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|  | NOVEMBER 11, 2004
 S&P RATINGS NEWS Big Pharma's Report Card [Page 2 of 2] Pfizer (Rating: AAA/CreditWatch: Stable) Pfizer's cholesterol-lowering treatment Lipitor posted double-digit gains in sales and new prescriptions in the third quarter. Meanwhile, sales of its Celebrex/Bextra pain-medication franchise will benefit from Vioxx's withdrawal. However, in the longer term, the sales growth prospects of the COX-2 franchise is uncertain, given the greater scrutiny on the category. Zoloft suffered slight sales declines after the FDA voiced concerns about the use of such antidepressants. Norvasc sales were also slightly down after the drug lost its patent exclusivity in select foreign markets. Viagra sales fell primarily because of increased competition in the erectile-dysfunction category. Nevertheless, Pfizer posted a slight increase in total sales, and cost-cutting efforts helped bolster earnings. Developments to watch: • Successful commercialization of new products is critical, as Pfizer is set to lose several major products to generic competition over the next couple of years. • A number of Pfizer's core products, such as Zoloft, Viagra, and Lipitor, face increasing competition. • Lipitor will account for an increasing portion of sales, especially as patents on a number of other products expire. Also, the launch of Vytorin and the expected launch of generic Zocor and Pravachol in early 2006 will hurt sales growth prospects for Lipitor. • It's unclear how the withdrawal of Vioxx will affect the long-term prospects of the Celebrex/Bextra COX-2 franchise. The bottom line: Pfizer will be challenged over the next couple of years by a number of major patent expirations and increased competition to remaining franchises from both branded rivals and generics. The company, however, has several promising prospects and an exceptional financial profile, so Standard & Poor's isn't currently concerned about the rating. Schering-Plough (Rating: A-/CreditWatch: Negative) Schering-Plough has taken some major steps in the third quarter toward turning around its beleaguered pharmaceutical business, but management still has a lot of work ahead. It recently launched Vytorin, its high-profile cholesterol lowering drug. It has also entered into a strategic alliance with Bayer. Schering-Plough also boosted its liquidity with the issuance of $1.5 billion in preferred securities. Still, it is too early to judge Vytorin's success. As a combination of the successful Zetia and Merck's Zocor, Vytorin should be a major success, but this depends on how quickly sales ramp up. The statin drug market faces generic competition in the first half of 2006, which may slow growth of the whole cholesterol-lowering category. Also, Schering-Plough shares in the earnings of Vytorin with Merck, and the launch of a cholesterol-lowering drug is very expensive. In the meantime, the drugmaker has yet to arrest the decline of PEG-Intron, and Clarinex appears to be a non-growth franchise. Furthermore, it's still contending with its manufacturing compliance issues. Remediation costs will continue through at least 2005. Developments to watch: • Standard & Poor's will monitor the growth of the Vytorin/Zetia franchise. • Schering-Plough's pipeline is arguably one of the lightest in the industry. Standard & Poor's will monitor the company's efforts to restock. • The company must continue its efforts to resolve its manufacturing noncompliance issues. The bottom line: The gradual deterioration in Schering-Plough's performance isn't a major concern at this point. However, we expect earnings to continue struggling over the next several quarters as PEG-Intron sales continue to decline and as the company incurs the costs of launching Vytorin. In the meantime, Vytorin must perform. In the first half of 2006, cheaper, generic versions of Zocor and Pravachol could slow the dollar growth of the overall market in cholesterol-lowering treatments. Wyeth (Rating: A/CreditWatch: Negative) The strong growth of the drugs Effexor, Prevnar, and Enbrel more than offset declines in Protonix and Premarin. Protonix competes against generic Prilosec, and in this very price-sensitive environment, sales will likely struggle in the future. The Premarin franchise, meanwhile, continues its sales slide. Both product developments, along with the strong growth of the remaining main drugs, are incorporated into the ratings and outlook on Wyeth. On the 1999 class-action suit regarding the safety of its diet drugs, Wyeth is awaiting plaintiff response to its proposed amendment to its national settlement. This amendment would enable Wyeth to settle a number of Matrix 1- and Matrix 2-level claims (the least serious) for $1.275 billion. Implementation of the amendment would likely result in an additional charge. However, Standard & Poor's believes the implementation might actually be a positive development, as it would remove a major uncertainty facing Wyeth. Developments to watch: • Because of diet-drug litigation, we wouldn't be surprised if Wyeth incurs another charge in the fourth quarter. The question is how large. • Continued growth of core products will be important as several key franchises face increasing competition -- Effexor vs. Cymbalta, Enbrel vs. Humira, and Protonix vs. generic Prilosec. • Amid pipeline maturation, Wyeth has some interesting prospects. The company needs to deliver them, as it confronts major patent expirations in 2008. The bottom line: The negative outlook is less reflective of Wyeth's drug business, which is healthy and growing, than the uncertainty of the ongoing diet-drug litigation.
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