Pfizer company outlook: a

(1)

PFIZER COMPANY OUTLOOK: A COVID-DEPENDENT BUSINESS?

DAVID ALMEIDA ARIAS - 47762

A Project carried out on the Master’s in Management Program, under the supervision of: FRANCISCO ANTUNES

19/05/2022

(2)

PFIZER COMPANY REPORT

Abstract

This equity report aims at analyzing and evaluating the pharmaceutical company Pfizer in a context of the global pandemic and the possible outcomes of the post-pandemic. We also researched the latest industry trends and analyzed the pharma regulation, M&A activity, patents, and emerging technologies. Thorough the report, we explained the methodologies and how recent industry and economic factors will affect the revenues of the main Pfizer’s pharmaceutical products

Keywords: Pfizer; Pandemic; Vaccines; Patents

This work used infrastructure and resources funded by Fundação para a Ciência e a

Tecnologia (UID/ECO/00124/2013, UID/ECO/00124/2019 and Social Sciences DataLab,

Project 22209), POR Lisboa (LISBOA-01-0145-FEDER-007722 and Social Sciences

DataLab, Project 22209) and POR Norte (Social Sciences DataLab, Project 22209).

(3)

This report is part of the … report (annexed), developed by DAVID ARIAS and TIAGO

ROMÃO and should be read has an integral part of it.

(4)

Introduction

This individual report cover the company description, with its history, activity and a brief analysis of its main segments. Moreover, there is a detailed industry analysis, which covers the main industry trends, impacts on the regulation, patents expiration and a peer analysis. Lastly, there is a well detailed revenue forecast description of each segment and a description of the main costs and its evolution for the years to come. All these topics are crucial to determine the fair value of the company, as Pfizer’s future cash flows are based on the future results of the company, and in order to estimate that, a careful study has been made in this report.

The valuation part will be covered by my partner and will be divided in topics such as DCF valuation with a risk, scenario and sensitivity analysis; and relative valuation with multiples. My partner report will also cover the final

recommendation and other crucial studies regarding macroeconomy and shareholder structure analysis.

The final goal is to evaluate Pfizer’s intrinsic value through a careful analysis through its operating segments in an environment with a lot of uncertainty of the pandemic future,

(6)

Pfizer is the 3th biggest pharmaceutical company in terms of market cap

Pfizer is one of the main participants in

pharmaceuticals M&A deals

Company overview

Pfizer is one of the biggest research-based and premier innovative biopharmaceuticals globally. Founded by cousins Charles Pfizer and Charles Erhart, it is now operating for more than 170 years. United States is Pfizer's largest market, where the company has its headquarters (NY). Its other segments account for a total of 124 countries: Developed Europe, Emerging Markets (China, Latin America, and Africa) and Developed ROW (Japan, Canada, South Korea, Australia and New Zealand).

The company's operation focuses on discovering, developing, manufacturing, marketing, selling, and distribution of biopharmaceutical products worldwide.

Following the spin-off and combination with UpJohn business, Pfizer started operating as a single operating segment beginning in the fourth quarter of 2020.

Since the fourth quarter of 2021, Pfizer's commercial operations have been divided into two operating segments, with each one being led by one manager:

Biopharma – the innovative science-based biopharmaceutical business, and PC1 – the global contract development and manufacturing organization.

M&A historic

Pfizer has an extensive M&A track record since the turn of the millennium. In 2000, Pfizer acquired Warner-Lambert for $90 billion, a fast-growing pharma company, increasing Pfizer’s product portfolio, such as Listerine mouthwash. In 2003, Pfizer acquired Pharmacia Corporation (formed through the merger Pharmacia AB and The Upjohn Company), making Pfizer the world’s leading research company. In 2019 Wyeth was acquired for $68 billion as a strategy to diversify its vaccines and biological medicines. In 2015, Hospira, a company leader in biosimilars, was bought for $17 billion; this acquisition was part of Pfizer’s strategy to divide its patent-protected and off-patent portfolio. In 2016, Medivation was acquired for $14 billion, which led to new oncology drugs in Pfizer’s portfolio, such as Xtandi.

In 2019, GSK and Pfizer completed a transaction to form a new joint-venture by combining both companies’ consumer healthcare businesses to create a global consumer healthcare company. Pfizer owns a 32% equity stake, and GSK owns 68%. The combined portfolio of both companies represents one of the biggest OTC businesses. Recently, GSK announced a demerge of at least 80% of its

(7)

r r i a 1 Exhibit 1: Revenue breakdown by segment in 2021 (in billions)

Source: Company data

68% ownership interest in the joint venture in July 2022. The newly independent company will be called Haleon, following the demerger.

In 2019, Pfizer completed its transaction to spin off its Upjohn business with another pharmaceutical company called Mylan to create another company called Viatris, Pfizer stockholders owned 57% of the outstanding shares of Viatris common stock. Other recent acquisitions include Array in 2019 for $11.2 billion, a biopharmaceutical company that develops small molecule medicines to treat cancer. Trillium, in November 2021, for $2 billion, a clinical-stage immune- oncology pharma company; and the most recently, in March 2022 called Arena for $6.7 billion, another clinical-stage company with a focus on immuno- inflammatory diseases.

Title 2

Exhibit 2: Revenue breakdown over the years (in billions)

Exhibit 3: Revenue breakdown by geography (in billions)

Revenue breakdown

Pfizer's revenue can be divided into six different segments: Internal medicine, Oncology, Hospital, Vaccines, Inflammation & Immunology, rare diseases, and Pfizer Centre one. In 2021, the vaccine segment accounted for 51% of the total evenues($42.6bn), a considerable increase as in 2020, this segment just epresented 8% of Pfizer revenues. Other relevant segments are oncology, nternal medicine, and hospital, which represented 15%($12.3bn), 11%($9.3bn), nd 9%($7.3bn), respectively. The other three segments account for 1%($9.6bn) of Pfizer's revenues. In total, Pfizer revenues were $81,2bn in 2021, a huge increase of 95% in comparison with 2020, mainly driven by the sales of Comirnaty, an mRNA-based coronavirus vaccine to help prevent COVID-19, which is being jointly developed and commercialized with BioNTech, which accounted for 45% of total revenues in 2021. Geographically, 36,6% of the revenue comes from the US, and 63,4% comes from other countries, a massive shift compared to 2020, as more than 50% of the revenues came from the US.

This change happened because most of the revenue of Comirnaty came from foreign markets.

Pfizer predicts that its revenues will peak in 2022, with a value above $100 billion driven by the growth of sales of Covid treatments and vaccines, with an eventual decrease over the following years as the pandemic reaches an endemic stage.

Industry overview

The pharmaceutical market is highly regulated and characterized by strict approval processes, with an average of only 10% of chance of a drug being approved and usually can take years in the approval process. Overall, global pharmaceutical industry revenue amounted to $1,063bn in 2021, with oncology (16.54%) and vaccines (9.62%) being the main segments.

(8)

Title 2 Exhibit 4: Estimated and projected old-age dependency ratios by region

Source: United nations

Exhibit 5: Pharma industry revenues forecast (in billions)

Source: Statista

Exhibit 6: Vaccine industry forecasts (in billions)

Source: Statista

The global market for pharmaceuticals is expected to expand over the following years, led by demographic changes, as the world population is growing faster and is expected to reach 8.55 billion people by 2030. The proportion of the aging population (65+ years) is also increasing, representing 9% of the worldwide population in 2020, with a forecast to reach 16% in 2050, according to United Nations¹. Most of the aging population is concentrated in North America (17%) and Europe (19%). Another factor is that the incidence of chronic diseases – which represent 99% of prescriptions in USA, as people with chronic conditions take more prescriptions a year - is increasing due to higher urbanization, sedentarism, poor nutrition and bad mental health¹. Moreover, increasing drug prices and higher adoption of expensive and innovative treatments are crucial factors.

Revenues are predicted to reach $1,397billion in 2026, this growth is mainly driven by innovative drugs and vaccines. Plus, higher revenues post-covid are expected, as the pandemic had negatively affected most of pharmacy segments, because healthcare access was more limited, and treatments were postponed.

Industry segments

Vaccines: revenues skyrocketed in 2021, increasing 203%, as new players entered the market due to the pandemic and billions of covid vaccines were produced and sold around the globe. Covid vaccine sales represented 64% of total vaccine revenues in 2021².

Considering the five leading players in the Covid vaccine market, Pfizer accounts for 61.83% of the market share, followed by Moderna (27.89%), AstraZeneca (5.31%), and JNJ (4.06%). Based on the Airfinity forecast³, most players will increase their revenues, except for Pfizer and AstraZeneca. NovaVax will be part of the leading players in 2022 due to the high efficacy of its vaccine in clinical trials, and it is also expected that other relevant players will enter the market in the following years.

Consensus predicts that after 2021, the demand for covid vaccines will decline, as most of the population will already be immunized against the disease. It is possible to prove the statement, as in 2022, the vaccination rate against Covid has halved, as people in rich countries are less willing to take repeated booster shots (e.g., fourth doses programs showed 50% less demand in Israel and

1 https://www.un.org/en/development/desa/population/publications/pdf/ageing/WorldPopulationAgeing2019- Highlights.pdf

2 https://www-statista-

com.eu1.proxy.openathens.net/outlook/hmo/pharmaceuticals/vaccines/worldwide?currency=USD#revenue

3 https://www.airfinity.com/reports/covid-19-vaccine-market-revenue-forecast-april-2022

(9)

Exhibit 7: Covid vaccines weekly demand

Source: Airfinity

Exhibit 8: Oncology drugs forecast (in billions)

Source: Statista

Exhibit 9: I&I, cardiovascular and rare diseases drugs forecast (in billions)

Sources: Fortunebusiness and gminsights

Chile)⁴. The hesitancy is still frequent in low-income countries – even with a low vaccination rate. One of the factors to explain the lower appetite for lower doses is that new Covid variants are less lethal. Consequently, fewer manufacturing contracts will be made due to less vaccine demand.

Despite lower demand, Covid 19 vaccines revenue will stay steady in 2022 due to the number of doses that are granted by the agreements, which are more than 6.3 billion.⁵As the pandemic enters an endemic stage, booster shots aiming at emerging variants and new product pipelines (e.g., vaccines that combine flu, covid, and other diseases) will play a key role in the segment revenues from 2023 onwards. Regarding other vaccines, steady growth is expected due to an increase in travel-related vaccinations, more refreshments, and new advancements in technology.

Oncology: The largest segment of the pharmaceutic market, mainly driven by immune-oncology, characterized by high-priced drugs, with most of the revenue generated in wealthy countries. The main types of cancer diagnostic in 2020 were breast (11.7%), lung (11.4%), and Colorectum (10%).⁶

The segment was highly affected by the pandemic, showing a growth of 9.2% in 2020, compared to 17.7% between 2018 and 2019, as there was less accessibility to the drugs and fewer medical consultations reduced the number of cases detected. For the subsequent years, consensus expects high growth in revenues of oncologic products, with a CAGR of 12.99%⁷from 2022 to 2026, as the number of annual cancer cases will tend to grow 54% by 2040¹, driven by the worldwide rapidly aging of the population, and technologic advancements in the oncology area - increasing the probability of success and making prices more accessible

Cardiovascular drugs: Used to treat a class of diseases related to heart or blood vessels. In 2015, 41.5% of the US population suffered from heart disease, and a CAGR of 3.8% is expected due to an increase in the awareness of cardiovascular health and treatments with higher risk reductions. Anticoagulant drugs represent the most significant part of the market-share (nearly 45%) due to their increased use in various cardiac indications and effectiveness in reducing cardiac strokes.⁸

4 https://www.ft.com/content/9ac9f8fc-1ab3-4cb2-81bf-259ba612f600

5 https://www.airfinity.com/reports/covid-19-vaccine-market-revenue-forecast-2022

6 http://pressroom.cancer.org/GlobalCancerStats2020

7 https://www-statista-com.eu1.proxy.openathens.net/outlook/hmo/pharmaceuticals/oncology- drugs/worldwide?currency=USD

8 https://www.fortunebusinessinsights.com/industry-reports/cardiovascular-drugs-market-100379

(10)

Title 2 Exhibit 10: Number of pipeline products Phase I by therapeutic drug class

Source: Iqvia

Exhibit 11: Number of clinical trials

Source: Iqvia

Exhibit 12: Total pharma R&D spending (in billions)

Inflammation & immunology: Immunology drugs modify the immune response and are used to fight infections or treat immunological disorders. Rheumatoid arthritis can be considered the main market segment due to the increased prevalence of the disease and the number of patients under treatment. The main drug class for treating diseases in this category is monoclonal antibodies (64.5%). It is expected to have a CAGR of 8.2% between 2021 and 2028.⁹

Rare diseases: Expected to grow in the coming years with a CAGR of 12.2%, due to the increase of the number of rare diseases around the globe – as it is estimated that 6% to 8% of the EU population is affected by a rare disease, higher number of drug launches and increase in R&D spending, as 70% of disorders have no treatment.¹⁰

R&D and M&A activity

Pharma industry is one of the most dependent on research and development.

More than 6000 drugs are in active development, 68% more in comparison with 2016, being Oncology the most representative segment of the pipeline (37%), as the products under development more than doubled since 2011, with most of the growth driven after 2016. Vaccines had the second higher CAGR since 2016, due to focus on Covid vaccines.

The industry saw a huge increase of 14% of clinical trials activity In 2021, a higher growth in comparison with 2016-2020. In 2021, 36.9% of clinical trials were in phase 1, 41.9% in phase 2 and 21.2% in phase 3. Therapies areas that showed the highest probability of success in 2021 were infectious diseases (19%), rare oncology (16%) and cardiovascular (15%), while de lowest probability was oncology of non-rare diseases (2%), immune system (5%) and vaccines (7%).¹¹Overall, success rate in clinical trials declined to 5%, far below the average of 13.1% between 2011 and 2021, as trial complexity¹²declined due to a drastic drop in number of sites and the impact of the pandemic. It is expected that R&D spends will grow steadily during the next years due to better funds access and research efforts. EvaluatePharma analysts predict a 4.2% CAGR between 2022 and 2026.¹³The big pharma companies that most spent in R&D in 2021 were Roche($14 billion), J&J($12.2 billion), Merck($11.4 billion) and Pfizer($10.5 billion)

Source: EvaluatePharma

9 https://www.fortunebusinessinsights.com/industry-reports/immunology-market-100657

10 markethttps://www.gminsights.com/industry-analysis/rare-disease-treatment-market

11 https://www.iqvia.com/insights/the-iqvia-institute/reports/global-trends-in-r-and-d-2022

12 Trial complexity takes into consideration number of subjects, eligibility, trial sites, endpoints and countries;

13 https://www.evaluate.com/thought-leadership/pharma/evaluate-pharma-world-preview-2021-outlook-2026

(11)

Title 2 Exhibit 13: Pharmaceutical deal cound

Source: McKinsey

Exhibit 14: Number of FDA approvals

Source: Nature

Overall, regulatory hurdles increase uncertainty, which leads to a higher risk aversion, one of the main factors that makes the sector lag behind in new technology trends, according to the McKinsey report¹⁴.

Historically, the pharmaceutical industry takes a leadership position in the rankings for the industries with higher M&A activity. In fact, it is one of the main sources of value creation within the industry. It be seen as an important strategy for companies looking for innovation, economies of scale and portfolio realignment. In other words, big pharma seeks to find options to increase gross margins, either by accessing new revenue streams or increasing process efficiency that leads to cost reductions. From the past years, M&A activity in pharma industry more than doubled between 2005 and 2019, which can be justified by the sector’s growth and more investments in new technological trends In total, $132 billion worth of deals were signed during 2020, led by AstraZeneca- Alexion($32 billion). It is expected that M&A activity will continue growing in the coming years, due to high cash reserves and capital allocation strategies¹⁵, this type of deal type of deal is expected to escalate in the short term, since it proves to be the best option when companies have cash accumulated.

Regulation and patents

Pharmaceutic companies are subject to extensive regulation in all business segments, including approval, manufacturing, and pricing. In order to get approval, the FDA must evaluate whether the product is safe and effective, a process that usually takes, on average, ten months¹⁶. During the last years, there has been an increase in the number of drugs approved¹⁷, as regulators were more agile in conceding emergency approvals.

The price of prescription drugs has reached double-digit increases in the last decade, becoming more unaffordable for the population. Consequently, governments have been taking measures such as reform bills, negotiation of drug prices¹, and limit and price thresholds, plus biosimilars tend to have a big impact due to their lower costs and cause price pressure. In 2022, prices rose between 4.5% and 5% in approximately 1614 drugs, a minor number compared with 2711 in 2021.¹⁸

After a patent is expired, generic entry causes significant price competition, as more players will enter to get a stake of the market, leading to an overall

14 https://www.mckinsey.com/industries/life-sciences/our-insights/how-new-biomolecular-platforms-and-digital- technologies-are-changing-r-and-d

15 https://www.mckinsey.com/business-functions/m-and-a/our-insights/a-new-prescription-for-m-and-a-in-pharma

16 https://www.fda.gov/drugs/special-features/frequently-asked-questions-about-fda-drug-approval-process

17 https://www.nature.com/articles/d41573-021-00002-0

18 https://www.biopharmadive.com/news/pharma-drug-price-increase-2022/616675/

(12)

Title 2

reduction in pharmaceutical prices – ranging from 6.6% to 66% after 1-5 years after generic entry¹⁹. Moreover, generic competitors operate with low R&D expenses and lower costs and are easier to be approved by FDA regulators. On average, drugs are granted 20 years of patent protection. In order to mitigate the effects of generic competition, pharma companies have been trying to raise drug prices, invest in lobbying, and making structural reorganizations²⁰. Biosimilars also pressure competition, as they provide additional treatment options with lower prices but are more costly and difficult to approve than generics. ²¹

Peer analysis

To select competitors to compare, we used a criterion that took into consideration geography, as all chosen companies are US-based and work with the same type of products; from all the companies filtered, we have chosen those with the highest market cap, thus three main competitors were chosen: J&J, ABBVIE, and Eli Lilly.

Market-share: Pfizer is one of the industry's leading players, with the second- highest market share among all players in the big pharma sector (15.39%) in 2021, a considerable increase in comparison with 2020 (9.56%), as Pfizer managed to get the highest stake of the covid vaccine market. Over the last five years, J&J had the highest market share in the big pharma industry (17.75% in 2021), ABBVIE has been growing its market-share, after a huge growth between 2018 and 2019 and now represents 10.65% of big pharma industry earnings; Eli Lilly is the smallest player in terms of market-share, as it only has a stake of 5.6%.

Margins: Pfizer's Gross Margin has been stable and above its main peers between 2018(78%) and 2020(79.6%). However, after 2021, the ratio drastically reduced to 62.1%. Thus Pfizer became the worst-performing company compared to the selected peers, while Eli Lilly and J&J had the best performance – with a gross margin of 74.2% and 73.2%, respectively.

Pfizer's operational margin has been below its peers, but the company is increasing its operational efficiency by growing its ratio from 16.5% (2018) to 25.2% (2021). Abbvie maintained the first position during most of the years despite a drastic decrease in 2020.

19 Vondeling GT, Cao Q, Postma MJ, Rozenbaum MH. The Impact of Patent Expiry on Drug Prices: A Systematic Literature Review. Appl Health Econ Health Policy.

20 https://www.uspharmacist.com/article/drug-patent-expirations-and-the-patent-cliff

21 https://www.pfizer.com/sites/default/files/investors/financial_reports/annual_reports/2018/our-innovation/progressing- our-science/biosimilars-vs-generics/index.html

Exhibit 15: Market-share – Pfizer, EliLilly, J&J, AbbVie and Merck

Source: Bloomberg

Exhibit 16: EBIT margin - Pfizer, EliLilly, J&J and AbbVie

Source: Own estimates

(13)

Title 1

Title 2 Exhibit 17: ROA - Pfizer, EliLilly, J&J and AbbVie

Exhibit 18: ROE - - Pfizer, EliLilly, J&J and AbbVie

Profitability ratios: In what concerns return on equity, Pfizer managed to double its ratio between 2020 and 2021, even with lower leverage than in previous years, presenting 28.47% of return to investors, a value higher than the average of the last years. The apparent underperformance compared to its peers happens due to Pfizer's lower leverage ratio, even though the company had the highest return on assets (12.11%) in 2021. Regarding core ROIC, Pfizer has been underperforming, as its investments in operations have not been bringing a higher return than its peers. In conclusion, there are signs of concern with shareholder value creation despite its operational improvement.

Stock performance: By analysing stock performance, it is possible to see that the Pfizer cumulative return has been lower than the S&P 500 since the middle of 2020, the same applies to most of its peers. Thus, selected big pharma companies have been underperforming, with the exception of Eli Lilly, which had extremely high returns, especially in 2021, due to positive results of diabetes and Alzheimer's drugs. After October of 2021, Pfizer overperformed most of its peers due to a higher-than-expected forecast Covid-19 vaccine revenues and the news impact of the first successful trial results of Paxlovid²²

Exhibit 19: Core ROIC - - Pfizer, EliLilly, J&J and AbbVie

Forecasts

Revenue forecasts

We took in consideration that after patent expiration, drug prices will decrease, and Pfizer will lose its market-share. To calculate the revenue loss, we based on historical data, such as sales decrease of Sutent(fell 13% and 18% in the years followed patent expiration) and Lipitor (fell from $9.57 billion to $3.94 billion followed by the year of patent expiration), we believe that the impact on the revenues patent expiration is higher during the first years after patent protection, drug revenues will decrease 20% in the first year and 30% in the second year, and after that a steady decrease of 10%, as generic competition gets more stablish.

22 Bloomberg

(14)

Exhibit 20: Main Patent expirations until 2029

Exhibit 21: Vaccine revenue composition (in billions)

Exhibit 22: Main Covid vaccine revenues (in billions)

Source: Airfinity

Vaccine: This segment includes manufacturing, development, marketing, sale, and distribution of vaccines for all ages, in pneumococcal, meningococcal, tick- borne encephalitis, and COVID-19. They are mainly aimed at preventing infectious diseases with unmet medical needs. Pfizer’s vaccines are primarily sold to the federal government, CDC, wholesalers, individual provider offices, retail pharmacies, and integrated delivery systems. Outside the U.S., vaccines are primarily sold to government and non-government institutions.

Prior to 2021, the leading vaccine product was Prevnar, responsible for preventing pneumococcal disease, which represented 88.9%($5,85bn) of the vaccine revenue in 2020. The overall sales of Prevnar reduced by 9.8% in 2021 due to disruptions of healthcare activity related to Covid 19. Since 2021, Comirnaty has been the main driver of vaccine revenue, representing 86.2%($36,7bn) of the vaccine segment. It was the first Covid-19 vaccine to receive FDA approval, and three billion doses were manufactured in 2021, of which 2.2 billion were delivered around the world. In total, 21.23%($7,8bn) of the revenue came from U.S. markets, while 78.77%($28,9bn) were sold to other countries. The increase in sales outside the U.S. was driven by global uptake and a growing number of regulatory approvals in different countries. MRNA vaccines have a huge competitive advantage due to their high efficacy and ability to convert to variant targeting vaccines.²³

Even with complete vaccination, new Covid variants proved that it is still possible to evade vaccine protection. Moreover, studies show that Covid antibodies tend to fade after months following the second dose. Thus, to maintain protection against infection and hospitalization, booster shots demand growth, resulting in more supply agreements with governments. As such, Pfizer has the capacity to manufacture up to 4 billion doses by the end of 2022 and deliver 2 billion doses to low and middle-income countries.

Pfizer forecasts $32bn in revenues for Comirnaty in 2022, based on contracts already signed in January of 2022 that include doses to be delivered in the whole fiscal year. Although we agree with the forecasts, it is predicted that the revenues will be higher due to the high expected covid vaccine demand, new regulatory approvals for paediatric usage, and a higher-than-expected Q1 sales. Thus, our estimative is that 2022 sales will be a number between Airfinity forecasts ($36.4 billion) and Pfizer’s predicted sales ($32 billion). Thus, we predict that Comirnaty revenues will be 34.2 billion in 2022

Moreover, more companies are receiving covid vaccine approvals, and it is expected that Pfizer will eventually lose part of its market-share. Consensus

23 https://theconversation.com/rna-vaccines-what-protection-do-they-provide-against-covid-19-variants-160223

(15)

in

fo P w Exhibit 23: Main Covid vaccine market-share

Source: Airfinity

Exhibit 24: Pfizer’s vaccine segment forecasts (in billions)

Source: Own forecasts

Exhibit 25: Oncology revenue composition (in billions)

estimates that next year, new players such as Novavax will play a key role in delivering cheaper vaccines with a higher efficacy level, which is a crucial factor

immunising the population of less developed countries.

We expect that Comirnaty sales will plummet from 2023 onwards. In order to recast the numbers, we based on the covid vaccine market forecast and fizer’s market-share estimation until 2026. Between 2026 and 2028, revenues ill fall 10% each year, and from 2028 to 2030, it will fall 5% per year.

Covid vaccines (in

billions) 2022 2023 2024 2025 2026

Market volume

$ 64.6* $ 36.1 $ 23.6 $ 17.1 $ 13.7

Market-share

52.9% 52.4% 48.2% 46.2% 46.0%

Revenue

$ 34.2 $ 18.9 $ 11.4 $ 7.9 $ 6.3

Despite the negative Prevnar-13 results last year, the negative growth prospects, and the patent expiration in 2026, a new version called Prevnar-20 is expected to grow in the Prevnar Family. The new updated product covers seven other serotypes that will be more prevalent in the population; it has also received authorization for its use in adults aged 18 and older by the FDA in June 2020.

Thus, we believe that Prevnar vaccine sales will increase and achieve a CAGR of 5% from 2022 to 2029, based on pneumococcal industry vaccine growth between 2016 and 2020²⁴. Nymenrix sales are expected to decline at the same average rate, and other vaccine sales will stay stable.

Oncology: This segment includes brands of biologics, small molecules, immunotherapies, and biosimilars, growing 13.5% from 2020 to 2021. Ibrance, a medication to treat breast cancer, is the main product of the segment and represents 55% of the oncology revenues. In 2018, the average price of one drug dose was $539 in the U.S., and $162 in the world²⁵. In 2021, the product had a flat performance, as delays in diagnostics and treatments started to show signs of recovering. On the other hand, biosimilars such as Ruxience, Zirabev and Retacrit tripled its revenue and represented the significant growth in oncology products, moreover, new biosimilar monoclonal antibodies were introduced in the market.

Ibrance, a CDK 4/6 inhibitor, has been put under pressure with competitors drugs from the same category, Verzenzio (Lilly) and Kisqali (Novartis). Both have had successful trials and reduced patient risk of death between 25% and 29%, an

24 https://www.imarcgroup.com/pneumococcal-vaccine-market

25 Statista

(16)

Exhibit 26: Oncology drugs segment forecasts

Exhibit 27: Hospital drugs segment forecast

overall higher percentage than Ibrance last trials²⁶. However, the main threat for the drug is that it failed to prevent cancer from returning in treated patients in a recent trial, while Verzenzio showed positive results²⁷. This will impede Ibrance from entering the post-surgery endocrine therapy market, which will be the main factor that will slow its growth rate, based on that assumption, we believe that Ibrance sales will grow below the expected market growth rate, with a CAGR of 2% between 2022 and 2026 and a rapid decline after its patent expiration date (2026). Due to positive past performance and new perspectives in the target market, we believe that Xtandi and Inlyta will grow with a CAGR of 13% until their patents get expired. Other oncology products, in which some of them are already with the patent expired, will have the same average growth rate of the last three years.

Hospital: This segment is a portfolio of sterile injectable and anti-infective medicines, growing 7.7% between 2020 and 2021 due to the anti-infective portfolio in international markets, plus the recent launch of new medicines. Most of the medicines aim to fight bacterial infections. Hospital segment prospects higher growth in 2022 due to Paxlovid – an oral covid 19 treatment, which got an emergency approval by the FDA in December 2021 and received authorization in other countries.

Regarding Paxlovid, Pfizer forecasts $22 billion in revenues for 2022 and will account for 75.2% of overall Hospital segment income as the company entered agreements with multiple countries regarding supply contracts committed as of late-January 2022. According to B.I. Calculations, the predicted income is based on only one-third of the 120 million predicted treatment courses that will be produced in 2022. For now, Paxlovid seems to be one of the unique antiviral treatments that showed robust results in reducing hospitalization or deaths after Merck's molnupiravir efficacy setback²⁸. Although we agree with Pfizer's numbers, we expect that Paxlovid sales will be slightly lower since the medicine still need to pass several regulatory procedures in order to be approved for the general population. Moreover, quarterly results showed lower than expected revenues, which might be due to the fact that the product is already showing signs of reduced demand. From 2023 onwards, it is expected that sales will go down, as more Covid treatment options will be available, and the disease will hospitalize fewer people. Thus, to calculate the predicted revenues for the following years, we assumed it would have a similar growth rate to the vaccine

26 https://www.fiercepharma.com/marketing/pfizer-s-ibrance-under-threat-from-novartis-and-lilly-leans-real-world-data- breast-cancer

27 https://www.fiercepharma.com/pharma/pfizer-s-ibrance-misses-shot-at-big-new-market-early-breast-cancer-failure

28 https://www.fiercepharma.com/manufacturing/pfizer-boosts-paxlovid-manufacturing-capacity-as-merck-s-rival-covid- pill-sees

(17)

Exhibit 28: I&I drugs revenue forecasts (in billions)

Exhibit 29: Internal medicine revenue forecasts (in billions)

market, as it covers the same growth drivers. The other medicines in the segment treat a wide range of diseases and are expected to grow at the average of the last three years; anti-infectives will lead the growth as new medicines enter the global market.

Inflammation & immunology: Composed by brands and biosimilars that treat chronic immune and inflammatory diseases. Inflammation & Immunology products showed a slight decrease of 3% in 2021 due to the decrease in sales of Enbrel, which was impact by higher biosimilars competition. The main products of the segment are Xeljanz and Enbrel, both representing 82%. Xeljanz sales remained flat in 2021 as data from a long-term safety study showed negative impact.

Xeljanz, a JAK inhibitor used to treat moderate to severe active rheumatoid arthritis faces competition with TNF and other JAK inhibitors such as Humira and Rivonq (both from AbbVie). The product has recently missed primary end goals in recent studies, as it failed to reach the non-inferiority criteria to TNF inhibitors²⁹. It has also been a matter of concern since 2019, as FDA warned of a higher risk of developing blood cots and death for patients taking the drug. On the other hand, those regulatory concerns did not have a significant effect on Xeljanz sales since it did not affect rheumatoid arthritis indication, and at the same time, It still managed to increase the prescription volume by 12% a year¹ in 2021, but the impact was more prominent in 2022, as sales only grew 1%. Thus, despite regulation concerns over JAK inhibitors and the expansion of TNF inhibitors, we still predict that products in this category will grow during the next years, as they are still the main prescriptions. However, this growth will be below the market CAGR, – Xeljanz will grow at a CAGR of 6% until 2026 (year that the patent expires). The patent of Enbrel is already expired and is currently facing competition from biosimilars, which is expected to be more intense in the future.

Thus, we predict that the negative growth rate will maintain the average of the last three years.

Internal medicine: Includes brands in cardiovascular metabolic and women's health, growing 3.6% between 2020 and 2021, due to sales growth of Eliquis, an oral coagulant that aims to treat thrombosis and pulmonary embolism, which represents 64% of internal medicine revenues; It is also developed and commercialized by BMS. Eliquis sales increased 20% due to higher adoption of non-valvular atrial fibrillation and gains in oral-anticoagulant market-share. On the

29 https://www.fiercepharma.com/marketing/fda-weighs-harsher-sanctions-against-pfizer-s-xeljanz-heels-trial-raised- safety-red-flags

(18)

Exhibit 30: Rare diseases revenue forecasts (in billions)

Exhibit 31: Clinical trial data information

Source: fda, science direct and Iqvia

Exhibit 32: New products projected revenue (in billions)

other hand, there was a significant drop on sales of Chantix (-56%), due to a voluntary recall during the second half of 2021.

Eliquis is expected to grow due to non-valvular atrial fibrillation adoption.

Moreover, it will also gain a higher stake in market-share in the anti-coagulants market, the main segment of the cardiovascular drugs market. For this reason, we believe that the drugs will grow far more than the cardiovascular market CAGR, 19%

Rare diseases: Brands with products aimed for therapeutic areas with rare diseases such as a yloidosis, haemophilia and endocrine diseases. In 2021, the revenues of this segment increased 20% in 2021, as Vyndaqel, representing 57% of total revenue, increased its sales by 56%. The drug was approved by the FDA in 2019 and is used to treat ATTR-cardiomyopathy and polyneuropathy. The growth was mainly driven by higher uptake of the ATTR-CM indication in the U.S.

during 2021.

Vyndaqel is expected to grow at 25% in 2022 and 21% in 2023, as the drug will grow more than the average market rate for rare diseases, as there have been a higher ATTR-CM indication worldwide, moreover Vyndagel/Vyndamax is the only drug approved by the FDA to treat ATTR-CM³⁰, plus diagnostic postponement due to COVID-19 shall be less intense in 2022. However, its growth will be lower than in past years as the patent expiration comes closer. Other rare diseases drugs are expected to decrease at the same average rate of previous years.

Pfizer Centreone(PC1): This segment was previously managed within the Hospital therapeutic area, and since the fourth quarter of 2021, Pfizer Centreone is a separated operating segment. PC1 includes revenues from pharmaceutical ingredient sales, operation and revenues related to manufacturing and supply agreements. Its revenues increased 85% in 2021 due to increased manufacturing of legacy Upjohn products and certain Comirnaty-related manufacturing activities on behalf of BioNTech – which was accounted for $320 million. It is expected that the revenues will increase in a steady rate of 4%, as the manufacturing and supply agreements reaches a stable state.

New products: Patents expiration affects the company's future cash flows drastically, but new drug releases tend to compensate the effect of patents expiration. Currently, there are 89 projects under development in Pfizer's portfolio, and it is mainly composed of oncology drugs (31.46%), vaccines (20.22%), and I&I (15.73%). According to the last company data, there were 27 products in phase 1, 25 in phase 2, 27 in phase 3, and 10 under the registration

30 https://www.fda.gov/news-events/press-announcements/fda-approves-new-treatments-heart-disease-caused-serious- rare-disease-transthyretin-mediated

(19)

Title 2

process. In order to forecast the new products based on the research pipeline, we considered the market average time of the approval process in each phase, and the probability of success based on Pfizer historical data (43% phase 1, 52%

phase 2 and 83% phase 3)³¹. As a result, a portfolio increase is expected in the next years. We are not taking into account covid vaccines or drugs in the new drugs forecasts, as we are already considering Comirnaty and Paxlovid and all its modifications in the forecasts. Based on historical data, new products at the first year will have an average revenue of $45 million with a growth rate of 15% until 2026 and a growth rate of 25% from 2027 to 2030.

Cost forecasts

Exhibit 33: Costs and expenses forecasts (In billions)

In 2021, COGS accounted 54% of operational costs and expenses (excluding amortization), followed by R&D (24%) and SG&A (22%). A huge difference in comparison with 2020, as SG&A represented 39% of operational costs and expenses, whilst COGS were less representative (29%). This Shows that Pfizer drastically changed its cost structure, which was mainly affected by the manufacturing of Comirnaty. In a risk perspective, the company has managed to decrease its operational leverage.

COGS: Since 2019, COGS have been increasing, with a huge growth of 263%

between 2020 ($8,5bn) and 2021 ($30,8bn). Moreover, Pfizer’s COGS as % of sales went up from 20.37% to 37.92%. The increase in costs of goods sold and its percentage of sales can be explained by the increase of production of the COVID vaccine and the fact that the gross profit is split in 50% between Pfizer and BioNtech, plus the royalties’ expenses. Moreover, the costs were also driven by an increase in the sale volume of other products and an unfavourable impact of foreign exchange. It is predicted that the COGS as % of revenues will reduce in the coming years after 2022, as Pfizer manages to improve its supply chain. In the annual report of the company, the pharmaceutical stresses out the cost commitment towards more cost-efficient processes. COGS are expected to settle at 34% of revenues this year and to reduce gradually until 2030, point at which it is in line with the average ratio of competitors for the period just before the forecast (2018-2021).

SI&A: After going down 8% in 2020, selling, informational and administrative expenses increased 9.54% between 2020($11,6bn) and 2021 ($12,7bn) due to product-related spending and the higher provision in reform fees, driven by Comirnaty, plus costs related to implementation of initiatives to reduce costs and increase productivity. At the same time, SI&A in percentage of revenues

31 https://www.sciencedirect.com/science/article/pii/S1359644621005444

(20)

Title 2 Exhibit 34: PP&E forecasts(in billions)

Exhibit 35: Intangibles composition

Exhibit 36: Intangibles forecasts (in billions)

decreased from 27.84% to 15.63% and it is predicted that the ratio will increase and stabilize next to 25% in 2030, in accordance with the average ratio of competitors for the period 2018-2021. The absolute amount for 2022 is given by the upper limit considered by Pfizer in the recently disclosed quarterly performance report.

R&D: R&D expenses have been growing since 2018, peaking in 2021 ($13,8bn) after a huge increasing of 47% in comparison with 2020 ($9,4bn). This happened because of the charges for in process research and development related to the acquisition of Trillium, a clinical stage immuno-oncology company developing therapies targeting cancer immune evasion in November 2021. Moreover, there was an increase in charges of payments on licensing agreements and investments in therapeutics areas. Forecasts for R&D expenses were done on the basis of the evolution of drugs in Pfizer’s R&D Pipeline and the average expense generated per drug in that same pipeline, for the past years 2020 and 2021. Research and Development expense are expected to bump up significantly close to the dates of patents’ expiration, 2026-2028, that matches the timing for pipeline increases. These are crucial periods for Pfizer in the need to sustain competitive advantages, something that does not happen in the shorter term (2022/2023) with the revenue stream from Covid-19 giving a sense of confidence on performances.

PP&E and intangibles

PP&E: It is divided in 6 sub sections: Land, Buildings, Machinery & Equipment, Furniture & fixtures, Construction in progress and Accumulated Depreciation.

Between 2020 and 2021 there was a heavy expenditure in machinery and equipment (11,4%). Assuming Pfizer will keep the number of properties constant in the future, and that the majority are located in the United States, we predict that PP&E will evolve as the price per square meter grows at the US inflation rate of 2% in the steady rate. Accumulated depreciation, as percentage of PPE, would be a rolling average comprising periods of 4 years.

Intangible assets: Once a compound receives regulatory approval, all milestone payments are recorded in Identifiable intangible assets. Intangibles were divided between Developed technology rights (90.5%), brands (2.16%), IRP&D (3.82%) and licensing agreements. There were no significative changes between 2020 and 2021, and when the amortization was considered, finite intangible assets dropped 12.8%, mainly affected by the high amortization value of developed technology rights, which represent 96% of the total amortization value and increased from $50,532 to $53,732 due to capitalized Comirnaty sales milestones to BioNTech.

(21)

PFIZER,INC.

COMPANY REPORT

Brands and Licensing Agreements tend to be stable across periods thus, will be forecasted to remains at 2022 amounts. Developed technology rights comprise the “costs for developed technology acquired from third parties” and the general trend is to decrease given the fact that this pandemic is seen as an opportunity for large companies to find the real purpose, instead of pursuing profits exclusively. This means broader public knowledge and greater sharing, according to which, one predicts that protecting assets will be gradually more difficult with a possible influence of governments. Under such assumptions, companies are expected to prioritize internally developed technologies rather than purchasing them out.

2022 is predicted to be in line with the 2 prior years and then, it stabilizes round 75% of total revenues. Regarding IPR&D, which stands for the assets waiting for regulatory approval, it will be forecasted based on the total number of projects in the last stage of the R&D Pipeline, which is exactly the approval stage.

In the end, intangible assets are set to decrease on a yearly basis due to the difficulties in acquiring those and protecting them, as we have previously explained.

(22)

PFIZER,INC.

COMPANY REPORT

Appendix

Appendix 1: Reformulated Balance sheet

(23)

PFIZER,INC.

COMPANY REPORT

Appendix 2: Reformulated Income statement

Appendix 3: Cash Flows Map

Pfizer company outlook: a