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Analyzation of Pfizer's Stock After Aquisition of King Pharmaceuticals - Protocol
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Analyzation of Pfizer's Stock After Aquisition of King Pharmaceuticals - Protocol


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This is the written protocol accompanying the ppt.

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  • 1. Pfizer Protocol Stock Valuation After Purchase of King Page 1 of 8
  • 2. K. Navi Phifer Alina Sachapow Magdalena Neumann Prof. Dr. D. Arora Corporate Finance – Hochschule für Technik und Wirtschaft Berlin 23 October Page 2 of 8
  • 3. Our protocol focuses on the valuation of the Pfizer Corporations stock in relation to its recentacquisition of King Pharmaceuticals. News of the event – gathered from more than one news sourcefor accuracy – is summarized in brevity below. Our technical analysis can be found on page four,including a scope from two years up to the third quarter of 2010, and our fundamental analysis is onpages five and six, reviewing key figures of Pfizers financial data and the companys businessdecisions which we believe have impacted the value of Pfizers shares. All figures, facts, andstatistics have been researched thoroughly and include footnote citations referencing the Works Citedand certain statistical charts found on pages seven and eight and nine, respectively. At the end ofpage six we draw our conclusions about the accuracy of the present valuation of Pfizers stock but arecareful to refrain from making predictons concerning the future forecasts of the company or itssubsidiaries. Pfizer announced the acquisition of King Pharmaceuticals on October 12th 2010 for $3.6billion cash. As in keeping with Pfizers tendency to overvalue companies which they purchase, i iiPfizer and King agreed to a purchase amount approximately 40% higher than the closing price ofKings shares on October 11th, which was 46% more than its one-month average closing price on thesame date. The acquisition deal is of course subject to regulatory approval under American iiijurisdiction; the tender transaction is expected to be closed during the first quarter of 2011 at thelatest. iii The deal is seen as a long-awaited and dearly needed strategic move in Pfizers M & A(Merger and Acquisition) portfolio due to the expiration next year on two of Pfizers most valuable imedications: Lipator and Xalatan, the former accounting for $12.4 billion alone in revenue. Pfizer is ivattempting to compensate for this noteable loss by continuing expansion of the business to includewider areas of the pharmaceutical market such as animal care, infant nutritional products, and alarger number of human health care medications from prevention to primary care to emergencyroom. The acquisition of King Pharmaceuticals, though it is a very specialized company dealing onlyin pain medications, is an integral part of Pfizers business plan for staying atop the highly icompetitive and unstable pharmaceutical industry. Page 3 of 8
  • 4. To make the analysis a little more clearly, we only want to analyze it with the help of thecharts of the stock, the trends, the volume, the On Balance Volume (OBV), the Moving AverageConvergence (MACD) and the Simple Moving Average (SMA). Pfizer has suffered a decrease in the value of its stock for many years. Since 2000 its stockprice has been going down rapidly and the company has been in a long-term downward trend. InMarch 2009 Pfizer’s stock price fell down to $11.62 per share after it had had a high of about $50 in2000. Although it has been a low, the volume has increased which already was an indicator that thetrend could change. After the low in March 2009, the stock reversed and experienced an upwardtrend again. This intermediate trend lasted several months until the 19th January, 2010. The fact thatit was a strong trend has been confirmed by several factors. The SMA started to rise again in May2009 after a long period of decline. The same did the MACD curve. After having reached its down inMarch 2009, it bean to increase and crossed the centerline in mid May. It stayed above the centerlinefor several months thereafter and nearly did not cross it again. As we can see in the OBV graph, thevolume increased as well smoothly until mid-October. On the 19th January Pfizer’s stock reached ahigh of $20 after which the uptrend reversed. After a three-month period of relatively stable volume,the price began to fall again. Because the MACD decreased correspondingly, it was clear that thetrend was strong. It lasted almost half a year until July 1st. Already in mid-June the MACD curvebegan to rise again and indicated that the stock price would as well. Taking the so-called “Head andshoulders” pattern between May and July 2010 into consideration, it was a good sign that the trendwould reverse again. The upward trend started in the beginning of July. The OBV curve shows thatthe volume has increased as well in correlation, but it did not reach the volume of the past uptrend.This trend lasted till the end of October, but the MACD curve has already implied a downwardsmovement in August. Insofar as a fundamental analysis of the stock value is concerned, it is not possible to simplyglance at the bottom line of the balance sheets released at the annual shareholders meeting to grasp acomprehensive overview of Pfizer. For the purposes of the financial analysis of this protocol, wehave narrowed down our focus to include the most dire figures (which can be found in Table A ofthe appendix) such as cash, debt, and yearly profits as well as liquidation, book, and enterprise valueof the company. Pfizers current financial situation is one of convalescence and offensive business tactics. Thecorporation has seen its stock price plummet to one-third of its peak price in the last ten years. It hasalso been constantly fighting for increased market share within the pharmaceutical industry to on top Page 4 of 8
  • 5. of all the generic drugs flooding the market after patents on new ones expire. The largest issuesPfizer faces, however, are the expiration of patents next year on two key medications (discussed onpg. 3 in the news summary), leadership of the current CEO, and the cut-throat race to invent newmedications. Insofar as the latter is concerned, Pfizer isnt staying afloat very well. The race to find themiracle cure for cancer has turned out to be an expensive and fruitless effort thus far. One could also vargue that the company is still recovering from its previous CEO, Henry McKinnel, whose businessand financial decisions severely hurt the company between 2001 and 2006. ii Net income in the past two years has remained stable despite the acquisition of Wyeth andoperating costs of Pfizers many subsidiaries. Pfizers net income fell by 70% in the 3rd quarter of2010 due to higher tax rates, acquisition costs, pre-tax charges to impair intangible assets and tocover litigation costs from one of Pfizers subsidiaries, Quigley Co. A healthy amount of cash should be kept available in every company; liquidity ensuresflexibility and is a sort of insurance against defaulting debtors, unforeseen accidents, and financialdecisions made on short-notice. Having an ample amount of cash on hand doesnt seem to be a viproblem for Pfizer, however, since it is choosing to spend cash on expanding and strengthening thebusiness, such as new acquisitions and the repurchase of 30 million of its common stock (totaling$500 million in the third quarter). The total amount of cash available has steadily increased in the ivpast three years. This could be due to the cash acquisition of Wyeth over a year ago, since the KingPharmaceuticals deal has yet to start paying out revenues. Pfizers enterprise value, also called themarket value of the company as the theoretical price if Pfizer were to be taken over, is $154.47billion.Pfizer is targeting revenues between $65.2 and $67.7 billion for 2012, which is considerably ivhigher than the 2008 and 2009 revenues of $48 and $50 billion, respectively. vii After discussing these various figures and points to consider, we have agreed to disagree onour conclusions. Due to the many various forms of valuating a companys profits and stock price, it isnearly impossible to obtain an accurate financial representation of a company. Alina, who coveredthe technical analysis and charts with much detail, firmly believes that Pfizer’s stock price willcontinue its downward trend (following the “head and shoulders” pattern) because the stock wasovervalued in past years. Magda and Navi, however, feel that the company’s stock is undervalueddue to the large amount of speculation distorting the market. All in all, we amateurs have only brieflytouched on a financial understanding and evaluation of the company from the perspective of its shareprices. Even the professional analysts cannot be certain of what the future will bring. Page 5 of 8
  • 6. Page 6 of 8
  • 7. APPENDIXTable APfizer (PFE) 2008 2009 2rd Q 2010Revenues $ 48,296 M $ 50,009 M $ 66.78 BTotal Debt (mrq) $ 17,283 M $ 48,662 M $ 43.28 BCash $ 142 M $ 1,312 M $ 19.27 BCash per share $ 0.31 $ 0.25 $ 0.234EPS (ttm) $ 1.20 $ 1.07 1.01Share price 12.31 17.55 16.06 (Nov 17, 2010)Enterprise value $ 161.15 B (Nov 14, 2010)Book value $ 57.6 B $ 90.0 B $ 86.44 BBook value per share $ 8.52 B $ 11.15 B $ 10.75 BP/BV 1.44 1.57 1.54P/E (ttm) 10.25 16.40 22.08Div & Yield 0.72 (4.20%) Source: EPS : Earnings per share P/BV: Price to Book Value P/E: Price to Earnings mrq: Most Recent Quarter (as of Oct.3, 2010) ttm: Trailing Twelve Months ( as of Oct, 3 2010)Table B: Comparison of Pfizer with Rival Merk (3rd Quarter of 2010 ) PFE MRKEmployees 116,500 93,000Qrtly. Rev. Growth (yoy) 39.30% 83.90%Revenue (ttm) 66.78 billions 43.99 billionsGross Margin (ttm) 78.06% 57.91%Operating Margin (ttm) 27.69% 11.71%Net Income (ttm) 6.13 billions 7.85 billionsEPS (ttm) 0.76 2.59P/E (ttm) 22.08 13.40P/S (ttm) 2.04 2.46 Page 7 of 8
  • 8. Source: Page 8 of 8
  • 9. Chart A: Pfizer Stock Price & VolumeChart B: Pfizer (PFE) & Merck (MRK) Stock Valuations Page 9 of 8
  • 10. Page 10 of 8
  • 11. Endnotes / Referencesi Simpson, Stephen. “Pfizers King for a Day.” 14 Oct 2010.ii Investopedia. “Golden Parachute Example: the Pfizer Flop.” Accessed: 17 Oct 2010. Greb, Eric. “Pfizer to Purchase King Pharmaceuticals.” 14 Oct 2010.iv Investopedia. “Drug Companies with Expiring Patents.” Accessed: 17 Oct 2010. The Pharma Letter. “ASCO highlights include cancer drug news from Pfizer, Roche, Sanofi, Merck KGaA, Novartisand Eisai.” Accessed: 18 Oct 2010. Brealy, Meyers, Marcus. Fundamentals of Corporate Finance. “Chapter Two: Financial Markets and Institutions,” pg. 45.----------------------------------------------------------------------------------------------------------------------------- -----Pfizer Corp. “PFIZER REPORTS THIRD-QUARTER 2010 RESULTS” pg. 7Yahoo! Finance. Annual reports chart. Page 11 of 8