Pfizer JPM May 2014

www.jpmorganmarkets.com

North America Equity Research

28 May 2014

Pfizer Inc.

OverweightPrevious: Not Rated

PFE, PFE US

Moving to an OW Rating and $35 PT from NR:

Attractive Entry Point at Current Depressed Valuation

Price: $29.61

Price Target: $35.00

Pharmaceuticals Major &

Specialty

Chris Schott, CFA AC

(1-212) 622-5676

[email protected]

Bloomberg JPMA SCHOTT

Jessica Fye

(1-212) 622-4165

[email protected]

Wendy L Lin

(1-212) 622-5350

[email protected]

Dana C Flanders

(1-212) 622-1256

[email protected]

J.P. Morgan Securities LLC

YTD 1m 3m 12m

Abs -3.3% -7.6% -8.1% 2.1%

Rel -6.7% -9.9% -11.2% -13.1%

Pfizer Inc. (PFE;PFE US)

FYE Dec 2013A 2014E 2015E 2016E

EPS - Recurring ($)

Q1 (Mar) 0.51 0.57A - -

Q2 (Jun) 0.56 0.58 - -

Q3 (Sep) 0.58 0.58 - -

Q4 (Dec) 0.56 0.53 - -

FY 2.22 2.26 2.21 2.35

Bloomberg EPS FY ($) 2.18 2.24 2.27 2.37

Source: Company data, Bloomberg.

Company Data

Price ($) 29.61

Date Of Price 27 May 14

52-week Range ($) 32.96-27.12

Market Cap ($ mn) 193,442.10

Fiscal Year End Dec

Shares O/S (mn) 6,533

Price Target ($) 35.00

Price Target End Date 31-Dec-14

See page 10 for analyst certification and important disclosures.

J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that

the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single

factor in making their investment decision.

27

29

31

33

$

May-13 Aug-13 Nov-13 Feb-14 May-14

Price Performance

PFE share price ($)

S&P500 (rebased)

Following a period of restriction, we are moving to an OW rating and a December

2014 price target of $35 (OW rating and December 2014 $35 price target prior to

restriction) from a Not Rated designation. We continue to see an attractive core

thesis at Pfizer with improving pipeline prospects (lead by a palbociclib filing

expected in 3Q/14) as well as a longer-term break-up of the organization. With

business development clearly a greater focus within the Pfizer story following the

AstraZeneca bid, we believe any such move would likely improve the standalone

viability of the companys individual business units. Trading at 13.1x our 2014

EPS estimate (a substantial discount to its peers), we see a favorable risk/reward

in PFE shares at current levels.

PFE shares are currently valued at a ~26% discount to Major Pharma

peers. Pfizer shares are currently trading at 13.1x our 2014 EPS estimate, well

below our major pharma average of 17.7x. We note that Pfizer has historically

traded at a ~14% discount to the group and current valuation is at a multi-year

low relative to the group. With valuations at this level, we see an attractive

entry point for long-term investors with both our DCF and SOTP valuations

suggesting upside into the mid-to-upper $30 range for PFE shares.

Pfizer remains a solid fundamental story with palbociclib and potential

long-term break-up theses intact. Before considering business development,

we continue to view Pfizer as a solid fundamental story with a potential 2015

palbociclib launch and a possible break-up of the larger organization over time.

The company has largely moved past its patent cliff and the potential 2015

launch of a high margin, multi-billion product (palbo) positions Pfizer for a

return to growth in 2016 and beyond. In addition, management continues to

explore a potential break-up of the larger Pfizer organization, which could

unlock significant shareholder value over the next 2-3 years, in our view.

However, M&A optionality could still enhance the Pfizer story. Given the

recent bid for AstraZeneca, business development has clearly become a core

focus of the story. We see solid rational for a potential AstraZeneca merger from

both a strategic (enhanced pipeline, improved established product outlook) and

financial (tax inversion, access to ex-US cash) standpoint and would not be

surprised to see talks resume at some point in the future. That said, we see a

range of business development opportunities for Pfizer to pursue as the company

looks to strengthen the standalone thesis for each of its business units.

This document is being provided for the exclusive use of ANSHUMAN CHAWLA at A.T. KEARNEY INDIA PVT.LTD.

2North America Equity Research

28 May 2014

Chris Schott, CFA

(1-212) 622-5676

[email protected]

We expect segment profitability to shift significantly over the next 2-3 years

months. While Pfizers weak 1Q results and segment P&L disclosures have clearly

created controversy in the story, we do not see these events as thesis altering.

Specifically, while Pfizers GEP segment reported the highest operating margin

(mid-50%s) of the three divisions and accounted for the majority of the companys

current profitability, we expect this segment to come under pressure as several

billion dollars of patent expirations impact the business in 2015 (Celebrex, EU

Lyrica, etc.). At the same time, we anticipate margin expansion within Pfizers

remaining business unit as VOC benefits from palbociclib moving to market and

GIP margins improve on the Xeljanz and Eliquis ramp and slowing opex growth.

In total, we anticipate VOC/GIP to increase to ~50% of Pfizers profitability by

2020, relative to ~30% in 1Q/14.

While the palbociclib filing announcement had a modest impact on PFE

shares, we see the update as a clear positive. Pfizer announced that following

discussions with the FDA, the company plans to file palbociclib in early 3Q of this

year based on the phase II PALOMA-1 study. In our view, palbociclib represents

Pfizers highest profile pipeline asset with $5+ billion in peak sales potential, but

expectations had been mixed around whether or not a filing based on phase II

would be possible following AACR. While we expect uncertainty on phase II

approval will remain, we estimate that the product could be approved in early 2015

given palbociclibs breakthrough designation. Along these lines, we believe FDA

acceptance of the filing and a palbociclib approval would represent clear positive

catalysts for PFE shares.

Our SOTP work continues to suggest an upside case in the high $30s. We

continue to run our SOTP analysis off of Pfizers 2016 earnings given the shifting

profitability in its business units and the potential timing of an actual break-up. Our

upper $30s upside case is based on two catalysts over the next several years: 1) a

2015 launch of palbociclib as well as the 2) potential enhanced long-term earnings

power of the GEP franchise, ideally through business development or strategic

partnerships. Pfizers discussion of the various options available to the business

suggest a willingness to consider all ranges of shareholder value enhancing

structures for its business over time.



28 May 2014

Chris Schott, CFA

(1-212) 622-5676

[email protected]

Attractive Entry Point at Current

Depressed Valuation

We continue to see an attractive core thesis at Pfizer with improving pipeline

prospects (lead by a palbociclib filing expected in 3Q/14) as well as a longer-term

break-up of the organization. While an AstraZeneca acquisition (or any range of

business development opportunities) clearly cannot be ruled out following the recent

bid, we see any such move as likely improving the standalone viability of Pfizers

individual business units. Trading at 13.1x our 2014 EPS estimate (a substantial

discount to its peers), we see a favorable risk/reward in PFE shares at current levels.

Shares are trading at a 5-year valuation low of 14x, 26%

discount to major pharma

Pfizer shares are currently trading at 13.1x our 2014 EPS estimate, several turns

below the major pharma average of 17.7x. This represents a 26% discount to its

Major Pharma peers. Since the beginning of 2010, Pfizer has traded at a roughly 14%

discount to its peers. With the stock currently trading at more than two standard

deviations below the companys historical average, we see an attractive entry point

for longer-term investors.

Figure 1: PFE Trading at 13.4x 2014E EPS

$ in millions

Source: J.P. Morgan estimates, Bloomberg.

Figure 2: PFE Trading at 25% Discount to Major Pharma Peers

Source: Bloomberg estimates

Fundamentals P/E Analysis

Price Market Cap EPS (local) CAGR P/E Ratio (local ratio) Relative P/E

Company Symbol Rating (local) (mln USD) 2014E 2015E 2016E 2017E '14-'20 2014E 2015E 2016E 2014E 2015E

AbbVie ABBV N 53.99 85,848 3.13 3.84 4.12 4.35 8% 17.2x 14.1x 13.1x 97% 82%

Bristol-Myers BMY OW 48.89 81,019 1.80 1.61 2.02 2.76 14% 27.1x 30.4x 24.2x 153% 176%

Eli Lilly & Co. LLY N 59.73 66,865 2.63 2.88 3.53 4.05 12% 22.7x 20.7x 16.9x 128% 120%

Merck & Co. MRK OW 56.69 165,670 3.44 3.67 4.19 4.41 8% 16.5x 15.4x 13.5x 93% 90%

Pfizer PFE OW 29.61 188,605 2.26 2.21 2.35 2.63 7% 13.1x 13.4x 12.6x 74% 78%

J & J JNJ 100.81 285,202 5.95 6.40 6.85 6.85 16.9x 15.8x 14.7x

-30.00%

-25.00%

-20.00%

-15.00%

-10.00%

-5.00%

0.00%

1/1/10 1/1/11 1/1/12 1/1/13 1/1/14



28 May 2014

Chris Schott, CFA

(1-212) 622-5676

[email protected]

Pfizer remains very solid fundamental story with palbociclib

and potential long-term break-up theses intact

While we believe a potential AstraZeneca deal could strengthen Pfizers businesses,

we certainly do not see a need for business development. Absent business

development activity, we continue to view Pfizer as a solid fundamental story with a

potential 2015 palbociclib launch and a possible break-up of the larger organization

over the next 3-4 years.

The company has largely moved past its patent cliff and a potential 2015 launch of

its new breast cancer drug palbociclib could drive growth over the next 5-7 years.

Please see page 7 for our updated views on palbociclib and please see our previously

published note for details on the VOC business unit: VOC Division Deep Dive:

Palbociclib Success Should Support Premium Valuation.

In addition, management continues to explore a potential break-up of the larger

Pfizer organization. We note that management sees two major segments within Pfizer

even with three operating units. On the 1Q14 call, Pfizers CEO Ian Read highlighted

that there are really two major segments within Pfizer an innovative one and an

established one and that further decisions on its business structure would be more

focused on those two major segments versus multiple business units. However, we

continue to analyze the company based on its three distinct operating segments with

different business models.

We would also note that managements ultimate decision may not necessarily take

place as a simple spin-off of one or more business units, and could result in a range

of possibilities, including the acquisition of a specialty pharma/generics company.

For more information, please refer to our previously published note: Value Core

Deep Dive: Limited Growth but a Range of Strategic Opportunities.

However, M&A optionality could still enhance Pfizers story

Given the recent bid for AstraZeneca, business development has clearly become a

core focus of the story. We see solid rational for a potential AstraZeneca merger

from both a strategic (enhanced pipeline, improved established product outlook) and

financial (tax inversion, access to trapped cash) standpoint and would not be

surprised to see talks resume in the future. That said, we see a range of business

development opportunity for Pfizer to pursue as the company looks to strengthen the

standalone thesis for each of its business units.

Segment P&L: We Expect Segment

Profitability to Shift Significantly Over the

Next 2-3 Years

Pfizer provided segment P&L granularity for its three business units for the first time

with 1Q14 results. While there was some controversy surrounding the segment P&L

details, the disclosed margin structures were in-line with our expectations. We note

that while Pfizers GEP segment reported the highest operating margin (mid-50%s)

of the three divisions, the profitability of this segment will likely come under

pressure as future patent expirations hit the business (Celebrex, EU Lyrica, etc.). In



28 May 2014

Chris Schott, CFA

(1-212) 622-5676

[email protected]

addition, we view current VOC margins as depressed given high levels of investment

in key pipeline assets and new product launches, and we expect operating margins to

significantly expand as palbociclib launches.

The company reported P&L details for each of the segments, as well as for other

corporate functions (i.e. finance, operations). We base our analysis off of a modified

P&L that allocates corporate costs to each of the business units using the ranges

Pfizer provided in the press release.

Figure 3: Pfizer Revenue by Business Segment

Source: Company reports and J.P. Morgan estimates.

Figure 4: Pfizer EPS by Business Segment


Global Established Pharma (GEP) currently generates mid-50%s operating

margins, but will decline in profitability as products lose patent protection

In 1Q14, GEP generated a 55.7% operating margin and contributed roughly 70% of

the company's operating profit. GEP's gross margin was 81.7%, SG&A represented

21.5% of sales, and R&D represented 4.5% of sales. This was in-line with our

expectations, as the segment currently contains a number of products that will lose

patent production over the next several years (Celebrex in 2014, Zyvox in 2015,

etc.). We are forecasting the segments gross margin to decline from the 1Q reported

81.7% to the high 70%s over time.

Figure 5: Global Established Pharma Segment P&L (w/ Allocated Corporate Expenses)

$ in millions


$28 B $26 B $23 B $22 B $21 B $21 B $21 B $21 B

$9 B$10 B

$11 B $12 B $14 B $15 B$17 B $18 B

$14 B$13 B $14 B $14 B

$15 B$16 B $15 B

$14 B

$ B

$10 B

$20 B

$30 B

$40 B

$50 B

$60 B

FY 2013A FY 2014E FY 2015E FY 2016E FY 2017E FY 2018E FY 2019E FY 2020E

GEP Total Revenues VOC Total Revenues GIP Total Revenues

$1.53 $1.59 $1.39 $1.33 $1.41 $1.50 $1.56 $1.63

$0.19 $0.26

$0.36 $0.48 $0.65

$0.77 $0.93

$1.08 $0.49 $0.39 $0.45

$0.52

$0.56

$0.70$0.62

$0.58

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

FY 2013A FY 2014E FY 2015E FY 2016E FY 2017E FY 2018E FY 2019E FY 2020E

GEP EPS VOC EPS GIP EPS

FY 2013A 1QA 2QE 3QE 4QE FY 2014E FY 2015E FY 2016E FY 2017E FY 2018E FY 2019E FY 2020E

GEP Total Revenues 28143 5990 6691 6537 6670 25888 22968 21548 21172 21214 21254 21396

Cost of Revenues 5280 1094 1305 1275 1334 5008 4823 4741 4658 4667 4782 4921

Gross Profit 22862 4896 5386 5262 5336 20880 18145 16807 16515 16547 16472 16475

SG&A 6742 1288 1539 1471 1701 5998 5283 4741 4340 4243 4145 4065

Research & Development 1296 272 301 261 300 1135 1034 970 953 955 956 963

Operating income 14825 3336 3546 3530 3335 13747 11829 11097 11221 11349 11371 11447

Gross margin 81.2% 81.7% 80.5% 80.5% 80.0% 80.7% 79.0% 78.0% 78.0% 78.0% 77.5% 77.0%

SG&A % sales 24.0% 21.5% 23.0% 22.5% 25.5% 23.2% 23.0% 22.0% 20.5% 20.0% 19.5% 19.0%

R&D % sales 4.6% 4.5% 4.5% 4.0% 4.5% 4.4% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5%

Opex % of sales 28.6% 26.0% 27.5% 26.5% 30.0% 27.6% 27.5% 26.5% 25.0% 24.5% 24.0% 23.5%

Operating margin 52.7% 55.7% 53.0% 54.0% 50.0% 53.1% 51.5% 51.5% 53.0% 53.5% 53.5% 53.5%



28 May 2014

Chris Schott, CFA

(1-212) 622-5676

[email protected]

Vaccines, Oncology, and Consumer Health (VOC) margins likely to expand as

palbociclib launches

We see Pfizers $10 billion VOC division as a core value driver for the company

over time, but in the near term we are not be surprised to see this unit report

operating margins below corporate-average due to increased investments in key

pipeline assets (palbociclib, MenB) and new products launches (Prevnar 13). For

1Q14, VOC reported a gross margin of 80.2% and an operating margin of 25.2%.

SG&A accounted for 33.0% of sales and R&D accounted for 22% of sales.

Figure 6: Vaccines, Oncology, and Consumer Health (VOC) Segment P&L (w/ Allocated Corporate Expenses)

$ in millions


However, with a potential 2015 launch of palbociclib, Pfizers highest profile

pipeline asset, we expect significant operating leverage and mix shift to drive margin

expansion over the next 4-6 years and believe we could see long-term operating

margins expand into the low 40% range.

Global Innovative Pharma (GIP) should see margin expansion over time

In 1Q14, GIP reported a gross margin of 86.2% and an operating margin of 25.3%,

with SG&A representing 32.9% of sales and R&D representing 27.9% of sales. We

expect GIP margins to increase over time with incremental operating margin

expansion driven by the ramp of Xeljanz and Eliquis.

Figure 7: Global Innovative Pharma Segment P&L (w/ Allocated Corporate Expenses)

$ in millions



VOC Total Revenues 9260 2174 2381 2446 2675 9675 10949 12300 14118 15480 16829 18387

Cost of Revenues 2025 430 488 514 562 1993 2190 2275 2541 2786 2945 3218

Gross Profit 7235 1744 1893 1932 2113 7682 8759 10024 11576 12693 13884 15170

SG&A 3184 717 833 832 990 3371 3613 3874 4235 4489 4712 4965



Gross margin 78.1% 80.2% 79.5% 79.0% 79.0% 79.4% 80.0% 81.5% 82.0% 82.0% 82.5% 82.5%

SG&A % sales 34.4% 33.0% 35.0% 34.0% 37.0% 34.8% 33.0% 31.5% 30.0% 29.0% 28.0% 27.0%

R&D % sales 24.0% 22.0% 20.0% 21.5% 21.5% 21.3% 19.0% 17.5% 15.5% 15.4% 14.0% 14.0%

Opex % of sales 58.4% 55.0% 55.0% 55.5% 58.5% 56.1% 52.0% 49.0% 45.5% 44.4% 42.0% 41.0%

Operating margin 19.8% 25.2% 24.5% 23.5% 20.5% 23.3% 28.0% 32.5% 36.5% 37.6% 40.5% 41.5%


GIP Total Revenues 13821 3076 3279 3275 3341 12971 13529 14321 14818 15654 14726 13589

Cost of Revenues 1826 426 438 488 456 1809 1783 1913 2094 2260 2069 1759

Gross Profit 11996 2650 2840 2787 2885 11162 11746 12408 12725 13394 12657 11830

SG&A 4234 1013 1104 979 1277 4372 4433 4580 4818 4795 4738 4565



Gross margin 86.8% 86.2% 86.6% 85.1% 86.3% 86.1% 86.8% 86.6% 85.9% 85.6% 86.0% 87.1%

SG&A % sales 30.6% 32.9% 33.7% 29.9% 38.2% 33.7% 32.8% 32.0% 32.5% 30.6% 32.2% 33.6%

R&D % sales 22.0% 27.9% 22.7% 26.5% 27.4% 26.1% 25.6% 24.1% 23.2% 21.1% 23.1% 23.3%

Opex % of sales 52.6% 60.9% 56.3% 56.4% 65.6% 59.8% 58.4% 56.1% 55.7% 51.7% 55.2% 56.9%

Operating Margin 34.2% 25.3% 30.3% 28.7% 20.8% 26.3% 28.5% 30.5% 30.2% 33.8% 30.7% 30.1%



28 May 2014

Chris Schott, CFA

(1-212) 622-5676

[email protected]

Early 3Q palbociclib Filing a Clear

Positive, Suggests Early 2015 Launch

Pfizer recently announced that following discussions with the FDA, the company

plans to file palbociclib in early 3Q of this year based on the phase II PALOMA-1

study. palbociclib represents Pfizers highest profile pipeline asset given its $5+

billion potential, but expectations had been mixed around whether or not a filing

based on phase II would be possible following AACR. We note that Pfizer stock

seems largely unaffected by the news of an early 3Q palbociclib filing. Along these

lines, to the extent that the FDA accepts Pfizers filing and the product is ultimately

approved, we see significant upside for PFE shares.

This uncertainty around filing timelines mainly stemmed from PALOMA-1s

immature overall survival data, which showed a lower benefit relative to the very

strong improvement in PFS seen with the product. Recall that data from AACR

confirmed a strong PFS improvement with the palbo arm seeing roughly double the

time to progression vs. letrozole alone (20.2 mos vs. 10.2 mos, p =0.0004). However,

preliminary overall survival data presented at AACR was immature (61 events out of

165 patients) and showed a smaller benefit (37.5 vs. 33.3 months, 0.813 HR). We

would note, however, that all current ER+ breast cancer products have been

approved based on PFS. Additionally, while the OS improvement exhibited in

PALOMA-1 is not of the same magnitude as the PFS benefit, we view these results

as clinically meaningful and would expect broad use of palbo if approved.

While we expect uncertainty around approval off of phase II data will remain, we

estimate that the product could be approved in early 2015 given palbociclibs

breakthrough designation and a 3Q filing. We estimate $5 billion in peak sales for

the product and note that an additional adjuvant label over time could drive sales to

$10+ billion.

We currently include $4 billion of risk-adjusted sales in 2020 for palbo in our model,

which reflects an 80% risk-adjustment on the first-line indication and no value for

the adjuvant indication. We calculate that our un-risk-adjusted estimates for palbo

use in first-line (ie. $5 billion) would drive a low-teens VOC top-line CAGR and a

high-20%s EPS CAGR over the next 5-7 years. We believe this growth profile would

support a top-tier bio-pharma multiple in the mid-20s for the VOC division and

would make a strong case for a larger break-up of the Pfizer organization.

Please see our previously published note for more details: VOC Division Deep Dive:

Palbociclib Success Should Support Premium Valuation.

Our SOTP Analysis Continues to Suggest

an Upside Case in the High-$30s

For our sum of the parts analysis, we applied a range of industry-like multiples to

each business unit based on what we view as appropriate comps. We based the entire

analysis on estimated 2016 earnings to bring it closer to the timing of an eventual

break-up. While GEP represents the largest of the three business units from a topline



28 May 2014

Chris Schott, CFA

(1-212) 622-5676

[email protected]

and operating margin perspective, we anticipate a fairly rapid decline in sales and

margins for this business unit due to several near-term patent expirations.

Figure 8: Our SOTP Analysis Suggests Upside of $37-38

Source: J.P. Morgan estimates.

Investment Thesis, Valuation and Risks

Pfizer Inc. (Overweight; Price Target: $35.00)

Investment Thesis

Overweight rating. We have an Overweight rating on Pfizer. We see an attractive

core thesis at Pfizer with improving pipeline prospects as well as a potential longer-

term break-up of the organization. With PFE trading at 13.1x our 2014 EPS estimate

and with the potential for high-single-digit EPS growth through 2020, we see a

favorable risk/reward in PFE shares at current levels.

Valuation

Pfizer trades at 13.1x our 2014 EPS estimate of $2.26. This represents a 26%

discount to its US major pharma peers. Recall that the US major pharma group

currently trades at a 10% premium to the S&P 500 on 2014E P/E.

Dec-14 price target of $35. Our price target is based on DCF methodology, as we

believe this best captures the overall value of these businesses. For our Pfizer DCF,

we take the present value of cash flows within our forecast window and thereafter

wind down the existing-products business while including risk-adjusted contributions

from pipeline assets. We use a 0% sector terminal growth rate and a WACC of 9.0%

(above recent norms based on a higher equity risk premium given the litany of issues

facing the sector over the next few years). This translates into a DCF value of $35.

Risks to Rating and Price Target

Risks to our Overweight rating on Pfizer include failure to maintain operating

margins, potential for pipeline setbacks, and the challenges PFEs size presents to

longer-term growth/management.

.

Conservative Case Established Products Upside VOC palbo Upside Bull Case

2016E EPS Multiple Value 2016E EPS Multiple Value 2016E EPS Multiple Value 2016E EPS Multiple Value

GEP $1.33 11x $14.62 $1.33 14x $18.60 $1.33 11x $14.62 $1.33 14x $18.60

VOC $0.48 18x $8.62 $0.48 18x $8.62 $0.48 25x $11.97 $0.48 25x $11.97

GIP $0.52 14x $7.33 $0.52 14x $7.33 $0.52 14x $7.33 $0.52 14x $7.33

SOTP Value: $30.56 SOTP Value: $34.55 SOTP Value: $33.91 SOTP Value: $37.90

PFE Current Share Price: $29.90 Current Share Price: $29.90 Current Share Price: $29.90 Current Share Price: $29.90

Premium to Current: 2% Premium to Current: 15% Premium to Current: 19% Premium to Current: 29%



28 May 2014

Chris Schott, CFA

(1-212) 622-5676

[email protected]

Pfizer Inc.: Summary of Financials

Income Statement - Annual FY13A FY14E FY15E FY16E Income Statement - Quarterly 1Q14A 2Q14E 3Q14E 4Q14E

Revenues 51,452 48,951 47,929 48,661 Revenues 11,296A 12,467 12,373 12,814

Cost of products sold (9,261) (9,078) (9,106) (9,246) Cost of products sold (1,986)A (2,306) (2,351) (2,435)

Gross profit 42,191 39,873 38,822 39,416 Gross profit 9,310A 10,161 10,022 10,380

SG&A (14,166) (13,753) (13,341) (13,207) SG&A (3,020)A (3,479) (3,284) (3,970)

R&D (6,554) (6,581) (6,581) (6,581) R&D (1,612)A (1,521) (1,658) (1,790)

Operating income 21,471 19,539 18,901 19,628 Operating income 4,678A 5,161 5,081 4,619

Net interest (income) / expense (1,009) (1,023) (989) (927) Net interest (income) / expense (229)A (265) (265) (265)

Other income / (expense) - - - - Other income / (expense) - - - -

Pretax income 21,118 19,808 18,712 19,101 Pretax income 4,901A 5,176 5,096 4,635

Income taxes (5,810) (5,252) (4,865) (4,966) Income taxes (1,227)A (1,398) (1,376) (1,251)

Net income - recurring 15,282 14,527 13,818 14,106 Net income - recurring 3,665A 3,772 3,714 3,377

Diluted shares outstanding 6,894 6,435 6,239 6,014 Diluted shares outstanding 6,476A 6,449 6,421 6,394

EPS - excluding non-recurring 2.22 2.26 2.21 2.35 EPS - excluding non-recurring 0.57A 0.58 0.58 0.53

EPS - recurring 2.22 2.26 2.21 2.35 EPS - recurring 0.57A 0.58 0.58 0.53

Balance Sheet and Cash Flow Data FY13A FY14E FY15E FY16E Ratio Analysis FY13A FY14E FY15E FY16E

Cash and cash equivalents 2,183 7,594 9,388 8,921 Sales growth (12.8%) (4.9%) (2.1%) 1.5%

Short Term Investment 30,225 30,225 30,225 30,225 EBIT growth (11.9%) (9.0%) (3.3%) 3.8%

Accounts receivable 9,357 11,391 10,651 10,814 EPS growth - recurring 1.1% 1.8% (1.9%) 5.9%

Inventories 6,166 6,222 5,818 5,907

Other current assets 8,313 8,714 8,148 8,272 Gross margin 82.0% 81.5% 81.0% 81.0%

Current assets 56,244 64,145 64,230 64,139 EBIT margin 41.7% 39.9% 39.4% 40.3%

PP&E 12,397 8,769 9,274 9,743

Total assets 172,101 171,570 168,425 165,315 Tax rate 27.5% 26.5% 26.0% 26.0%

Net margin 29.7% 29.7% 28.8% 29.0%

Total debt 36,489 36,489 36,489 36,489

Total liabilities 95,481 95,904 96,476 96,604 Return on assets (ROA) 8.9% 8.5% 8.2% 8.5%

Shareholders' equity 76,620 75,666 71,949 68,711 Return on equity (ROE) 19.9% 19.2% 19.2% 20.5%

Net income (including charges) 22,072 14,527 13,818 14,106 Free cash flow yield 8.5% 9.1% 9.1% 8.2%

D&A 6,410 10,023 4,787 4,601

Change in working capital (3,392) (2,068) 2,282 (248)

Other 3,603 500 500 500

Cash flow from operations 17,765 18,179 17,653 15,471

Capex (1,206) (1,591) (1,558) (1,581)

Free cash flow 17,290 17,340 16,827 14,575

Cash flow from investing activities (10,625) (1,591) (1,558) (1,581)

Cash flow from financing activities (14,975) (11,177) (14,301) (14,356)

Source: Company reports.

Note: $ in millions (except per-share data).Fiscal year ends Dec


10


28 May 2014

Chris Schott, CFA

(1-212) 622-5676

[email protected]

Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research

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Important Disclosures

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Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Pfizer Inc..

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Date Rating Share Price

($)

Price Target

($)

04-Dec-06 N 24.90 --

24-Jun-08 N 17.69 --

06-Jan-09 N 18.16 20.00

16-Oct-09 OW 17.77 21.00

05-Jan-10 OW 18.66 24.00

01-Feb-11 OW 19.22 25.00

31-Jul-12 OW 24.04 28.00

13-Dec-12 OW 25.51 29.00

30-Jan-13 OW 27.51 31.00

19-Mar-13 OW 27.99 32.00

11-Apr-13 OW 29.92 33.00

22-May-13 NR 28.78 --

24-Jun-13 OW 27.71 33.00

26-Sep-13 OW 28.52 34.00

03-Jan-14 OW 30.46 35.00

28-Apr-14 NR 32.04 --

0

11

22

33

44

55

Price($)

Oct

06

Apr

08

Oct

09

Apr

11

Oct

12

Apr

14

Pfizer Inc. (PFE, PFE US) Price Chart

OW $32OW $33 NR

OW $24 OW $31NR OW $35

N N N $20 OW $21 OW $25 OW $28OW $29OW $33OW $34

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.

Break in coverage Dec 04, 2006 - Jun 24, 2008.


11


28 May 2014

Chris Schott, CFA

(1-212) 622-5676

[email protected]

The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire

period.

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Coverage Universe: Schott, Christopher: AbbVie (ABBV), Actavis plc (ACT), Allergan (AGN), Amarin Corporation (AMRN),

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Mylan Inc. (MYL), Perrigo Company (PRGO), Pfizer Inc. (PFE), Sagent Pharmaceuticals (SGNT), Teva Pharmaceuticals (TEVA),

Valeant Pharmaceuticals (VRX), Zoetis (ZTS)

J.P. Morgan Equity Research Ratings Distribution, as of March 31, 2014

Overweight

(buy)

Neutral

(hold)

Underweight

(sell)

J.P. Morgan Global Equity Research Coverage 44% 44% 11%

IB clients* 58% 49% 40%

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Attractive Entry Point at Current Depressed ValuationShares are trading at a 5-year valuation low of 14x, 26% discount to major pharmaPfizer remains very solid fundamental story with palbociclib and potential long-term break-up theses intactHowever, M&A optionality could still enhance Pfizers story

Early 3Q palbociclib Filing a Clear Positive, Suggests Early 2015 LaunchOur SOTP Analysis Continues to Suggest an Upside Case in the High-$30sInvestment Thesis, Valuation and RisksInvestment ThesisValuationRisks to Rating and Price Target

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Pfizer JPM May 2014