 $1,451 $1,450 $1,672 $1,810 $1,937 $1,973 $2,171 $2,189 $2,407 $2,648 $2,913 $3,204
Deferred taxes on income $485 $380 $398 $364 $13,238 $12,632 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Other noncurrent liabilities $2,752 $3,386 $3,537 $3,724 $4,436 $4,766 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Total non-current liabilities $5,526 $5,453 $7,131 $7,851 $27,741 $28,948 $29,849 $28,440 $26,292 $24,665 $27,131 $27,358 $30,093 $33,103 $36,413 $40,054
Total liabilities $17,422 $17,434 $20,860 $26,406 $51,398 $55,406 $59,698 $64,636 $69,190 $70,471 $77,518 $78,164 $85,981 $94,579 $104,037 $114,440
Shareholders Equity $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Preferred stock, without par value; $0 $0 $0 $0 $219 $193 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Common stock, $.05 par value $332 $337 $340 $341 $435 $438 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Additional paid-in capital $5,943 $8,895 $9,300 $9,368 $66,396 $67,098 $67,098 $0 $0 $0 $0 $0 $0 $0 $0 $0
Retained earnings $18,459 $19,599 ($2,650) ($1,786) ($1,898) $35,492 $43,267 $52,781 $62,890 $74,011 $86,244 $99,700 $114,502 $130,784 $148,694 $168,395
Accumulated other comprehensive
expense ($1,045) ($1,515) ($11,378) ($16,341) ($29,352) $2,278 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Employee benefit trusts ($2,888) ($3,382) $24,430 $30,243 $29,382 ($1,229) ($1,229) $0 $0 $0 $0 $0 $0 $0 $0 $0
Treasury stock, shares at cost: 2000-
435; 1999-413 ($6,851) ($7,858) ($1,749) ($1,875) $195 ($35,992) ($35,992) $0 $0 $0 $0 $0 $0 $0 $0 $0
Total shareholders equity $13,950 $16,076 $18,293 $19,950 $65,377 $68,278 $62,840 $57,710 $57,658 $56,377 $62,015 $62,531 $68,785 $75,663 $83,229 $91,552
Total liabilities and shareholders
equity $31,372 $33,510 $39,153 $46,356 $116,775 $123,684 $122,537 $122,346 $126,848 $126,848 $139,533 $140,696 $154,765 $170,242 $187,266 $205,993
58

Pro-forma Balance Sheet
Actuals
Forecasts
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Assets
Current Assets
Cash and cash equivalents 7.52% 3.28% 2.65% 4.05% 1.30% 1.46%
Short-term investments 12.84% 17.20% 19.36% 23.02% 8.93% 14.62%
Accounts receivable, less allowance for
doubtful accounts: 17.11% 16.38% 12.25% 12.48% 7.51% 7.57% 8.00% 9.50% 10.00% 11.00% 11.00% 11.00% 11.00% 11.00% 11.00% 11.00%
Short-term loans 0.87% 0.42% 0.69% 0.86% 0.33% 0.53%
Inventories 0.00% 0.00% 2.58% 2.44% 0.00% 0.00%
Finished goods 3.66% 3.57% 0.00% 0.00% 1.98% 0.00%
Work in process 3.11% 3.21% 2.71% 2.46% 1.90% 0.00%
Raw materials and supplies 1.48% 1.29% 1.05% 0.87% 1.12% 0.00%
Total inventories 8.25% 8.06% 6.35% 5.78% 5.00% 5.38% 5.50% 5.50% 5.50% 5.50% 5.50% 5.50% 5.50% 5.50% 5.50% 5.50%
Prepaid expenses and taxes 5.41% 5.95% 3.62% 3.88% 2.39% 2.38%
Assets of discontinued businesses
held for sale 0.00% 0.00% 4.16% 3.39% 0.00% 0.15%
Total current assets 51.99% 51.29% 49.07% 53.46% 25.47% 32.09% 38.00% 44.00% 50.00% 50.00% 50.00% 50.00% 50.00% 50.00% 50.00% 50.00%
Long-term loans and investments 5.62% 7.55% 14.62% 11.13% 5.26% 3.13%
Property, plant and equipment, less
accumulated depreciation 27.68% 28.13% 24.99% 23.11% 15.66% 14.86% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00%
Goodwill, less accumulated
amortization: 2000-$300; 1999-$256 5.96% 5.34% 4.31% 2.59% 19.10% 19.21%
Identifiable intangible assets, less
accumulated amortization 0.00% 0.00% 0.00% 0.00% 31.13% 26.88%
Other assets, deferred taxes and
deferred charges 8.74% 7.69% 7.01% 9.71% 3.38% 3.82%
Total current assets 48.01% 48.71% 50.93% 46.54% 74.53% 67.91% 62.00% 56.00% 50.00% 50.00% 50.00% 50.00% 50.00% 50.00% 50.00% 50.00%
Total assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Liabilities and Shareholders Equity
Current Liabilities
Short-term borrowings, including
current portion of long-term debt 30.42% 24.60% 30.02% 32.83% 17.16% 20.33% 25.00% 28.00% 28.00% 28.00% 28.00% 28.00% 28.00% 28.00% 28.00% 28.00%
Accounts payable 10.84% 9.86% 6.76% 6.13% 5.06% 4.82% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
Dividends payable 2.00% 3.99% 3.93% 3.51% 2.53% 2.56%
Income taxes payable 4.29% 4.88% 3.72% 8.45% 3.73% 3.54%
Accrued compensation and related
items 5.19% 5.63% 4.92% 4.11% 3.41% 3.50%
Accrued litigation settlements 0.00% 0.00% 0.00% 0.00% 2.73% 0.48%
Other current liabilities 15.53% 19.76% 13.74% 13.06% 11.41% 12.40%
Liabilities of discontinued businesses
held for sale 0.00% 0.00% 2.73% 2.19% 0.00% 0.12%
Total current liabilities 68.28% 68.72% 65.81% 70.27% 46.03% 47.75% 50.00% 56.00% 62.00% 65.00% 65.00% 65.00% 65.00% 65.00% 65.00% 65.00%
Long-term debt 10.18% 6.44% 12.51% 11.89% 11.20% 13.14% 11.00% 11.00% 11.00% 11.00% 11.00% 11.00% 11.00% 11.00% 11.00% 11.00%
Pension benefit obligations 0.00% 0.00% 0.00% 0.00% 5.57% 5.09%
Postretirement benefit obligation other
than pension plans 2.96% 3.24% 2.81% 2.36% 2.82% 2.62% 2.80% 2.80% 2.80% 2.80% 2.80% 2.80% 2.80% 2.80% 2.80% 2.80%
Deferred taxes on income 2.78% 2.18% 1.91% 1.38% 25.76% 22.80%
Other noncurrent liabilities 15.80% 19.42% 16.96% 14.10% 8.63% 8.60%
Total non-current liabilities 31.72% 31.28% 34.19% 29.73% 53.97% 52.25% 50.00% 44.00% 38.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00%
Total liabilities 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Shareholders Equity
Preferred stock, without par value; 0.00% 0.00% 0.00% 0.00% 0.33% 0.28%
Common stock, $.05 par value 2.38% 2.10% 1.86% 1.71% 0.67% 0.64%
Additional paid-in capital 42.60% 55.33% 50.84% 46.96% 101.56% 98.27%
Retained earnings 132.32% 121.91% -14.49% -8.95% -2.90% 51.98%
Accumulated other comprehensive
expense -7.49% -9.42% -62.20% -81.91% -44.90% 3.34%
Employee benefit trusts -20.70% -21.04% 133.55% 151.59% 44.94% -1.80%
Treasury stock, shares at cost: 2000-
435; 1999-413 -49.11% -48.88% -9.56% -9.40% 0.30% -52.71%
Total shareholders equity 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
59

Statement of Cash Flows
Actuals(Millions)
Forecasts(Millions)
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Operating Activities
Income from continuing operations $4,972 $3,718 $7,788 $9,126 $3,910 $11,361 $11,580 $13,213 $14,746 $16,221 $17,843 $19,627 $21,590 $23,749 $26,124 $28,736
Adjustments to reconcile income from continuing
operations to net cash provided by operating
activities:
Cumulative effect of a change in accounting
principle $0 $0 $0 $410 $30 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Discontinued operations $0 $0 ($251) ($278) ($16) $22 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Harmonization of accounting methodology $0 $0 ($175) $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Loss on sale of animal health feed-additive
products $0 $85 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Trovan inventory write-off $310 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Merger-related in-process research and
development charge $0 $0 $0 $0 $5,052 $1,071 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Costs associated with the withdrawal of Rezulin $0 $102 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Gain on sale of business $0 $0 $0 ($77) ($3,885) ($51) $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Gains on sales of product lines $0 $0 $0 ($34) ($87) ($12) $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Gains on sales of equity investments $0 ($216) ($17) $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Asset impairment charges $0 $0 $0 $63 $2,820 $702 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Depreciation and amortization $905 $968 $972 $1,036 $4,078 $5,093 $4,632 $3,524 $2,359 $2,595 $2,855 $3,140 $3,454 $3,800 $4,180 $4,598
Deferred taxes and other $213 ($265) $193 ($385) ($104) ($1,579) $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Charges to write-down equity investments $0 $0 $0 $0 $16 $40 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Other $0 $0 $0 $0 $604 $555 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Changes in assets and liabilities, net of effect of
businesses divested:
Accounts receivable ($1,274) ($498) $81 ($963) ($904) ($465) $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Inventories ($278) ($436) ($110) ($129) ($202) ($542) ($618) ($705) ($786) ($865) ($952) ($1,047) ($1,151) ($1,267) ($1,393) ($1,533)
Prepaid and other assets ($127) $365 $106 ($1,423) ($905) ($640) $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Accounts payable and accrued liabilities $378 $807 ($412) $461 $670 ($708) $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Income taxes payable $144 $1,315 $332 $1,736 ($550) $805 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Other deferred items $250 $250 $354 $321 $1,198 $688 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Net cash provided by operating activities $5,493 $6,195 $8,861 $9,864 $11,725 $16,340 $15,440 $15,856 $16,712 $17,951 $19,746 $21,721 $23,893 $26,282 $28,910 $31,801
Investing Activities
Purchases of property, plant and equipment ($2,493) ($2,191) ($2,105) ($1,758) ($2,641) ($2,601) ($3,860) ($4,404) ($4,915) ($5,407) ($5,948) ($6,542) ($7,197) ($7,916) ($8,708) ($9,579)
Proceeds from disposals of property, plant and
equipment $83 $91 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Purchases of short-term investments, net of
maturities ($9,270) ($7,982) ($14,218) ($12,652) ($9,931) ($17,499) $20,072 $22,903 $25,560 $28,116 $30,927 $34,020 $37,422 $41,164 $45,281 $49,809
Proceeds from redemptions of short-term
investments $7,785 $6,592 $12,808 $9,781 $12,060 $11,723 $13,124 $15,856 $19,661 $21,628 $23,790 $26,169 $28,786 $31,665 $34,831 $38,315
Purchases of long-term investments ($40) ($618) ($3,708) ($2,877) ($1,883) ($1,329) $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Proceeds from redemptions of long-term
investments $42 $346 $80 $3,477 $356 $1,570 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Increases in long-term loans ($41) ($220) $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Purchases of other assets ($253) ($174) ($227) ($528) ($788) ($327) $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Proceeds from sales of other assets $193 $184 $132 $272 $360 $6 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Proceeds from sales of businesses $26 $193 $8 $220 $5,602 $1,276 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Cash and cash equivalents acquired through
acquisition of Pharmacia $0 $0 $0 $0 $1,789 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Other investing activities $62 $26 $95 ($273) ($86) $22 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Net cash used in investing activities ($3,906) ($3,753) ($7,135) ($4,338) $4,838 ($9,422) $9,264 $10,571 $11,797 $12,977 $14,274 $15,702 $17,272 $18,999 $20,899 $22,989
Financing Activities
Proceeds from issuances of long-term debt $14,025 $18 $1,837 $603 $600 $2,586 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Repayments of long-term debt ($14,046) ($529) ($151) ($374) ($439) ($664) $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Increase in short-term debt $2,134 $1,247 $2,344 $2,815 $194 $2,466 $2,934 $3,876 $4,915 $5,407 $5,948 $6,542 $7,197 $7,916 $8,708 $9,579
Decrease in short-term debt ($14) ($2,427) ($519) ($539) ($946) ($288) $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Proceeds from common stock issuances $62 $59 $62 $66 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Purchases of common stock ($2,542) ($1,005) ($3,665) ($4,996) ($13,037) ($6,659) ($6,948) ($7,047) ($6,882) ($7,570) ($8,327) ($9,159) ($10,075) ($11,083) ($12,191) ($13,410)
Cash dividends paid ($1,820) ($2,197) ($2,715) ($3,168) ($4,353) ($5,082) ($4,632) ($4,581) ($5,112) ($5,623) ($6,185) ($6,804) ($7,484) ($8,233) ($9,056) ($9,962)
Stock option transactions and other $574 $1,129 $711 $594 $1,072 $1,012 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Net cash used in financing activities ($1,627) ($3,705) ($2,096) ($4,999) ($16,909) ($6,629) ($6,485) ($6,166) ($5,898) ($6,488) ($7,137) ($7,851) ($8,636) ($9,499) ($10,449) ($11,494)
60

Pro-forma Statement of Cash Flows
FORECASTS
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Operating Income $6,945,000,000 $5,781,000,000 $9,984,000,000 $11,796,000,000 $3,263,000,000 $14,007,000,000 $ 15,439,704,000.00 $ 17,617,805,100.00 $ 19,661,470,491.60 $ 21,627,617,540.76 $ 23,790,379,294.84 $ 26,169,417,224.32 $ 28,786,358,946.75 $ 31,664,994,841.43 $ 34,831,494,325.57 $ 38,314,643,758.13
Operating Activities
Income from continuing operations 71.59% 64.31% 78.00% 77.37% 119.83% 81.11% 75.00% 75.00% 75.00% 75.00% 75.00% 75.00% 75.00% 75.00% 75.00% 75.00%
Adjustments to reconcile income from continuing
operations to net cash provided by operating
activities: 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Cumulative effect of a change in accounting
principle 0.00% 0.00% 0.00% 3.48% 0.92% 0.00%
Discontinued operations 0.00% 0.00% -2.51% -2.36% -0.49% 0.16%
Harmonization of accounting methodology 0.00% 0.00% -1.75% 0.00% 0.00% 0.00%
Loss on sale of animal health feed-additive
products 0.00% 1.47% 0.00% 0.00% 0.00% 0.00%
Trovan inventory write-off 4.46% 0.00% 0.00% 0.00% 0.00% 0.00%
Merger-related in-process research and
development charge 0.00% 0.00% 0.00% 0.00% 154.83% 7.65%
Costs associated with the withdrawal of Rezulin 0.00% 1.76% 0.00% 0.00% 0.00% 0.00%
Gain on sale of business 0.00% 0.00% 0.00% -0.65% -119.06% -0.36%
Gains on sales of product lines 0.00% 0.00% 0.00% -0.29% -2.67% -0.09%
Gains on sales of equity investments 0.00% -3.74% -0.17% 0.00% 0.00% 0.00%
Asset impairment charges 0.00% 0.00% 0.00% 0.53% 86.42% 5.01%
Depreciation and amortization 13.03% 16.74% 9.74% 8.78% 124.98% 36.36% 30% 20% 12% 12% 12% 12% 12% 12% 12% 12%
Deferred taxes and other 3.07% -4.58% 1.93% -3.26% -3.19% -11.27%
Charges to write-down equity investments 0.00% 0.00% 0.00% 0.00% 0.49% 0.29%
Other 0.00% 0.00% 0.00% 0.00% 18.51% 3.96%
Changes in assets and liabilities, net of effect of
businesses divested:
Accounts receivable -18.34% -8.61% 0.81% -8.16% -27.70% -3.32%
Inventories -4.00% -7.54% -1.10% -1.09% -6.19% -3.87% -4.00% -4.00% -4.00% -4.00% -4.00% -4.00% -4.00% -4.00% -4.00% -4.00%
Prepaid and other assets -1.83% 6.31% 1.06% -12.06% -27.74% -4.57%
Accounts payable and accrued liabilities 5.44% 13.96% -4.13% 3.91% 20.53% -5.05%
Income taxes payable 2.07% 22.75% 3.33% 14.72% -16.86% 5.75%
Other deferred items 3.60% 4.32% 3.55% 2.72% 36.71% 4.91%
Net cash provided by operating activities 79.09% 107.16% 88.75% 83.62% 359.33% 116.66% 100% 90% 85% 83% 83% 83% 83% 83% 83% 83%
0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Investing Activities 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Purchases of property, plant and equipment -35.90% -37.90% -21.08% -14.90% -80.94% -18.57% -25.00% -25.00% -25.00% -25.00% -25.00% -25.00% -25.00% -25.00% -25.00% -25.00%
Proceeds from disposals of property, plant and
equipment 1.20% 1.57% 0.00% 0.00% 0.00% 0.00%
Purchases of short-term investments, net of
maturities -133.48% -138.07% -142.41% -107.26% -304.35% -124.93% 130.00% 130.00% 130.00% 130.00% 130.00% 130.00% 130.00% 130.00% 130.00% 130.00%
Proceeds from redemptions of short-term
investments 112.10% 114.03% 128.29% 82.92% 369.60% 83.69% 85.00% 90.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Purchases of long-term investments -0.58% -10.69% -37.14% -24.39% -57.71% -9.49%
Proceeds from redemptions of long-term
investments 0.60% 5.99% 0.80% 29.48% 10.91% 11.21%
Increases in long-term loans -0.59% -3.81% 0.00% 0.00% 0.00% 0.00%
Purchases of other assets -3.64% -3.01% -2.27% -4.48% -24.15% -2.33%
Proceeds from sales of other assets 2.78% 3.18% 1.32% 2.31% 11.03% 0.04%
Proceeds from sales of businesses 0.37% 3.34% 0.08% 1.87% 171.68% 9.11%
Cash and cash equivalents acquired through
acquisition of Pharmacia 0.00% 0.00% 0.00% 0.00% 54.83% 0.00%
Other investing activities 0.89% 0.45% 0.95% -2.31% -2.64% 0.16%
Net cash used in investing activities -56.24% -64.92% -71.46% -36.78% 148.27% -67.27% 60.00% 60.00% 60.00% 60.00% 60.00% 60.00% 60.00% 60.00% 60.00% 60.00%
0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Financing Activities 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Proceeds from issuances of long-term debt 201.94% 0.31% 18.40% 5.11% 18.39% 18.46%
Repayments of long-term debt -202.25% -9.15% -1.51% -3.17% -13.45% -4.74%
Increase in short-term debt 30.73% 21.57% 23.48% 23.86% 5.95% 17.61% 19.00% 22.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00%
Decrease in short-term debt -0.20% -41.98% -5.20% -4.57% -28.99% -2.06%
Proceeds from common stock issuances 0.89% 1.02% 0.62% 0.56% 0.00% 0.00%
Purchases of common stock -36.60% -17.38% -36.71% -42.35% -399.54% -47.54% -45.00% -40.00% -35.00% -35.00% -35.00% -35.00% -35.00% -35.00% -35.00% -35.00%
Cash dividends paid -26.21% -38.00% -27.19% -26.86% -133.40% -36.28% -30.00% -26.00% -26.00% -26.00% -26.00% -26.00% -26.00% -26.00% -26.00% -26.00%
Stock option transactions and other 8.26% 19.53% 7.12% 5.04% 32.85% 7.22%
Net cash used in financing activities -23.43% -64.09% -20.99% -42.38% -518.20% -47.33% -42.00% -35.00% -30.00% -30.00% -30.00% -30.00% -30.00% -30.00% -30.00% -30.00%
61

Appendix E: Cost of Debt Estimation
Short Term Borrowings:
Short Term Borrowings (Millions)
Principal Rate Weight
Value
Weighted
Rate
Commercial Paper 9,109 1.30% 87.93% 1.14%
Other Short Term Borrowings 1,250 11.25% 12.06% 1.36%
Short Term Borrowings 10,359 100.00% 2.5%*
*Given in 2004 10-K
Long Term Borrowings:
Long Term Debt (Millions)
Maturity Date Principal Rate Weight Value Weighted Rate
Libor based floating rate Jan-06 1,000 1.80% 13.74% 0.25%
Feb-05 771 5.63% 10.59% 0.60%
Dec-28 749 6.60% 10.29% 0.68%
Feb-14 742 4.50% 10.19% 0.46%
Mar-07 686 2.50% 9.42% 0.24%
Apr-09 644 5.63% 8.85% 0.50%
Japanese Yen Mar-08 586 0.80% 8.05% 0.06%
Dec-18 528 6.50% 7.25% 0.47%
Mar-09 294 3.30% 4.04% 0.13%
Mar-18 294 4.65% 4.04% 0.19%
Jan-08 266 6.00% 3.65% 0.22%
Debentures, Notes, borrowings, and mortgages 719 6.00% 9.88% 0.59%
Total Long Term Debt** 7,279 4.38%
**Does not include amounts due within one year
Balance Sheet Debt:
62

Percent of Total
Liabilties
Computed Interest
Rate
Value Weighted
Rate
LIABILITIES (Millions)
Current Liabilities
Short-term borrowings 10,359 24.22% 2.50% 0.006
Current Portion of Long term Debt 907 2.12% 4.38%
Accounts payable 2,672 6.25% 0.00% 0.000
Dividends payable 1,418 3.32% 0.000
Income taxes payable 1,963 4.59% 0.00% 0.000
Accrued compensation and related items 1,939 4.53% 6.00% 0.003
Accrued litigation settlements 264 0.62% 2.50% 0.000
Other current liabilities 6,872 16.07% 2.50% 0.004
Liabilities of discontinued businesses held for sale 64 0.15% 4.38% 0.000
Total current liabilities 26,458 61.86%
Long-term debt 7,279 17.02% 4.38% 0.007
Pension benefit obligations 2,821 6.60% 6.00% 0.004
Postretirement benefit obligation other than pension plans 1,450 3.39% 10.00% 0.003
Deferred taxes on income**** 0 0.00% 0.00% 0.000
Other noncurrent liabilities 4,766 11.14% 6.00% 0.007
Total non-current liabilities 16,316 38.14%
Total liabilities 42,774 100.00%
12,632
Weighted Average Cost of Debt 3.45%
Appendix F: Regression Analysis:
Two Year:
SUMMARY OUTPUT (2003-2005)
Regression Statistics
Multiple R 0.24624658
R Square 0.060637378
Adjusted R Square 0.019795525
Standard Error 0.049704838
Observations 25
ANOVA
df SS MS F Significance F
Regression 1 0.003668025 0.003668025 1.484687235 0.235393985
Residual 23 0.056823132 0.002470571
Total 24 0.060491157
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept -0.01071184 0.010508607 -1.01933928 0.318645059 -0.032450545 0.011026874 -0.032450545 0.011026874
X Variable 1 0.435905178 0.357745797 1.218477425 0.235393985 -0.304148384 1.175958739 -0.304148384 1.175958739
63

Three Year:
SUMMARY OUTPUT (2002-2005)
Regression Statistics
Multiple R 0.483692549
R Square 0.233958482
Adjusted R Square 0.212071581
Standard Error 0.047112706
Observations 37
ANOVA
df SS MS
F Significance F
Regression 1 0.023726333 0.023726333 10.68942956 0.002421708
Residual 35 0.077686246 0.002219607
Total 36 0.101412579
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept -0.00989422 0.007748099 -1.27698686 0.210014035 -0.025623699 0.005835257 -0.025623699 0.005835257
X Variable 1 0.594927185 0.18196445 3.269469309 0.002421708 0.225519715 0.964334656 0.225519715 0.964334656
Five Year:
SUMMARY OUTPUT(2000-2005)
Regression Statistics
Multiple R 0.363164555
R Square 0.131888494
Adjusted R Square 0.116658468
Standard Error 0.055936169
Observations 59
ANOVA
df SS MS F Significance F
Regression 1 0.027095158 0.027095158 8.659767915 0.004697853
Residual 57 0.178344733 0.003128855
Total 58 0.20543989
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 0.000298867 0.007319511 0.040831495 0.967572919 -0.0143582 0.014955934 -0.0143582 0.014955934
X Variable 1 0.458094958 0.155669089 2.942748361 0.004697853 0.146372986 0.76981693 0.146372986 0.76981693
64

Appendix G: Intrinsic Valuation Methods:
Discounted Dividends:
Pfizer Inc.
(Amounts in millions of dollars except per share data)
Forecast Years
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Terminal
Dividends (Millions) $4,631.91 $4,580.63 $5,111.98 $5,623.18 $6,185.50 $6,804.05 $7,484.45 $8,232.90 $9,056.19 $9,961.81
Present Value Factor 0.952 0.907 0.864 0.823 0.784 0.747 0.711 0.677 0.645
Present Value of Dividends 4,411.76 4,155.56 4,417.18 4,627.97 4,848.81 5,080.19 5,322.61 5,576.60 5,842.71
Present Value of Future Dividends Per Share $0.61 $0.57 $0.61 $0.64 $0.67 $0.70 $0.73 $0.77 $0.80 $1.37
Total Present Value of Forecast Future Dividends $6.08
Continuing (Terminal) Value (assume no growth) $45.73
Present Value of Continuing (Terminal) Value $29.50
Estimated Value per Share $35.58
FV - April 05 $36.02
Earnings Per Share $1.70 $1.93 $2.09 $2.30 $2.53 $2.78 $3.06 $3.36 $3.70
Dividends per share $0.64 $0.63 $0.70 $0.77 $0.85 $0.93 $1.03 $1.13 $1.24
Book Value Per Share $9.37 $8.62 $7.92 $7.91 $7.74 $8.51 $8.58 $9.44 $10.38 $11.42
Shares Outstanding 7,286.00
Actual Price per share $26.15
Estimated Ke 4.99%
growth rate 0.02
Sensitivity Analysis
g
0 0.015 0.03 0.045
Ke 0.03 $35.48 $64.88 N/A N/A
0.04 $28.13 $41.36 $94.29 N/A
0.05 $23.72 $31.28 $50.18 $182.50
0.06 $20.78 $25.68 $35.48 $64.88
0.07 $18.68 $22.12 $28.13 $41.36
65

Discounted Free Cash Flows:
Pfizer Inc.
(Amounts in millions of dollars except per share data)
Forecast Years
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Cash Flow from Operations $15,440 $15,856 $16,712 $17,951 $19,746 $21,721 $23,893 $26,282 $28,910 $31,801
Cash Provided (Used) by Investing Activities ($10,036) ($11,011) ($11,797) ($12,652) ($13,085) ($13,085) ($14,393) ($15,832) ($17,416) ($19,157)
Free Cash Flow (to firm) 5,404 4,845 4,915 5,299 6,661 8,636 9,499 10,449 11,494 12,644
discount rate (4.07% WACC) 0.961 0.923 0.887 0.853 0.819 0.787 0.756 0.727 0.698
Present Value of Free Cash Flows 5,193 4,473 4,361 4,517 5,457 6,798 7,185 7,594 8,027
Total Present Value of Annual Cash Flows 53,605
Continuing (Terminal) Value (assume no growth) 610,813
Present Value of Continuing (Terminal) Value 426,558
Value of the Firm (end of 1987) 480,163
Book Value of Debt and Preferred Stock 55,599
Value of Equity (end of 2004) 424,564
Estimated Value per Share 58.27
FV - April 05 58.98
Earnings Per Share $1.70 $1.93 $2.09 $2.30 $2.53 $2.78 $3.06 $3.36 $3.70
Dividends per share $0.64 $0.63 $0.70 $0.77 $0.85 $0.93 $1.03 $1.13 $1.24
Book Value Per Share $9.37 $8.62 $7.92 $7.91 $7.74 $8.51 $8.58 $9.44 $10.38 $11.42
Actual Price per share $26.15
Shares Outstanding 7,286.00 Sensitivity Analysis
g
WACC 4.07% 0 0.015 0.03 0.045
Growth Rate 2.00% WACC 0.03 $44.50 $88.83 N/A N/A
0.04 $30.23 $48.52 $121.68 N/A
0.05 $21.75 $31.34 $55.31 $223.10
0.06 $16.14 $21.85 $33.26 $67.50
0.07 $12.18 $15.86 $22.29 $36.45
66

Discounted Residual Income:
Pfizer Inc.
Forecast Years
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Terminal
Beginning BE (per share) 9.37 10.44 11.74 13.13 14.66 16.34 18.18 20.21 22.45
EPS $1.70 $1.93 $2.09 $2.30 $2.53 $2.78 $3.06 $3.36 $3.70
DPS $0.64 $0.63 $0.70 $0.77 $0.85 $0.93 $1.03 $1.13 $1.24
Ending BE (per share) 9.37 10.44 11.74 13.13 14.66 16.34 18.18 20.21 22.45 24.91
"Normal" Income 0.47 0.52 0.59 0.66 0.73 0.82 0.91 1.01 1.12
Residual Income (RI) 1.24 1.41 1.50 1.64 1.80 1.97 2.15 2.36 2.58 2.58
Present Value of RI 1.18 1.28 1.30 1.35 1.41 1.47 1.53 1.60 1.67
BV Equity (per share) 2004 9.37
Total PV of RI (end 2004) 12.78 Sensitivity Analysis
Continuation (Terminal) Value 51.72 g
PV of Terminal Value (end 2004) 33.37 0 0.015 0.03 0.045
EstimatedValue Per Share (2004) 55.52 Ke 0.03 $103.17 $180.52 N/A N/A
FV - April 2005 56.19579 0.04 $73.13 $102.67 $220.84 N/A
0.05 $55.37 $69.62 $105.24 $354.58
Ke 0.0499 0.06 $43.75 $51.49 $66.97 $113.42
Growth 0 0.07 $35.60 $40.12 $48.01 $65.39
67

Discounted Abnormal Earnings Growth:
Pfizer Inc.
Perp
Forecast Years
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
EPS $1.70 $1.93 $2.09 $2.30 $2.53 $2.78 $3.06 $3.36 $3.70
DPS $0.64 $0.63 $0.70 $0.77 $0.85 $0.93 $1.03 $1.13 $1.24
DPS invested at 4.99% $0.03 $0.03 $0.04 $0.04 $0.04 $0.05 $0.05 $0.06
Cum-Dividend Earnings $1.97 $2.12 $2.33 $2.57 $2.82 $3.11 $3.42 $3.76
Normal Earnings $1.79 $2.03 $2.19 $2.41 $2.65 $2.92 $3.21 $3.53
Abnormal Earning Growth (AEG) $0.18 $0.09 $0.14 $0.15 $0.17 $0.19 $0.20 $0.22 $0.00
PV Factor 0.952 0.907 0.864 0.823 0.784 0.747 0.711 0.677
PV of AEG $0.17 $0.08 $0.12 $0.13 $0.13 $0.14 $0.15 $0.15
Core EPS $1.70
Total PV of AEG $1.07
Continuing (Terminal) Value $0.00
PV of Terminal Value $0.00
Total PV of AEG
Average Perpetuity $2.77
Capitalization Rate (perpetuity) 0.0499
Value Per Share pv $55.52 Dec-04
fv $ 56.20 5-Apr
Ke 0.0499 Sensitivity Analysis
g 0 g
0 0.015 0.03 0.045
Ke 0.03 $62.03 $62.03 $62.03 $62.03
Actual Price per share $26.15 0.04 $59.20 $59.20 $59.20 $59.20
0.05 $55.49 $55.49 $55.49 $55.49
0.06 $52.60 $52.60 $52.60 $52.60
0.07 $50.80 $50.80 $50.80 $50.80
68

Long Run Return on Equity based on P/B Ratio:
Year Net Income Shareholder Equity ROE Ke Growth Rate Equity (BV) Price, Estimated
1999 $4,952 $13,950 0.35 4.99% 2.00% 9.37 99.42182305
2000 $3,726 $16,076 0.23
2001 $7,788 $18,293 0.43
2002 $9,126 $19,950 0.46
2003 $3,910 $65,377 0.06
2004 $11,361 $68,278 0.17
2005 $12,407 $62,840 0.25 Sensitivity Analysis
2006 $14,094 $57,710 0.30 g
2007 $15,222 $57,658 0.35 0 0.015 0.03 0.045
2008 $16,744 $56,377 0.40 Ke 0.03 $105.34 $201.30 N/A N/A
2009 $18,418 $62,015 0.40 0.04 $79.00 $120.78 $287.90 N/A
2010 $20,260 $62,531 0.40 0.05 $63.20 $86.27 $143.95 $547.69
2011 $22,286 $68,785 0.40 0.06 $52.66 $67.10 $95.97 $182.56
2012 $24,515 $75,663 0.40 0.07 $45.14 $54.90 $71.98 $109.54
2013 $26,966 $83,229 0.40
2014 $29,663 $91,552 0.40
Average $15,090 $55,018 0.337
69

Appendix H: Method of Comparables:
Price to Earnings (Forward)
P/E Forward
PFIZER 16.4
ABBOTT LABS 22.4
BRISTOL-MYERS SQ 17.6
NOVARTIS AG 20.7
MERCK 11.8
Average 18.125
Average w/o Outliers 20.233
Valuation $ 33.89
Valuation w/o outliers $ 37.84
Price to Earnings (Trailing)
P/E Trailing
PFIZER 31.3
ABBOTT LABS 23.9
BRISTOL-MYERS SQ 18.6
NOVARTIS AG
N/A
MERCK 20.2
Average 20.9
Average w/o Outliers 20.9
Valuation $ 39.08
Valuation w/o outliers $ 39.08
Price to Book
70

P/B
PFIZER 2.66
ABBOTT LABS 5.27
BRISTOL-MYERS SQ 4.3
NOVARTIS AG 3.43
MERCK 3.81
Average 4.2025
Average w/o Outliers 3.847
Valuation $ 38.87
Valuation w/o outliers $ 35.58
Dividends to Price
D/P
PFIZER 3.1
ABBOTT LABS 2.3
BRISTOL-MYERS SQ 4.7
NOVARTIS AG 1.6
MERCK 4.9
Average 3.375
Average w/o Outliers 4.800
Valuation $ 31.22
Valuation w/o outliers $ 44.40
Price to Sales
71

P/S
PFIZER 4.1
ABBOTT LABS 3.63
BRISTOL-MYERS SQ 2.24
NOVARTIS AG 3.88
MERCK 3.07
Average 3.205
Average w/o Outliers 3.527
Valuation $ 23.11
Valuation w/o outliers $ 25.43
Price to Earnings Growth
PEG
PFIZER 1.08
ABBOTT LABS 2.04
BRISTOL-MYERS SQ 2.82
NOVARTIS AG 1.73
MERCK 1.69
Average 2.07
Average w/o Outliers 1.820
Valuation $ 24.84
Valuation w/o outliers $ 21.84
72