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

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 Conclusions11 Accounting Analysis13 Key Accounting Policies...13 Degree of Flexibility..............................16 Actual Accounting Strategy...17 Quality of Disclosure.19 Ratio Analysis & Forecast Financials25 Financial Ratio Analysis25 Financial Statement Forecasts37 Valuation Analysis...39 Cost of Capital...39 Intrinsic Valuation Methods..41 Method of Comparables46 Appendix..49 References71

Mo Money
Rusty Klein Justin Kime Rene Jimenez Todd Johnson

Pfizer, Inc.
Investment Recommendation Under-Valued Date of Valuation 4/1/2005

PFE - NYSE (4/13/2005) 52 week price range Revenue(2004 Market Capitalization Shares Outstanding Dividend Yield 3-Month Avg. Daily Trading Volume Percent Institutional Ownership

$27.28 $21.99 - 37.90 $52.5B $203.53B 7.46B 2.80% 28.65M 65%

EPS Forecast FYE 12/31 EPS

2004(A) 2005(E) 2006(E) 2007(E) $1.87 $1.70 $1.93 $2.09 Industry Pfizer Average 31.30 20.90 16.40 20.23 1.08 1.82 2.66 3.85 4.00 0.57

Valuation Ratio Comparison Trailing P/E Forward P/E Forward PEG M/B D/E Valuation Estimates Actual Current Price (4/1/2005) Ratio Based Valuations Trailing P/E Ke Forward P/E Forward PEG 4.58% D/E 4.99% M/B 4.52% Ford Epic Valuation Intrinsic Valuations Discounted Dividends Free Cash Flows Residual Income Abnormal Earnings Growth Long-Run Residual Income Perpetuity

Book Value Per Share (mrq) ROE(2004) ROA(2004) Est. 5 year EPS growth rate Cost of Capital Estimations 5-Year Regression 3-Year Regression 2-Year Regression Published Kd WACC(bt)

$9.37 17% 9% 12% R Squared 0.132 0.234 0.061 Beta 0.458 0.595 0.436 0.393

$ 26.15

$ $ $ $ $ $

39.08 37.84 21.84 44.98 35.58 62.16

3.45% 4.07%

$ $ $ $ $

35.58 58.27 55.52 55.52 99.42

Executive Summary
Recommendation Undervalued Security

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.

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

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.

Pfizers Industry Standing Pfizers 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 doesnt 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 Pfizers 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

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 Pfizers future growth.

Valuations Based upon our valuations, Pfizers 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 Pfizers 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

market and side effects become apparent, legal fees and settlement costs can cost a company millions of dollars.

Business & Industry Analysis

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.

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.

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

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

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.

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 Pfizers 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 Pfizers 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 isnt 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. Pfizers 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

transparent and discloses all relevant information that is pertinent to investors and regulators.

o properly evaluate the performance of Pfizer it is necessary to evaluate certain qualitative and quantitative measures. After

evaluating Pfizers financial statements it is apparent that Pfizer is

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 Pfizers parents company along with all subsidiaries operated in the US and internationally. Financial information included for companies operated internationally is included as of November 30th 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 partners 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. Pfizers 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

Pfizers accounting strategy and policies are conservative in nature and reflect the underlying economic reality of the company. Pfizers 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 Pfizers competitors in the US. Pfizer and Merck do a good job in disclosing financial information while Bristol-Meyers is slightly more hesitant isnt 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 arent as transparent and dont 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 companys 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
Net Sales / Cash From Sales

2002 1.10

2001 1.02

2000 0.99

1999 1.00

1.00

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Net Sales /Accounts Receivable

5.15 7.74

5.60 12.09

5.44 10.59

5.39 10.95

5.10 10.58

Net Sale / Inventory

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 Pfizers revenue recognition policy. Pfizers 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 7.15 0.26 1.28 0.01

0.70 1.07 0.64 0.43 0.01

0.74 1.18 0.59 -2.79 0.01

0.88 1.67 0.45 0.70 0.01

0.87 1.10 0.72 0.23 0.01

CFFO/OI

CFFO/NOA Total Accruals / Change in Sales Pension Expense / SG&A

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 Pfizers management. The Pharmacia merger had drastic affects on Pfizers 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 companys 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. Pfizers 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. Pfizers largest fluctuation was .7 to -2.79 which suggests that Pfizers 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. Pfizers 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
Net Sales / Cash From Sales Net Sales /Accounts Receivable

2001 2.09% 0.94% -3.26% -16.00% -29.44% 31.76% -499.64% 0.36%

2002 8.48% 2.90% 14.16% -5.79% -8.61% 7.59% -115.49% 21.84%

2003 -9.24% -7.98% -35.96% -44.59% 565.84% -58.65% 195.86% 8.83%

-0.95% 5.65% 3.47% 1.14% 50.82% -37.36% 198.42% 45.86%

Net Sale / Inventory

Asset Turnover

CFFO/OI

CFFO/NOA Total Accruals / Change in Sales Pension Expense / SG&A

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, Pfizers quality of disclosure and reporting justified all causes of variation. Because Pfizer is the worlds 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

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.

he financial ratio analysis and forecasting methods are essential to understanding potential performance based on a companys past and present operations. The financial ratio analysis utilizes a variety of

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

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be 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 Liquidity Analysis Current Ratio Quick Asset Ratio Inventory Turnover(Days) Accounts Receivable Turnover(Days) Profitability Analysis Gross Profit Margin Operating Profit Margin Net Profit Margin Asset Turnover Return on Assets Return on Equity Capital Structure Analysis Total Liabilities/Total Equity Times Interest Earned Debt Service Margin 1.37 0.99 172.88 71.57 2000 1.43 1.03 200.98 67.74 2001 1.40 0.98 237.25 60.34 2002 1.34 0.99 241.65 65.22 2003 1.26 0.88 216.69 70.88 2004 1.50 1.11 322.36 65.10

0.80 0.25 0.18 0.87 0.16 0.35

0.83 0.20 0.13 0.88 0.11 0.23

0.87 0.34 0.27 0.74 0.20 0.43

0.88 0.36 0.28 0.70 0.20 0.46

0.78 0.07 0.09 0.39 0.03 0.06

0.86 0.27 0.22 0.42 0.09 0.17

1.25 18.32 2.91

1.08 12.57 3.60

1.14 34.31 6.28

1.32 46.08 6.09

0.79 9.32 4.51

0.81 28.24 6.12

22.45%

Sustainable growth rate 9.51% 27.73% 29.86%

-0.68%

9.20%

Pfizers sustainable growth rate is very volatile. This is due in large parts to sizeable acquisitions. Pfizers 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. Pfizers 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 Pfizers 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. Pfizers 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 Pfizers 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 Pfizers asset base to double. As Pfizer sells off some of Pharmacias assets this ratio will improve but will

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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 Pfizers 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, Pfizers main competitors, and the industry average. The industry average was calculated from Pfizers three main competitors. Merck Companys 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

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Current Ratio
1.80 1.70 1.60 1.50 1.40 1.30 1.20 1.10 1.00 2000 Pfizer Abbot 2001 2002 2003 Merck 2004 Industry Average

Bristol Meyers

Quick Asset Ratio

1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 2000 Pf izer A bbot 2001 2002 Bristol Meyers Merck 2003 2004 Industry A verage

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Accounts Re cie vable Turnove r 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 2000 Pf izer A bbot 2001 2002 Bristol Meyers Merck 2003 2004 Industry A verage

Days Supply of Re cie vable s 300.00 250.00 200.00 150.00 100.00 50.00 0.00 2000 Pf izer A bbot 2001 2002 2003 Merck 2004 Industry A verage

Bristol Meyers

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Inventory Turnover
8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 2000 Pf izer 2001 A bbot 2002 Bristol Meyers 2003 Merck 2004 Industry A verage

Days Supply of Inve ntory 1000.00 900.00 800.00 700.00 600.00 500.00 400.00 300.00 200.00 100.00 0.00 2000 Pf izer A bbot 2001 2002 Merck 2003 2004 Industry Average

Bristol Meyers

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Gross Profit Margin

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2000 Pfizer 2001 Abbot 2002 Bristol Meyers Merck 2003 2004 Industry Average

Operating Profit Margin

60% 50%

40% 30% 20%

10% 0% 2000 Pf izer 2001 Abbot 2002 Bristol Meyers 2003 Merck 2004 Industry Average

32

Net Profit Margin

40% 35% 30% 25% 20% 15% 10% 5% 0% 2000 Pfizer 2001 Abbot 2002 Bristol Meyers Merck 2003 2004 Industry Average

Asset Turnover
1.20 1.00

0.80 0.60

0.40 0.20

0.00 2000 Pfizer 2001 Abbot 2002 Bristol Meyers Merck 2003 2004 Industry Average

33

Return on Assets
30% 25%

20% 15%

10% 5%

0% 2000 Pfizer 2001 Abbot 2002 Bristol Meyers Merck 2003 2004 Industry Average

Return on Equity
60%

50% 40%

30% 20%

10% 0% 2000 Pfizer 2001 Abbot 2002 Bristol Meyers Merck 2003 2004 Industry Average

34

Debt to Equity
2.50

2.00

1.50

1.00

0.50

0.00 2000 Pfizer 2001 Abbot 2002 Bristol Meyers Merck 2003 2004 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 Pfizer 2001 Abbot 2002 Bristol Meyers Merck 2003 2004 Industry Average

35

Debt Service Margin

14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 2000 Pfizer 2001 Abbot 2002 Bristol Meyers Merck 2003 2004 Industry Average

Operating Cash Flow as a Percentage of Operating Income

400% 350% 300% 250% 200% 150% 100% 50% 0% 2000 Pfizer 2001 Abbot 2002 Bristol Meyers Merck 2003 2004 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 Pfizers 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 Pfizers 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, Pfizers growth rate in sales is estimated to be 10%. Another key number used in calculations is the gross profit

37

margin. Pfizers growth profit margin at the end of 2004 was 86%. With the hostile attitude towards drug manufacturers for charging high prices, Pfizers 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

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.

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

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 Pfizers weighted average cost of debt. The beta () for Pfizer was calculated using three different time periods. Used in the calculations were the firms monthly returns, and the Standard and Poors 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 Pfizers 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 Pfizers current share price was 4.56%.

Appendix E: Cost of Debt Calculations

Time Period 2002-2005 2003-2005 2000-2005 Implied

Beta Estimate R-Squared 0.594927185 0.435905178 0.458094958 0.233958482 0.060637378 0.131888494

Estimated Ke 4.99% 4.52% 4.58% 4.56%

40

The estimated costs of debt and equity are consistent with a company of Pfizers 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 2002-2005 2003-2005 2000-2005 Implied

Estimated Estimated Estimated Ke WACCbt WACCat 4.99% 4.52% 4.58% 4.56% 4.07% 4.04% 4.30% 4.06% 3.78% 3.74% 4.01% 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() Cost of Equity(Ke) Cost of Debt(Kd) WACCbt WACCat 0.595 4.99% 3.45% 4.07% 3.78%

Intrinsic Valuation Methods

Various intrinsic valuation methods are needed to accurately value a companys 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.
~ E d t +1 t e

PPS t =

t =1

(1 + k )

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
Ke 0.03 0.04 0.05 0.06 0.07 0 $35.48 $28.13 $23.72 $20.78 $18.68 g 0.015 0.03 0.045 $64.88 N/A N/A $41.36 $94.29 N/A $31.28 $50.18 $182.50 $25.68 $35.48 $64.88 $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.

VE, t =

Et ( FCF t +1 )

t=0

(1 + k )
e

t +1

In Pfizers 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
WACC 0.03 0.04 0.05 0.06 0.07 0 $44.50 $30.23 $21.75 $16.14 $12.18 g 0.015 0.03 0.045 $88.83 N/A N/A $48.52 $121.68 N/A $31.34 $55.31 $223.10 $21.85 $33.26 $67.50 $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.
~ Et ( NI t +1 ) k e ( BVEt )

VE, t = BVEt +

t=0

(1 + k )
e

t +1

In Pfizers 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 $103.17 $180.52 N/A N/A $73.13 $102.67 $220.84 N/A $55.37 $69.62 $105.24 $354.58 $43.75 $51.49 $66.97 $113.42 $35.60 $40.12 $48.01 $65.39

Ke

0.03 0.04 0.05 0.06 0.07

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 firms 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.

V0E =

Earn1 1 AEG2 AEG3 AEG4 + + + + L 2 3 E 1 E 1 E E E

1 AEG2 AEG3 AEG4 + + + + L Earn 1 2 3 E 1 E E E

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 $62.03 $62.03 $59.20 $59.20 $55.49 $55.49 $52.60 $52.60 $50.80 $50.80

Ke

0.03 0.04 0.05 0.06 0.07

0.03 $62.03 $59.20 $55.49 $52.60 $50.80

0.045 $62.03 $59.20 $55.49 $52.60 $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 $105.34 $201.30 N/A N/A $79.00 $120.78 $287.90 N/A $63.20 $86.27 $143.95 $547.69 $52.66 $67.10 $95.97 $182.56 $45.14 $54.90 $71.98 $109.54

Ke

0.03 0.04 0.05 0.06 0.07

Method of Comparables

This method utilizes ratios from the firms competitors to find an industry average and an expected share price for the company. Pfizers 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.

PPSassessed, t

P = E ( EPSt +1 ) * E comparable firms

average

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 Pfizers competitors was 20.9. There were no outliers for this ratio. When multiplied by Pfizers earnings per share of $1.87, this gives a valuation of $39.08. This is higher than Pfizers actual share price of $26.15 The forward looking P/E average ratio was 18.125. When eliminating Mercks outlying value of 11.8 a more reliable average of 23.23 is attained. When this is multiplied by Pfizers 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 Labs 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 Pfizers 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 Pfizers 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 Pfizers sales per share of 7.21 gives a suggested price per share of $25.43. This is only $.72 lower than Pfizers 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 Pfizers 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 Pfizers actual price. The other two comparable ratios are just slightly under Pfizers actual price per share. Even after looking at the sensitivity analysis performed for every intrinsic valuation model, Pfizers cost of capital would have to be over-estimated by a large amount for Pfizers 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/Fin3321Spring-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-Spring05/Lecture_Notes/Chapter-8.doc

50

Appendix
Appendix A: Sales Manipulation Diagnostics
Net Sales/Cash From Sales Pfizer Abbot Labs Bristol Meyers Squibb Merck Industry Average Net Sales/Accounts Recievable Pfizer Abbot Labs Bristol Meyers Squibb Merck Industry Average Net Sales/Inventory Pfizer Abbot Labs Bristol Meyers Squibb Merck Industry Average 2003 1.00 1.00 1.00 1.00 1.00 2003 5.15 5.22 5.10 5.59 5.30 2003 7.74 6.31 11.65 8.80 8.92 2002 1.10 1.03 1.04 0.94 1.00 2002 5.60 5.22 5.46 3.95 4.88 2002 12.09 6.26 10.30 7.23 7.93 2001 1.02 1.03 0.95 1.01 1.00 2001 5.44 1.35 4.51 4.06 3.31 2001 10.59 1.71 10.59 5.92 6.07 2000 0.99 1.22 1.02 1.00 1.08 2000 5.39 1.62 4.76 7.67 4.69 2000 10.95 2.03 9.09 13.36 8.16

Appendix B: Expense Manipulation Diagnostics

Asset Turnover Pfizer Abbot Labs Bristol Meyers Squibb Merck Industry Average CFFO/OI Pfizer Abbot Labs Bristol Meyers Squibb Merck Industry Average CFFO/NOA Pfizer Abbot Labs Bristol Meyers Squibb Merck Industry Average 2003 0.39 0.66 0.68 0.55 0.63 2003 7.15 1.35 1.13 1.28 1.25 2003 0.26 0.19 0.33 0.38 0.30 2002 0.70 0.65 0.65 0.45 0.58 2002 1.07 1.43 0.46 1.28 1.06 2002 0.64 0.23 0.09 0.35 0.22 2001 0.74 0.16 0.65 0.48 0.43 2001 1.18 3.09 2.64 1.18 2.31 2001 0.59 0.25 0.54 0.32 0.37 2000 0.88 0.23 0.99 1.01 0.74 2000 1.67 2.34 1.21 0.81 1.46 2000 0.45 0.29 0.79 0.32 0.46

51

Total Accruals/Change in Sales Pfizer Abbot Labs Bristol Meyers Squibb Merck Industry Average Pension Expense/SG&A Pfizer Abbot Labs Bristol Meyers Squibb Merck Industry Average

2003 1.28 1.40 1.64 9.81 4.28 2003 0.01 0.53 N/A N/A 0.53

2002 0.43 0.24 -1.67 42.72 13.76 2002 0.01 0.62 N/A N/A 0.62

2001 -2.79 11.45 7.07 -0.35 6.06 2001 0.01 1.35 N/A N/A 1.35

2000 0.70 0.55 N/A N/A 0.55 2000 0.01 1.22 N/A N/A 1.22

Appendix C: Financial Ratio Analysis Current Ratio

Pfizer Abbot Bristol Meyers Merck Industry Average 2000 1.43 1.72 1.44 1.37 1.51 2001 1.40 1.06 1.19 1.12 1.13 2002 1.34 1.33 1.21 1.16 1.24 2003 1.26 1.38 1.61 1.20 1.40 2004 1.50 1.57 1.50 N/A 1.54

Quick Asset Ratio

Pfizer Abbot Bristol Meyers Merck Industry Average 2000 1.03 0.78 1.00 0.96 0.91 2001 0.98 0.44 0.87 0.74 0.68 2002 0.99 0.61 0.85 0.84 0.77 2003 0.88 0.66 1.24 0.86 0.92 2004 1.11 0.84 1.20 N/A 1.02

Accounts Receivable Turnover

Pfizer Abbot Bristol Meyers Merck Industry Average 2000 5.39 1.62 4.76 7.67 4.69 2001 6.05 1.35 4.51 4.06 3.31 2002 5.60 5.22 5.46 3.95 4.88 2003 5.15 5.22 5.10 5.59 5.30 2004 5.61 5.32 4.43 N/A 4.88

52

Days Supply of Receivables

Pfizer Abbot Bristol Meyers Merck Industry Average 2000 67.74 224.79 76.63 47.59 77.90 2001 60.34 271.08 81.01 89.80 110.42 2002 65.22 69.93 66.84 92.30 74.82 2003 70.88 69.99 71.62 65.31 68.87 2004 65.10 68.55 82.36 N/A 74.82

Inventory Turnover
Pfizer Abbot Bristol Meyers Merck Industry Average 2000 1.82 0.51 2.45 7.43 3.46 2001 1.54 0.42 3.21 1.01 1.55 2002 1.51 2.79 2.98 1.32 2.36 2003 1.68 2.84 3.18 1.69 2.57 2004 1.13 3.39 3.81 N/A 3.60

Days Supply of Inventory

Pfizer Abbot Bristol Meyers Merck Industry Average 2000 200.98 721.06 148.93 49.14 105.44 2001 237.25 860.22 113.72 360.42 235.66 2002 241.65 130.65 122.39 276.92 154.35 2003 216.69 128.57 114.71 216.08 142.02 2004 322.36 107.66 95.87 N/A 101.42

Gross Profit Margin

Pfizer Abbot Bristol Meyers Merck Industry Average 2000 83% 75% 73% 44% 64% 2001 87% 75% 70% 83% 76% 2002 88% 55% 71% 82% 69% 2003 78% 55% 71% 81% 69% 2004 86% 55% 69% N/A 62%

Operating Profit Margin

2000 2001 2002 2003 2004

53

Pfizer Abbot Bristol Meyers Merck Industry Average

20% 30% 30% 24% 28%

34% 51% 12% 47% 37%

36% 22% 17% 45% 28%

7% 20% 25% 40% 28%

27% 21% 23% N/A 22%

Net Profit Margin

Pfizer Abbot Bristol Meyers Merck Industry Average 2000 13% 26% 25% 17% 23% 2001 27% 18% 27% 34% 26% 2002 28% 18% 13% 33% 22% 2003 9% 16% 17% 30% 21% 2004 22% 16% 12% N/A 14%

Asset Turnover
Pfizer Abbot Bristol Meyers Merck Industry Average 2000 0.88 0.23 0.99 1.01 0.74 2001 0.74 0.16 0.65 0.48 0.43 2002 0.70 0.65 0.65 0.45 0.58 2003 0.39 0.66 0.68 0.55 0.63 2004 0.42 0.68 0.64 N/A 0.66

Return on Assets
Pfizer Abbot Bristol Meyers Merck Industry Average 2000 11% 6% 25% 17% 16% 2001 20% 3% 17% 17% 12% 2002 20% 12% 9% 15% 12% 2003 3% 11% 11% 17% 13% 2004 9% 11% 8% N/A 10%

Return on Equity
Pfizer Abbot Bristol Meyers 2000 23% 11% 57% 2001 43% 7% 53% 2002 46% 26% 24% 2003 6% 21% 32% 2004 17% 23% 23%

54

Merck Industry Average

46% 38%

45% 35%

39% 30%

44% 32%

N/A 23%

Debt to Equity Ratio

Pfizer Abbot Bristol Meyers Merck Industry Average 2000 1.08 0.78 1.25 1.71 1.25 2001 1.14 1.57 2.06 1.74 1.79 2002 1.32 1.21 1.77 1.61 1.53 2003 0.79 0.99 1.80 1.61 1.47 2004 0.81 1.01 1.98 N/A 1.50

Times Interest Earned

Pfizer Abbot Bristol Meyers Merck Industry Average 2000 12.57 N/A 48.58 0.32 24.45 2001 34.31 N/A 12.19 0.88 6.54 2002 46.08 16.16 6.46 0.82 7.81 2003 9.32 23.14 26.15 0.67 16.65 2004 28.24 27.67 84.96 N/A 56.32

Debt Service Margin

Pfizer Abbot Bristol Meyers Merck Industry Average 2000 3.60 2.29 2.79 1.67 2.25 2001 6.28 2.34 3.65 1.63 2.54 2002 6.09 3.67 0.61 3.61 2.63 2003 4.51 3.14 1.86 11.46 5.49 2004 6.12 4.08 1.49 N/A 2.79

55

Appendix D: Forecasted Financial Statements Income Statement

Actuals(Millions) 1999 $27,376 $5,464 $21,912 2000 $29,574 $4,907 $24,667 2001 $29,024 $3,823 $25,201 2002 $32,373 $4,045 $28,328 2003 $45,188 $9,832 $35,356 2004 $52,516 $7,541 $44,975 Forecasts(Millions) 2005 $55,142 $11,028 $44,113 2006 $58,726 $11,745 $46,981 2007 $63,424 $12,685 $50,739 2008 $69,767 $13,953 $55,813 2009 $76,743 $15,349 $61,395 2010 $84,417 $16,883 $67,534 2011 $92,859 $18,572 $74,287 2012 $102,145 $20,429 $81,716 2013 $112,360 $22,472 $89,888 2014 $123,596 $24,719 $98,877

Revenues Cost of sales Gross Profit Operating Expenses: Selling, informational and administrative expenses Research and development expenses Merger-related costs Merger-related in-process research and development charge Other (income)/deductions-net Income from continuing operations before provision for taxes on income and minority interests Provision for taxes on income Minority interests Income from continuing operations Discontinued operations:

$10,810 $4,036 $33

$11,442 $4,435 $3,257

$9,717 $4,776 $819

$10,846 $5,176 $630

$15,242 $7,131 $1,058

$16,903 $7,684 $1,193

$17,645 $8,271 $0

$17,094 $8,271 $0

$16,543 $8,271 $0

$16,543 $8,271 $0

$16,543 $8,271 $0

$16,543 $8,271 $0

$16,543 $8,271 $0

$16,543 $8,271 $0

$16,543 $8,271 $0

$16,543 $8,271 $0

$88

($248)

($95)

($120)

$3,610

$753

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$6,945 $1,968 $5 $4,972 $0 $0 ($20) $0 $0 $4,952

$5,781 $2,049 $14 $3,718 $0 $0 $8 $0 $0 $3,726

$9,984 $2,433 $14 $7,537 $251 $0 $251 $7,788 $0 $7,788

$11,796 $2,609 $6 $9,181 $278 $77 $355 $9,536 ($410) $9,126

$3,263 $1,621 $3 $1,639 $16 $2,285 $2,301 $3,940 ($30) $3,910

$14,007 $2,665 $10 $11,332 ($22) $51 $29 $0 $0 $11,361

$15,440 $0 $0 $13,234 $0 $0 $0 $0 $0 $12,407

$17,618 $0 $0 $15,562 $0 $0 $0 $0 $0 $14,094

$19,661 $0 $0 $16,807 $0 $0 $0 $0 $0 $15,222

$21,628 $0 $0 $18,488 $0 $0 $0 $0 $0 $16,744

$23,790 $0 $0 $20,337 $0 $0 $0 $0 $0 $18,418

$26,169 $0 $0 $22,371 $0 $0 $0 $0 $0 $20,260

$28,786 $0 $0 $24,608 $0 $0 $0 $0 $0 $22,286

$31,665 $0 $0 $27,068 $0 $0 $0 $0 $0 $24,515

$34,831 $0 $0 $29,775 $0 $0 $0 $0 $0 $26,966

$38,315 $0 $0 $32,753 $0 $0 $0 $0 $0 $29,663

Discontinued operations-net of tax

Net income

56

Pro-forma Income Statement

Actuals Revenues Cost of sales Gross Profit Operating Expenses: Selling, informational and administrative expenses Research and development expenses Merger-related costs Merger-related in-process research and development charge Other (income)/deductions-net Income from continuing operations before provision for taxes on income and minority interests Provision for taxes on income Minority interests Income from continuing operations Discontinued operations: 1999 2000 2001 2002 2003 2004 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 19.96% 16.59% 13.17% 12.49% 21.76% 14.36% 80.04% 83.41% 86.83% 87.51% 78.24% 85.64% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 39.49% 14.74% 0.12% 0.00% 0.32% 38.69% 15.00% 11.01% 0.00% -0.84% 33.48% 16.46% 2.82% 0.00% -0.33% 33.50% 15.99% 1.95% 0.00% -0.37% 33.73% 15.78% 2.34% 11.18% 7.99% 32.19% 14.63% 2.27% 2.04% 1.43% 2005 100% 20.00% 80.00% 2006 100% 20.00% 80.00% Forecasts 2007 100% 20.00% 80.00% 2008 100% 20.00% 80.00% 2009 100% 20.00% 80.00% 2010 100% 20.00% 80.00% 2011 100% 20.00% 80.00% 2012 100% 20.00% 80.00% 2013 100% 20.00% 80.00% 2014 100% 20.00% 80.00%

32.00% 15.00%

31.00% 15.00%

30.00% 15.00%

30.00% 15.00%

30.00% 15.00%

30.00% 15.00%

30.00% 15.00%

30.00% 15.00%

30.00% 15.00%

30.00% 15.00%

Discontinued operations-net of tax

Net income

25.37% 7.19% 0.02% 18.16% 0.00% 0.00% 0.00% -0.07% 0.00% 0.00% 18.09%

19.55% 6.93% 0.05% 12.57% 0.00% 0.00% 0.00% 0.03% 0.00% 0.00% 12.60%

34.40% 8.38% 0.05% 25.97% 0.00% 0.86% 0.00% 0.86% 26.83% 0.00% 26.83%

36.44% 8.06% 0.02% 28.36% 0.00% 0.86% 0.24% 1.10% 29.46% -1.27% 28.19%

7.22% 3.59% 0.01% 3.63% 0.00% 0.04% 5.06% 5.09% 8.72% -0.07% 8.65%

26.67% 5.07% 0.02% 21.58% 0.00% -0.04% 0.10% 0.06% 0.00% 0.00% 21.63%

28.00%

30.00%

31.00%

31.00%

31.00%

31.00%

31.00%

31.00%

31.00%

31.00%

24.00%

26.50%

26.50%

26.50%

26.50%

26.50%

26.50%

26.50%

26.50%

26.50%

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) 1999 Assets Current Assets Cash and cash equivalents Short-term investments Accounts receivable, less allowance for doubtful accounts: Short-term loans Inventories Finished goods Work in process Raw materials and supplies Total inventories Prepaid expenses and taxes Assets of discontinued businesses held for sale Total current assets Long-term loans and investments Property, plant and equipment, less accumulated depreciation Goodwill, less accumulated amortization: 2000-$300; 1999-$256 Identifiable intangible assets, less accumulated amortization Other assets, deferred taxes and deferred charges Total non-current assets Total assets Liabilities and Shareholders Equity Current Liabilities Short-term borrowings, including current portion of long-term debt Accounts payable Dividends payable Income taxes payable Accrued compensation and related items Accrued litigation settlements Other current liabilities Liabilities of discontinued businesses held for sale Total current liabilities Long-term debt Pension benefit obligations Postretirement benefit obligation other than pension plans Deferred taxes on income Other noncurrent liabilities Total non-current liabilities Total liabilities Shareholders Equity Preferred stock, without par value; Common stock, $.05 par value Additional paid-in capital Retained earnings Accumulated other comprehensive expense Employee benefit trusts Treasury stock, shares at cost: 2000435; 1999-413 Total shareholders equity Total liabilities and shareholders equity 2000 2001 2002 2003 2004 Forecasts(Millions) 2005 FORECASTS 2006 2007 2008 2009 2010 2011 2012 2013 2014

$2,358 $4,028 $5,368 $273 $0 $1,147 $977 $464 $2,588 $1,696 $0 $16,311 $1,764 $8,685 $1,870 $0 $2,742 $15,061 $31,372

$1,099 $5,764 $5,489 $140 $0 $1,195 $1,074 $433 $2,702 $1,993 $0 $17,187 $2,529 $9,425 $1,791 $0 $2,578 $16,323 $33,510

$1,036 $7,579 $4,798 $269 $1,011 $0 $1,062 $412 $2,485 $1,418 $1,627 $19,212 $5,724 $9,783 $1,689 $0 $2,745 $19,941 $39,153

$1,878 $10,673 $5,785 $399 $1,133 $0 $1,142 $403 $2,678 $1,797 $1,571 $24,781 $5,161 $10,712 $1,200 $0 $4,502 $21,575 $46,356

$1,520 $10,432 $8,775 $391 $0 $2,308 $2,219 $1,310 $5,837 $2,786 $0 $29,741 $6,142 $18,287 $22,306 $36,350 $3,949 $87,034 $116,775

$1,808 $18,085 $9,367 $653 $0 $0 $0 $0 $6,660 $2,939 $182 $39,694 $3,873 $18,385 $23,756 $33,251 $4,725 $83,990 $123,684

$0 $0 $9,803 $0 $0 $0 $0 $0 $6,740 $0 $0 $46,564 $0 $18,381 $0 $0 $0 $75,973 $122,537

$0 $0 $11,623 $0 $0 $0 $0 $0 $6,729 $0 $0 $53,832 $0 $18,352 $0 $0 $0 $68,514 $122,346

$0 $0 $12,685 $0 $0 $0 $0 $0 $6,977 $0 $0 $63,424 $0 $19,027 $0 $0 $0 $63,424 $126,848

$0 $0 $13,953 $0 $0 $0 $0 $0 $6,977 $0 $0 $63,424 $0 $19,027 $0 $0 $0 $63,424 $126,848

$0 $0 $15,349 $0 $0 $0 $0 $0 $7,674 $0 $0 $69,767 $0 $20,930 $0 $0 $0 $69,767 $139,533

$0 $0 $15,477 $0 $0 $0 $0 $0 $7,738 $0 $0 $70,348 $0 $21,104 $0 $0 $0 $70,348 $140,696

$0 $0 $17,024 $0 $0 $0 $0 $0 $8,512 $0 $0 $77,383 $0 $23,215 $0 $0 $0 $77,383 $154,765

$0 $0 $18,727 $0 $0 $0 $0 $0 $9,363 $0 $0 $85,121 $0 $25,536 $0 $0 $0 $85,121 $170,242

$0 $0 $20,599 $0 $0 $0 $0 $0 $10,300 $0 $0 $93,633 $0 $28,090 $0 $0 $0 $93,633 $187,266

$0 $0 $22,659 $0 $0 $0 $0 $0 $11,330 $0 $0 $102,996 $0 $30,899 $0 $0 $0 $102,996 $205,993

$5,299 $1,889 $349 $748 $905 $0 $2,706 $0 $11,896 $1,774 $0 $515 $485 $2,752 $5,526 $17,422 $0 $0 $332 $5,943 $18,459 ($1,045) ($2,888) ($6,851) $13,950 $31,372

$4,289 $1,719 $696 $850 $982 $0 $3,445 $0 $11,981 $1,123 $0 $564 $380 $3,386 $5,453 $17,434 $0 $0 $337 $8,895 $19,599 ($1,515) ($3,382) ($7,858) $16,076 $33,510

$6,263 $1,411 $819 $775 $1,026 $0 $2,866 $569 $13,729 $2,609 $0 $587 $398 $3,537 $7,131 $20,860 $0 $0 $340 $9,300 ($2,650) ($11,378) $24,430 ($1,749) $18,293 $39,153

$8,669 $1,620 $926 $2,231 $1,084 $0 $3,448 $577 $18,555 $3,140 $0 $623 $364 $3,724 $7,851 $26,406 $0 $0 $341 $9,368 ($1,786) ($16,341) $30,243 ($1,875) $19,950 $46,356

$8,818 $2,601 $1,300 $1,919 $1,753 $1,402 $5,864 $0 $23,657 $5,755 $2,861 $1,451 $13,238 $4,436 $27,741 $51,398 $0 $219 $435 $66,396 ($1,898) ($29,352) $29,382 $195 $65,377 $116,775

$11,266 $2,672 $1,418 $1,963 $1,939 $264 $6,872 $64 $26,458 $7,279 $2,821 $1,450 $12,632 $4,766 $28,948 $55,406 $0 $193 $438 $67,098 $35,492 $2,278 ($1,229) ($35,992) $68,278 $123,684

$14,924 $2,985 $0 $0 $0 $0 $0 $0 $29,849 $6,567 $0 $1,672 $0 $0 $29,849 $59,698 $0 $0 $0 $67,098 $43,267 $0 ($1,229) ($35,992) $62,840 $122,537

$18,098 $3,232 $0 $0 $0 $0 $0 $0 $36,196 $7,110 $0 $1,810 $0 $0 $28,440 $64,636 $0 $0 $0 $0 $52,781 $0 $0 $0 $57,710 $122,346

$19,373 $3,459 $0 $0 $0 $0 $0 $0 $42,898 $7,611 $0 $1,937 $0 $0 $26,292 $69,190 $0 $0 $0 $0 $62,890 $0 $0 $0 $57,658 $126,848

$19,732 $3,524 $0 $0 $0 $0 $0 $0 $45,806 $7,752 $0 $1,973 $0 $0 $24,665 $70,471 $0 $0 $0 $0 $74,011 $0 $0 $0 $56,377 $126,848

$21,705 $3,876 $0 $0 $0 $0 $0 $0 $50,387 $8,527 $0 $2,171 $0 $0 $27,131 $77,518 $0 $0 $0 $0 $86,244 $0 $0 $0 $62,015 $139,533

$21,886 $3,908 $0 $0 $0 $0 $0 $0 $50,807 $8,598 $0 $2,189 $0 $0 $27,358 $78,164 $0 $0 $0 $0 $99,700 $0 $0 $0 $62,531 $140,696

$24,075 $4,299 $0 $0 $0 $0 $0 $0 $55,887 $9,458 $0 $2,407 $0 $0 $30,093 $85,981 $0 $0 $0 $0 $114,502 $0 $0 $0 $68,785 $154,765

$26,482 $4,729 $0 $0 $0 $0 $0 $0 $61,476 $10,404 $0 $2,648 $0 $0 $33,103 $94,579 $0 $0 $0 $0 $130,784 $0 $0 $0 $75,663 $170,242

$29,130 $5,202 $0 $0 $0 $0 $0 $0 $67,624 $11,444 $0 $2,913 $0 $0 $36,413 $104,037 $0 $0 $0 $0 $148,694 $0 $0 $0 $83,229 $187,266

$32,043 $5,722 $0 $0 $0 $0 $0 $0 $74,386 $12,588 $0 $3,204 $0 $0 $40,054 $114,440 $0 $0 $0 $0 $168,395 $0 $0 $0 $91,552 $205,993

58

Pro-forma Balance Sheet

Actuals 1999 Assets Current Assets Cash and cash equivalents Short-term investments Accounts receivable, less allowance for doubtful accounts: Short-term loans Inventories Finished goods Work in process Raw materials and supplies Total inventories Prepaid expenses and taxes Assets of discontinued businesses held for sale Total current assets Long-term loans and investments Property, plant and equipment, less accumulated depreciation Goodwill, less accumulated amortization: 2000-$300; 1999-$256 Identifiable intangible assets, less accumulated amortization Other assets, deferred taxes and deferred charges Total current assets Total assets Liabilities and Shareholders Equity Current Liabilities Short-term borrowings, including current portion of long-term debt Accounts payable Dividends payable Income taxes payable Accrued compensation and related items Accrued litigation settlements Other current liabilities Liabilities of discontinued businesses held for sale Total current liabilities Long-term debt Pension benefit obligations Postretirement benefit obligation other than pension plans Deferred taxes on income Other noncurrent liabilities Total non-current liabilities Total liabilities Shareholders Equity Preferred stock, without par value; Common stock, $.05 par value Additional paid-in capital Retained earnings Accumulated other comprehensive expense Employee benefit trusts Treasury stock, shares at cost: 2000435; 1999-413 Total shareholders equity 2000 2001 2002 2003 2004 Forecasts 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

7.52% 12.84% 17.11% 0.87% 0.00% 3.66% 3.11% 1.48% 8.25% 5.41% 0.00% 51.99% 5.62% 27.68% 5.96% 0.00% 8.74% 48.01% 100.00%

3.28% 17.20% 16.38% 0.42% 0.00% 3.57% 3.21% 1.29% 8.06% 5.95% 0.00% 51.29% 7.55% 28.13% 5.34% 0.00% 7.69% 48.71% 100.00%

2.65% 19.36% 12.25% 0.69% 2.58% 0.00% 2.71% 1.05% 6.35% 3.62% 4.16% 49.07% 14.62% 24.99% 4.31% 0.00% 7.01% 50.93% 100.00%

4.05% 23.02% 12.48% 0.86% 2.44% 0.00% 2.46% 0.87% 5.78% 3.88% 3.39% 53.46% 11.13% 23.11% 2.59% 0.00% 9.71% 46.54% 100.00%

1.30% 8.93% 7.51% 0.33% 0.00% 1.98% 1.90% 1.12% 5.00% 2.39% 0.00% 25.47% 5.26% 15.66% 19.10% 31.13% 3.38% 74.53% 100.00%

1.46% 14.62% 7.57% 0.53% 0.00% 0.00% 0.00% 0.00% 5.38% 2.38% 0.15% 32.09% 3.13% 14.86% 19.21% 26.88% 3.82% 67.91% 100.00% 8.00% 9.50% 10.00% 11.00% 11.00% 11.00% 11.00% 11.00% 11.00% 11.00%

5.50%

5.50%

5.50%

5.50%

5.50%

5.50%

5.50%

5.50%

5.50%

5.50%

38.00%

44.00%

50.00%

50.00%

50.00%

50.00%

50.00%

50.00%

50.00%

50.00%

15.00%

15.00%

15.00%

15.00%

15.00%

15.00%

15.00%

15.00%

15.00%

15.00%

62.00% 100.00%

56.00% 100.00%

50.00% 100.00%

50.00% 100.00%

50.00% 100.00%

50.00% 100.00%

50.00% 100.00%

50.00% 100.00%

50.00% 100.00%

50.00% 100.00%

30.42% 10.84% 2.00% 4.29% 5.19% 0.00% 15.53% 0.00% 68.28% 10.18% 0.00% 2.96% 2.78% 15.80% 31.72% 100.00%

24.60% 9.86% 3.99% 4.88% 5.63% 0.00% 19.76% 0.00% 68.72% 6.44% 0.00% 3.24% 2.18% 19.42% 31.28% 100.00%

30.02% 6.76% 3.93% 3.72% 4.92% 0.00% 13.74% 2.73% 65.81% 12.51% 0.00% 2.81% 1.91% 16.96% 34.19% 100.00%

32.83% 6.13% 3.51% 8.45% 4.11% 0.00% 13.06% 2.19% 70.27% 11.89% 0.00% 2.36% 1.38% 14.10% 29.73% 100.00%

17.16% 5.06% 2.53% 3.73% 3.41% 2.73% 11.41% 0.00% 46.03% 11.20% 5.57% 2.82% 25.76% 8.63% 53.97% 100.00%

20.33% 4.82% 2.56% 3.54% 3.50% 0.48% 12.40% 0.12% 47.75% 13.14% 5.09% 2.62% 22.80% 8.60% 52.25% 100.00%

25.00% 5.00%

28.00% 5.00%

28.00% 5.00%

28.00% 5.00%

28.00% 5.00%

28.00% 5.00%

28.00% 5.00%

28.00% 5.00%

28.00% 5.00%

28.00% 5.00%

50.00% 11.00%

56.00% 11.00%

62.00% 11.00%

65.00% 11.00%

65.00% 11.00%

65.00% 11.00%

65.00% 11.00%

65.00% 11.00%

65.00% 11.00%

65.00% 11.00%

2.80%

2.80%

2.80%

2.80%

2.80%

2.80%

2.80%

2.80%

2.80%

2.80%

50.00% 100.00%

44.00% 100.00%

38.00% 100.00%

35.00% 100.00%

35.00% 100.00%

35.00% 100.00%

35.00% 100.00%

35.00% 100.00%

35.00% 100.00%

35.00% 100.00%

0.00% 2.38% 42.60% 132.32% -7.49% -20.70% -49.11% 100.00%

0.00% 2.10% 55.33% 121.91% -9.42% -21.04% -48.88% 100.00%

0.00% 1.86% 50.84% -14.49% -62.20% 133.55% -9.56% 100.00%

0.00% 1.71% 46.96% -8.95% -81.91% 151.59% -9.40% 100.00%

0.33% 0.67% 101.56% -2.90% -44.90% 44.94% 0.30% 100.00%

0.28% 0.64% 98.27% 51.98% 3.34% -1.80% -52.71% 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) 1999 Operating Activities Income from continuing operations Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Cumulative effect of a change in accounting principle Discontinued operations Harmonization of accounting methodology Loss on sale of animal health feed-additive products Trovan inventory write-off Merger-related in-process research and development charge Costs associated with the withdrawal of Rezulin Gain on sale of business Gains on sales of product lines Gains on sales of equity investments Asset impairment charges Depreciation and amortization Deferred taxes and other Charges to write-down equity investments Other Changes in assets and liabilities, net of effect of businesses divested: Accounts receivable Inventories Prepaid and other assets Accounts payable and accrued liabilities Income taxes payable Other deferred items Net cash provided by operating activities Investing Activities Purchases of property, plant and equipment Proceeds from disposals of property, plant and equipment Purchases of short-term investments, net of maturities Proceeds from redemptions of short-term investments Purchases of long-term investments Proceeds from redemptions of long-term investments Increases in long-term loans Purchases of other assets Proceeds from sales of other assets Proceeds from sales of businesses Cash and cash equivalents acquired through acquisition of Pharmacia Other investing activities Net cash used in investing activities Financing Activities Proceeds from issuances of long-term debt Repayments of long-term debt Increase in short-term debt Decrease in short-term debt Proceeds from common stock issuances Purchases of common stock Cash dividends paid Stock option transactions and other Net cash used in financing activities $4,972 2000 $3,718 2001 $7,788 2002 $9,126 2003 $3,910 2004 $11,361 Forecasts(Millions) 2005 $11,580 2006 $13,213 2007 $14,746 2008 $16,221 2009 $17,843 2010 $19,627 2011 $21,590 2012 $23,749 2013 $26,124 2014 $28,736

$0 $0 $0 $0 $310 $0 $0 $0 $0 $0 $0 $905 $213 $0 $0

$0 $0 $0 $85 $0 $0 $102 $0 $0 ($216) $0 $968 ($265) $0 $0

$0 ($251) ($175) $0 $0 $0 $0 $0 $0 ($17) $0 $972 $193 $0 $0

$410 ($278) $0 $0 $0 $0 $0 ($77) ($34) $0 $63 $1,036 ($385) $0 $0

$30 ($16) $0 $0 $0 $5,052 $0 ($3,885) ($87) $0 $2,820 $4,078 ($104) $16 $604

$0 $22 $0 $0 $0 $1,071 $0 ($51) ($12) $0 $702 $5,093 ($1,579) $40 $555

$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $4,632 $0 $0 $0

$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $3,524 $0 $0 $0

$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $2,359 $0 $0 $0

$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $2,595 $0 $0 $0

$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $2,855 $0 $0 $0

$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $3,140 $0 $0 $0

$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $3,454 $0 $0 $0

$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $3,800 $0 $0 $0

$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $4,180 $0 $0 $0

$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $4,598 $0 $0 $0

($1,274) ($278) ($127) $378 $144 $250 $5,493

($498) ($436) $365 $807 $1,315 $250 $6,195

$81 ($110) $106 ($412) $332 $354 $8,861

($963) ($129) ($1,423) $461 $1,736 $321 $9,864

($904) ($202) ($905) $670 ($550) $1,198 $11,725

($465) ($542) ($640) ($708) $805 $688 $16,340

$0 ($618) $0 $0 $0 $0 $15,440

$0 ($705) $0 $0 $0 $0 $15,856

$0 ($786) $0 $0 $0 $0 $16,712

$0 ($865) $0 $0 $0 $0 $17,951

$0 ($952) $0 $0 $0 $0 $19,746

$0 ($1,047) $0 $0 $0 $0 $21,721

$0 ($1,151) $0 $0 $0 $0 $23,893

$0 ($1,267) $0 $0 $0 $0 $26,282

$0 ($1,393) $0 $0 $0 $0 $28,910

$0 ($1,533) $0 $0 $0 $0 $31,801

($2,493) $83 ($9,270) $7,785 ($40) $42 ($41) ($253) $193 $26 $0 $62 ($3,906)

($2,191) $91 ($7,982) $6,592 ($618) $346 ($220) ($174) $184 $193 $0 $26 ($3,753)

($2,105) $0 ($14,218) $12,808 ($3,708) $80 $0 ($227) $132 $8 $0 $95 ($7,135)

($1,758) $0 ($12,652) $9,781 ($2,877) $3,477 $0 ($528) $272 $220 $0 ($273) ($4,338)

($2,641) $0 ($9,931) $12,060 ($1,883) $356 $0 ($788) $360 $5,602 $1,789 ($86) $4,838

($2,601) $0 ($17,499) $11,723 ($1,329) $1,570 $0 ($327) $6 $1,276 $0 $22 ($9,422)

($3,860) $0 $20,072 $13,124 $0 $0 $0 $0 $0 $0 $0 $0 $9,264

($4,404) $0 $22,903 $15,856 $0 $0 $0 $0 $0 $0 $0 $0 $10,571

($4,915) $0 $25,560 $19,661 $0 $0 $0 $0 $0 $0 $0 $0 $11,797

($5,407) $0 $28,116 $21,628 $0 $0 $0 $0 $0 $0 $0 $0 $12,977

($5,948) $0 $30,927 $23,790 $0 $0 $0 $0 $0 $0 $0 $0 $14,274

($6,542) $0 $34,020 $26,169 $0 $0 $0 $0 $0 $0 $0 $0 $15,702

($7,197) $0 $37,422 $28,786 $0 $0 $0 $0 $0 $0 $0 $0 $17,272

($7,916) $0 $41,164 $31,665 $0 $0 $0 $0 $0 $0 $0 $0 $18,999

($8,708) $0 $45,281 $34,831 $0 $0 $0 $0 $0 $0 $0 $0 $20,899

($9,579) $0 $49,809 $38,315 $0 $0 $0 $0 $0 $0 $0 $0 $22,989

$14,025 ($14,046) $2,134 ($14) $62 ($2,542) ($1,820) $574 ($1,627)

$18 ($529) $1,247 ($2,427) $59 ($1,005) ($2,197) $1,129 ($3,705)

$1,837 ($151) $2,344 ($519) $62 ($3,665) ($2,715) $711 ($2,096)

$603 ($374) $2,815 ($539) $66 ($4,996) ($3,168) $594 ($4,999)

$600 ($439) $194 ($946) $0 ($13,037) ($4,353) $1,072 ($16,909)

$2,586 ($664) $2,466 ($288) $0 ($6,659) ($5,082) $1,012 ($6,629)

$0 $0 $2,934 $0 $0 ($6,948) ($4,632) $0 ($6,485)

$0 $0 $3,876 $0 $0 ($7,047) ($4,581) $0 ($6,166)

$0 $0 $4,915 $0 $0 ($6,882) ($5,112) $0 ($5,898)

$0 $0 $5,407 $0 $0 ($7,570) ($5,623) $0 ($6,488)

$0 $0 $5,948 $0 $0 ($8,327) ($6,185) $0 ($7,137)

$0 $0 $6,542 $0 $0 ($9,159) ($6,804) $0 ($7,851)

$0 $0 $7,197 $0 $0 ($10,075) ($7,484) $0 ($8,636)

$0 $0 $7,916 $0 $0 ($11,083) ($8,233) $0 ($9,499)

$0 $0 $8,708 $0 $0 ($12,191) ($9,056) $0 ($10,449)

$0 $0 $9,579 $0 $0 ($13,410) ($9,962) $0 ($11,494)

60

Pro-forma Statement of Cash Flows

Operating Income

1999 $6,945,000,000

2000 $5,781,000,000

2001 $9,984,000,000

2002 $11,796,000,000

2003 2004 $3,263,000,000 $14,007,000,000

FORECASTS 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 $ 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 Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Cumulative effect of a change in accounting principle Discontinued operations Harmonization of accounting methodology Loss on sale of animal health feed-additive products Trovan inventory write-off Merger-related in-process research and development charge Costs associated with the withdrawal of Rezulin Gain on sale of business Gains on sales of product lines Gains on sales of equity investments Asset impairment charges Depreciation and amortization Deferred taxes and other Charges to write-down equity investments Other Changes in assets and liabilities, net of effect of businesses divested: Accounts receivable Inventories Prepaid and other assets Accounts payable and accrued liabilities Income taxes payable Other deferred items Net cash provided by operating activities Investing Activities Purchases of property, plant and equipment Proceeds from disposals of property, plant and equipment Purchases of short-term investments, net of maturities Proceeds from redemptions of short-term investments Purchases of long-term investments Proceeds from redemptions of long-term investments Increases in long-term loans Purchases of other assets Proceeds from sales of other assets Proceeds from sales of businesses Cash and cash equivalents acquired through acquisition of Pharmacia Other investing activities Net cash used in investing activities Financing Activities Proceeds from issuances of long-term debt Repayments of long-term debt Increase in short-term debt Decrease in short-term debt Proceeds from common stock issuances Purchases of common stock Cash dividends paid Stock option transactions and other Net cash used in financing activities

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%

0.00% 0.00% 0.00% 0.00% 0.00% 4.46% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 13.03% 3.07% 0.00% 0.00%

0.00% 0.00% 0.00% 0.00% 1.47% 0.00% 0.00% 1.76% 0.00% 0.00% -3.74% 0.00% 16.74% -4.58% 0.00% 0.00%

0.00% 0.00% -2.51% -1.75% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% -0.17% 0.00% 9.74% 1.93% 0.00% 0.00%

0.00% 3.48% -2.36% 0.00% 0.00% 0.00% 0.00% 0.00% -0.65% -0.29% 0.00% 0.53% 8.78% -3.26% 0.00% 0.00%

0.00% 0.92% -0.49% 0.00% 0.00% 0.00% 154.83% 0.00% -119.06% -2.67% 0.00% 86.42% 124.98% -3.19% 0.49% 18.51%

0.00% 0.00% 0.16% 0.00% 0.00% 0.00% 7.65% 0.00% -0.36% -0.09% 0.00% 5.01% 36.36% -11.27% 0.29% 3.96%

30%

20%

12%

12%

12%

12%

12%

12%

12%

12%

-18.34% -4.00% -1.83% 5.44% 2.07% 3.60% 79.09% 0.00% 0.00% -35.90% 1.20% -133.48% 112.10% -0.58% 0.60% -0.59% -3.64% 2.78% 0.37% 0.00% 0.89% -56.24% 0.00% 0.00% 201.94% -202.25% 30.73% -0.20% 0.89% -36.60% -26.21% 8.26% -23.43%

-8.61% -7.54% 6.31% 13.96% 22.75% 4.32% 107.16% 0.00% 0.00% -37.90% 1.57% -138.07% 114.03% -10.69% 5.99% -3.81% -3.01% 3.18% 3.34% 0.00% 0.45% -64.92% 0.00% 0.00% 0.31% -9.15% 21.57% -41.98% 1.02% -17.38% -38.00% 19.53% -64.09%

0.81% -1.10% 1.06% -4.13% 3.33% 3.55% 88.75% 0.00% 0.00% -21.08% 0.00% -142.41% 128.29% -37.14% 0.80% 0.00% -2.27% 1.32% 0.08% 0.00% 0.95% -71.46% 0.00% 0.00% 18.40% -1.51% 23.48% -5.20% 0.62% -36.71% -27.19% 7.12% -20.99%

-8.16% -1.09% -12.06% 3.91% 14.72% 2.72% 83.62% 0.00% 0.00% -14.90% 0.00% -107.26% 82.92% -24.39% 29.48% 0.00% -4.48% 2.31% 1.87% 0.00% -2.31% -36.78% 0.00% 0.00% 5.11% -3.17% 23.86% -4.57% 0.56% -42.35% -26.86% 5.04% -42.38%

-27.70% -6.19% -27.74% 20.53% -16.86% 36.71% 359.33% 0.00% 0.00% -80.94% 0.00% -304.35% 369.60% -57.71% 10.91% 0.00% -24.15% 11.03% 171.68% 54.83% -2.64% 148.27% 0.00% 0.00% 18.39% -13.45% 5.95% -28.99% 0.00% -399.54% -133.40% 32.85% -518.20%

-3.32% -3.87% -4.57% -5.05% 5.75% 4.91% 116.66% 0.00% 0.00% -18.57% 0.00% -124.93% 83.69% -9.49% 11.21% 0.00% -2.33% 0.04% 9.11% 0.00% 0.16% -67.27% 0.00% 0.00% 18.46% -4.74% 17.61% -2.06% 0.00% -47.54% -36.28% 7.22% -47.33%

-4.00%

-4.00%

-4.00%

-4.00%

-4.00%

-4.00%

-4.00%

-4.00%

-4.00%

-4.00%

100%

90%

85%

83%

83%

83%

83%

83%

83%

83%

-25.00%

-25.00%

-25.00%

-25.00%

-25.00%

-25.00%

-25.00%

-25.00%

-25.00%

-25.00%

130.00% 85.00%

130.00% 90.00%

130.00% 100.00%

130.00% 100.00%

130.00% 100.00%

130.00% 100.00%

130.00% 100.00%

130.00% 100.00%

130.00% 100.00%

130.00% 100.00%

60.00%

60.00%

60.00%

60.00%

60.00%

60.00%

60.00%

60.00%

60.00%

60.00%

19.00%

22.00%

25.00%

25.00%

25.00%

25.00%

25.00%

25.00%

25.00%

25.00%

-45.00% -30.00% -42.00%

-40.00% -26.00% -35.00%

-35.00% -26.00% -30.00%

-35.00% -26.00% -30.00%

-35.00% -26.00% -30.00%

-35.00% -26.00% -30.00%

-35.00% -26.00% -30.00%

-35.00% -26.00% -30.00%

-35.00% -26.00% -30.00%

-35.00% -26.00% -30.00%

61

Appendix E: Cost of Debt Estimation Short Term Borrowings:

Short Term Borrowings (Millions) Value Weighted Rate Principal Rate Weight 9,109 1.30% 87.93% 1.14% 1,250 11.25% 12.06% 1.36% 10,359 100.00% 2.5%*

Commercial Paper Other Short Term Borrowings Short Term Borrowings

*Given in 2004 10-K Long Term Borrowings:

Long Term Debt (Millions) Libor based floating rate Maturity Date Principal Rate Weight Value Weighted 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% 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% 719 6.00% 9.88% 0.59% 7,279 4.38%

Japanese Yen

Debentures, Notes, borrowings, and mortgages Total Long Term Debt**

**Does not include amounts due within one year

Balance Sheet Debt:

62

LIABILITIES (Millions) Current Liabilities Short-term borrowings Current Portion of Long term Debt Accounts payable Dividends payable Income taxes payable Accrued compensation and related items Accrued litigation settlements Other current liabilities Liabilities of discontinued businesses held for sale Total current liabilities Long-term debt Pension benefit obligations Postretirement benefit obligation other than pension plans Deferred taxes on income**** Other noncurrent liabilities Total non-current liabilities Total liabilities

Percent of Total Liabilties 10,359 907 2,672 1,418 1,963 1,939 264 6,872 64 26,458 7,279 2,821 1,450 0 4,766 16,316 42,774 12,632 24.22% 2.12% 6.25% 3.32% 4.59% 4.53% 0.62% 16.07% 0.15% 61.86% 17.02% 6.60% 3.39% 0.00% 11.14% 38.14% 100.00%

Computed Interest Rate 2.50% 4.38% 0.00% 0.00% 6.00% 2.50% 2.50% 4.38% 4.38% 6.00% 10.00% 0.00% 6.00%

Value Weighted Rate 0.006 0.000 0.000 0.000 0.003 0.000 0.004 0.000 0.007 0.004 0.003 0.000 0.007

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 Regression Residual Total 1 23 24 SS MS F Significance F 0.003668025 0.003668025 1.484687235 0.235393985 0.056823132 0.002470571 0.060491157 Lower 95% Upper 95% Lower 95.0% Upper 95.0% -0.032450545 0.011026874 -0.032450545 0.011026874 -0.304148384 1.175958739 -0.304148384 1.175958739

Intercept X Variable 1

Coefficients Standard Error t Stat P-value -0.01071184 0.010508607 -1.01933928 0.318645059 0.435905178 0.357745797 1.218477425 0.235393985

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 Regression Residual Total 1 35 36 SS F Significance F MS 0.002421708 0.023726333 0.023726333 10.68942956 0.077686246 0.002219607 0.101412579 Lower 95% Upper 95% Lower 95.0% Upper 95.0% -0.025623699 0.005835257 -0.025623699 0.005835257 0.225519715 0.964334656 0.225519715 0.964334656

Intercept X Variable 1

P-value Coefficients Standard Error t Stat -0.00989422 0.007748099 -1.27698686 0.210014035 0.594927185 0.18196445 3.269469309 0.002421708

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 Regression Residual Total 1 57 58 SS MS F Significance F 0.027095158 0.027095158 8.659767915 0.004697853 0.178344733 0.003128855 0.20543989 Lower 95% Upper 95% Lower 95.0% Upper 95.0% -0.0143582 0.014955934 -0.0143582 0.014955934 0.146372986 0.76981693 0.146372986 0.76981693

Intercept X Variable 1

Coefficients Standard Error t Stat P-value 0.000298867 0.007319511 0.040831495 0.967572919 0.458094958 0.155669089 2.942748361 0.004697853

64

Appendix G: Intrinsic Valuation Methods: Discounted Dividends:

Pfizer Inc. (Amounts in millions of dollars except per share data) Forecast Years 2005 2006 2007 2008 2009 2010 2011 2012 2013 Terminal $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 0.952 0.907 0.864 0.823 0.784 0.747 0.711 0.677 0.645 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 $0.61 $6.08 $45.73 $29.50 $35.58 $36.02 $1.70 $0.64 $8.62 $1.93 $0.63 $7.92 $2.09 $0.70 $7.91 $2.30 $0.77 $7.74 $2.53 $0.85 $8.51 $2.78 $0.93 $8.58 $3.06 $1.03 $9.44 $3.36 $1.13 $10.38 $3.70 $1.24 $11.42 $0.57 $0.61 $0.64 $0.67 $0.70 $0.73 $0.77 $0.80 $1.37

2004 Dividends (Millions) Present Value Factor Present Value of Dividends Present Value of Future Dividends Per Share Total Present Value of Forecast Future Dividends Continuing (Terminal) Value (assume no growth) Present Value of Continuing (Terminal) Value Estimated Value per Share FV - April 05 Earnings Per Share Dividends per share Book Value Per Share Shares Outstanding Actual Price per share Estimated Ke growth rate

$9.37 7,286.00 $26.15 4.99% 0.02

Sensitivity Analysis
Ke 0.03 0.04 0.05 0.06 0.07 0 $35.48 $28.13 $23.72 $20.78 $18.68 g 0.015 0.03 0.045 $64.88 N/A N/A $41.36 $94.29 N/A $31.28 $50.18 $182.50 $25.68 $35.48 $64.88 $22.12 $28.13 $41.36

65

Discounted Free Cash Flows:

Pfizer Inc. (Amounts in millions of dollars except per share data) Forecast Years 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 $15,440 $15,856 $16,712 $17,951 $19,746 $21,721 $23,893 $26,282 $28,910 $31,801 ($10,036) ($11,011) ($11,797) ($12,652) ($13,085) ($13,085) ($14,393) ($15,832) ($17,416) ($19,157) 5,404 4,845 4,915 5,299 6,661 8,636 9,499 10,449 11,494 12,644 0.961 0.923 0.887 0.853 0.819 0.787 0.756 0.727 0.698 5,193 4,473 4,361 4,517 5,457 6,798 7,185 7,594 8,027 610,813 426,558 480,163 55,599 424,564 58.27 58.98 $1.70 $0.64 $8.62 $1.93 $0.63 $7.92 $2.09 $0.70 $7.91 $2.30 $0.77 $7.74 $2.53 $0.85 $8.51 $2.78 $0.93 $8.58 $3.06 $1.03 $9.44 $3.36 $1.13 $10.38 $3.70 $1.24 $11.42

2004 Cash Flow from Operations Cash Provided (Used) by Investing Activities Free Cash Flow (to firm) discount rate (4.07% WACC) Present Value of Free Cash Flows Total Present Value of Annual Cash Flows Continuing (Terminal) Value (assume no growth) Present Value of Continuing (Terminal) Value Value of the Firm (end of 1987) Book Value of Debt and Preferred Stock Value of Equity (end of 2004) Estimated Value per Share FV - April 05 Earnings Per Share Dividends per share Book Value Per Share Actual Price per share Shares Outstanding WACC Growth Rate

53,605

$9.37 $26.15 7,286.00 4.07% 2.00%

Sensitivity Analysis
WACC 0.03 0.04 0.05 0.06 0.07 0 $44.50 $30.23 $21.75 $16.14 $12.18 g 0.015 0.03 0.045 $88.83 N/A N/A $48.52 $121.68 N/A $31.34 $55.31 $223.10 $21.85 $33.26 $67.50 $15.86 $22.29 $36.45

66

Discounted Residual Income:

Pfizer Inc. Forecast Years 2008 2009 13.13 14.66 $2.30 $2.53 $0.77 $0.85 14.66 16.34 0.66 1.64 1.35 0.73 1.80 1.41

2004 Beginning BE (per share) EPS DPS Ending BE (per share) "Normal" Income Residual Income (RI) Present Value of RI BV Equity (per share) 2004 Total PV of RI (end 2004) Continuation (Terminal) Value PV of Terminal Value (end 2004) EstimatedValue Per Share (2004) FV - April 2005 Ke Growth 9.37 12.78 51.72 33.37 55.52 56.19579 0.0499 0

9.37

2005 9.37 $1.70 $0.64 10.44 0.47 1.24 1.18

2006 10.44 $1.93 $0.63 11.74 0.52 1.41 1.28

2007 11.74 $2.09 $0.70 13.13 0.59 1.50 1.30

2010 16.34 $2.78 $0.93 18.18 0.82 1.97 1.47

2011 18.18 $3.06 $1.03 20.21 0.91 2.15 1.53

2012 20.21 $3.36 $1.13 22.45 1.01 2.36 1.60

2013 Terminal 22.45 $3.70 $1.24 24.91 1.12 2.58 1.67

2.58

Ke

0.03 0.04 0.05 0.06 0.07

Sensitivity Analysis g 0 0.015 0.03 0.045 $103.17 $180.52 N/A N/A $73.13 $102.67 $220.84 N/A $55.37 $69.62 $105.24 $354.58 $43.75 $51.49 $66.97 $113.42 $35.60 $40.12 $48.01 $65.39

67

Discounted Abnormal Earnings Growth:

Pfizer Inc. Perp 2004 EPS DPS DPS invested at 4.99% Cum-Dividend Earnings Normal Earnings Abnormal Earning Growth (AEG) 2005 $1.70 $0.64 2006 $1.93 $0.63 $0.03 $1.97 $1.79 $0.18 2007 $2.09 $0.70 $0.03 $2.12 $2.03 $0.09 Forecast Years 2008 2009 $2.30 $2.53 $0.77 $0.85 $0.04 $0.04 $2.33 $2.57 $2.19 $2.41 $0.14 $0.15 2010 $2.78 $0.93 $0.04 $2.82 $2.65 $0.17 2011 $3.06 $1.03 $0.05 $3.11 $2.92 $0.19 2012 $3.36 $1.13 $0.05 $3.42 $3.21 $0.20 2013 $3.70 $1.24 $0.06 $3.76 $3.53 $0.22

$0.00

PV Factor PV of AEG Core EPS Total PV of AEG Continuing (Terminal) Value PV of Terminal Value Total PV of AEG Average Perpetuity Capitalization Rate (perpetuity) Value Per Share Ke g pv fv 0.0499 0

0.952 $0.17 $1.70 $1.07

0.907 $0.08

0.864 $0.12

0.823 $0.13

0.784 $0.13

0.747 $0.14

0.711 $0.15

0.677 $0.15

$0.00 $0.00 $2.77 0.0499 $55.52 $ 56.20 Dec-04 5-Apr Sensitivity Analysis g 0 0.015 $62.03 $62.03 $59.20 $59.20 $55.49 $55.49 $52.60 $52.60 $50.80 $50.80

Ke Actual Price per share $26.15

0.03 0.04 0.05 0.06 0.07

0.03 $62.03 $59.20 $55.49 $52.60 $50.80

0.045 $62.03 $59.20 $55.49 $52.60 $50.80

68

Long Run Return on Equity based on P/B Ratio:

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

69

Appendix H: Method of Comparables: Price to Earnings (Forward)

PFIZER ABBOTT LABS BRISTOL-MYERS SQ NOVARTIS AG MERCK Average Average w/o Outliers Valuation Valuation w/o outliers $ $ P/E Forward 16.4 22.4 17.6 20.7 11.8 18.125 20.233 33.89 37.84

Price to Earnings (Trailing)

PFIZER ABBOTT LABS BRISTOL-MYERS SQ NOVARTIS AG MERCK Average Average w/o Outliers Valuation Valuation w/o outliers

P/E Trailing 31.3 23.9 18.6 N/A 20.2 20.9 20.9 $ $ 39.08 39.08

Price to Book

70

P/B PFIZER ABBOTT LABS BRISTOL-MYERS SQ NOVARTIS AG MERCK Average Average w/o Outliers Valuation Valuation w/o outliers $ $ 2.66 5.27 4.3 3.43 3.81 4.2025 3.847 38.87 35.58

Dividends to Price

D/P PFIZER ABBOTT LABS BRISTOL-MYERS SQ NOVARTIS AG MERCK Average Average w/o Outliers Valuation Valuation w/o outliers $ $ 3.1 2.3 4.7 1.6 4.9 3.375 4.800 31.22 44.40

Price to Sales

71

P/S PFIZER ABBOTT LABS BRISTOL-MYERS SQ NOVARTIS AG MERCK Average Average w/o Outliers Valuation Valuation w/o outliers $ $ 4.1 3.63 2.24 3.88 3.07 3.205 3.527 23.11 25.43

Price to Earnings Growth

PEG PFIZER ABBOTT LABS BRISTOL-MYERS SQ NOVARTIS AG MERCK Average Average w/o Outliers Valuation Valuation w/o outliers $ $ 1.08 2.04 2.82 1.73 1.69 2.07 1.820 24.84 21.84

72