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Rating Action:

MOODY'S CONFIRMS Aaa RATINGS OF PFIZER INC.; AFFIRMS PRIME-1 SHORT TERM RATING; NEGATIVE RATING OUTLOOK

15 Jun 2005
MOODY'S CONFIRMS Aaa RATINGS OF PFIZER INC.; AFFIRMS PRIME-1 SHORT TERM RATING; NEGATIVE RATING OUTLOOK

Approximately $6.5 Billion of Long Term Debt Affected by Rating Confirmation.

New York, June 15, 2005 -- Moody's Investors Service confirmed the Aaa long term debt ratings of Pfizer Inc. ("Pfizer"), concluding a rating review for possible downgrade initiated on April 7, 2005. At the same time, Moody's affirmed Pfizer's Prime-1 short term rating, which was not under review for downgrade. Following this rating action, the outlook on Pfizer's Aaa long term rating is negative.

The confirmation of Pfizer's Aaa rating reflects Moody's belief that Pfizer will continue to meet the guidelines outlined in Moody's Global Pharmaceutical Rating Methodology at the Aaa level. That belief is supported by Moody's expectation that: (1) Pfizer will reduce its gross debt levels over the next several years as it applies cash repatriated under the American Jobs Creation Act (AJCA) to repay debt; (2) Pfizer has the ability and willingness to maintain financial flexibility consistent with the Aaa rating; and (3) Pfizer's strong pipeline will remain consistent with the Aaa rating category.

Moody's placed Pfizer's Aaa rating under review for possible downgrade on April 7, 2005 when Pfizer announced that Bextra would be removed from the market and that Celebrex would carry a stricter warning level, potentially resulting in lower usage of the product. Moody's was concerned that lost cash flow from these events would put additional strain on financial ratios that were already low for the Aaa rating category, and at a time when Pfizer faced higher operating risks because of exposure to upcoming blockbuster patent expirations. As part of its rating review, Moody's performed a detailed review of Pfizer's existing products and late stage pipeline products, and prepared projections considering growth opportunities for each product, potential approvals of new drugs, and upcoming patent expirations between 2005 and 2007 on a number of products including Norvasc, Zoloft and Zithromax.

Based on Moody's projections, it appears very likely that Pfizer has the ability to meet the following key credit metrics: (1) operating cash flow to adjusted debt of 75%; (2) free cash flow to adjusted debt of 40%; and (3) adjusted cash and investments to adjusted debt of 75%. These ratios are the guidelines for the Aaa rating level specified in Moody's Global Pharmaceutical Rating Methodology. As of year-end 2004, Pfizer's ratios were approximately 62%, 33%, and 79%, respectively, according to Moody's calculations. Moody's does expect lower cash flow in 2005, stemming from limited Bextra sales, lower Celebrex sales, and the ongoing effect of generic competition on Neurontin, Accupril and Diflucan. Moody's projections also consider a dampening effect on gross margins, since mature products facing patent expirations are often very high-margin products. However, we anticipate a large reduction in Pfizer's debt levels, facilitated by repatriation opportunities under the AJCA, resulting in substantial improvement in these ratios. Moody's has also considered Pfizer's "Adapting to Scale" Initiative, which aims to remove $4 billion of expenses from Pfizer's cost structure by 2008.

The confirmation of Pfizer's Aaa rating also reflects Moody's belief that adhering to the specified metrics is largely in management's control through its financial policies, which include the AJCA repatriation strategy, share repurchases, and funding of acquisitions. Moody's estimates that in recent years Pfizer has performed share repurchases of approximately $5 billion annually (excluding proceeds from asset sales). Depending on the next several years of financial performance, this level may need to decline in order to support the metrics consistent with the Aaa rating.

A further consideration in confirming Pfizer's rating is its strong late-stage pipeline consisting of more than a dozen new chemical entities in Phase III or beyond. Several key products, Exubera and Oporia, are undergoing regulatory review. Lyrica, a potential blockbuster, was approved by the FDA earlier this year, and the launch is pending labeling discussions with the FDA.

Moody's evaluates pharmaceutical pipelines by estimating peak sales and comparing this figure to the existing revenue base. Moody's estimates that peak sales from Pfizer's late stage pipeline exceed 30% of Pfizer's current revenues, in line with the "Aaa" rating category as outlined in the Rating Methodology. The robustness of Pfizer's late-stage pipeline is a key differentiating factor compared to most other rated pharmaceutical companies, and helps to offset concerns regarding Pfizer's high exposure to upcoming patent expirations.

Although the rating is being confirmed at Aaa, Moody's is maintaining a negative outlook on Pfizer's ratings. While we believe it is likely that Pfizer will maintain a level of financial flexibility consistent with the indicated ratios, several risk factors could create deviations from our current expectations. In particular, the forecast is very sensitive to the following: (1) projected sales levels of several new products -- especially Caduet and Lyrica -- for which ultimate market acceptance is unclear (Caduet, in particular, has had a very slow launch); (2) earlier than expected generic entrants or faster than expected sales erosion upon generic competition; and (3) any disappointments related to late-stage pipeline products. Furthermore, in the currently heightened environment focused on drug safety issues, Moody's believes that additional safety concerns are hard to rule out. Viagra, for instance, has recently been linked to rare cases of blindness. Finally, Moody's notes that Pfizer's financial policies have been oriented to shareholders in the past, and a return to larger share repurchases or other shareholder value initiatives might ensue if Pfizer's share price does not reverse its downward trend. Moreover, as Pfizer faces a slow earnings outlook in 2005 and accelerating patent expirations in 2006 and 2007, the likelihood of cash financed acquisitions may increase.

These concerns create some degree of risk that Pfizer may not reach the guidelines outlined above, and Moody's believes a negative outlook is currently warranted. Over time, if Moody's becomes more confident that the specified ratios will be readily attained and remain sustainable, then the outlook is likely to stabilize. Conversely, if it becomes more clear that the specified ratios will not be attained, then the ratings are very likely to be downgraded. Examples of situations where this could occur include, but are not limited to: (1) weak performance of in-line products such as Lipitor; (2) a disappointing Lyrica launch; (3) any number of unpredictable events such as another safety-related product withdrawal or a major pipeline disappointment; or (4) an unwillingness to maintain financial policies that preserve the aforementioned ratios within the ranges outlined for the Aaa rating category.

The affirmation of Pfizer's short term rating reflects the company's strong liquidity profile. Pfizer still generates strong cash flow, and its balance sheet contained approximately $22 billion of cash and short term investments as of March 31, 2005, compared to $13.4 billion of short term debt and $6.4 billion of reported long term debt.

Ratings confirmed:

Pfizer Inc. -- Aaa senior notes, Eurobonds, medium term notes, industrial revenue bonds, revolving credit facility and issuer rating; (P)Aaa shelf registration rating

Warner-Lambert -- Aaa senior note rating

Pharmacia Corporation -- Aaa notes, medium term notes and industrial revenue bonds

Ratings affirmed:

Pfizer Inc. -- Prime-1 short term debt rating

Headquartered in New York, Pfizer Inc. is a global pharmaceutical company, with $52.5 billion of 2004 revenues.

New York
Patrick Finnegan
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Michael Levesque
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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