What to Do with Wyeth...

SECTOR REVIEW

Valuation Analysis Suggests Upside

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Wyeth shares have fallen 19% since July 23 surrounding 2 FDA nonapprovals

and a volatile market. The stock is out of favor, yet updated

valuation analysis (with more conservative assumptions) implies

opportunity.

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Wyeth is undervalued even in our worst case scenario (Protonix brand

erosion in 2008) and shares offer more than 20% upside potential in

our base case scenario and more than 40% upside potential in a takeout

scenario.

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Our Protonix brand erosion (downside) scenario values the stock at

$54, which assumes Teva launches at risk if a preliminary injunction is

not granted (decision expected by September 7th ).

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Valuation analysis of the Wyeth base case assumes shares are worth

$58 using relative valuation (our standard method) and $61 using sumof-

the-parts (SOTP) valuation. Interestingly, SOTP values Wyeth’s

biologics business at $45, close to its current price.

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The recent share price decline could increase Wyeth’s acquisition

attraction and our SOTP analysis implies a take-out value of $69/share.

Our March 2007 M&A report highlighted Wyeth’s strategic and financial

prospects as a target for Pfizer, GlaxoSmithKline & Novartis.

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A Pfizer acquisition is particularly interesting as Wyeth would provide

significant access to biologics, yet provide upside to its primary care

business including franchises in depression and osteoporosis.

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We are sticking with our Outperform rating considering valuation and

our view that after the Protonix PI decision, investors will see Wyeth as

a low risk stock with potential upside from modest expectations on

sales and margins, Alzheimer’s data in 2008, and acquisition support.

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Wyeth target price is reduced from $66 to $58; $5 of this reduction is

due to a lowered S&P P/E given its change since our last target price

update at Q2 results. The balance is explained by our new assumption

that the stock trades at a 5% discount to peers rather than at parity.

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A lower S&P P/E multiple also drives reduced target prices for MRK

(from $57 to $53), LLY (from $67 to $62), ABT (from $60 to $58), JNJ

(from $67 to $65), SGP (from $39 to $36), PFE (from $28 to $26). BMY

increases from $29 to $30 as we concurrently raise it to a 10% premium

to sector P/E, given higher expected growth relative to most peers.

Investment Thesis on Wyeth Post

Recent Disappointments

The valuation opportunity for Wyeth has been reduced by the July 23rd non-approval of

Pristiq. Conversely, we see the non-approval of bifeprunox as an immaterial event. To

that end, we would advocate that Wyeth abandon development of bifeprunox given its lack

of differentiation, modest earnings contribution if approved for maintenance therapy in

schizophrenia, and strategic distraction.

Before the Pristiq non-approval we saw potential WYE upside from 4 sources and

although these remain, we had expected Pristiq to be a material part of the company’s

base business by 2011 ($2.6Bn or 10% of sales), we now see Pristiq as a rather minor

contributor ($378MM or 2% of sales). The 4 sources of upside potential that remain are as

follows:

1) Revenue upside from existing products and 2007-2008 launches is a real possibility,

relative to our “at consensus” forecasts, which are more conservative than management

guidance for Enbrel, Aprela, Viviant, and Tygacil.

2) Project Springboard (cost cutting program) benefits could exceed our expectations,

creating better margin support.

3) Alzheimer’s disease program (bapineuzumab) could be landscape-altering: free call

option from high risk but potentially extremely high value, novel program and phase 2

results available in 2008.

4) Possible upside from a takeover by a larger Pharma company. As we wrote in our

March 20 note “Global Pharma M&A,” we believe WYE is one of the two (with BMY) most

likely takeout candidates in the US and EU major Pharmaceutical groups. Pfizer in

particular would be a fitting takeover partner.

In addition to these options, we would expect a positive stock reaction if management

would change its capital allocation policy with an emphasis on share repurchase and/or

dividend generosity. We do not have an indication that such decision is imminent, but we

do understand that investors have been pressing management to revisit this policy,

particularly since the recent share price fall. Further, the diet drug liability is close to final

resolution and this gives management more flexibility towards these forms of capital

returns. Clearly an increase in share repurchase would send a powerful message to

investors as to management confidence in the Company’s medium to longer-term outlook.

Assuming Pristiq is an insignificant product, base revenues in 2011 are lower (previous

$25.8Bn versus current revenues of $23.6Bn) and Wyeth revenue and earnings growth in

2010 and 2011 is negative; revenue growth is negative 1% in both 2010 and 2011 and

earnings growth is negative 4% and negative 2% respectively. These forecasts assume

Effexor XR and Protonix generics in mid-2010. We see Pristiq as less important because

use in menopausal symptoms made up the majority of our forecast and this indication is

unlikely to be approved before end-2009/early 2010, right before brand erosion of Effexor

XR is expected.

The challenges in 2010 and 2011 should be followed by a period of renewed growth in

2012 forward and we think investors will come to appreciate this as the pipeline evolves

and forecasts start to incorporate 2012 forward. Wyeth has a “hole” to fill in 2010 and

2011 but beyond that, they have a stable business with potential upside. Growth beyond

2012 is a function of pipeline potential and stability from Wyeth’s attractive biologics

business. As to pipeline, we see Prevnar 13 as a franchise that could provide long-term

growth to the Prevnar franchise with potential use in adults. In addition, Aprela (Viviant +

conjugated estrogens) may provide a nice mix-upgrade to the Prempro business as WYE

switches patients to this therapy, which may justify premium pricing to Prempro. Further,

methylnaltrexone could be bigger than expected given its 2 indications (post-operative

ileus and chronic opoid use) and the dismal outlook of its nearest competitor (GSK

Entereg). Lastly, Wyeth’s mid-stage pipeline particularly bapineuzumab for Alzheimer’s

Disease and TRU-015 (potentially indicated for rheumatoid arthritis, lupus and oncology)

could offer substantial upside and will be more in focus over the next 12-months.

Sum of the Parts Valuation Implies

Attractive Entry Point

As shown in Exhibit 1, using a sum-of-the-parts methodology, we estimate that WYE has a

valuation of $61 per share, based on assumptions discussed below. This implies 34%

upside potential from current levels. Furthermore, we believe that WYE is one of the most

attractive acquisition targets in major pharma, and its value as a target could be

approximately $69, as discussed in the next section.

Exhibit 1: WYE Sum of the Parts Valuation

US$ in millions, unless otherwise stated

WYE Standalone Pretax WYE Net Total Equity

2008E Pretax Operating Tax Operating Equity Diluted Value/

Biologics Business Revenues Margin Income Rate Income Multiple Value Shares Share

Enbrel $2,202.0 48% $1,057.0

Prevnar 2,640.3 69% 1,821.8

Refacto 352.7 60% 211.6

BeneFIX 438.8 60% 263.3

r-BMP-2 406.1 60% 243.7

$6,040.0 $3,597.4 26% $2,662.1 23.0x (1) $61,227.8 1,374.5 $44.55

Other Marketed Products 9,219.9 50% 4,610.0 26% $3,411.4 14.0x (2) $47,759.1 1,374.5 $34.75

Consumer Business 2,721.9 20% 544.4 26% $402.8 16.0x (3) $6,445.5 1,374.5 $4.69

Patent-exposed Business (4) 4,596.3 (DCF valuation, assuming discount rate of 9.5%) $2.38

Pipeline 347.6 $16.67

Unallocated expenses and 0.0 (7,452.2) 26% ($5,514.7) 10.0x ($55,146.6) 1,374.5 ($40.12)

nonoperating income

Subtotal $22,925.7 $62.91

Less: diet drug liability ($2.00)

WYE Standalone $60.91

Upside/(downside) to current price 34%

Potential M&A Synergies Synergies

2008E % of Avg. Net Total Equity Premium/

SG&A + combined Pretax Tax Income Equity Diluted Value/ (Disc.) to

Source of synergies R&D SG&A+R&D Synerties Rate (5) Impact Multiple Value Shares Share Standalone

WYE $10,356.1

Avg of 3 most likely

buyers (5) 21,370.5 7% $2,220.9 23% $1,710.1 10.0x $17,100.6 1,374.5 $12.44 20%

$31,726.6 8% $2,538.1 23% $1,954.4 10.0x $19,543.6 1,374.5 $14.22 23%

9% $2,855.4 23% $2,198.7 10.0x $21,986.5 1,374.5 $16.00 26%

Value of bapineuzumab (assumed to be lost to Elan via change of control provision, in event of WYE takeout)

Bapineuzumab (DCF valuation, assuming discount rate of 15.0%) $6.08

TOTAL VALUE AS TARGET (standalone value + synergies - bapineuzumab) $69.05 13%

Upside/(downside) to current price 52%

Current stock price: $45.33

(1) average of large-cap biotech stocks: AMGN, BIIB, DNA, GILD, CELG. Using CS estimates

(2) average of large-cap pharma stocks: BMY, LLY, MRK, PFE, SGP, WYE, JNJ, ABT. Using CS estimates

(3) average of consumer products stocks: PG, CL, KMB, CLX. Using consensus estimates (no CS coverage)

(4) includes US revenues of Protonix, Effexor, and Zosyn

(5) average of PFE, NVS and GSK, the 3 most likely acquirors of WYE per our 3/20/07 Global Pharma M&A report

Source: Company data, Credit Suisse estimates

Our sum of the parts valuation starts with the premise that WYE’s business has 5 separate

components, each with different growth, margins, and commercial lives – and thus

deserving of different valuation metrics. We estimate the incremental earnings and cash

flow streams associated with each of these 5 pieces, and value them individually. Then,

we bundle the remaining expenses, such as G&A and R&D, that are not specifically tied to

one of the 5 components, and together with non-operating income, value these as a 6th

component. The 5 discrete segments, and our key assumptions for each, are as follows:

A Wyeth Acquisition Scenario

Could be a Source of Upside

WYE Could be the Top Major Pharma Takeout

Candidate

In our March 20, 2007 report entitled “Global Pharma M&A – Intensifying Interests,” we

concluded that WYE was one of the two most likely takeover candidates in US and

European major Pharma. We screened all possible combinations among the 13 top

companies (78 possible deals) against various criteria including financial, strategic,

potential synergies, and antitrust risk. Based on this analysis, we concluded that WYE

and Bristol-Myers Squibb (BMY) were the most likely acquisition targets in the group.

Since March, WYE’s attractiveness relative to BMY has increased, as an important risk for

BMY approaches. This fall Eli Lilly (LLY) will report Phase 3 data on prasugrel, a potential

competitor to BMY’s leading franchise, Plavix. We expect the data to show superiority to

Plavix, and this could lessen BMY’s attractiveness. Moreover, the time before Plavix’s

2011 patent expiration continues to shrink.

WYE would provide a number of benefits to a big pharma acquiror. First and foremost is

its biologics franchise, which is a key area of need for most major Pharma companies.

WYE would provide an acquiror with leading biologics manufacturing and R&D capabilities,

but unlike most potential biotech targets, would combine these with large, growing,

currently marketed biologics products (most notably Prevnar and Enbrel). Additionally,

WYE has a substantial primary care franchise (again, unlike most potential biotech

targets) that could help fill a big pharma’s primary care sales infrastructure and provide

synergy opportunities. Finally, our review of the contracts for Wyeth’s important

cooperative arrangements suggests that most of them are transferable through a change

in control. A notable exception is the bapineuzumab, WYE’s Alzheimer’s disease

collaboration with Elan (ELN).

We Estimate Takeout Value at About $69

To estimate WYE’s value as an acquisition target, we make two adjustments to our

standalone sum-of-the-parts value, as shown in Exhibit 1.

First, we believe that the value of synergies to a big pharma buyer is approximately $12-

$16 per share (we use the midpoint of $14 in our valuation). Across a wide range of

historical Pharma deals, companies have announced pretax synergies averaging about

11% of the combined base of SG&A and R&D expenses (see Exhibit 2, taken from our

March global Pharma M&A report). In our analyses we commonly use 8% as a threshold

for synergies required to breakeven (from an EPS dilution standpoint). This provides

some conservatism and a margin for a deal to potentially become accretive

Exhibit 2: Synergies in Global Pharmaceutical M&A Transactions

% of combined SG&A and R&D base

0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

Sanofi -Synthelabo / Aventis

Pfizer / Pharmacia

Amgen / Immunex

Bristol-Myers Squibb/ Du Pont Pharma

Abbott/ Knoll Pharmaceuticals

Glaxo Wellcome / SmithKline Beecham

Pfizer/ Warner Lambert

Monsanto / Pharmacia & Upjohn

Warner Lambert / AHP

Hoechst / Rhone Poulenc

Sanofi / Synthelabo

Astra / Zeneca

AHP / Monsanto

Glaxo / SmithKline Beecham

Roche / Corange

Hoechst / Roussel-Uclaf

Sandoz / Ciba Geigy

Pharmacia / Upjohn

Rhone Poulenc Rorer / Fisons

Hoechst / Marion Merrill Dow

Glaxo / Wellcome

AHP / American Cyanamid

Roche / Syntex

Pretax Synergies as % of SG&A + R&D

Historical Average: 11%

Source: Company data, Credit Suisse estimates

Second, it is important account for the change of control provision with bapineuzumab.

The collaboration agreement provides that if either WYE or ELN is acquired by a third

party, the other company has the opportunity to buy out the rights to this collaboration. In

our sum-of-the-parts standalone valuation, the pipeline component contains the value of

bapineuzumab. We assume that if WYE is acquired, ELN will exercise its buyout, and

thus we deduct the value of bapineuzumab from our takeout valuation. Our $6 per share

valuation of bapineuzumab assumes peak sales of approximately $5 billion, which could

be conservative, as discussed in our May 21, 2007 note, “WYE: Alzheimer’s Drug Could

Be Landscape Altering.”

Adding $14/share in synergies and subtracting $6/share for bapineuzumab from our $61

standalone valuation, we estimate a takeout valuation of $69/share.