Oxford Brookes University BSc. (Hons.) In Applied Accounting

Research Report

“The financial and business performance of Pfizer from 1 January 2011 to 31 December 2013”

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TABLE OF CONTENTS

1. PROJECT OBJECTIVES AND RESEARCH APPROACH...............................41.1. RESEARCH PROJECT TOPIC........................................................................................................41.2. REASONS FOR TOPIC SELECTION...............................................................................................41.3. WHY PFIZER?............................................................................................................................... 41.4. RESEARCH AIM............................................................................................................................. 41.5. RESEARCH OBJECTIVES............................................................................................................... 41.6. RESEARCH QUESTIONS................................................................................................................51.7. RESEARCH APPROACH.................................................................................................................5

2.......................INFORMATION GATHERING, ACCOUNTING AND BUSINESS TECHNIQUES..............................................................................................................7

2.1. INFORMATION GATHERING.........................................................................................................72.2. INFORMATION GATHERING PROBLEMS AND LIMITATIONS...................................................72.3. ETHICAL ISSUES............................................................................................................................72.4. RESEARCH ANALYSIS TOOLS.......................................................................................................8

2.4.1 PESTEL.................................................................................................................................... 82.4.2 SWOT........................................................................................................................................ 82.4.3 Ratio analysis........................................................................................................................ 9

3. ANALYSIS...........................................................................................................123.1. BUSINESS ANALYSIS..................................................................................................................12

3.1.1 PESTEL.................................................................................................................................. 123.1.2 SWOT..................................................................................................................................... 16

3.2. FINANCIAL ANALYSIS................................................................................................................193.2.1. Profitability analysis...................................................................................................... 193.2.2. Liquidity ratios................................................................................................................. 213.2.3. Risk ratios........................................................................................................................... 233.2.4. Shareholders ratios........................................................................................................ 24

4. CONCLUSION.....................................................................................................26

Table of Figures

FIGURE 1: SWOT SUMMARY...............................................................................................................15FIGURE 2: PROFITABILITY RATIOS......................................................................................................19FIGURE 3: MAIN OPERATING EXPENSES ANALYSIS...........................................................................20FIGURE 4: LIQUIDITY RATIOS...............................................................................................................21FIGURE 5: RISK RATIOS.........................................................................................................................23FIGURE 6: PFIZER SHAREHOLDERS RATIOS.......................................................................................24FIGURE 7: GLAXOSMITHKLINE SHAREHOLDERS RATIOS................................................................25

1. Project objectives and research approach

1.1. Research project topic Research topic number eight, “An analysis and evaluation of the business and financial performance of an organisation over a three year period” is the topic that I have selected for the purpose of performing the research analysis on. The analysis will be performed on Pfizer, an American pharmaceutical company, and its performance will be compared to Glaxosmithkline (GSK), a pharmaceutical company located in the United Kingdom. The period covered by the analysis will be from 1 January 2011 to 31 December 2013.

1.2. Reasons for topic selectionI selected research topic number eight because it matched the strengths that I possess and the interests that I have in that area. The topic also provided me with an opportunity to practice and harness my skills in the area of analysing the performance of businesses. Another major reason for selecting this topic is the realisation that the research could be conducted by completely utilising information obtained from secondary sources without the need of primary sources. I tried to obtain information from primary sources to improve the quality of the research report but was not successful as explained in section 2.2.

1.3. Why Pfizer?Pfizer was selected mainly because of the headlines it created when it wanted to purchase one of its competitors in the United Kingdom, AstraZeneca. I wanted to find out How Pfizer was performing business wise and financially for it to want to purchase one of its competitors.

Pfizer is an American company founded by cousins Charles Pfizer and Charles Erhart in 1849. The company has its headquarters in New York, United States of America. The company currently employs approximately 77,700 employs in all of its operations. Pfizer has a wide range of leading products and medicines that support wellness and prevention, as well as treatment and cures for diseases across a broad range of areas (Pfizer, n.d).

1.4. Research aimThis research has one main aim and that is to analyse and evaluate the business and financial performance of Pfizer over a three-year period from January 2011 to December 2013. As this is a wide aim, a couple of objectives will be set to enable me achieve my aim.

1.5. Research objectivesIn order to achieve the research aim, the following objectives have been set:

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a) To identify the factors that can have an influence on the performance of companies in the pharmaceutical industry.

b) To identify Pfizer’s strengths and weaknesses.c) To identify the factors that have influenced Pfizer’s financial performance

from January 2011 to December 2013.d) To advice Pfizer on what can be done to improve their business and

financial performance.

1.6. Research questionsTo successfully achieve the research objectives, I devised a couple of questions which once answered effectively would lead to the achievement of the research objectives and ultimately the research aim. The questions set are as follows:

a) How does the general business environment affect the business and financial performance of pharmaceutical companies?

b) What are the opportunities and threats that Pfizer faces?c) What are the factors that provide Pfizer with its strengths and

weaknesses?d) How has Pfizer performed financially from January 2011 to December

2013?e) What can Pfizer do to improve its business and financial performance?

1.7. Research approachTo achieve my research objectives and aims, I have adopted a structured approach that will address different aspects of the research. This research has applied the following approach:

a) I will start by analysing the general business environment using the PESTEL model. This will enable me identify those factors that can influence the performance of companies operating in the pharmaceutical industry. From this, I will be able to identify the opportunities and threats that are present in the general environment.

b) The SWOT model will then be used to look into Pfizer and identify its strengths and weaknesses. The model will then use the information obtained from the PESTEL model and summarise the opportunities and threats that Pfizer faces.

c) After having obtained a good understanding of the general business environment and the factors that can influence the performance of Pfizer as well as its strengths and weaknesses, ratio analysis will then be used to analyse the factors that have influenced the financial performance of Pfizer.

d) Recommendations on what Pfizer should do in order to improve its business and financial performance will then be provided based on the findings from the use of the above three tools.

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The above structured approach will enable me get the answers to the research questions that I have set and lead to the achievement of the research objectives and main aim.

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2. Information gathering, accounting and business techniques

2.1. Information gatheringIn performing the research, information has been gathered from different sources all of which are secondary in nature. As hinted in section 1.2, the research has fully relied on secondary sources of information because of the difficulties involved with obtaining information from primary sources. The sources of information used include the following:

a) The company websites of Pfizer and Glaxosmithklineb) Pharmaceutical industry journals and reportsc) Business and financial websites such as Forbes, Bloomberg and Yahoo

Financed) Business and financial newspapers such as Financial Times and The New

York Timese) Various books used in my ACCA studies and general business books.

2.2. Information gathering problems and limitationsThe process of gathering information for use in this research was not without problems. Information obtained from different sources was conflicting and so I had to sift through a number of sources to verify the correctness of the information before using it.

The authenticity of some sources of information was questionable, as they did not show their sources. To avoid any issues I decided to rely on information sources that are well known and reliable as listed above.

Primary sources of information were not used because of various reasons. There were difficulties in trying to get an appointment with the relevant Pfizer officials who I could pose the different questions that I wanted to obtain answers for. The response I got from Pfizer officials was that I had no formal identification on my participation in the Oxford Brooks BSc. Programme.

Time was another factor that prevented me from seeking information from primary sources. As I had to juggle my time between my ACCA studies, work and performing the research, I had to ensure that I started early. This removed the possibility of me seeking some sort of formal identification from Oxford Brooks, as I did not know how long it would take to get it and did not want to risk delaying the whole process of conducting the research.

2.3. Ethical issuesThe research and report preparation process had no major ethical issues to contend with. The only ethical matter that I had to address was ensuring that I

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used reliable sources of information and cited them in the body of the report and reference them in accordance to the Harvard referencing standards as instructed in the research manual.

2.4. Research analysis tools

2.4.1 PESTELPESTEL provides a means by which to analyse the general environment and identify factors that can have an influence on the performance of companies operating in a particular industry (Kourdi, 2009). The model analyses different aspect of the environment including political, economical, social, technological, environmental and legal and list the factors that can either provide opportunities for companies in the industry or can act as threats to their success.Limitations of PESTELThe PESTEL model benefits from being simple to use but suffers from the following limitations:

a) The model does not provide a means of ranking the factors identified in order of importance hence if not well experienced, management might waste their time focusing on issues with minimum impact to the company.

b) There are no clear rules on which factor should be categorised under which heading. A factor can appear to be political as well as economical or legal at the same time.

c) Due to its nature, the model might end up with a large number of factors, which might end up creating confusion and make management lose focus.

d) The model does not specify what is to be done once the factors have been identified. Inexperienced users of the model might think listing of the factors is the end of the whole exercise of analysing the general environment.

2.4.2 SWOTThe SWOT model provides a way for summarising the main factors found within an organisation that provides it with its strengths and weaknesses and also those factors outside the organisation that provide it with opportunities and threats (Kourdi, 2009). The model can be used in conjunction with the PESTEL model as the opportunities and threats are normally an output of the PESTEL model. The SWOT model is widely used, as it is very simple to apply.

Limitations of SWOTThe SWOT model has the following limitations:

a) The model does not tell the users what to do with the factors that have been identified

b) There is no way to rank the factors in order of importance so as to provide focus to management on where to start in addressing the factors

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identifiedc) The model does not provide clear rules on where factors are to be

classified. One factor can be perceived to be a threat by one but might appear as an opportunity to another.

d) The simplistic nature of the model might end up with users identifying a large number of factors that might derail managements’ focus on the crucial issues that they have to address.

2.4.3 Ratio analysisRatio analysis is a technique used to analyse the financial statements of an organisation and provide an overview on how a company has performed financially in different areas (Glen, 2008).Ratio analysis can be performed on a single organisation over time or can be performed on different companies preferably operating in the same industry. The technique is simple to apply and as a result is widely used.

My financial analysis of Pfizer will analyse the ratios in the following main areas:1) Profitability

a) Gross profit margin – Analyses the amount of profit generated from sales before deducting operating costs. This can be affected by sales volumes, pricing, manufacturing costs as well as sales mix (Elliot and Elliot, 2007).

b) Net profit margin – This ratio analyses the ability of management to control its operating costs (Elliot and Elliot, 2007).

c) Asset turnover – This ratio assesses management’s effectiveness in utilising the company’s resources in generating revenue (Elliot and Elliot, 2007).

d) Return on capital employed – This is the main measure of profitability of a business. It is normally a function of its gross and net profit margins as well as the asset turnover. This ratio provides a snapshot of whether a company is profitable or not and to get a good understating of the reasons behind the behaviour of the ratio then an analysis of the first three ratios above is necessary (Elliot and Elliot, 2007).

2) Liquiditya) Current ratio – This assesses the ability of a company to pay its current

obligations using its current assets (Clive, 2009). Companies would prefer to be able to pay their current obligations using their current assets without the need of relying on long-term borrowings.

b) Quick ratio – This ratio is similar to the current ratio. The only difference is that it does not include inventory as part of its current assets as inventories are not liquid.

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3) Working capital managementa) Inventory days – These are the number of days that a company takes

between buying its inventories and selling them (Clive, 2009). Ideally, companies should be able to sell its inventory quickly and hence have a short period for its inventory days,

b) Receivable days – These are the number of days that a company takes to collect money from its customers after selling its goods (Clive, 2009). A short period is deemed to be better.

c) Payable days – These are the number of days that a company takes to pay its suppliers for the goods it has purchased (Clive, 2009).

4) Riska) Debt-to-equity – This shows the level of debt that a company has relative

to its equity (Clive, 2009). High debt levels make a company risky as any default might lead to serious consequences, which could include bankruptcy.

b) Interest cover – This measures the ability of a company to pay its interest expenses from the profits generated in the year (Clive, 2009). Failure to generate sufficient profits to pay the interest expenses might lead to serious consequences including bankruptcy.

c) Dividend cover – This measures the ability of the company to pay dividends from the profits generated. Failure to generate sufficient profits to pay dividends might signal that the company is facing difficulties and investors might dispose of their shares.

5) Shareholdersa) Earnings per share – This is a very important ratio for shareholders as it

gives and indication of how well management have done in generating profits for the shareholders (Elliot and Elliot, 2007). Shareholders would prefer to see this ratio increasing year after year.

b) Dividend per share – This represents the amount of dividend that each share has earned (Elliot and Elliot, 2007). Shareholders would prefer to see growth in dividends that they receive but the payment of dividends is the prerogative of management based on the company’s profitability and investment needs

I have attached the formulas for calculating the ratios together with the actual calculation of the ratios in appendix 5.

Limitations of ratio analysisRatio analysis has the following limitations:

a) The effectiveness of the tool is affected by the difference in accounting policies applied by the companies being compared

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b) As the technique is applied on financial statements, it can be affected by the manipulation of the financial statements

c) The financial statements explain what has happened in the past and as a result, ratio analysis also analyses the past and not the future, which is of most importance to many.

d) High inflation levels could affect the meaningfulness of the ratios and the resulting analysis.

e) The technique cannot be used on companies in different industries as the factors affecting their performance are different.

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3. Analysis

3.1. Business analysis

3.1.1 PESTEL

Political factors

Political stability and securityA stable political environment and safety guarantees are essential for companies operating in any business industry to succeed. Lack of a stable political environment will discourage investment in that country as companies will not be able to plan effectively due to uncertainties. Safety is also paramount as without this, company assets and employees will be at risk.

Government policies on health care systemsGovernment policies towards health care systems can have a huge influence on the pharmaceutical industry. In the UK, the health care system is mostly funded by the government who in turn becomes the largest customer for the pharmaceutical companies. A change in policy towards private funding might discourage investment in the industry as drugs might become very expensive and hence not affordable by the majority.

Economic factors

Economic growthThe rate of economic growth of countries around the world can have an impact on companies in the pharmaceutical industry. As economies contract leading to unemployment and decreasing purchasing power, consumers tend to switch to generic drugs and even delay or skip treatment and governments try to reduce their spending. This in turn will result into less revenue for the companies in the pharmaceutical industry. During the recent global economic slump, Pfizer saw its revenues decline by approximately 8% from 2008 to 2011 mainly attributed to its customers switching to generic products and governments restricting the amount of spending on branded drugs (Merson, 2014).

TaxationThe tax policies in different countries can have a huge influence on the operations and performance of companies in the pharmaceutical industries. As different countries do have different tax regimes, some of these might appeal more to some companies and might relocate their operations to those countries with lower tax rates.

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Recently, Pfizer wanted to purchase one of the major European pharmaceutical companies, AstraZeneca which is located in the United Kingdom. Although Pfizer claimed that this was only for business reasons as AstraZeneca is well known for its strengths in the research and development of drugs, it was later discovered that the main motivation behind the move was the tax savings that the company could have enjoyed had the purchase been successful. The new company would have beet structured in such a way that it could protect all the overseas profits from being subject to US taxes and also benefit from the huge cash piles from its oversees operations which would be expensive to repatriate to the US. Pfizer would be paying taxes at 23% in the UK on its oversees earnings as opposed to 30% in the US (Gill, 2014).

Currency exchange ratesAs approximately 60% of Pfizer’s revenues are generated outside the USA, adverse exchange rates can have a huge impact on its performance. In recent years, the US$ has been appreciating against other major currencies leading to the company reporting huge currency exchange losses in its financial statements. In 2013, the company reported a total of US$1.2 billion in exchange losses (Pfizer Annual Report, 2013).

Social factors

DemographicsDemographics are very important for companies in the pharmaceutical industry. An increase in the population translates into more people requiring healthcare and so more revenue for the pharmaceutical companies. The population of the world is expected to increase from 7 billion in 2014 to 9.6 billion in 2050. The age distribution is also another important aspect that can have an influence on the performance of companies in the pharmaceutical industry. Different age groups face different health problems hence companies will need to conduct the right research into products required to address those issues. As of 2014, 51% of the World population consisted of people below the age of 30 years (United States Census Bureau, 2014). Pharmaceutical companies can use this information to focus more on producing healthcare products for this age category.

Lifestyle choicesThe number of obese people is currently on the rise around the world. This is due to a number of factors including eating habits and lack of exercise. According to the World Health Organisation (2014), 65% of the world's population live in countries where overweight and obesity kills more people than underweight andMore than 40 million children under the age of 5 were overweight or obese in 2012. Pharmaceutical companies have the opportunity to develop products that can help reduce obesity as well as develop products that will be required to treated illnesses related to obesity such as diabetics and hypertension.

Technological factors

Research and development

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The pharmaceutical industry is one that requires huge investments in research and technology. It is important that the companies develop new technologies that will enable them perform research much efficiently and within a short period of time as opposed to now where it can take up to ten years to introduce a drug to the market.

Environmental factors

Sustainable developmentPharmaceutical companies have an important role to play in preserving the environment. Reduction of waste, reducing energy consumption and greenhouse gasses emissions are just some of the things that these companies can do to contribute towards sustainable development. Pfizer is committed to protecting the environment and has embarked on a number of projects aimed to achieve this objective. Some of the efforts undertaken include the use of renewable sources of energy such as water and wind, recycling of water and waste in order to reduce usage, reduction in its packaging materials and the consolidation of its operations in order to reduce its energy footprint (Pfizer, 2013).

Legal factors

Patents rightsPatent s infringement is very common in the pharmaceutical industry and normally results into big and costly lawsuits. In 2013, Pfizer was awarded a US$2.15 billion settlement as a result of Teva Pharmaceuticals and Sun Pharma infringing its patens for its acid-reflux drug Protonix (Grey, 2013).

Price fixingPrice fixing is another area that companies in the pharmaceutical industry are susceptible to as they try to compete with the cheap generic drugs. In 2010, Pfizer and other major pharmaceutical companies in America were sued for conspiring to fix prices of their products with an aim of keeping cheaper brands from Canada out of the market (Rosenblatt, 2010).

Personal lawsuitsPharmaceutical companies are facing the danger of being sued by users of their products claiming unacknowledged and undesired side effects from use of their products. In 2012, Pfizer had to pay a total of US$894 million to settle personal lawsuits on two of its pain relievers, Celebrex and Bextra, which the users claimed caused heart attacks and strokes among other harm (USA Today, 2014). In the USA, Pfizer is currently facing a huge lawsuit by a group of women who claim that its anti-cholesterol drug, Lipitor, gave them type-2 diabetes (Dye, 2014).

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Laws and regulationsThe pharmaceutical industry is one of the industries that has the toughest laws and regulations in the world due to its sensitivity. It is important that companies in this industry abide by these rules and regulations for theme to succeed. Failure to do so will result into sever fines and penalties and even revocation of the licenses allowing them to operate.

Pfizer has been embroiled in a number of cases related to its violation of laws and regulations. In 2012, Pfizer was sued by its employees in Puerto Rico for failing to properly manage their pension plan resulting into losses of hundreds of million of dollars. In 2010, the company had to pay a total of US$1.37 million after being sued by one of its former scientists who was fired for raising safety concerns at one of its laboratories (Mattera, 2014).

Unethical clinic trialsThe research and development phase of many drugs is normally very complex and long and can be affected by unethical behaviour claims. Due to the nature of the industry, some drugs might require testing on animals and others on human beings. Strict rules and regulations have to be followed during this phase. In 2011, Pfizer settled a 15-year long battle with the families of four children who died as a result of the company administering its clinical trial drugs, Trovan and ceftriaxone for the treatment of meningitis in Kano, Nigeria (Smith, 2011).

Figure 1: SWOT summarySTRENGHTS

Strong and well recognised brand name

Good financial performance leading to lower borrowing costs

Huge diversified portfolio of products

WEAKNESSES Expiration of patents Over dependency on few drugs

OPPORTUNITIES Growth of emerging markets Increase in population

THREATS Change in healthcare industry

increase dependency on government

Deregulation on imported drugs Counterfeit products

3.1.2 SWOT

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StrengthsPfizer has a very strong and well-recognised brand name that is recognised globally. The company is ranked as the number one pharmaceutical company globally (Forbes, 2013) and its brand was ranked as the 31st most valuable brand in the world by the European Brand Institute (Eurobrand, 2014)

The company has performed financially well in the period under review. This good financial performance enables the company gain the confidence of its shareholders and prospective investors. The good financial performance will also enable the company negotiate lower interest rates for its borrowings and hence expand its operations much effectively. The strong financial performance experienced by Pfizer has resulted in the company having huge cash reserves that they can use to expand the business by acquiring other companies. Recently, Pfizer tabled a bid of US$ 100 billion for the purchase of AstraZeneca, a UK pharmaceutical company (Gill, 2014).

Pfizer has a huge portfolio of products that are currently aiding to its good business and financial performance. Currently the company has a total of 602 licences products which its sales in different markets globally and a pipeline of 83 products that are at different phases of development. Some of its well-known and best performing products include Lipitor, Lyrica, Celebrex and Viagra (Hegel, 2014).

WeaknessesAlthough Pfizer has a huge portfolio of products, it relies too heavily on a few products to generate much of its revenues. In 2013, Pfizer generated approximately 46% of its total revenue from ten of its products. The expiration of these products patents will see its profits decline drastically as cheaper generic products will now become available (Merson, 2014).

As most of the companies in this industry rely on patent rights, it is vey important for the companies to maintain them. Pfizer is facing a problem as some of its major products are nearing their end of the patent period. By December 2013, Pfizer had estimated that it will loose approximately 8% of its revenue in the coming year as a result of loss of exclusivity of some of its drugs as their patents expire (McGrath, 2014).

OpportunitiesThe continued success of the emerging economies such as Brazil, India, China, Russia and South Africa as well as other countries in Africa and Asia which are experiencing huge economic growth presents Pfizer with good opportunities.

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The company could expand its market and tap in these countries to share in their success. With economic development, the population of these countries are bound to experience greater growth in wealth and changes in their lifestyle. This might include a move from using generic drugs that are normally cheaper, to branded ones that are more expensive. As Pfizer specialises in the production of branded products, it could see its market expand and improve its business and financial performance.

The current population increase also presents another opportunity for Pfizer. As people increase so will their need for healthcare products. The current estimates are that the total global population will increase to 9 billion people by 2050. This represents an increase of 25% from the global population in 2014 (United States Census Bureau, 2014).

Recently, the World Health Organisation has announced that the once world famous drug, antibiotics, is showing signs of not being effective as humans are developing resistance to it from improper use of the drug. This presents a great threat to the world as antibiotics are used to treat a number of life-threatening conditions. Pfizer has an opportunity to invest in the research and development of an alternative drug that could be used to treat these life-threatening conditions, as the rewards that could be obtained from the discovery of such a drug are enormous.

ThreatsOne of the main threats facing companies in the pharmaceutical industry is the existence of counterfeit drugs. This does threaten the profitability of the companies as well as the well being of their users. In 2013, the medicine counterfeit market was valued at US$2 billion in the US alone (Hegel, 2014). Due to this, it is very important for Pfizer and other companies in the industry as well as law enforcement agencies around the world to clamp down on these counterfeit drugs. In 2012, the US Food and Drug Administration Department issued an alert of the existence of a counterfeit drug called Altuzan, used for the treatment of cancer (US Food and Drug Administration, 2012). Also in April 2014, The World Health Organisation issued an alert on the existence of counterfeit anti-malaria drugs in West and Central Africa and warned travellers to that region to be vigilant of the medication their purchase there (Centres for Disease Control and Prevention, 2014).

Pfizer generated approximately 45% of its revenues in 2013 from the USA and mostly through the healthcare system financed by the government. This huge dependency is risky as a change in policy by the government towards a private funded system might significantly reduce the company’s income, as its products

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will become more expensive and not affordable by the majority of people (Merson, 2014).

The United States Government is currently contemplating the deregulation of its drug market to allow cheaper drugs to be imported. This will present a great threat to Pfizer as it depends heavily on the US protected market to generate much of its revenues. The company will see its profits decline and directly affect its ability to invest in further research and development, which in turn will affect its future profitability (Johnson, 2014).

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3.2. Financial analysis

3.2.1. Profitability analysis

Figure 2: Profitability ratios

2013 2012 2011 2013 2012 2011GlaxoSmithkline Pfizer

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Profitability Ratios

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Return on capital employed (ROCE)Pfizer has enjoyed a good period as its ROCE has more than doubled within the three-year period being reviewed. This shows that the company is able to generate more profits from the assets that they have. The increase is a result of doubling of its net profit and a decline in its capital employed. To get a better understanding of the reasons behind the increase in net profits and the decline in its capital employed, a closer look at the profit margins and the asset turnover is required.

Gross profit marginThe gross profit margin of Pfizer has not changed significantly during the three-year period as shown in figure 2 above. The company has suffered declining revenues in each of the three years being reviewed but has also equally managed to control its cost more effectively.The expiry of the patents of some of Pfizer’s top revenue generating products in 2011 such as Viagra, an erectile dysfunction pill and Lipitor, a cholesterol-lowering drug, has seen cheaper generic drugs flooding the market and hence reducing Pfizer’s share of revenues from these products. In total, these two

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products were generating approximately 13% of Pfizer’s revenue prior to the expiry of the patents but dropped to 8% in 2013 (Ward, 2014).

Pfizer has responded to the decline in revenues by embarking on a program to reduce its costs. The company has restructured its research and development department in its efforts to streamline its operations and focus on projects with high margin potential (Berg, 2014).

GlaxoSmithKline has seen its gross profit margin decline in each of the three years. This has been due to declining revenues and increased costs. Companies in the pharmaceutical industry are facing tough times as most of their patents are expiring and new innovations have been made yet (Rowland, 2014).

Net profit marginPfizer has seen its net profit margin approximately triple over the three-year period as shown in figure 2 above. The reasons for the increase are the effective cost control measures instituted by the company for its marketing and advertising expenses. During this period, management have effectively controlled these costs to ensure that they were in line with the revenue generated as shown in figure 3 below. The company has also seen a huge decrease in its litigation costs due to effective risk management as well as an increase in the compensation that the company has received after successful litigation for the infringement of its patents. All these measures saved the company approximately $4 billion in 2013 compared to 2011 (Meyers, 2014).

Figure 3: Main operating expenses analysisMain operating expenses

Figures in $ millions 2013 2012 2011Revenue 51,584 54,657 61,035Selling and admin expenses 14,355 15,171 17,581Research and development 6,678 7,482 8,681Amortisation of intangible assets 4,599 5,109 5,465

Selling and admin/Revenue 28% 28% 29%Research and development/Revenue 13% 14% 14%Amortisation of intangible assets/Revenue 9% 9% 9%

Asset turnoverPfizer has seen its asset turnover remain constant at 0.3 times as shown in figure 2 above. This means that the company is 30 cents in revenue for every $1 of assets they company controls. This is a very low level of revenue and the company needs to improve its asset utilisation in generating revenue.

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GSK’s asset turnover were twice those of Pfizer but still below one indicating that they were also not generating enough revenue from the assets they control.

Overall, the profitability of Pfizer, as shown by its ROCE, has improved mainly due to good cost control measures, the reduction in litigation costs faced by the company and the compensation received from its competitors due to patent infringements. Their asset utilisation in generating revenue is very low and management has to address this problem.

3.2.2. Liquidity ratios

Figure 4: Liquidity ratios

2013 2012 2011 2013 2012 2011GlaxoSmithkline Pfizer

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Current and quick ratiosPfizer’s current and quick ratios have been increasing slightly during the period being reviewed. Both measures show that the company is fairly liquid as it can pay its maturing obligations by using its current assets even without including its inventories. The increase is attributed to the decline in accruals relating to its legal expenses following a decline in lawsuits against the company and the positive outlook provided by its legal team. During the period under review, a total of $5 billion of legal accruals have been reversed (Meyers, 2014). Pfizer has also managed to reduce its restructuring accruals as the company is approaching its final stages of the restricting program and so can more accurately assess the required costs (Berg, 2014).

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GSK on the other hand has seen its current and quick ratios remain flat in 2011 and 2013. The company is just able to pay its current liabilities by using its current assets but would not be able if its inventories are excluded. This shows that Pfizer are more liquid than GSK.

Inventory days outstandingPfizer’s inventory days have increased by a total of 42 days from 2011 to 2013. The company’s policy is to carry enough inventories to satisfy a months sales (Hegel, 2014). During the period, the average amount of inventory being maintained remained fairly constant. The increase in the number of days is due to the company not adjusting its inventory levels to match its policy following the decline in sales. The excess inventories mainly relate to its Viagra and Lipitor drugs which are now facing stiff competition from cheaper generic drugs (Hegel, 2014).

GSK has managed to reduce its inventory days, which are much less than those of Pfizer. This shows that GSK are managing their inventories much better than Pfizer.

Receivable days outstandingPfizer has managed to reduce the number of days it takes to collect money from its customers. This decrease is attributed to the company’s good credit control efforts and the recovery of the economies of many countries. As the majority of Pfizer’s customers are governments and government-sponsored agencies, recovery of their economies has meant that they are able to pay for their services and obligations much quicker.

GSK has seen its receivable days remain fairly constant in line with its revenues. This shows that the company is managing its customers well but not as well as Pfizer.

Payable days outstandingThe number of days that Pfizer takes to pay its suppliers has slightly increased during the period as shown in figure 4 above. This increase is attributed to the decrease in its cost of sales following the decrease in production of its products that have seen its patents expire while its actual amount of payables has remained fairly constant.

GSK has also seen its payable das slightly increase during the period. Its payable days are also double those of Pfizer showing that it takes nearly a year for GSK to pay its suppliers.

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3.2.3. Risk ratios

Figure 5: Risk ratios

2013 2012 2011 2013 2012 2011GlaxoSmithkline Pfizer

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Debt-to-equityThe debt-to-equity ratio of Pfizer has been fluctuating between 46% and 48% during the period under review. These ratios show that the company does not have huge debts compared to its equity and so the company is not risky. The actual amount of debt has been declining during the period but the equity has been declining faster. In 2011, the company embarked on a program to buy back its shares, as it believed they were undervalued. A total of $10 billion has so far been utilised to buy back the company shares (Merson, 2014). The decline in the debt levels shows that the company has ample cash reserves to finance its operations. This also shows that the company does not have any significant projects planed for the near future.

GSK has a very high debt-to-equity ratio indicating that the company is very risky. The ratio has also been increasing over the period and is nearly five times that of Pfizer. GSK has required this level of debt to finance its acquisition program, which the company is currently implementing (GlaxoSmithKline, 2013).

Interest coverThe interest cover ratio of Pfizer has been increasing during the period as shown in figure 5 above. This increase is a result of the increase in its operating profits and its declining interest expenses in line with the decline in its actual debt levels. The ratio shows that the company is comfortably able to pay its interest expenses using the profits generated in the period hence avoiding the risk of default in paying its interest charges.

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GSK has seen its interest cover ratio decline slightly reflecting the decline in its operating profits. The company still has a high ratio showing that the company faces less risk of defaulting in paying its interest obligations.

Dividend coverThe dividend cover of Pfizer has remained fairly constant during the period. The ratio shows that the company is able to pay its dividends from the profits generated in the year hence reducing the level of risk of failing to pay dividends in the future.

GSK has seen its dividend cover slightly decline during the period. This was due to decline of the profits available to shareholders and the increase in the level of dividends being paid as GSK follows a policy of progressive dividend growth.

3.2.4. Shareholders ratios

Figure 6: Pfizer shareholders ratios

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Dividend per sharePfizer’s shareholders have seen their dividend payment increase each year as shown in figure 6. Pfizer’s dividend policy is for the board to decide what amount should be paid out based on the company’s profitability and future plans. During the three years under review, the dividend pay-out has been between 43% and 45%. So far the company has managed to maintain a dividend pay-out ratio of

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between 43% and 45% while retaining the balance to finance the share repurchase program and reinvest in the business (Hegel, 2014).

Earnings per shareThe earnings per share of Pfizer more than doubled during the period under review. This was caused by the increase in the company’s net profits as explained in 3.2.1 above and a decline in its share capital following the share repurchase program instituted by the company as explained in 3.2.3 above. The ratio shows that the company generating more profits for its shareholders which is good news for current and prospective investors.

Figure 7: GlaxoSmithKline Shareholders ratios

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Dividend and earnings per shareGSK has seen its dividends payments increase annually in line with the company’s policy of annual dividend growth. The company’s earnings per share has also increased following the slight improvements in the company’s profits. Overall, GSK’s shareholders will be happy with the company’s performance.

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4. Conclusion

Pfizer has performed very well financially given the challenges that the company and the pharmaceutical industry are facing. The company has managed to improve its profitability even though the company’s revenues have been declining during the three years reviewed mainly due to the expiry of patents of some of its high revenue generating products. Effective cost control measures coupled with a decline in the number of lawsuits the company is facing have greatly helped Pfizer improve its profitability. The nature of the pharmaceutical industry has seen Pfizer not utilise its assets effectively since much of the investments made now in the research and development of products are expected to generate revenues in the future. The company could look into developing new techniques for developing its products that would shorten the development period and hence improve its asset utilisation.

The company has also been effective and efficient in managing its working capital and improve its liquidity. Pfizer has improved its ability to pay its maturing obligations from its current assets. The company has also managed to collect money from its customers much quicker even though the duration of holding has increased due to holding more inventories. The company needs to keep an eye on the length of time it takes to pay its suppliers as delays in paying them might results in tougher credit terms or even denial of products or services.

Pfizer can be considered to not to be risky due to the low level of debt that the company has when compared to its equity. The company has been able to generate sufficient profits to be able to pay its interest obligations many times over. The company has also been able to generate enough profits after paying its interest obligations to pay dividends to its shareholders and leave some profits for reinvestment into the business.

The shareholders of Pfizer will view the company’s performance as being very good from their perspective. Their earnings per have been improving year after year and the amount of dividends they have been receiving have also been increasing annually. These increases convey the message that management are confident that the company will continue to be profitable and generate more profits that will in turn enable shareholders receive even more dividends.

Pfizer has a number of factors that it can use to its advantage to manage the opportunities that are present in the general environment. The company has a well-recognised brand and a huge portfolio of products. These factors, coupled with its strong financial performance, could enable Pfizer expand its operations and venture into new markets which are enjoying good economic growth such as

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Brazil, Russia, China and Africa. The company could also use its strong financial position to acquire other pharmaceutical companies especially those with strong research development departments, as this will provide more prospects for the company to come up with more products and improve their performance.

The expiration of some of its best performing drug patents present a problem for Pfizer. Over the past three years, the company has seen its revenue decline by a total of 8% following the expiration of the Lipitor and Viagra drugs patents. Pfizer should speed up its research and development of new products so as to be able to replace those products whose patents expire.

Dependency on a few products for the generation of major part of the revenue should be reduced. Currently Pfizer generates 48% of its revenues from ten of its products. The expiration of the patents of these products could lead in the company losing a significant portion of its revenues. Pfizer should speed up its research and development programs so as to generate more products that can share the task of generating revenues.

The threat posed by counterfeit products is something that Pfizer should take very seriously as it has the potential to seriously affect its profitability and performance. As noted in the report, counterfeit drugs contributed to a total of US$2 billion in the US market alone. Corporation with the drug and law enforcement agencies is required in order to tackle this problem.

Pfizer should also need to come up with new strategies to address the possible deregulation of the importation of prescription drugs in the US as this has the potential of seriously affecting its revenues and profitability. The company could lobby the US Congress and try to come to an agreement that will benefit all parties concerned.

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