US-based and European-based Pharmaceutical Companies A Financial Comparison Neal Lewis Amit Patil...
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US-based and European-based Pharmaceutical Companies A Financial Comparison Neal Lewis Amit Patil Karla Niehaus
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Transcript of US-based and European-based Pharmaceutical Companies A Financial Comparison Neal Lewis Amit Patil...
US-based andEuropean-based
Pharmaceutical Companies
A Financial ComparisonNeal Lewis
Amit PatilKarla Niehaus
Hypothesis
There are some significant differences between European and American Companies– American companies are
there to make money– Europeans have multiple
objectives– Different time horizons– Differences in corporate
governance
Corporate governance
U.S.: Board of DirectorsEurope: varies widely
– U.K. similar to the U.S.– Germany: dual system,
with Management board and Supervisory board
– Switzerland: anything goes
Hypothesis:Due to these
differences, we expect to see differences in financial performance:– Expect the U.S. to show
better short-term profit performance
– Expect the U.S. companies to be better short-term investment opportunities
The Companies
U.S.– Pfizer– Merck– Bristol-Myers
Squibb– Johnson &
Johnson– Pharmacia
Europe– Glaxo
Smithkline– AstraZeneca– Aventis– Novartis– Roche
The European Companies
Glaxo and AstraZeneca are based in England– both have management
boards that include outside Directors
– Both are the results of recent mergers (2000, 1999)
– Both follow U.K. financial guidelines (not U.S. GAAP)
Aventis is a French/German company based in Strasbourg France– Recent merger of Rhone-
Poulenc and Hoechst (1999)– Follows the German model– Has a supervisory board made
up of 50% labor representation. Oversees the management board
– Finances are in Euros
Novartis and Roche are
Swiss– Novartis is a 1996 merger of
Ciba and Sandoz, both of Basel. Roche is also based in Basel
– Both companies have a management board, made up primarily of company executives
– Finances are in Swiss Francs
Financial Analysis
Use of Financial Ratios to see
Operational Differences Comparing the results To check if hypothesis holds
true
Financial Analysis (Cont.)
Net Profit Margin Return on
stockholder’s Equity Basic Earning Power Return on Assets Current Ratio Quick Ratio Debt to Assets Debt to Equity
Times Interest Earned Inventory Turnover Days Sales Outstanding Fixed Assets Turnover Total Assets Turnover Dividend Yield Price Earnings Ratio Market/Book Ratio
Financial Analysis (Cont.)
ROE = Net Income/Common Equity
-80.00%-60.00%
-40.00%-20.00%
0.00%
20.00%40.00%60.00%
Company
Return On Equity(2000)
Financial Analysis (Cont.)
Return on Assets = Net Income/Total Assets
-30.00%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
Company
Return On Assets(2000)
Financial Analysis (Cont.)
TIE = EBIT/Interest Charges
-100
102030405060
Company
TIE(2000)
Financial Analysis (Cont.)
Inventory Turnover = Sales/Inventories
0
5
10
15
20
25
Company
Inventory Turnover(2000)
Financial Analysis (Cont.)
Fixed Asset Turnover = Sales/Fixed Assets
0
0.8
1.6
2.4
3.2
4
4.8
Company
Fixed Asset Turnover(2000)
Ratios reflecting difference in company objectives
Profit margin– US 18% vs Euro 7%– Americans more concerned with profit– Europeans more willing to take on
debt with interest expenses
Debt ratios– Debt-to-Equity Euro 65% vs US 40%– Most of debt is not from stockholders
Ratios reflecting differences in timelines
DSO– US 59 vs Euro 66– Europeans wait a bit longer before
recovering cash Inventory Turnover
– US 14 vs Euro 7– Europeans hold onto more inventory– English companies comparable to
US
Ratios reflecting differences in governance
English management structure similar to US
– BEP, focus more on earnings– Total Asset Turnover, accountable for
effective use of assets– M/B value, regarded highly from the outside
Swiss management is primarily internal– High current and quick ratios– Good for credit approval– Stockholders like productive use of assets
Quick Ratio Vs Inv. Turnover
Quick Ratio to Inventory Turnover
0.000
0.500
1.000
1.500
2.000
2.500
3.000
0 5 10 15 20 25 30
Inv. Turnover
Qui
ck R
atio
US
Phar
EU
M/B Value vs. Profit Margin
0
2
4
6
8
10
12
14
16
18
20
-10 0 10 20 30 40 50
Profit Margin, %
Mar
ket/B
ook
Val
ue
U.S.
Europe
Pharmacia
ROA vs. M/B
0
5
10
15
20
25
30
0 5 10 15 20 25
Market/Book value
Ret
urn
On A
sset
s
P/E vs. M/B
0
20
40
60
80
100
120
0 5 10 15 20 25
Market/Book value
Pri
ce/E
arni
ngs
ratio
U.S.
Europe
Pharmacia
Investing
American companies are better short-term opportunities– Both perceived of high value– US more likely to make a profit in near
future– US more stable management
structures– US prioritize stockholder satisfaction
Questions??
