Earning Release

Smith & Nephew PLC’s (NYSE:SNN) revenues remained flat in 3Q 09, in line with our estimate. However, performance at the operating and net levels exceeded our expectations in 3Q 09. Going forward, we maintain our positive outlook for the company, based on new product launches and the earnings improvement program. Considering our positive outlook and current ADR price levels we maintain our BUY rating for the ADR. We will reassess our target price and rating in our 3Q 09 update report. We are likely to take a 6-12 month investment horizon as we now anticipate a significant negative currency impact on the UK stock over the medium term1. Despite our positive fundamental outlook we reiterate a HOLD rating for the UK stock as we expect a significant negative currency impact on the UK stock in the medium term. We will reassess our target price and rating in our 3Q 09 update report.

New Valuations

Pfizer Inc.(NYSE:PFE)revenues continue to depict lacklustre performances due to weak sales of its blockbuster drugs such as Lipitor and Viagra, amongst others. Pfizer's R&D pipeline continues to appear weak, with 11 of its 25 drugs in Phase 3 comprising line extensions. The Wyeth acquisition was completed in October 2009 and Pfizer will start reporting performance from 4Q 09. Wyeth's pipeline is strong but requires significant R&D investment from Pfizer. Moreover, revenues are expected to remain under pressure, exacerbated by Lipitor's patent expiry (starting next year). 38.9% of Pfizer's revenues face patent expiry over next couple of years. Consequently, Pfizer has an upheaval task to rein in the revenue deterioration by focusing on new launches and Wyeth drugs. The company continues to focus on Sutent and Lyrica. Although the long term outlook for both these drugs is positive, with the expected launch of line extensions over the next couple of years; in the medium term these drugs are expected to grow at a modest pace. As the consolidation of Wyeth has begun and the company will report partial performance in 4Q 09, we expect a negative impact on consolidated margins over the medium term. Moreover, patent expiry of blockbuster drugs will have a lasting impact on operating performance. Pfizer has gross margin of approximately 85%, compared to Wyeth's 71%. We continue to expect Pfizer, with Wyeth's consolidation and its low cost sourcing strategies to be able to achieve higher economies of scale, thereby bridging the gap between both companies' gross margins over the next 2 years. Moreover, net margin will be hampered by high interest charges streaming from the increased debt following the Wyeth's acquisition.

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