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

Research Report

“The financial and business performance of Pfizer from 1 January 2012 to 31 December 2014”

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TABLE OF CONTENTS

1. PROJECT OBJECTIVES AND RESEARCH APPROACH..........................................4

1.1. TOPIC OF THE RESEARCH.............................................................................................................4

1.2. REASONS FOR SELECTING THE TOPIC.........................................................................................4

1.3. REASONS FOR SELECTING PFIZER...............................................................................................4

1.4. AIMS OF THE RESEARCH............................................................................................................... 5

1.5. OBJECTIVES OF THE RESEARCH...................................................................................................5

1.6. RESEARCH QUESTIONS.................................................................................................................. 5

1.7. RESEARCH APPROACH...................................................................................................................6

2. INFORMATION GATHERING, ACCOUNTING AND BUSINESS TECHNIQUES 7

2.1. INFORMATION GATHERING...........................................................................................................7

2.2. INFORMATION GATHERING PROBLEMS AND LIMITATIONS......................................................7

2.3. ETHICAL ISSUES..............................................................................................................................7

2.4. RESEARCH ANALYSIS TOOLS.........................................................................................................8

2.4.1 PESTEL...................................................................................................................................... 8

2.4.2 SWOT.......................................................................................................................................... 8

2.4.3 Ratio analysis.......................................................................................................................... 9

3. ANALYSIS..................................................................................................................... 13

3.1. BUSINESS ANALYSIS....................................................................................................................13

3.1.1 PESTEL.................................................................................................................................... 13

3.1.2 SWOT....................................................................................................................................... 18

3.2. FINANCIAL ANALYSIS..................................................................................................................22

3.2.1. Profitability analysis........................................................................................................ 22

3.2.2. Liquidity ratios................................................................................................................... 25

3.2.3. Risk ratios............................................................................................................................. 28

3.2.4. Shareholders ratios.......................................................................................................... 30

4. CONCLUSION............................................................................................................... 33

Table of Figures

FIGURE 1: SWOT SUMMARY...............................................................................................................18

FIGURE 2: PROFITABILITY RATIOS......................................................................................................22

FIGURE 3: MAIN OPERATING EXPENSES ANALYSIS...........................................................................24

FIGURE 4: LIQUIDITY RATIOS...............................................................................................................25

FIGURE 5: RISK RATIOS.........................................................................................................................28

FIGURE 6: PFIZER SHAREHOLDERS RATIOS.......................................................................................30

FIGURE 7: GLAXOSMITHKLINE SHAREHOLDERS RATIOS................................................................31

1. Project objectives and research approach

1.1. Topic of the research

I have selected topic number eight, “An analysis and evaluation of the business

and financial performance of an organisation over a three year period” as the

topic for this research. The research will focus on Pfizer, a pharmaceutical

company from America. The results of Pfizer will be compared to those of

GlaxoSmithKline (GSK), which is also a pharmaceutical company located in the

United Kingdom. The research will cover a period from 1 January 2012 to 31

December 2014.

1.2. Reasons for selecting the topic

Topic number eight, “An analysis and evaluation of the business and financial

performance of an organisation over a three year period” was selected because

of my interests in financial and business analysis as well as to utilise my

strengths and skills in the area. This topic gave me the chance to start practicing

on the skills and knowledge learned during my ACCA studies and gave me a fill of

what to expect in my future career as an accountant.

1.3. Reasons for selecting Pfizer

I decided to select Pfizer because of the interest I have in the pharmaceutical

industry as my father once worked for the company. I was also interested in the

company due to its recent failed attempt to acquire AstraZeneca, one of its major

competitors in the United Kingdom. I wanted to find out how the company was

performing both business wise and financially for it to warrant such a strategy.

Two cousins Charles Pfizer and Charles Erhart created Pfizer back in 1849. It is

the second largest pharmaceutical company behind Johnson & Johnson (Chen,

2015). The company’s head offices are located in New York and it employs

approximately 80,000 employees worldwide. The company has a set of

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diversified operations and focuses mainly on supporting wellness and

prevention and treatment and cures of diseases (Pfizer, n.d).

1.4. Aims of the research

The main aim of this research is to conduct an analysis of the business and

financial performance of Pfizer covering three years starting from January 2012

to December 2014.

1.5. Objectives of the research

A number of objectives have been set in order to facilitate the achievement of

this research aim:

a) Find out what factors impact on the performance of companies in the

pharmaceutical industry.

b) Find out the opportunities and threats that Pfizer faces.

c) Find out the factors that contribute to Pfizer’s strengths and weaknesses.

d) Find out how Pfizer has performed financially during the three-year

period from January 2012 to December 2014.

e) Give suggestions on what Pfizer should do to improve its business and

financial performance.

1.6. Research questions

For the research to be successful and achieve its objectives, a number of research

questions have been developed to guide the research and provide more focus.

These research questions are:

a) What are the general business factors that affect the pharmaceutical

industry?

b) What are the threats and opportunities present in the general

environment?

c) What are Pfizer’s strengths and weaknesses?

d) What has been Pfizer’s financial performance during the three-year

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period from January 2012 to December 2014?

e) What should Pfizer do to improve its performance?

1.7. Research approach

The research has adopted a systematic and logical approach in order to ensure

that the main aim of the research is achieved and address the different areas of

the research.

a) The general business environment will be analysed using the PESTEL tool

in order to establish the factors that have an impact on pharmaceutical

companies as well as identify the existing opportunities and threats.

b) Pfizer’s operations will then be looked into to identify the factors that give

the company its strengths and weaknesses as well as utilise the results

from the PESTEL and summarise its opportunities and threats.

c) Ratio analysis will then be applied in order to find out how the company

has performed financially after having obtained an insight into the Pfizer’s

business performance and its internal operations.

d) Suggestions will then be given on what Pfizer should do in order to

improve its business and financial performance.

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2. Information gathering, accounting and business techniques

2.1. Information gathering

This research has used information gathered exclusively from various secondary

sources. The nature of the research topic allowed for the research to be

successfully conducted by using information obtained from secondary sources

only. The sources included:

a) Pfizer and GlaxoSmithKline company websites

b) Journals from the pharmaceutical industry

c) Specialist analyst reports covering companies in the pharmaceutical

industry

d) Various reputable business and financial websites including Forbes,

Financial Times and Bloomberg

e) Various books on business and financial studies

2.2. Information gathering problems and limitations

There were a number of problems faced during the process of gathering

information for the purpose of conducting this research. The first of which was

the inconsistency of information obtained from different sources. This was

resolved by crosschecking the information with another source and only used it

when there were similar.

Although the research could have been improved by using information from

primary sources, this was not possible as it was not possible to get anyone from

Pfizer or GSK to respond to my emails requesting interviews as well as

information from the companies.

2.3. Ethical issues

The only major ethical issue that I had to address was to do with plagiarism. I

had to make sure that I correctly cited in the body of the report and referenced

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all sources of information that I used in the report using the Harvard referencing

guide as required by Oxford Brookes University research guide.

2.4. Research analysis tools

2.4.1 PESTEL

PESTEL enables the general business environment to be analysed and factors

affecting the business performance of companies in a particular industry be

identified (Kourdi, 2009). The model groups the factors into six categories

namely political, economical, social, technological, environmental and legal. The

factors in these categories are then analysed to identify whether they provide

opportunities or threats to companies operating in the respective industry.

PESTEL limitations

a) The model might be confusing if used by an inexperienced user since the

factors are not ranked in order of importance and hence an inexperienced

user might end up focusing on issues that are of little significance to the

company.

b) The model does not provide a clear guide as to where a factor should be

placed. For example, one can argue that government policies on

unemployment are political factors while another could argue that they

are economic factors.

c) There are no limits as to how many factors could be included in the model.

This might result into users trying to identify vary many factors some of

which are of little significance to the industry and company hence wasting

valuable time and loss of focus.

d) No indication is given as to what should be done next once the factors

have been identified.

2.4.2 SWOT

SWOT is a tool that summarises the opportunities and threats that have been

identified by analysing the general environment as well as the strength and

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weaknesses originating from the internal operations of a company (Kourdi,

2009).

SWOT limitations

a) There is no guidance as to what should be done with the factors that have

been listed in the model

b) The factors listed are not ranked in order of importance hence if care is

not taken, time might be wasted in dealing with factors that are not

important.

c) As was seen with the PESTEL model, factors can be listed in different

categories depending on the preference of the user. One person could see

a factor as a threat but another could easily see it as an opportunity.

2.4.3 Ratio analysis

Ratio analysis is a method of comparing balances obtained from the financial

statements of a company and trying to find out what has caused the balances to

behave in the way they have (Glen, 2008). This provides an opportunity for the

financial performance of the company to be analysed in detail and future actions

planned on how the performance can be improved.

Ratio analysis can analyse balances from one company over a period of time or

from similar companies over the same period of time.

Pfizer financial analysis will focus on a number of ratios categorised as follows:

1) Profitability

a) Gross profit margin – The ratio looks at the level of profit being generated

from sales before operating costs are deducted. Factors affecting the gross

profit include product sales mix, volume of sales, pricing and cost of

manufacturing (Elliot and Elliot, 2013).

b) Net profit margin – The ratio assesses how well management are able to

control the operating costs of the company in order to create value for its

shareholders (Elliot and Elliot, 2013).

c) Asset turnover – The ratio looks at the ability of management to generate

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revenue given the assets that are under their control (Elliot and Elliot,

2013).

d) Return on capital employed – The ratio incorporates the results of the

ratios above and provides a measure of how profitable the business has

been. The ratio is the main profitability measure of a business and is

widely used by many to obtain an overview of the profitability of a

business (Elliot and Elliot, 2013).

2) Liquidity

a) Current ratio – The ratio examines the company’s ability to pay meet its

short-term obligations using its short-term assets (Clive, 2009). Ideally, a

company would want to be able to meet its short-term obligations using

its short-term assets without relying on additional financing.

b) Quick ratio – The ratio is closely related to the current ratio with the only

exception being that it excludes inventory from the short-term assets as

they are viewed as not being liquid enough to be extinguished in a short

period of time.

3) Working capital management

a) Inventory days – This ratio analyses the number of days that a company

takes from acquiring its inventory to selling it (Clive, 2009). The ideal

scenario will be for a company to have less inventory days ratio as this

indicates it is able to sell more inventory and generate more revenue.

b) Receivable days – This ratio analyses the duration that a company takes

from selling its inventory or services to receiving money from its

customers (Clive, 2009). An ideal scenario will be for a company to have a

very short receivable days ratio as this shows that the company is

collecting money from its customers quickly for the purpose of

reinvesting into the business or paying it back to the owners by way of

dividends.

c) Payable days – This ratio analyses the duration that a company takes from

purchasing its goods or services from its suppliers to when it pays for

them (Clive, 2009).

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4) Risk

a) Debt-to-equity – This ratio compares the level of debt that a company

carries to its equity (Clive, 2009). Carrying high levels of debt increases

the risk level of a company as any failure to meet the debt obligations

might result into serious consequences that might include liquidation.

b) Interest cover – This ratio looks at the capacity of the company to pay its

interest obligations from the profits that have been generated in the

relevant year without having to rely on reserves (Clive, 2009). Not being

able to meet its interest obligations could lead to a company facing

bankruptcy.

c) Dividend cover – This ratio looks at the capacity of a company to pay

dividends from the profits that have been generated in the respective year

without having to rely on its reserves.

5) Shareholders

a) Earnings per share (EPS) – This ratio is crucial for investors and

shareholders as it provides an insight on how management have fared in

generating profits for the owners of the company (Elliot and Elliot, 2013).

From shareholders perspective, an increasing EPS is preferable to them.

b) Dividend per share – This ratio shows how much dividend has been paid in

respect of each share (Elliot and Elliot, 2013).

Appendix 5 contains a list of all the ratios above and an analysis on how they

have been calculated.

Limitations of ratio analysis

a) Different accounting policies over time or those being applied by different

companies might distort the effectiveness of the ratios being compared.

b) Since ratio analysis utilises balances from the financial statements, the

ratios can be affected by the manipulation of the balances in the financial

statements.

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c) Ratio analysis is based on historical balances in the financial statements

and so tells us about the past, which is not necessarily a good indicator of

the future.

d) The results of the ratio analysis could be made less useful if inflation

levels are high.

e) Ratio analysis is not suitable for comparing companies in different

industries as they are affected by different factors and might have

different accounting methods.

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3. Analysis

3.1. Business analysis

3.1.1 PESTEL

Political factors

Political stability and security

Political stability and a safe environment are crucial ingredients for businesses to

be able to operate effectively and be profitable. Businesses will be reluctant to

invest or plan for their long-term future if there is political uncertainty as well as

lack of security. As Pfizer operates in a number of countries worldwide, it is

crucial that the political stability in the countries in which it operates is assured

as well as the safety of its facilities and employees.

Government policies on health care systems

The health care sector policies adopted by different governments can have a

significant impact on the pharmaceutical industry. Different countries have

different health care systems with some countries having their health care

services being mainly provided b the private sector while others have their

health care being provided by the government. A good example is the UK, which

has its health care being funded by the government that effectively makes it the

biggest customer of pharmaceutical companies in the country.

Economic factors

Economic growth

The level of economic prosperity of different countries is related to the

performance of companies operating in the pharmaceutical industry. High levels

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of prosperity results in more branded drugs which are more expensive being

utilised while in periods of declining economic prosperity leads to many

governments adopting austerity plans leading to patients using more generic

drugs which are more cheaper than the branded ones. During the period under

review, Pfizer has witnessed its revenue decline by approximately 9% from 2012

to 2014 (Merson, 2015).

Taxation

Tax policies being adopted by different countries globally can have a big impact

on the performance of companies in the pharmaceutical industry. This can lead

to strategic acquisitions of companies in countries with favourable tax regimes in

order to reduce the amount of tax that the company pays.

A good example of this can be seen when Pfizer attempted to acquire

AstraZeneca, a UK company claiming that it wanted to harness the power of

AstraZeneca’s research and development facilities and expertise. The deal failed

to go through after it was discovered that the main push for the acquisition was

the favourable tax rates in the UK, which would have resulted in the company

paying taxes at a rate of 23% in the UK as compared to 30% that the company,

was paying in America (Gill, 2014).

Currency exchange rates

Being a multinational, Pfizer finds itself operating in more than 40 countries

worldwide and generating more than 62% of its revenue from its oversees

operations. The recent appreciation of the US$ against other major currencies

have resulted in the company realising huge exchange rate losses in their

financial statements. A total of US$ 1.4 billion in exchange losses were reported

in Pfizer’s financial statements for the year ending December 2014 (Pfizer

Annual Report, 2014).

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Social factors

Demographics

Demographics have a direct impact on the performance of companies operating

in the pharmaceutical industry. The growth in the global population leads to

more people in need of healthcare, which in turn translates into more business

for pharmaceutical companies. According to the United States Census Bureau

(2014), The global population is set to grow from 7.2 billion in 2014 to 9.8 billion

in 2050.

Age distribution of the population is also important to pharmaceutical

companies since different age groups have unique health problems, which they

face. Being able to analyse the global demographic trends and develop the

appropriate health care products could give a company a competitive advantage.

Lifestyle choices

The world is currently witnessing an increase in the number of people classified

as being obese. This has been contributed by poor eating habits and insufficient

physical exercise. The World Health Organisation (2015) estimates that 63% of

the global population reside in countries where obesity and its related illnesses

kill more people than other health issues. Pharmaceutical companies can use

their research facilities to create cures for the obesity related illnesses such as

type II diabetes and hypertension as well as products that could help tackle the

obesity problem.

Technological factors

Research and development

Companies in the pharmaceutical industry invest huge sums of money in

research and development. Usually the research, development and trials of drugs

takes a long time which can easily reach ten years hence it is very important that

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companies devise means that can shorten this period and produce drugs much

faster.

Environmental factors

Sustainable development

The world is currently witnessing an increase in awareness in the drive towards

sustainable development. Companies in the pharmaceutical industry can

contribute towards achieving this goal. Pfizer has adopted policies that are

aimed at enabling the company make a meaningful contribution towards

achieving sustainable development. The company has developed strategies that

aim to see the 50% of the company’s energy coming from renewable sources as

well as recycling 100% of its water and waste so as to cut down on its usage. The

company also aims to use 100% recycle material for its packaging by the year

2025 (Pfizer, 2015).

Legal factors

Patents rights

The infringement of patents is rife in the pharmaceutical industry. To be able to

recoup the huge outlay in research and development of its drugs, companies

normally acquire patents, which last for a specific period of time after which

other companies can produce and sell the drugs. Infringing on the patents of

others can result into costly court cases and fines. In 2013, Sun Pharma and Teva

Pharmaceuticals were found guilty of infringing on one of Pfizer’s patents on an

acid-reflux drug, Protonix, and were fined a total of US$2 billion (Grey, 2013).

Price fixing

With the competition that the branded drugs produced by the major

pharmaceutical companies face from generic drugs, companies might be tempted

to collude in order to form cartels and fix prices. According to Rosenblatt (2014),

Pfizer and other North American pharmaceutical companies were taken to court

for colluding in fixing their product prices in order to lock out from their market

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the much cheaper drugs being produced by Canadian pharmaceutical companies.

Personal lawsuits

Lack of full and proper disclosure of the side effects caused by their drugs could

lead to the pharmaceutical companies being sued by the users of the drugs.

Pfizer had to pay a total of US$ 932 million in 2012 as settlement of various

lawsuits relating to the side effects of two of its pain relievers, Bextra and

Celebrex, which included strokes and heart attacks (USA Today, 2014). Pfizer is

also in the process of negotiating a settlement with a women’s group who are

claiming that they have suffered type II diabetes as a result of using Lipitor,

Pfizer’s anti-cholesterol drug (Dye, 2015).

Laws and regulations

The laws and regulations governing the pharmaceutical industry are among the

toughest due to the nature of the industry. Companies operating in this industry

are obliged to adhere to these rules and regulations failure of which they might

suffer huge consequences. Pfizer has found itself in the wrong end of the law a

couple of times. In 2013, the company was sued by one of its employees who was

fired after acting as a whistle blower and exposing a number of health and safety

issues. As a result of this, Pfizer had to pay a fine of US$ 1.5 million. In 2013 the

company was also sued by employees in its Puerto Rico operations as a result of

a failed pension scheme managed by the company (Mattera, 2014).

Unethical clinic trials

The pharmaceutical industry is affected by claims that companies in the industry

are involved in drug clinical trials that are unethical. Most drugs developed

undergo clinical trials where they are tested on animals or humans where very

stringent set of rules that have to be followed. According to Smith (2013), Pfizer

had to settle a long standing case relating to clinical trials of its drugs Ceftriaxone

and Trovan which treat meningitis, which were conducted on children in Kano,

Nigeria and resulted into the death of three of its subjects.

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3.1.2 SWOT

Figure 1: SWOT summary

STRENGHTS

Global recognised brands

Strong research department

Huge portfolio of drugs and

medicines

WEAKNESSES

Many patents close to expiring

Huge dependency on few branded

products

OPPORTUNITIES

Economic growth of emerging

markets

Global population growth

THREATS

Dependency on governments

Lifting of restrictions on imported

drugs

Increase in counterfeit products

Strengths

Pfizer is a global company with a well-known brand name. Forbes (2015) ranks

the company as the second largest pharmaceutical company worldwide and its

brand name is ranked 37th in the list of the worlds most valuable brands

(Eurobrand, 2015)

The company has a very strong research and development department that is

responsible for developing well-recognised drugs such as Lyrica, an anti-

epileptic drug and Prevner Family for the treatment of meningitis and

pneumonia. As of July 2015, the department has a total of 172 products under

different phases of research and development (Pfizer, 2015).

Pfizer boasts of a huge product portfolio that is performing very well in the

market. Out of the top 20 best selling banded drugs in the market globally, Pfizer

has 3 of them namely Lyrica, Viagra and Celebrex. The company owns a total of

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714 products that are licenced for sale globally and a further 172 products under

different phases of research and development (Hegel, 2015).

Weaknesses

Pfizer relies heavily on a few drugs for generating revenue even though the

company boasts of a huge product portfolio. In 2014, 42% of the total revenue of

Pfizer was generated from 10 of its products (Merson, 2015). This is risky as any

breakthrough in research and drug production of similar products could see the

company suffer in tames of sales and revenue generation.

The pharmaceutical industry relies on patents to give companies exclusivity in

drug production so that they can recoup their investment in research and

development undertaken to produce the drugs. Once the patents expire, other

companies can start producing the drugs and enjoy a share of the market. As of

December 2014, Pfizer estimated that the company stands to loose 16% of its

revenue for those products whose patents will be expiring in the next two years

(McGrath, 2014).

Opportunities

The world is witnessing a rise in emerging economies including the BRIC nations

of Brazil, Russia, India and China as well as other Asian and African countries.

This is good news for Pfizer as it could size this opportunity and increase its

market share in these regions. As economies of these countries develop and

grow, its people are also likely to experience an increase in their wealth and a

change in their way of life. Health care is also bound to see improvements as

more people will seek formal health services as well as move from using

traditional medication and generic drugs and move into branded drugs. Pfizer

can use its global reach and its well-developed research and development

department to satisfy the healthcare needs of these countries.

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The growth in the global population presents an opportunity for companies in

the pharmaceutical industry. With more people, there will be an increase in the

need for healthcare and drugs for the well being of the population. The United

States Census Bureau (2014), the global population is set to hit 9.8 billion people

by 2050, which is a 36% increase from the global population as of 2014.

The treatment of various life-threatening illnesses is facing huge challenges as

antibiotics are no longer proving to be effective following many tears of misuse

by patients. If efforts are not taken to address this situation, the world might

witness a huge catastrophe in its healthcare. Companies in the pharmaceutical

industry such as Pfizer have the ability to tackle this problem by undertaking

research on alternatives to antibiotics to help cure these life-threatening

illnesses. A company that manages to develop an alternative to antibiotics stands

to benefit significantly.

Threats

Counterfeit drugs are proving to be a great threat to companies specialising in

branded drugs. This poses a threat to both the companies as their revenues

suffer and the patients whose health is put at risk. Hagel (2015) estimates that in

2014, the counterfeit drug market had a value of more than US$2.2 billion. As

this represents a huge loss in revenue for companies such as Pfizer, it is crucial

that they undertake all efforts to curb the counterfeit drug market. In 2013, the

Food and Drug Administration Department in America alerted the world of a

counterfeit drug used to treat cancer called Altuzan, which was being produced

in America and distributed globally (US Food and Drug Administration, 2013).

Pfizer is relying heavily on revenue generated from its services rendered and

drugs sold to the government and its agencies. In 2014, more than 41% of its

revenue was generated from dealings with governments and their related

agencies. This is very risky as any shift in government policy from government

funded to a privately funded one could result in a decline in revenues as the

drugs could be expensive for individuals to afford (Merson, 2015).

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The United States Healthcare system is currently undergoing reviews. One of the

issues under review is the restriction imposed on the importation of cheaper

drugs from Canada. If the Government decides to lift these restrictions, Pfizer

stands to lose a great deal of its North American market, which is currently with

the Government as the government will go for the cheaper drugs with the aim of

cutting down costs. This will affect the ability of Pfizer to invest on further drug

research and might have in impact on the future of healthcare globally (Johnson,

2014).

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3.2. Financial analysis

3.2.1. Profitability analysis

Figure 2: Profitability ratios

2014 2013 2012 2014 2013 2012GlaxoSmithkline Pfizer

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

-

0.1

0.2

0.3

0.4

0.5

0.6

0.7

Profitability Ratios

Tim

es

Source: Appendix 5

Return on capital employed (ROCE)

Pfizer has enjoyed mixed results as far as its ROCE is concerned. In 2013, the

ROCE increased before declining sharply in 2014. To understand the reasons

behind these movements, a closer look at the gross and net profit margins as well

as the asset turnover ratios

Gross profit margin

Pfizer’s gross profit margin have remind stable over the three years. The

company has seen its revenues decline over the three years but management

have been effective in controlling costs. The progressive decline in revenue is

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attributed to the expiration of patents of some of its high revenue earners

including Viagra and Lipitor in 2012, which combined were responsible for 15%

of the company’s revenue before the expiration of the patents. Post expiration of

the patents, these two products have only managed to generate 7% of the

revenue as cheaper unbranded substitutes have now become available (Ward,

2014).

To address the decline in its revenues, Pfizer has instituted cost control measures

which have been focused on the way it conducts research for its products with

the aim of concentrating on few but high margin potential products (Berg, 2015).

GSK have also seen its gross profit margins remain fairly stable albeit with a

slight decline. The company has also seen its revenue decline during the period.

This shows that companies in the pharmaceutical industry are facing tough times

in generating revenues as product patents expire (Rowland, 2014).

Net profit margin

The net profit margin of Pfizer saw a huge increase in 2013 as shown in figure 2

above. The main reasons for this increase was an income of US$ 1.3 billion

following a successful litigation of settlement with Teva Pharmaceutical

Company and Sun Pharmaceutical Company for their infringement of Pfizer’s

patents of its Protonix product in the U.S. The company also saw a decline in its

legal expenses to the tune of US$ 2.2 billion as a result of the benefits of the risk

management strategies that the company had initiated starting in 2011 (Meyers,

2015).

The decline in the net profit margin in 2014 was mainly due to the non-

recurrence of the litigation income of US$ 1.3 billion in 2013 and a slight increase

in the research and development costs following the write-off of research

expense incurred on products that Pfizer deem not to have high margin earning

potential in line with their new strategy (Meyers, 2015). Management have done

a good job at controlling other costs in line with the revenue being generated as

shown in figure 3 below.

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Figure 3: Main operating expenses analysis

Main operating expenses

Figures in $ millions 2014 2013 2012

Revenue

49,60

5

51,58

4

54,65

7

Selling and admin expenses

14,09

7

14,35

5

15,17

1

Research and development 8,393 6,678 7,482

Amortisation of intangible assets 4,039 4,599 5,109

Selling and admin expenses/Revenue 28% 28% 28%

Research and development/Revenue 17% 13% 14%

Amortisation of intangible assets/Revenue 8% 9% 9%

Source: Pfizer financial statements for 2012, 2013 and 2014

GSK has also seen its net profit margin decline during the three years under

review. This has mainly been contributed by the decline in revenues as well as a

lack of effective operating cost control measures as their operating costs have

remind fairly the same while the revenue has declined (Hansen, 2015).

Asset turnover

The asset turnover of Pfizer has remind constant at 0.3 times during all the three

years being reviewed. For every US$ in assets controlled, the company is able to

generate 30 cents as revenue. The asset turnover is very low and management

need to ensure that this level increases in the future if they are to create value for

their shareholders. It is safe to say that, as their new strategy of investing in

potential high margin earning products starts to bear fruits, the asset turnover is

bound to improve.

GSK’s asset turnover is double that of Pfizer showing that they are more effective

in utilising the assets under their control.

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The overall profitability position of Pfizer as shown by its ROCE has mainly been

affected by its operating costs and to a laser extent its revenue. Although the

revenue has been declining during the period, management have been effective

in controlling their production costs. The huge research expense write-off

following their new product development strategy was the main cause for the

decline in net profits and hence a decline in the ROCE. In the future as its new

strategy of investing in high earning products start to take effect, it can be

expected that the ROCE will improve.

3.2.2. Liquidity ratios

Figure 4: Liquidity ratios

2014 2013 2012 2014 2013 2012GlaxoSmithkline Pfizer

-

50

100

150

200

250

300

350

400

450

-

0.5

1.0

1.5

2.0

2.5

3.0

Liquidity Ratios

Day

s

Tim

es

Source: Appendix 5

25

Current and quick ratios

Both the current and quick ratios of Pfizer are all above 1 and have been

improving over the three years under review. This means that Pfizer is liquid and

can meet its short-term obligations using its short-term assets without the need

to rely on other sources such as liquidating its long-term investments or

disposing its long-term assets. Pfizer can meet these obligations even without the

need of selling its inventories. This improvement of the ratios is mainly

attributed to the fall in the company’s accruals relating to its legal costs due to a

decrease in the number of lawsuits the company is facing and what it expects to

face in the future following good risk management strategies implemented by the

company. A total of US$ 2.2 in accruals have so far been reversed during the

period under review (Meyers, 2015).

On the other hand, the current and quick ratios of GSK have remained fairly

stable over the three years under review. The current ratio indicates that the

company is just able to meet its current obligations using its current assets but

will struggle to meet them without the disposal of its inventory. This makes GSK

less liquid.

Inventory days outstanding

Pfizer’s inventory days outstanding although very high have been declining over

the three years under review, which is good as the company is able to sell its

products much faster. The improvement of the ratio follows management efforts

of reducing the level of inventory the company carries as a result of the decline in

sales. The company is facing a huge task of reducing its inventory levels

especially those of its high value products Lipitor and Viagra whose patent for

exclusivity have expired and are facing stiff competition from similar unbranded

versions (Hegel, 2015).

GSK has seen its inventory days outstanding ratio increase over the period

although they are slightly below those of Pfizer. This shows that the company is

26

struggling to sell its inventory. A closer look at the company shows that the

increase in the ratio is mainly due to the build up of inventory of its new product

Zoster, which the company was planning to introduce into the market in the

beginning of 2015 (Hansen, 2015).

Receivable days outstanding

Pfizer has succeeded in reducing the duration it takes to collect money from its

customers during the period under review. The improvement in the ratio is due

to the effective credit control procedures that the company established back in

2012 during its restructuring program, which saw the pay of many of its

employees linked to various targets which they had to achieve. Furthermore, the

continued improvement of the global economy has meant that many

governments, which are the biggest customer for Pfizer, are now in a position to

pay its debts quicker (Singh, 2015).

GSK’s receivable days outstanding ratio has remained stable over the three years

being reviewed meaning that the GSK is able to manage its receivable well as

they are very much within the company’s policy of 90 days collection (GSK,

2014).

Payable days outstanding

Pfizer’s payable days outstanding have declined slightly during the three years

under review. This means that the company is paying its suppliers mush quicker,

which is a good thing as it maintains good relations with its suppliers. The

improvement is mainly due to the improvement in the cash position of the

company and its good credit control procedures ensuring that resources are

available to meet its obligations (Singh, 2015).

GSK has seen its payable days outstanding increase during the period. GSK takes

more than one year to pay its suppliers, which is more than twice the time Pfizer

takes.

27

3.2.3. Risk ratios

Figure 5: Risk ratios

2014 2013 2012 2014 2013 2012GlaxoSmithkline Pfizer

0%

50%

100%

150%

200%

250%

300%

350%

400%

-

2.0

4.0

6.0

8.0

10.0

12.0

Risk Ratios

Tim

esSource: Appendix 5

Debt-to-equity

Pfizer’s debt-to-equity has increased slightly over the three years under review

as shown in figure 5 above. The ratio is not significantly high which means that

the company is not risky. Should anything happen leading to the company failing

to meat its debt obligations, the equity of the shareholders are sufficient to cover

the debts. Although the ratio has increased, the actual debt levels have been

declining as the company has been repaying them as its contractual terms. The

actual cause for the increase in the ratio is the decline in the equity of the

company following the share repurchase program worth US$15 billion approved

by the board of directors in 2014 as they believed that they were undervalued in

an attempt to improve shareholder value (Merson, 2015).

28

GSK has seen is debt-to-equity ratio increase during the period and is

significantly higher than that of Pfizer. At a rate of 381% as of December 2014,

the ratio is very high and makes the company very risky. This means that GSK

will not be able to meet its debt obligations from its equity without the need of

disposing of some of its non-current assets. The high debt levels have been

necessary for the financing of the company’s expansion program

(GlaxoSmithKline, 2014).

Interest cover

Pfizer’s interest cover ratio is more than one and has been increasing in all the

three years under review. This shows that the company is able to pay its interest

expenses from profits generated in the same financial period. Although the profit

levels have been falling during the period, the actual interest expenses have also

been declining following a decline in the overall debt levels resulting in the

increase in the interest cove ratio.

GSK’s interest cover ratio has declined during the period although it is still

capable of paying the interest from profits generated during the same period.

The decline in the ratio is mainly due to the decline in the level of profits

generated as explained in section 3.2.1.

Dividend cover

The dividend cover ratio of Pfizer has declined over the three years under review

although it is still capable of paying them from the profits generated during the

same financial period. The main reasons for the decline were the fall in the level

of profits generated as explained in section 3.2.1 above as well as the increase in

the amount of dividends being paid out as management believe that the future in

positive and the company stands to generate more profits.

GSK has also seen its dividend cover decline over the period although it can still

just pay them from the profits generated in the same period. The company’s

29

management has discretion on the amount of dividends to be paid based on the

future outlook of the company.

3.2.4. Shareholders ratios

Figure 6: Pfizer shareholders ratios

2013 2012 2011Pfizer

-

0.50

1.00

1.50

2.00

2.50

3.00

3.50

Pfizer Shareholders Ratios

$

Source: Appendix 5

Dividend per share

The shareholders of Pfizer have witnessed the amount of dividend per share

being paid out increase during the three years under review. The company has a

progressive dividend growth policy where it seeks to increase the amount of

dividend per share being paid each year. Although this strategy sends a positive

message to investors that the future is good, management should be careful

especially during this period, which has witnessed a decrease in revenue and

profits (Hegel, 2015).

Earnings per share

30

Pfizer shareholders have seen their earnings per share more than double during

the three years under review. The main reason for this is the reduction in the

outstanding shares as a result of the share repurchase scheme put in place by

management in an attempt to improve shareholders value as explained in section

3.2.3. The ratio shows that the shareholders are earning more from their shares,

which is a positive sign to them.

Figure 7: GlaxoSmithKline Shareholders ratios

2013 2012 2011GlaxoSmithkline

-

20

40

60

80

100

120

GlaxoSmithKline Shareholders Ratios

Pen

ce

Source: Appendix 5

Dividend and earnings per share

Overall, GSK has seen its dividend per share increase over the period mainly due

to the future outlook that management have on the company. This is despite the

fact that the actual profits generated have been declining during the period. From

the shareholders perspective, this is good but in the long run it might not be

sustainable without the improvement in the profitability of the company.

31

GSK shareholders have also seen some improvements in their earnings per share

over the period mainly due to the reduction in the number of shares outstanding

following the share buy-back program the company implemented in 2014.

32

4. Conclusion

Pfizer has experienced mixed performance in its business over the three years

under review from January 2012 to December 2014. In an environment where

the global economy is recovering, the company has found it difficult to generate

revenues and as a result it has witnessed a decline in its profitability. The expiry

of patents of some of its high earning products has reduced the ability of the

company to generate high revenues. The company has also been affected by the

huge write-offs of its research and development costs following adjustments of

its strategies that aim to focus on potential high earning products.

The assets under the control of management have not been utilised effectively

and as a result they have been generating a low level of revenue than would have

been preferred. Management should find ways of using its modern research

methods to develop techniques which could shorten the time it takes to research

and develop its products which when combined with its focus on potential high

earning products, could improve the fortunes of the company and improve its

asset utilisation as well as its profitability.

The working capital management of the company has been very effective. The

company has seen an improvement in its liquidity as shown by the current and

quick ratios. It is able to meet its current obligations from its current assets

without having to rely on its long terms assets. The company has also improved

its credit control activities and is now collecting money from its customers much

quicker as well as turning its inventory much faster. Pfizer has also managed to

shorten the duration it takes to pay its suppliers hence maintain good relations

with them.

The company can be considered not risky based on the various measures used to

assess the level of risk that the company faces. The company has a low debt level

compared to its equity and the actual amount of debt has been declining. The

company has also managed to increase its ability to pay off its interest

obligations from the profits it generates. The company is also able to pay the

33

declared dividends from the profits it has generated without the need to rely on

its reserves.

The shareholders of the company should be very pleased based on the measure

used to assess the performance of the company. They have managed to see the

amount of dividend being paid out per share increase in each of the three years

under review. The have also managed to see the level of earnings per share

increase over the period albeit through the repurchase of shares as instituted by

management. The growth in dividends will give them some encouragement as it

signals that the future is good.

Pfizer has huge potential to improve its performance given the various

opportunities and strength that the company possesses. Given its globally well-

recognised brand name in combination with its extensive portfolio of products

and strong financial performance, the company could look into concurring the

emerging economies market including China, Russia, Africa and Brazil. The

company can also use its huge financial reserves to acquire well-established

research companies in its efforts to come up with more advanced products in a

short period of time.

The company is facing a number of threats that it needs to address if it is to

improve its performance. The expiry of some of the patents of its high earning

products such as Viagra and Lipitor has resulted in the decline in the revenues

generated by the company by approximately 8%. The company should seek to

quickly replace these high earning products by expediting its research and

development activities.

Pfizer is also at risk as it has placed a huge dependence on a few products for

generating most of its revenues. Currently, the company relies on ten of its

products to generate more than 42% of its revenues. As the patents of these

products will eventually expire, the company stands to lose more revenue if they

are not replaced promptly. The company should also seek to develop more

products with high earning potential so as to diversify the risk.

34

Counterfeit products pose a huge threat to Pfizer and other companies in the

pharmaceutical industry. Pfizer and other pharmaceutical companies, seek to

tackle this problem by cooperating with law enforcement agencies. Failure to

address this problem could lead to losses in revenue as evidenced in the report

whereby the counterfeit market was estimated at more than US$ 2.2 billion.

35