4Q08 Review & Model Book
Delivering EPS, Focus Shifts
To M&A
Barbara Ryan
Research Analyst
(1) 203 863 2239
barbara.ryan@db.com
George Drivas
Research Associate
(1) 203 863 2242
george.drivas@db.com
Consolidation Provides a Viable Path to Long Term Earnings Persistency
We have maintained that the upside to multiples for Pharma is dependent on
improving revenue and earnings visibility during the patent cliff period. In our
view, the only viable option towards achieving that goal was via major acquisitions
and/or consolidation. PFE’s acquisition of WYE reinforces our thesis, and the
strongest in Pharma have a unique opportunity in the current "buyers" environment
to convert their strong balance sheets into tangible future revenues and EPS, and
to create value by eliminating excess sector capacity.
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LOCATED IN APPENDIX 1.
Results
Top picks
Bristol-Myers Squibb (BMY.N),USD22.63 Buy
Merck & Co. (MRK.N),USD29.72 Buy
Pfizer (PFE.N),USD14.38 Buy
Companies featured
Bristol-Myers Squibb (BMY.N),USD22.63 Buy
2008A 2009E 2010E
EPS (USD) 1.74 1.86 2.12
P/E (x) 12.4 12.2 10.7
EV/EBITDA (x) 6.8 6.4 5.6
Eli Lilly (LLY.N),USD36.72 Hold
2008A 2009E 2010E
EPS (USD) 4.02 4.08 3.82
P/E (x) 11.3 9.0 9.6
EV/EBITDA (x) 7.0 4.9 4.9
Merck & Co. (MRK.N),USD29.72 Buy
2008A 2009E 2010E
EPS (USD) 3.42 3.23 3.72
P/E (x) 10.8 9.2 8.0
EV/EBITDA (x) 8.1 5.5 4.4
Pfizer (PFE.N),USD14.38 Buy
2008A 2009E 2010E
EPS (USD) 2.42 1.88 2.44
P/E (x) 8.0 7.6 5.9
EV/EBITDA (x) 4.3 3.6 2.8
Schering-Plough (SGP.N),USD19.44 Hold
2008A 2009E 2010E
EPS (USD) 1.75 1.61 1.76
P/E (x) 10.7 12.1 11.0
EV/EBITDA (x) 8.9 8.4 7.6
Wyeth (WYE.N),USD43.00 Hold
2008A 2009E 2010E
EPS (USD) 3.53 3.60 3.44
P/E (x) 11.6 11.9 12.5
EV/EBITDA (x) 6.4 6.4 6.7
Global Markets Research Company
The WYE acquisition accomplishes several imperatives for PFE; Additional
industry M&A is inevitable, in our view.
The PFE-WYE merger reduces PFE’s dependence on Lipitor, diversifies its
portfolio, and enhances revenue and earnings visibility through the patent cliff via
significant merger synergies in SG&A, R&D, and to lesser extent, manufacturing.
The substantially improved EPS outlook and cash flows should drive multiple
expansion over time, in our view. While necessary cost cutting efforts are already
well underway and companies are aggressively transforming their business
models to address an increasingly challenging regulatory and commercial climate,
overcapacity, EPS cyclicality/vulnerability surrounding patent losses, and pipelines
disappointments, continue to plague the industry. Aggressive M&A, including
consolidation, may be the only effective solution for some companies in our view.
Within our sector, we continue to see MRK as the most likely acquirer, while BMY
and SGP are most likely to be acquired if consolidation continues.
Absent M&A, Pharma Remains A Relative Port In The Economic Storm…
… in the short term, we expect pharma company earnings to continue to meet
expectations, with trends similar to those seen in 2008; sluggish revenues which
are being leveraged on the bottom line by cost cutting leverage. The impact of
currency was the single largest difference in revenue performance in 4Q08 as
translations moved from a tailwind (weak dollar), to a headwind (strong dollar).
However, 4Q08 EPS still exceeded expectations due to GM and tax offsets, as
well as cost cutting measures. Company guidance and EPS expectations for ’09
now include the onerous currency translations which will ensue with the stronger
US dollar relative to other major currencies.
With valuations at historical lows, new business models could drive upside
The drug industry is between the proverbial “rock” and a “hard” place, as
successful efforts to improve near term earnings are not being rewarded, as
investors appropriately question their persistency going into the patent cliff period.
In our view, the upside to multiples is dependent on improving revenue and
earnings visibility during that period, and, the most appropriate course of action
towards that goal is to make acquisitions, i.e., convert cash into revenues. The DB
weighted drug index trades at a 20% discount to the market, based upon ’09
forecasts, the low end of its 5-year range, and dividend yields are well above their
historical highs. The primary risk to the group is likely the opportunity cost of a
reacceleration in the economy which would favor the beneficiaries. In the nearer
term, we see low valuations, stable EPS forecasts, compelling dividend yields, and
most importantly, strategic actions, as the keys to relative outperformance.

Table of Contents
Bristol-Myers Squibb.................................................................................. 17
Eli Lilly .................................................................................................. 33
Merck & Co. ........................................................................................... 51
Pfizer .................................................................................................... 69
Schering-Plough ....................................................................................... 85
Wyeth................................................................................................. 101