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

Name:
ACCA Registration:
Word Count:

TABLE OF CONTENTS
1. PROJECT OBJECTIVES AND RESEARCH APPROACH......4
1.1.
1.2.
1.3.
1.4.
1.5.
1.6.
1.7.

RESEARCH PROJECT TOPIC.............................................................4

REASONS FOR TOPIC SELECTION......................................................4
WHY PFIZER?..............................................................................4
RESEARCH AIM.............................................................................4
RESEARCH OBJECTIVES..................................................................4
RESEARCH QUESTIONS...................................................................5
RESEARCH APPROACH....................................................................5

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...............................................................12
3.1. BUSINESS ANALYSIS....................................................................12
3.1.1 PESTEL.............................................................................12
3.1.2 SWOT...............................................................................16
3.2. FINANCIAL ANALYSIS....................................................................19
3.2.1. Profitability analysis........................................................19
3.2.2. Liquidity ratios................................................................21
3.2.3. Risk ratios.......................................................................23
3.2.4. Shareholders ratios.........................................................24

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

Table of Figures
FIGURE
FIGURE
FIGURE
FIGURE
FIGURE
FIGURE
FIGURE

1:
2:
3:
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6:
7:

SWOT SUMMARY...................................................................15
PROFITABILITY RATIOS.............................................................19
MAIN OPERATING EXPENSES ANALYSIS........................................20
LIQUIDITY RATIOS...................................................................21
RISK RATIOS..........................................................................23
PFIZER SHAREHOLDERS RATIOS.................................................24
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 selection
I 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 aim

This 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 objectives
In order to achieve the research aim, the following objectives have
been set:
a) To identify the factors that can have an influence on the
performance of companies in the pharmaceutical industry.
b) To identify Pfizers strengths and weaknesses.
c) To identify the factors that have influenced Pfizers 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 questions
To 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 approach
To 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.
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.

2. Information gathering, accounting and business

techniques
2.1. Information gathering
In 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 Glaxosmithkline
b) Pharmaceutical industry journals and reports
c) Business and financial websites such as Forbes, Bloomberg
and Yahoo Finance
d) Business and financial newspapers such as Financial Times
and The New York Times
e) Various books used in my ACCA studies and general business
books.
2.2. Information gathering problems and limitations
The 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 issues
The 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 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 PESTEL
PESTEL 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 PESTEL
The 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 SWOT
The 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 SWOT
The 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 identified
c) 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 analysis
Ratio 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 managements
effectiveness in utilising the companys 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) Liquidity
a) 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.
3) Working capital management
a) 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) Risk
a) 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

10

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) Shareholders
a) 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 companys 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 analysis
Ratio 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
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.

11

3. Analysis

3.1. Business analysis

3.1.1 PESTEL
Political factors
Political stability and security
A 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 systems
Government 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 growth
The 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).
Taxation
The 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,

12

some of these might appeal more to some companies and might

relocate their operations to those countries with lower tax rates.
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 rates
As approximately 60% of Pfizers 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
Demographics
Demographics 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 choices
Q The 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),

13

65% of the world's population live in countries where overweight

and obesity kills more people than underweight and
More 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
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 development
Pharmaceutical 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 rights
Patent 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 acidreflux drug Protonix (Grey, 2013).
Price fixing
Price 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
14

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 lawsuits
Pharmaceutical 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).
Laws and regulations
The 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 trials

The 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).

15

Figure 1: SWOT summary

STRENGHTS
Strong and well recognised
brand name
Good financial performance
leading to lower borrowing
costs
Huge diversified portfolio of
products
OPPORTUNITIES
Growth of emerging markets
Increase in population

WEAKNESSES
Expiration of patents
Over dependency on few
drugs

THREATS
Change in healthcare
industry increase
dependency on government
Deregulation on imported
drugs
Counterfeit products

3.1.2 SWOT

Strengths
Pfizer 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

16

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).

Weaknesses
Although 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).

Opportunities
The 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. 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).

17

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 lifethreatening conditions, as the rewards that could be obtained from
the discovery of such a drug are enormous.
Threats
One 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 antimalaria 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 companys income, as its products 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).

18

19

3.2. Financial analysis

3.2.1. Profitability analysis
Figure 2: Profitability ratios
Profitability Ratios
90%

0.8

80%

0.7

70%

0.6

60%

0.5

50%
0.4

Times

40%
0.3

30%

0.2

20%

0.1

10%
0%

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 margin
The 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 Pfizers top revenue generating
products in 2011 such as Viagra, an erectile dysfunction pill and

20

Lipitor, a cholesterol-lowering drug, has seen cheaper generic drugs

flooding the market and hence reducing Pfizers share of revenues
from these products. In total, these two products were generating
approximately 13% of Pfizers 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 margin
Pfizer 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 analysis

Main operating expenses
201
201
Figures in $ millions
3
2
51,5 54,6
Revenue
84
57
14,3 15,1
Selling and admin expenses
55
71
6,67 7,48
Research and development
8
2
Amortisation of intangible assets
4,59 5,10

21

201
1
61,0
35
17,5
81
8,68
1
5,46

Selling and admin/Revenue

Research and development/Revenue
Amortisation of intangible
assets/Revenue

28%
13%

28%
14%

29%
14%

9%

9%

9%

Asset turnover
Pfizer 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.
GSKs 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

22

Figure 4: Liquidity ratios

Liquidity Ratios
400

3.0

350

2.5

300
2.0

250
Days

200

1.5

150

Times

1.0

100
0.5

50
-

Current and quick ratios

Pfizers 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).
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 outstanding
Pfizers inventory days have increased by a total of 42 days from
2011 to 2013. The companys policy is to carry enough inventories
23

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 outstanding
Pfizer has managed to reduce the number of days it takes to collect
money from its customers. This decrease is attributed to the
companys good credit control efforts and the recovery of the
economies of many countries. As the majority of Pfizers 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 outstanding
The 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.
3.2.3. Risk ratios

24

Figure 5: Risk ratios

Risk Ratios
300%

12.0

250%

10.0

200%

8.0

150%

6.0

100%

4.0

50%

2.0

0%

Times

Debt-to-equity
The 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 cover
The 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.

25

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 cover
The 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
Pfizer Shareholders Ratios
3.50
3.00
2.50
2.00
$
1.50
1.00
0.50
-

Dividend per share

Pfizers shareholders have seen their dividend payment increase
each year as shown in figure 6. Pfizers dividend policy is for the

26

board to decide what amount should be paid out based on the

companys 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 payout ratio of between 43% and 45% while retaining the balance to
finance the share repurchase program and reinvest in the business
(Hegel, 2014).
Earnings per share
The earnings per share of Pfizer more than doubled during the
period under review. This was caused by the increase in the
companys 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
GlaxoSmithKline Shareholders Ratios
120

100

80

Pence

60

40

20

Dividend and earnings per share

GSK has seen its dividends payments increase annually in line with
the companys policy of annual dividend growth. The companys
earnings per share has also increased following the slight
improvements in the companys profits. Overall, GSKs shareholders

27

will be happy with the companys performance.

28

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
companys 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 companys 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

29

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
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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31