Pfizer Q4 2008 Earnings and Conference Call Transcript

| About: Pfizer Inc. (PFE)

Pfizer (NYSE:PFE)

Q4 2008 Earnings and Conference Call

January 26, 2009 8:30 am ET


Charles E. Triano - Senior Vice President, Investor Relations

Jeffrey B. Kindler - Chairman and Chief Executive Officer

Martin Mackay - Head of Research and Development

Ian Read - President, Worldwide Pharmaceutical Operations

Amy Schulman - Senior Vice President & General Counsel

Bernard Poussot - Chairman and Chief Executive Officer of Wyeth

Gregory Norden - Senior Vice President and Chief Financial Officer of Wyeth

Lawrence V. Stein - Senior Vice President and General Counsel of Wyeth

Justin R. Victoria - Vice President - Investor Relations of Wyeth


Catherine Arnold - Credit Suisse

David [Lessinger] - Bank of America

Barbara Ryan - Deutsche Bank Securities

Anthony Butler - Barclays Capital

Jami Rubin - Goldman Sachs

Roopesh Patel - UBS

Chris Schott - J.P. Morgan

Tim Anderson - Sanford Bernstein

Seamus Fernandez - Leerink Swann Llc

Steve Scala - Cowen and Company

Robert Hazlett - BMO Capital Markets


Good morning ladies and gentlemen and welcome to Quarter Earnings Release Conference Call. (Operator Instructions). I would now like to turn the call over to Mr. Charles Triano Pfizer’s Senior Vice President of Investor Relations.

Charles Triano

Good morning everyone. Thank you for joining us today to discuss today’s announcement that Pfizer has entered into an agreement to acquire Wyeth. I am here with our Chairman and Chief Executive Officer Jeff Kindler.

The presentation that accompanies today’s call can be viewed on This call is scheduled to last one hour and I would also add that today’s call is in lieu of our earnings conference call that was originally scheduled for this Wednesday.

Discussions during this conference call will include certain financial measures that were not prepared in accordance with US Generally Accepted Accounting Principles. Reconciliation of those non-US GAAP financial measures to the most directly comparable US GAAP financial measures can be found in Pfizer’s current report on Form 8-K dated January 26, 2009.

Discussions during this conference call will also include forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. The factors that could cause actual results to differ are discussed in Pfizer’s 2007 annual report on Form 10-K and in our reports on Form 10-Q and Form 8-K. These reports are available at our website in the Investor SEC Filing section.

With that I would like to turn the call over to Jeff Kindler.

Jeff Kindler

Thank you, Chuck good morning everyone, and thank you for joining us today. I am here with members of Pfizer’s senior management and we are also very honored this morning to be joined by Bernard Poussot, Chairman and Chief Executive of Wyeth. With Bernard are three members of his senior management team, Greg Norden, Chief Financial Officer; Larry Stein, General Counsel; and Justin Victoria, Vice President of Investor Relations.

We are very excited about today’s announcement that Pfizer and Wyeth will combine to become the world’s premier biopharmaceutical company. I know that Bernard shares my enthusiasm for this combination and for the opportunities it will create for patients today, for patients tomorrow and for patients around the world, so I would like to begin by asking Bernard to share his thoughts with you. Bernard?

Bernard Poussot

Thank you very much Jeff and good morning everyone. I appreciate the invitation to comment on the value that Wyeth will bring to this great company in the making. Our vision at Wyeth for about 20 years has been to establish a very strong foundation in science, focus on providing new solutions to patients and their families. As a result, we have created over the years what is today a global biopharmaceutical company with striking diversity. We established ranks in biotechnology and vaccines when others were just recognizing recently this highly desirable, strategic, objective.

Our execution has been relentless about building what I just described. We created diverse business platforms ranging from pharmaceuticals, biopharma, vaccines, but also nutritionals, consumer health care and more. Today, at the end of 2008, 60% of our revenues are from no traditional pharmaceuticals. We have built industry leading biotechnology and vaccine manufacturing capacity and capabilities. As a result, we established a diverse business sector leadership.

Biopharma Enbrel has become now the number one biologic product in the world. The vaccine Prevnar is today’s largest selling vaccine in the world. At the same time we established pharmaceuticals block busters such as Effexor and Zosyn which are both number one in their categories. We are also a strong nutritional franchise and we are number one in markets where we compete.

Consumer health is an important piece of our business with brands like Advil, Centrum, and Robitussin. In the name of health we have been a key provider on biologics and vaccines for animals.

There are many opportunities remaining in those key franchises. Just to name a few, in the field of rheumatoid arthritis and the psoriasis market, where we are leading with Enbrel we expect a $10 billion expansion between now and 2012. The fever vaccines we are preparing our Prevnar products not only for infants, there is also a totally new indication in adults. Even in consumer health we have been adding the Thermacare acquisition to our consumer pain franchise led by Advil.

We are also pleased to add a diverse portfolio of innovative new products. Tygacil, Torisel, Pristiq, Xyntha, and Relistor are all recent new product pools and we are still in the process of launching those products worldwide. Collectively they offer a multi-billion dollar peak potential.

I just want to finish highlighting prevention as a key driver in our view to manage rising healthcare costs. Nothing is more efficient than prevention to do this. We have built that key business over the years, which Prevnar, as I mentioned and we are working actively on a meningitis additional vaccine that could prove instrumental to children around the world.

We are doing the same in animals in providing the world with the first vaccines in West Nile virus, but also H5N3 against avian flu. So we are very concerned about safe guarding the food chain also, as nutrition is also the ultimate form of prevention. Along the same lines vitamins and supplements in our consumer division with Centrum and Caltrate also offer chances to people to manage their health better.

Lastly, our infant formula business is a benefit also, quality food at a very critical age, which is another form of prevention.

I think we have done all of this in fostering a culture of science first at Wyeth. We have actually encouraged our scientists to go for the stars and look for diseases that are very difficult to fight. Such an example is Alzheimer’s our approach has an unprecedented size and diversity of approaches ranging from biotechnology small molecule or even vaccine to fight this terrible disease, but I could also mention cancer, meningitis, as I said, pneumonia a number of significant problems. So that is what are scientists have been doing and building and I am very proud to present their good work.

At Wyeth we have said that our scientists are our strategic planners and they should be the ones leading the direction of the company. So not surprisingly, Jeff and Pfizer realized what we had built over the years and I am very proud to acknowledge here what people have been building patiently year after year.

We believe that we have now reached a level which is structured in such a way that our board and our shareholders will find it very attractive.

Thank you.

Jeff Kindler

Thank you, Bernard. That is a terrific summary of the great work that you and your leadership team at Wyeth have done in building a great company.

What I am going to do now is to talk a little bit about the transaction from my perspective, then I will turn it over to Frank who will give a brief overview of our fourth quarter results and then we will have a financial overview of the transaction for Frank together with our targets for the combined company and then we will turn to your questions.

So, this acquisition comes after months of careful consideration. As we reviewed literally hundreds of strategic options, it became clear that the acquisition of Wyeth would most meaningfully advance our strategic priorities. As we told you in the past these priorities include enhancing our in line and pipeline patent protected portfolio in key invest to win disease areas, areas where there are significant unmet medical needs and where we believe we can help address those needs; becoming a top tier player in biotherapeutics and vaccines; accelerating our growth in emerging markets; creating new opportunities for established products; investing in complimentary businesses and establishing a lower, more flexible cost base. In one single step this acquisition advances each and every one of those strategies that we have put forward.

Combing with Wyeth will extend our global healthcare leadership, clearly establishing Pfizer as a leader in human health, animal health, consumer health, and nutritionals as the number one company in primary care and the number two company in specialty care, as a top tier player in biotherapeutics and vaccines and as the company with unrivaled geographic reach. The operational discipline that we have been shaping at Pfizer for more than two years will drive this diverse product base forward and produce ever-improving performance.

Our unique model combining the speed and agility of our smaller, more focused business units, with the scale and resources of a global enterprise will enable us to seize new opportunities in markets around the world while maintaining clear accountability for each P&L.

Investors will be pleased to know that this deal definitively addresses the revenue loss from Lipitor’s loss of exclusivity. The combined company will solidify Pfizer’s ability to deliver consistent and stable earnings growth and strong operating cash flow and it will bring us many new points of product entry across the world to better serve patients, physicians, and customers. Finally and fundamentally this deal will significantly enhance the ability of our world-class people to advance our core mission, applying innovative science to improve world health.

The reason why we are able today to seize the unique opportunity created by this combination is because of all the hard work that the people at Pfizer have done over the last two years to strengthen our company. Frankly, until we improve the leadership structure and culture of this company and establish the critical importance of accountability, discipline and meeting our commitments, we simply weren’t prepared to move forward in this way. And, while the job is never done, we have made so much progress over the last two years that we are now highly confident that we can successfully integrate and operate the great company that this combination will produce.

Let me just take a moment to summarize how we have strengthened the foundation of this company.

First, we assembled a world-class leadership team from inside and outside of Pfizer.

Second, we set out to establish a lower and more flexible cost base. Just two years ago this week, we said we would reduce our cost base by between $1.5 and $2 billion on a constant currency basis by the end of 2008. This morning we reported that we have substantially exceeded that goal. Over that two year time period we reduced our total adjusted cost base by $2.8 billion. The difficult, painful, but very necessary work that had to be done to achieve that included, among other things, reducing headcount by approximately 16,000 employees, eliminating unnecessary layers of bureaucracy, refocusing the work in our R&D labs to high priority disease areas and optimizing our manufacturing network by closing 15 manufacturing sites. As a result of these and other actions we are now a much leaner, more agile organization than we were just two years ago.

Third, we revamped our research enterprise, narrowing our focus on those disease areas with significant unmet medical needs in which we believe we can make a difference; establishing therapeutic research organizations led by world-class chief scientific officer; creating the unique biotherapeutics and bioinnovation center and aggressively seeking new science and technology from the world outside our labs.

Fourth, we established distinct business units, each focused on a different customer segment; each with a clearly accountable leader; and each with responsibility for everything from deciding which compounds with proofs of concept warrant the significant investment required to develop them, all the way to how to maximize the opportunities for products that have lost exclusivity.

Finally, while again, this work is never done, I believe we have meaningfully changed our culture to one that is financially disciplined and focused on clear accountability for results.

These changes and others put us in a very strong position from which we can successfully seize the unique opportunity presented by combining Wyeth and Pfizer, and Wyeth is without doubt, the perfect partner for Pfizer. With this transaction we will be on our way to becoming the third largest biotherapeutics company in the world. Enbrel is the worlds leading biologic. Along with it comes a robust pipeline of biopharmaceutical candidates as well as Wyeth’s world-class pharmaceuticals science capabilities and its high-quality and high-volume manufacturing plants, including the one in Grange Castle, Ireland, the largest integrated biotechnology manufacturing facility in the world.

The Wyeth combination also allows us to enter the growing vaccines market in a powerful position. We will have the fourth largest vaccines business globally and our portfolio will include Prevnar, the largest vaccine in the world.

This deal will also expand our in line and pipeline portfolio in many of they key disease areas that we have identified as ones in which we want to invest to win. It will also support our expansion in emerging markets and our established products business and it will add complimentary businesses in nutritionals and consumer health as well as strengthening our animal health business.

Now this transaction also meaningfully diversifies our therapeutics offerings and platforms. Within human health it decreases our reliance on primary care medicines and creates the number two specialty company. By 2012 the proportion of our revenue that comes from primary care products will decrease by approximately a full 20% to just over half of revenues and we expect no drug will account for more than 10% of the combined company’s revenue.

As I noted, this acquisition further diversifies the company by strengthening our position in the attractive biologics and vaccine spaces. As you see on this slide, this diversification creates a more desirable balance in our portfolio reducing small molecule dependence from 90% to 70% by 2012.

On their own, Pfizer and Wyeth both have strong pipelines, but bringing them together creates a single pipeline that’s larger and more diverse with world-class technology platforms and a talent pool of scientists that is best in class. Such a broad pipeline requires expensive investments in multiple platform technologies. Bringing the pipelines of these two companies together will enable us to realize their potential more fully than if they remained separate.

As an example, Wyeth’s expertise in commercial and medical immunology, particularly across rheumatology and dermatology, will help advance development of our JAK3 inhibitor. In addition, we will be able to apply Pfizer’s commercial scale and clinical developing capability to Wyeth’s products and registration, Phase III and Phase II and our patient marketing expertise will help maximize the global potential of the Prevnar vaccine.

Now this slide shows the impressive industry rankings that the combined company will have in many of the fastest growing therapeutic areas. With this acquisition we remain the leader in primary care, of course, we will also advance our CNS infectious disease and specialty franchises to become number two in those important areas and, as I have noted, we will bolster our leading position in animal health as well.

Geographically the companies combined global footprint will be unrivaled. Going forward we will lead the pharmaceutical markets of the United States, Europe, Latin America, Japan and the rest of Asia. In addition, we will have leading market share positions in important growth areas such as Brazil, Russian, India and China. We see continued upside in emerging markets and we expect that to come from, among many other things, applying Pfizer’s commercial presence to Wyeth’s portfolio, particularly Enbrel, Prevnar, and Wyeth’s well-known and well-regarded nutritionals.

In the context of a fast changing global healthcare environment, the new company will be a well balanced biopharmaceutical enterprise made up of diverse businesses with the scale, breadth, and reach to deliver healthcare solutions and address the needs of patients, physicians, and other customers around the world.

Before Frank discusses the numbers I would like to emphasize one last point about the structural benefits of the new organization and some of the reasons why we believe we are positioned to successfully and quickly integrate the company and move forward.

Now as a $70 billion global company, clearly we will be an enterprise with significant scale and resources and real relevance to payers and patients. This gives us great competitive advantages. We will have the ability to benefit from the fixed costs of research, commercialization, and manufacturing and enable important platform investments while also maintaining financial flexibility.

At the same time, we know that a company that is that large cannot be managed in a centralized, monolithic way and that is why we remain committed to our operating model of focused, agile, patient centric business units. This model provides us clear accountability for performance. The world-class leaders of these businesses can manage their businesses to achieve the greatest return while taking advantage of the benefits of the global enterprise. We will continue to promote an entrepreneurial culture and the ability to harness scale where it is a competitive advantage for the business.

With that I will turn the call over to Frank to review the fourth quarter results, our 2009 guidance and the terms and details of this transaction. Frank?

Frank D’Amelio

Thank you, Jeff. I want to start by saying how pleased I am to talk to you today about what we believe is a great opportunity for both Pfizer and for Wyeth. The potential for the combination of our companies is greater than each company could have achieved on its own.

With that, let me briefly review our fourth quarter 2008 results before we review the transaction.

We delivered solid results in 2008, achieving our key financial metrics including exceeding our cost reduction target in the face of a very challenging global economy. Reported revenues were $12.3 billion, a year-over-year decrease of 4% driven by the negative impact of the loss of US exclusivity of Zyrtec and Camptosar and the loss of exclusivity for Norvasc in Korea and Japan whose collective fourth quarter revenue decreased year-over-year by $515 million; foreign exchange which decreased revenues by approximately $380 million or 3% which were partially offset by the solid performance of key products.

Reported net income was $266 million for the quarter compared with $2.7 billion in the year ago quarter, reported diluted EPS was $0.04 versus $0.40. These significant year-over-year decreases were primarily driven by a $2.3 billion pre-tax and after-tax charge resulting from an agreement in principle to resolve previously disclosed investigations regarding allegations of past off-label promotional practices concerning Bextra as well as other open investigations. And, to a lesser extent are the $1.2 billion pre tax increase or restructuring implementation charges related to cost reduction initiatives as well as the increased effective tax rate which were partially offset by savings resulting from cost reduction initiatives.

Adjusted revenues were $12.3 billion, a 4% decrease year-over-year, driven by the unfavorable impact of the loss of the exclusivity of Norvasc, Zyrtec and Camptosar and foreign exchange which, once again, partially offset the solid performance of key products.

Adjusted income increased 29% year-over-year to $4.4 billion and adjusted, diluted EPS increased 30% to $0.65, both of which benefited from savings associate with our cost reduction initiatives which were partially offset by an increase in the effective tax rate.

As you can see, we achieved essentially all elements of our full year guidance with the exception of reported, diluted EPS which includes the negative impact of the previously mentioned litigation related matters.

We achieved our adjusted revenue and adjusted diluted EPS guidance and we exceeded our adjusted total cost target, adjusted cost of sales, adjusted cost of sales, adjusted SI&A and adjusted, diluted EPS targets. We also expect to achieve cash flows from operations within our estimated range of $17 to $18 billion.

Looking to 2009 we expect, on the top line, annual revenues in the range of $44 to $46 billion which assumes a $3 billion year-over-year reduction versus 2008 directly related to the strengthening of the US dollar. On the bottom line adjusted diluted EPS in the range of $185 to $195. It is important to note that this guidance includes a $1 billion reinvestment in key, high-growth areas of our business including later-stage research and development programs, emerging markets, and established product strategies.

Now I would like to provide a bridge from ’08 actual to 2009 guidance.

We expect ’09 adjusted diluted EPS to be negatively impacted by approximately $0.21 due to the expected $3 billion year-over-year revenue decline related to foreign exchange; $0.21 related to increasing the effective tax rate to 30% reflecting financial strategies in connection with the proposed acquisition of Wyeth; $0.04 due to increased pension expenses and $0.04 resulting from a decrease in interest income. All of these factors translate into a negative impact of roughly $0.50 on 2009 adjusted diluted EPS versus 2008.

Now, under the terms of the agreement Pfizer is acquiring all of Wyeth’s outstanding common shares at a current value of about $50.00 per share. Wyeth’s shareowners will receive $33.00 per share in cash, plus a current value of approximately $17.00 per share of Pfizer’s stock based on a fixed exchange ratio of 0.985. The transaction will be funded through a combination of cash, debt, and equity. Upon completion, Pfizer shareowners will own approximately 84% in stock in the combined company and Wyeth shareowners will own 16%. We anticipate the transaction to be accretive within the second full year following the close which we expect to occur at the end of the third quarter or during the fourth quarter of 2009. The resulting transaction is currently valued at approximately $68 billion.

As I mentioned, the sources of funding for the transaction include $22.5 billion in cash, $22.5 billion of debt and about $23 billion in Pfizer’s stock. We have received commitments for debt financing from a syndicate of five banks.

Based on recent discussions with rating agencies, wherein we have reviewed this transaction, we expect to receive the following ratings:

A Moody’s rating of A1 stable long term and P1 affirmed short term and an S&P rating of AA stable long term and A1+ confirmed short term.

Given the amount of cash and debt being used to fund this transaction, beginning in the second quarter we are reducing our quarterly dividend to $0.16 per share which continues to be competitive [inaudible] years.

As part of this transaction we expect to realize about $4 billion in synergies. It is important to note that the $4 billion in synergies is incremental to the $400 million already achieved by Wyeth, $2.8 billion of savings that Pfizer achieved at the end of ’08 under our previous cost reduction initiative and in addition to the $2 billion of anticipated net savings from our new cost reduction initiative announced today.

We anticipate achieving 50% of these synergies within the first 12 months after the close, 75% within the first 24 months and the full benefit of the synergies in the first 36 months. We expect about half of these synergies to come from SI&A with the remaining from R&D and manufacturing resulting from a variety of activities which include the consolidation of support functions; implementing a global procurement structure; achieving economies of scale; rationalizing our global network of plants; and using a single platform for core research, among other things.

As a result of these actions we expect to reduce the combined companies’ global workforce by approximately 15%. This reduction includes the 10% reduction to Pfizer’s workforce associated with its new cost reduction initiative.

Now I would like to move on to our 2012 financial targets which are based on our current long-range forecast. Please note that these are to be subject to changes as a result of potential material negative impacts related to foreign exchange fluctuations, macro economic volatility, industry specific challenges, and changes to government healthcare policy, among other things.

We expect the revenue level of the combined company to be comparable with our pro forma 2008 revenue level of approximately $70 billion. By managing our mix of business and the total cost structure of the company, we expect overall operating margins in the high 30s to low 40s percentage range which we believe appropriately aligns with our expected revenue levels. We anticipate adjusted diluted EPS to be roughly the same as Pfizer’s 2008 level of $242 per share. We also expect our operating cash flow to be in the low $20 billions and we expect that in 2012 the combined company will be in a net cash position.

As you can see, the combination of Pfizer and Wyeth clearly addresses the revenue decline resulting from the loss of exclusivity of both Lipitor and Effexor.

Now I will turn it back to Jeff.

Jeff Kindler

Thanks so much, Frank. We will turn to your questions in a moment, first let me just sum up.

This is the right transaction at the right time for both Pfizer and for Wyeth and we are entering into it for the right reasons, to create value for shareholders, customers, and patients today, patients tomorrow and patients everywhere. Going forward we will have a greater ability to maximize our product portfolio while having the resources to invest in break through science and valuable therapeutic areas. A versified revenue base will better position the company for long-term growth. We will continue to operate with business units empowered to meet the needs of specific customers and able to benefit from the scale of an even stronger global organization.

Te new combined company is one with a broader portfolio; a stronger pipeline of innovative new products; more opportunities for growth, and an ability to offer patients a range of treatments for every stage of life. By joining together with Wyeth, Pfizer is creating the world’s premier biopharmaceutical company and we are excited about the opportunities to come.

So, let’s turn to your questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Catherine Arnold of Credit Suisse.

Catherine Arnold - Credit Suisse

I wanted to ask you about the leadership of the combined company. I think the press is reporting that Bernard will not be staying with the company? I don’t think that was addressed in your comments.

I also wonder if you can talk about how you plan to integrate the expertise of Wyeth into the new Pfizer organization to prevent exodus of key employees, because it is obviously key to the integration.

Then I wondered if you could comment on biosimilars? Will this accelerate your ability to pursue biosimilars new strategy and is that one of the arguments for the deal?

Jeff Kindler

Bernard and I have gotten to know each other quite well, as you can imagine. I have enormous respect for his experience and talents and skills. We share similar values and similar views about where our healthcare environment is going and what we need to do, as a company and I have been very gratified that he has agreed, after the closing, to continue to work with us, to ensure a smooth transition, and to see where we go from there. Obviously he is running Wyeth until the closing, but we are very grateful that he has agreed to stay on.

With regard to the rest of the management at Wyeth and the tremendously talented group of people there both in leadership and across the company, we are very excited about looking for the right opportunities for people. You are absolutely right that we have to focus on retention. We are not just buying assets and buildings and compounds, we are building an enterprise that was created by people, great people that have done a fabulous job creating a great company, and we are very mindful of that.

I will let Bernard elaborate on those two points maybe and then I will go to your question about biosimilars.

Bernard Poussot

Yes, Catherine, my commitment is certainly to run Wyeth and present Wyeth the closing and the best possible conditions, you can count on that, number one. Second I will dedicate a lot of my time and energy to work through the combination and make sure that Pfizer builds a very strong team. It is all about the talents that drive these businesses. It is not just products or assets it is the people. Of course I have observed that many, many times in the past. As far as my own role I think I will do that and I will have some time with Jeff to discuss what could happen after that.

In terms of biotechnology it is definitely an apparent sometimes more than a science. We have seen that not only from the research side, but also from the manufacturing side that the product is a process in this area and that is very different from small molecules. I think we have lined up some unbelievable talents, Ph.D.s, engineers, who design state of the art manufacturing sites who can do things that not even some of our peers can. I mean the Genentech came to us to a septin two years ago. That tells you about the kind of technology and know-how we have so we would be very happy to make sure that Jeff and his team see the pattern that we have brought and help to build this into a very strong company.

Jeff Kindler

Thank you. One more point on that Catherine, I think Bernard expressed it truly well, one of the major attractions and capabilities of Wyeth that contributes to the value or this transaction, we are very proud of our pharmaceutical sciences group both in small and large molecules, but we also appreciate the tremendous value and capability and scientific expertise that Wyeth has developed over many years.

I mentioned their world-class facility in Castle Grange and as Bernard said, the ability to manufacture biotherapeutical products at scale. It is a very complicated and intensive process and the ability to do that is absolutely a competitive advantage and certainly we will be looking at whether or not to bring that advantage to bear on biosimilars as well as our branded products.


Your next question comes from David Lessinger of Bank of America.

David Lessinger - Bank of America

I actually have a number of questions; I will try to be quick though.

First, can you discuss the necessity for the dividend cut in light of the much stronger 2012 cash flow outlook and earnings and specifically you have provided a target for 2012 earnings that I think is much higher than consensus expectations.

Second, with respect to repatriation of XUS cash can you discuss the negative impact on earnings per share?

Then third, I am not sure if it is possible, but I am hoping that you can discuss the interest rate on the debt that you expect to take on.

Frank D’Amelio

First, on the dividend cut, let’s look at that from a couple of perspectives. One is clearly to assist in the financing of the transaction. Two, is to redeploy capital. We have talked about total shareholders return as the focus of how we deploy capital. It is not just about paying the dividend, but also about redeploying some of that capital to get revenue and earnings expansion, price earnings multiple expansions, so clearly this is very consistent with what we have talked about before relative to shareholder return and redeploying capital opportunistically to get that.

In terms of the re-pad impact on EPS think about that as the effective tax rate going from what was about 22% in 2008 to 30% in 2009 and that having a negative impact on 2009 earnings relative to 2008 of $0.21 which we called out in the bridge trounce that I used in the deck.

Then on the interest rate, relative to the deal, it will be at market rates.


Your next question comes from Barbara Ryan of Deutsche Bank Securities.

Barbara Ryan - Deutsche Bank Securities

My question is a follow-on to David’s for you, Frank. I sort of came up with a pro forma of 243 in 2012 and probably the biggest unknown is what rate we should assume on the debt. So when you say a market rate, obviously this is a challenged market so we don’t have a lot of referenced transactions to look at. I am assuming that you have the lost interest income on the $22 billion in your own cash, which would be, in this environment, pretty de minimus maybe 2% and then assuming that the cost of the other $22 billion would be in the range of 75 to 9% I am just wondering if you can comment on where you see that range.

Frank D’Amelio

Yes, so without giving a specific rate, I think, once again, in market rates the numbers that you used I wouldn’t dispute. Then the other thing I would say is remember one of the things I called out on that 2012 chart, Barbara, is that we would be in a net cash position. I think it is important to note that we will be in a net cash position from 2012 which needs to be factored into your modeling on combination of interest expense, but also interest income.

Barbara Ryan - Deutsche Bank Securities

Right, so should we also assume that as the years go forward and you pay down big chunks, I mean of course we may have a changed interest rate environment, but that your rate may start out higher than it winds up in the end?

Frank D’Amelio

What I would say is, once again, it will depend on what is going on in the market and then it also depends on how much of the bridge facility we have remaining. So I think the short answer to that, for now, is market rates and I tried to guide you a little bit based on your comments.


Your next question comes from Anthony Butler of Barclays Capital.

Anthony Butler - Barclays Capital

Clearly you can drive some accretion with the combination of this transaction and that is great, but I am curious about couple of things. When you mention lower cost base and greater flexibility and you repeat that over and over again, I am just curious if today, given the past two years and the cost cutting initiatives that you have undertaken, if actually even today Pfizer is totally right sized.

I ask this because if you think about the combination and the 15% cost reductions out of the combined operating expenses that seems relatively low to me, so I would like some additional color on that. I would have argued much higher.

Then second, and it is more to Frank’s comment about total shareholder return and price earnings multiples, if you think longer term, even 2012 and beyond, given the consolidated large revenue base it strikes me as very difficult to see that growth coming from revenues. So, if you could incorporate some thoughts into revenue growth, is that even on the chart with respect to total shareholder return and expansion of key multiples?

Frank D’Amelio

On the 15%, that 15% was, I called it a combined company workforce number. If you think about it Wyeth has about 50,000 employees, slightly below that, we have about 80,000 employees, slightly above that and we were talking about 15% of that combined number which includes the 10% for the stand-alone Pfizer number which was the $2 billion net. And you have to realize, as you know, there will be synergies above and beyond workforce related savings. So that is the way to think about the 15%, it was really talking about the workforce.

In terms of revenue, what we did is we put a target out there for 2012 that is comparable to 2008 and clearly we see a lot of opportunities for revenue growth. Quite frankly it is much like we have been talking about before as a leadership team, leveraging established products, leveraging emerging markets. We talked about complimentary space. We now have lots of that complimentary space as a result of this transaction with Wyeth. So it is the things we have talked about and, quite frankly, what it all comes down to is executing, which is what we are going to do.

Jeff Kindler

I would just add one qualitative comment to all of that. The business units that we have created and that will be enhanced by virtue of this transaction are in a position to really maximize revenues and identify the appropriate cost base that are in both cases appropriate to their business. And by empowering these business leaders, giving them clear accountability, we are really going to unleash their ability to find new sources of revenues, to grow their respective businesses, as well as to manage the cost base that is best for them, which may be different in different cases. So that is where I think there is a tremendous amount of dynamism in the way we are approaching running the business.


Your next question comes from Jami Rubin of Goldman Sachs.

Jami Rubin - Goldman Sachs

My first question relates to the timing of the deal being closed. You said third to fourth quarter. I am wondering if you feel there is any upside to that and if you could comment on where you see potential issues with respect to FTC, any overlaps in the business. We don’t see much in the pharma business, but maybe there are in the animal health.

Secondly, we were curious to know if Wyeth is allowed to pay their quarterly dividend up until the deal closes.

My third question relates to opportunities going beyond just the $4 billion in cost savings. I am wondering if you can elaborate on whether or not there are any specific restrictions to spinning off assets to pay down debt.

Jeff Kindler

With regard to anti-trust, one of the many beautiful things about this deal is the companies are very, very complimentary and we are looking forward to working constructively with the anti-trust authorities to review any potential issues that may come down the pike.

With regard to closing and the opportunities beyond the $4 billion and the possibilities of other dispositions of assets I will turn it over to Frank.

Frank D’Amelio

First Jami had asked a question about the Wyeth dividend. On the dividend the answer is that we expect current plans are for Wyeth to continue to pays its dividend. Then in terms of restrictions on assets, obviously once the deal closes there is no restriction on anything relative to asset sales, relative to between now and where we are collaboratively with Wyeth based on certain terms and conditions in the contract. As far as closing, we will close as quickly as we can.


Your next question comes from Roopesh Patel with UBS.

Roopesh Patel - UBS

Jeff, I was wondering if you could kindly address the risk the deal poses to R&D momentum and the steps the company plans to take to minimize this.

Secondly, on revenue growth, the presentation states that 2012 revenues will be roughly the same as 2008. In light of several patent expirees that are scheduled in 2013, 2014 and 2015 I am curious if you expect any revenue growth even in those out years.

Lastly, between now and the deal closing I am wondering whether Wyeth will continue with its cost cutting initiatives or whether, now that the deal is announced, that is on hold.

Jeff Kindler

I will make a couple of comments and then I will ask Frank, Martin and Bernard to add to them. With regard first to R&D we are obviously mindful that the research and development is the core innovation engine for our business. We have learned a lot from prior transactions as well as some of the other activities that we have undertaken the last couple of years. We intend to proceed with great speed and focus and we are very mindful of the importance of protecting that very, very important core of our business.

Let me ask Martin Mackay, our head of R&D to elaborate a little bit about that and then I will come back to your other questions.

Martin Mackay

Just briefly to build on what Jeff said, I have been a long time admirer of the Wyeth R&D organization and a very long time admirer of Michael Dolsten the head of R&D. I have had the opportunity over the last period to speak with Michael and we both have very similar thoughts on productivity on the absolute necessity [inaudible] productivity. There are no acquisitions in the past to pull on our organization. I think we have learned from that lately so when this deal closes we will be able to launch an R&D organization, maintain our goals and commitments and I think really build up given the complementarily of both R& organizations.

Jeff Kindler

With regard to your question about post 2012 Roopesh, we really believe we are creating a company here with a wide range of diverse assets, investments in growth opportunities and the financial wherewithal to move the business forward. We are obviously very focused on the here and now and 2012, but this is a very long-term business and we believe this deal positions us extremely well for long-term shareholder value creation through this collection of businesses and their various opportunities in the future.

I will ask Frank if he wants to add anything to that and then I will ask Bernard to comment on Wyeth’s cost cutting.

Frank D’Amelio

I think what I will do to punctuate Jeff’s comments on revenue growth, I will come back a little bit to what I talked on to Tony Butler about, maybe put a little bit more detail to that, then I will ask Greg Norden to comment on the cost question relative to Wyeth.

Once again, I talked about opportunities we see, significant opportunities in emerging markets, established products and other parts of the industry. Let me just punctuate it with some numbers.

If you look at Asia Pacific, if you take our Japan, New Zealand and Australia, the current market there review, addressable market, about $50 billion of which we have 4%; 4% on $50 billion is $2 billion. We see that market growing between now and 2012 from $50 billion to $80 billion. We believe we can not only maintain our share there, but grow our share to 6%. 4% on $80 billion is $3.2 billion. Just by holding share we pick up $1.2 billion. If we can pick up two points of share and go to 6% that is $4.8 billion versus today’s $2 billion, almost $3 billion of incremental growth. Our job is to execute on those opportunities, build a strong platform, get real strong momentum, get the number that we have targeted for 2012 and then build upon that momentum going forward into 2013 and beyond. That is what we plan on doing which is why I talked about we need to execute and we will execute.

Greg, do you want to talk about the Wyeth cost reduction?

Gregory Norden

Yes, thanks Frank. As it relates to Wyeth I think what you have seen over the past couple of years and we see continuing into this year is very strong and disciplined financial management and we have been able to execute on our cost management strategies for quite some time. Between now and the time of closing we certainly have an obligation and a responsibility to continue to run our business as if we were going to remain independent. As such, we will continue to run this business the best we can and along the lines of the way we have in the past and that includes continuing with the cost containment initiatives that we started with project impact. We are going to continue that through 2009 is the answer to your question.


Your next question comes from Chris Schott of J.P. Morgan.

Chris Schott - J.P. Morgan

First of all when you think about the debt you are taking on with this transaction, how aggressively should we think about Pfizer paying down that debt, I know you mentioned about 2012 net cash, but I am trying to get at here, tax rate is in the 30% in 2009, should we think of it up in that 30% range a couple of years after that? Then maybe when we look at 2012 and beyond should we think about the tax rate maybe coming back down to this low to mid 20% range?

Then on the top line guidance for 2009, adjusting for currency it doesn’t seem like you’ve got much organic growth here. I would just be interested in your comments or thoughts overall on the impact the weakened economy is having on the pharma business as a whole as it relates to your business as well as Wyeth’s.

Frank D’Amelio

On the tax rate, we will be looking to pay down the debt, I will call it kind of in a consistent way going forward, which is why we said net cash by 2012. So in terms of your assumptions I would assume that 30% and I would keep it at roughly that level going forward for the next couple of years. That would be point one.

In terms of the revenue guidance for ’09, we put a range out there of $44 to $46 and we said a $3 billion negative impact from foreign exchange. Just to run the numbers, if you added that $3 billion back, if foreign exchange was constant, $44 to $46 would be $47 to $49, mid point to that is roughly $48 which is pretty much what we printed this year. And we did, to your point, we did assume some negative impact of the macro economic environment on the guidance that we are providing for 2009.


Your next question comes from Tim Anderson - Sanford Bernstein

Tim Anderson - Sanford Bernstein

I have three questions. Jeff this transaction goes against what you described in March of ’08 which was that you would not likely do another big pharma deal. My question to you is what changed over the course of those ten months.

My second question is whether at some point you might consider splitting up the combined company into something like truly separate, publicly traded entities?

The third question is for Bernard. Can you talk about how Wyeth arrived at a $50.00 share as being fair value? I think a case could be made that it is a pretty low price given what the future prospects for Wyeth have looked like.

Jeff Kindler

As far as what I have said in the past, I have always been very clear that we never say never and we are open to every opportunity and I have identified the conditions that would have to prevail for us to undertake a transaction like this, including obviously the strategic value and our ability to manage the inevitable risks and disruptions that come from any large scale merger of that kind.

We, as I said in my opening comments, are in a much stronger position than we were two years ago. In fact, I would have to say that we have gotten there faster than I might have even hoped and our confidence in our ability to execute on a transaction like this is very high, thanks to the hard work of our people.

We have also very clearly laid out all of the strategic priorities that we had and I went through them earlier this morning. This is a very, very unique deal. I don’t think there is anything else that could have been done that would have more perfectly matched those strategic priorities, all achieved in a single transaction. So it is, for all of the reasons I said in the beginning, the right deal, at the right time and for the right reasons.

As far as potential future considerations of the portfolio are concerned, what we are very excited about is that this transaction creates a very broad based, diversified portfolio of businesses that are complimentary with one another and I continue to believe that these various businesses benefit from the combination both of their own ability to maximize their opportunities, but at the same time take advantages of the scale and resources of the combined company.

Bernard Poussot

The answer to your question is this. The board of Wyeth obviously reviewed this question very, very thoroughly and evaluated exactly what this offer was at, this is our standard on prospects. I will just tell you that this transaction at Friday closing values for the Pfizer stock represented a $16 billion premium which in the current environment is not bad. 85% of the synergies created to Wyeth, I would remind you also that the deal is structured with 65% in cash and lastly the 35% component of the Pfizer stock offers, also, an ability to go up when the deal is understood and people realize the strengths of the combination. So between now and closing we will have adjusted for that.


Your next question comes from Seamus Fernandez of Leerink Swann.

Seamus Fernandez - Leerink Swann Llc

Frank, I was hoping you could discuss the context of the $1 billion reinvestment that you mentioned would occur this year on the R&D side and in some of the other parts of the business.

Then you mentioned the market share that Pfizer would hold in emerging markets and the growth you anticipate in those markets. Can you tell us what the combined share of the two companies would be?

Then also, Frank, could you just clarify for us the combined cost reductions, as I read them, are $4 billion from the combination with Wyeth with an incremental $2 billion from the additional cost program that you envisioned for Pfizer itself, is that correct?

Frank D’Amelio

I will answer the last question first, then Ian you are going to talk about the reinvesting question, and then on the revenue growth question that I gave with the addressable markets, I think what we will do is just keep that to those Pfizer numbers only for now, unless Ian wants to add anything to that.

The answer to your last question is yes. You take the $4 billion in synergies that we talked about from the combined company and you would add the $2 billion that we laid out from the stand-alone Pfizer. So the short answer to the last question is yes.

Ian Read

The reinvestment is to ensure we continue to drive the revenue the top line so it includes probably a portion into supporting the portfolio, progressing the Phase II and Phase III pipeline, which is very important to our 2012 and post revenue opportunities. It is building infrastructure as a field force in emerging markets that is in Turkey and in China and in Russia, Korea, and lastly building our offering of established products. As we widen our portfolio offering in these markets we should invest in ensuring we have supply and we have appropriate dossiers so to widen that offer.


Your next question comes from Steve Scala with Cowen and Company.

Steve Scala - Cowen and Company

Pfizer sold its consumer business a few years ago because it apparently did not make strategic sense. Why does the Wyeth OTC business make greater strategic sense or should we assume a similar fate?

Second has an FTC review of the Lipitor patent settlement been finalized and if not Bernard, what analysis has Wyeth completed regarding the Lipitor patent settlement? It would appear to be a key variable in your ability to make 2012 targets.

Lastly, Bernard when was your most recent update on the Bapineuzumab Phase III trial such as perhaps a DSMV update or some other knowledge of how things are progressing in Phase III.

Jeff Kindler

I will address the first question, then I will ask Amy Schulman our General Counsel to give you a Lipitor patent update and then I will turn it over the Bernard for the questions you have asked him.

On the consumer business a decision was made at the time based on the view that prevailed at that time. Where we are today is I think this is a terrific business and one that is very complimentary with our portfolio and one that we believe creates tremendous opportunities for increased shareholder value.

Amy, if I could ask you to give Steve an update on the Lipitor patent situation.

Amy Schulman

We are very comfortable with the FTC’s review of the Lipitor patent situation and as the course of the diligence both Wyeth and we went for each others products and various issues at some length and both of us were comfortable with what we found. The FTC review is completed, they have not yet issued a decision.

Bernard Poussot

On the Bapineuzumab question, first of all we do not commence on DSMB reviews. Regarding the ongoing Phase III program I can tell you that they are advancing. In most cases we have resumed activities XUS. In most countries a couple of situations still need to be addressed, but we are confident that within weeks we will be back in full gear in those countries, I mean the North American portion is progressing accordingly, so we are pleased and continue to hope for the original timing that we had for Bapineuzumab.


Your last question comes from Robert Hazlett of BMO Capital Markets.

Robert Hazlett - BMO Capital Markets

My question is specific to the Alzheimer’s therapeutic area and the pipeline compounds. Jeff clearly Pfizer has an effort there with multiple compounds, multiple licenses, as well as the monoclonal antibodies as does Wyeth. Do you expect there to be a divestiture in this area of one of the monoclonal anti-A beta monoclonal antibodies from the pipeline?

Jeff Kindler

Let me start by saying that you are right to point out that both companies have invested a great deal into this very, very important area of critical unmet medical need and both have very exciting programs which we believe are very complimentary of one another. We do not anticipate any issues along the lines you are talking about. We actually think these two efforts put together will be very complimentary and most importantly give us the opportunity to really see if we can’t address this very serious unmet medical need.

I think that concludes the time we have available. I appreciate everybody listening in today. Thank you and have a great day.

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