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16 January 2009
4Q08 US Pharma Preview
2009: Between a Rock and a
Hard Place -M&A On the Way?
Barbara Ryan
Research Analyst
(1) 203 863 2239
barbara.ryan@db.com
George Drivas
Research Associate
(1) 203 863 2242
george.drivas@db.com
4Q EPS & 09 Guidance Likely To Meet Estimates, Ex-Currency...
We expect that pharma company earnings will meet expectations, and that the
trends will remain largely similar to those seen in 2008, thus far: sluggish revenues
enhanced on the bottom line by cost cutting leverage. The impact of currency will
be the single largest difference in performance in the quarter, as translations
moved from a tailwind (weak dollar), to a headwind (strong dollar) --see our report
from August 11, 2008.
Deutsche Bank Securities Inc.
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, 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. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
Industry Update
Top picks
Bristol-Myers Squibb (BMY.N),USD22.21 Buy
Merck & Co. (MRK.N),USD27.82 Buy
Pfizer (PFE.N),USD17.24 Buy
Companies featured
Bristol-Myers Squibb (BMY.N),USD22.21 Buy
2007A 2008E 2009E
EPS (USD) 1.27 1.67 1.84
P/E (x) 22.7 13.3 12.1
EV/EBITDA (x) 14.5 7.2 6.6
Eli Lilly (LLY.N),USD37.47 Hold
2007A 2008E 2009E
EPS (USD) 3.54 3.99 4.15
P/E (x) 15.7 9.4 9.0
EV/EBITDA (x) 10.1 5.7 5.0
Merck & Co. (MRK.N),USD27.82 Buy
2007A 2008E 2009E
EPS (USD) 3.20 3.28 3.23
P/E (x) 15.8 8.5 8.6
EV/EBITDA (x) 12.7 5.8 5.1
Pfizer (PFE.N),USD17.24 Buy
2007A 2008E 2009E
EPS (USD) 2.18 2.34 2.40
P/E (x) 11.6 7.4 7.2
EV/EBITDA (x) 6.7 3.9 3.8
Schering-Plough (SGP.N),USD18.24 Hold
2007A 2008E 2009E
EPS (USD) 1.38 1.62 1.54
P/E (x) 21.0 11.3 11.9
EV/EBITDA (x) 38.5 9.5 8.3
Wyeth (WYE.N),USD38.38 Hold
2007A 2008E 2009E
EPS (USD) 3.52 3.53 3.62
P/E (x) 14.4 10.9 10.6
EV/EBITDA (x) 9.0 6.0 5.8
Global Markets Research Company
…A Relative Port In The Economic Storm, Short-Term
In our view, earnings for large cap pharma are likely to be in line with expectations,
as will guidance for 2009. While a consolation in the near term relative to other
economically sensitive industries, the longer term persistency of current results is
the larger issue plaguing multiples. In our view, unless or until visible revenues are
added to the cliff period to offset patent losses, P/E multiples are unlikely to
expand. In our view, Pharma has a unique opportunity to convert its strong
balance sheets into visible future revenues by acquiring commercial biotech
companies. We see three pharma companies as most likely to be active in the
M&A activity: PFE, MRK, and BMY. The companies most likely to be acquired
include, BMY, AMGN, BIIB, and GILD among others (for full discussion on topic
please see our report on industry consolidation from November 24, 2008)
But Focus Shifts To M&A: We View Acquisitions As Inevitable
With necessary cost cutting efforts already underway, but disappointments still
plaguing pipelines, it is clear to us that the industry must do more to tangibly add
to longer-term revenues, and further enhance the risk/return equation. In our view,
this will require aggressive M&A including consolidation.
With valuations at historical lows, new business models could drive upside
The drug industry is between the proverbial “rock” and a “hard” place, as
improving near term earnings are not being rewarded, as investors appropriately
question their persistency going into the patent cliff period. In our view, the
upside to multiples is dependent on improving revenue and earnings visibility
during that period, and, the most appropriate course of action towards that goal is
to make acquisitions, i.e., convert cash into revenues. The DB weighted drug
index trades at a 20% discount to the market, based upon ’09 forecasts, the low
end of its 5-year range, and dividend yields are well above their historical highs.
The primary risk to the group is likely the opportunity cost of a reacceleration in
the economy which would favor the beneficiaries. In the nearer term, we see low
valuations, stable EPS forecasts, compelling dividend yields, and most importantly,
strategic actions, as the keys to relative outperformance.
Table of Contents
Investment thesis .............................................................................. 3
Cost cuts should continue to fuel improved EPS, while currency adds a headwind.................3
High yields and modest valuations should limit downside .......................................................3
Key risks: anticipation of an economic recovery and the elections ...........................................3
4Q08 Pharma EPS Preview ............................................................... 5
We Expect 4Q08 EPS To Meet Expectations Fundamentally, But, Currency Headwinds Will
Place Downward Pressure On Ests. .........................................................................................5
Bristol-Myers Squibb...............................................................................................................14
Eli Lilly ....................................................................................................................................26
Merck.....................................................................................................................................38
Pfizer ......................................................................................................................................50
Schering-Plough......................................................................................................................62
Wyeth ....................................................................................................................................74
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