Financial Management Analysis on the Pfizer Company Term Paper
- Length: 7 pages
- Subject: Economics
- Type: Term Paper
- Paper: #32410334
Excerpt from Term Paper :
Pfizer can be included in the larger industrial sector of biotechnology and pharmaceuticals, although a great part of its revenues come from the pharmaceutical products for which it is renowned. The pharmaceutical companies have specialized in a vast category of drugs, from simple, aspirin- type drugs, to more complex ones, including drugs that inhibit or activate individual molecules in different selected environments. They also produce vitamins and livestock food supplements.
The pharmaceutical industry in the United States (and worldwide for that matter) is considered to be one of the most profitable and continuously booming. It is estimated that globally, over $300 billion worth of drugs are sold. A simple explanation for this high degree of profitability is, of course, the high demand of the sector: no matter what happens, drugs and medicine continue to be one of the necessities of people. Additionally, this demand seems to be on a constant rise, with the researches that lead to discovering new treatments for cancer, AIDS and other diseases. So, as a general characteristic of the industrial sector, demand seems to be on a constant rise and the industrial profitability is not expected to go down any time soon.
As a short, additional comment on the demand, it seems that the pharmaceutical companies have begun to focus on products for chronic diseases, like ulcer or cholesterol treatments, mainly because the R& D. costs are very high. A great part of the demand is ensured by the elderly population that is continuously rising and is expected to consume by 2025 $690 million worth of drugs.
The major pharmaceutical players, as of 2001, according to their revenues were Merck, Johnson & Johnson and Pfizer. Pfizer encountered a serious increase over the last two years and this was determined, in part, by the commercialization of profitable drugs, like Viagra, the pain management drug Celebrex or the antidepressant Zoloft. Indeed, in 2003, no less than 14 drugs produced by Pfizer find themselves top sellers in the respective therapeutic categories.
Brief overview and history of the company
The best definition of Pfizer's role and products is given on their website as such: "Pfizer Inc. discovers, develops, manufactures, and markets leading prescription medicines for humans and animals and many of the world's best-known consumer brands."
Pfizer's origins go as far back as 1849, when Charles Pfizer opened a company producing fine-chemicals. In time, the company grew and by the beginning of the century (1910), it was already accounting for total sales of $3 million. By 1951, the company was already a global player and it had established operations worldwide. The merger between Pfizer and Warner-Lambert in 2000 created the new Pfizer (Pfizer Inc.), a much larger and more prepared company to face the competition, even if the costs of the merger were not at all to be neglected.
I have divided the ratios that I have calculated into several categories that I will in turn analyze and explain. Further more, I have calculated the ratios for 2001 and 2002, so that I could compare the ratios and see how the company has evolved in time. Additionally, where the case was and where I had data, I compared the ratios obtained for Pfizer to the industrial average.
The two liquidity ratios that are generally used are the current ratio and the quick ratio (or acid test). Usually, a financial analyst's first concern is liquidity: will the company be able to honor all its liabilities in the near future?
The current ratio is calculated by dividing the current assets to the current liabilities. We calculate the current ratio because this will show whether the company has not been able to honor near future liabilities and has begun to accumulate long-term debts. If the current liabilities rise at a higher rate than the current assets (and this is why I wanted to compare to the 2001 ratios), then this could be a sign of possible problems.
As we can see from the table above, both the current ratio and the acid-test ratio have slightly dropped from 2001 to 2002. Should this be a concern? In my opinion, the decreases are too small to be considered and are not causes for concern. The ratios are still greater than 1, which means that the company's current assets are greater than the current liabilities and that these can still be met on proper time. If we refer to the liquidity ratios, we may affirm that the company has a solid position and that it can meet its liabilities in the near future.
Asset management ratios
Fixed asset turnover
Total asset turnover
The ratios regarding asset management show how efficiently the company is using the assets it has. Let's take the inventory turnover ratio. This is calculated by dividing the total sales to the stock value. As a general rule, this ratio should be as large as possible, because this would mean that the company is actually selling its stock (as we may affirm, a large value of stock is a question mark: why is the company producing and not selling?). The slight decrease from 2001 to 2002 was not enough to elucidate the company's health from this point-of-view, even if, in my opinion, the ratio itself was too small (the company's sales are almost equal to the company's stock). In order to find out what the value obtained here actually represented, I calculated one of Pfizer's main competitors (Merck) inventory turnover and the result was concluding: Merck's ratio was around 4.1, much bigger than Pfizer's. This leads me to believe that my initial suppositions were correct: Pfizer may be operating with more stock than is actually needed. It is the only explanation that I could provide, because, according to what I have said in the lines above regarding pharmaceutical demand (and especially the demand for Pfizer's products like Viagra), there should be no concern about selling the products.
The receivables turnover basically shows us how fast the clients are paying their bills and is calculated by dividing the total annual sales by the current accounts receivables. The results obtained for Pfizer in 2002 have made me believe that the company is not being paid quick enough. Indeed, the value of the ratio was of only 1.16 turns, which is very close to 1 and not very conclusive. I wanted to compare this to the value obtained by the most important competitor, Merck. Merck accounted for total sales of $13.918 billion sales in 2002 and had a total value of accounts receivable of $5.423. Calculating the ratio, its value was 2.57, twice as much as the value obtained in Pfizer's case. This was enough to draw a conclusion that not only Pfizer was not being paid fast enough, but, compared to its main competitor, it was being paid half as fast.
I have continued the same comparison analysis between Pfizer and Merck for the last two asset management ratios, the fixed-asset turnover and the total-asset turnover. In both cases, as you can see, Merck scored better ratios. The fixed asset turnover indicator was 0.33 for Pfizer and 0.42 for Merck, while the total assets turnover was almost twice larger in Merck's case than in Pfizer's. Besides the obvious reason, that the company is not using its assets as efficiently as it could, I have discovered one further explanation that may be used to explain Merck's poorer score here. As I have mentioned in the company's history, 2000 saw the merger between Pfizer and Warner-Lambert. Although this was two years before the year of our analysis, the merger may have reflected the fact that Pfizer has acquired some of its latest assets (from Warner- Lambert) at a higher price (of course, at a market price) than Merck has done years ago. Otherwise put, Merck has acquired its assets at a lower price than Pfizer has and this is reflected in the balance sheet. Indeed, if we have a look there, we will discover a difference of over $5 billion in total asset value between Pfizer and Merck. This, corroborated with a much higher value of current assets in Pfizer's case (almost twice as much), has probably led to the difference in ratio values obtained.
I have found it useful to calculate one important ratio here, the debt to total assets ratio, and compare the values obtained for the two companies. The ratio is calculated by dividing the total debt indicator (short- and long-term debt) to the total asset value and determines how much of the company's funds come from external credits. The concept here revolves around the financial leverage that a company uses. In general, the credit institutions will look for lower values of this indicator, because this ensures a lower risk, but a company will generally want to use higher level…