Pfizer
EXECUTIVE SUMMARY
After careful and thorough analysis, the teams recommendation is that Pfizer is a must BUY stock. As a leader in the pharmaceutical industry Pfizer shows some clear financial strengths such as an increased return on equity (11.78 in 2011 to 17.84 in 2012), a current ratio which has remained steady and higher than competitors and a shareholders equity which has increased in the past years from $57 billion to $81 billion. In addition, the pharmaceutical industry is expected to increase from $300 billion to $400 billion over the next three years and Pfizer is one of the only companies with the resources to acquire additional companies and capitalize on this market share.
Table of Contents
Page
Strategic Analysis
3
SWOT Analysis
9
Accounting Analysis
14
Financial Analysis
22
Forecasting
35
Valuation
46
Assessment of Solvency
56
Conclusion
59
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STRATEGIC ANALYSIS
Overview
Pfizer Inc. (Pfizer) was started in 1849 in New York by two cousins, Charles Pfizer and Charles Erhart. The discovery of Terramycin in 1950 paved the pathway of the companys growth from a small-scale chemical company to becoming the worlds largest pharmaceutical company.1 They were able to achieve revenues of 59 billion in 2012 with the help of their 91,500 employees worldwide. The company is publically traded on the New York Stock Exchange (PFE), London (PFZ), Euronext and Swiss stock exchanges. Pfizer has acquired several companies over the past decade including Warner-Lambert in 2000, Pharmacia 2003 and Wyeth in 2009. Their operations are focused on the discovery, development, manufacturing and marketing of prescription drugs. The organizations product portfolio is targeted towards a wide range of therapeutic areas including respiratory, cardiovascular, metabolic, infection, inflammation, oncology, ophthalmology, neuroscience, pain, tissue repair, gastrointestinal, womens health, orphan diseases and genitourinary, among others.2 Pfizer has secured its position as the industry leader by maintaining its portfolio of 600 established products. Its most profitable drug to date is a cholesterol medication, Lipitor, which is currently the most profitable drug in the United States grossing 7.2 billion in 2012.3 Pfizer announced that it will restructure its business into two innovative business segments and one value business segment. The first innovative business segment will include products that have patent protection beyond 2015 across several therapeutic
1 http://listdose.com/top-10-worlds-largest-pharmaceutical-companies-2013/
2 http://www.researchandmarkets.com/reports/1314910/pfizer_inc_pfe_financial_and_strategic_swot
3 http://americanactionforum.org/sites/default/files/OHC_PharmaIndPrimer.pdf
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areas such immunology, cardiovascular, metabolic, neuroscience, etc. The second innovative business segment will deal with vaccines, oncology and consumer healthcare. In addition to this, the value business segment will include mature drugs that have either lost patent protection or will lose before 2015.4
Industry Analysis
In order to understand the strategic avenues a company pursues, one must have a complete comprehension of the industry in which they compete in. The global pharmaceutical industry is compromised of three sub-industries; brand name drugs, generic drugs and medical devices. The global pharmaceuticals market is worth $300 billion a year, a figure expected to rise to $400 billion within three years. The 10 largest drugs companies control over one-third of this market, several with sales of more than $10 billion a year and profit margins of about 30%. Six are based in the United States and four in Europe.5 Over the past few years the industry has realized a decline in sales, causing mergers and acquisitions. Despite the recent obstacles the industry is expected to growth 5.1% in 2014. Currently, the U.S. biopharmaceutical sector employs more than 810,000 workers and supports a total of 3.4 million jobs across the country.6 Although the industry is very lucrative, it faces many challenges. Costs associated with developing a single drug can reach up to $1.2 billion. Subsequently, many developed drugs never reach the market due to strict regulations and lengthy FDA approvals. However, 43 new medicines were approved by the U.S. Food and Drug Administration (FDA) in 2012 representing the highest total in 15
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years. This is a proud landmark for an industry.7 The nature of the industry is faced with uncertainty and relies on scientific and technological breakthroughs for its survival.
Competitive Environment
RIVALRY AMONG COMPETITION-The pharmaceutical industry is highly competitive. Acompanys operations may be affected by new regulations, FDA denials, and technological advances of competitors, patents granted to competitors, competitive combination products, post-marketing surveillance and generic competition as company products mature. Current patent positions are significantly challenged by industry competitors. If the company faces an adverse result in a patent dispute this could lead to impairment charges attributed to certain products, price reductions and product displacements.8
THREAT OF SUBSTITUTION-Most companies focus on different classes of drugs. The threatfrom direct competition for a specific drug line is low. The dominate companies have billions of dollars invested into their research which puts them years ahead of others attempting to compete. However, many high grossing drugs are facing patent expiration within the next couple of years, which will enable generic versions to hit the market. There is an estimated $140 billion in total sales lost from patent expiration from 2012 to 2017.9
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THREAT OF NEW ENTRANTS-New entrants into the pharmaceutical industry face a highnumber of barriers. Heavy expenditures on research and development can be a major deterrent for new entrants. In 2012, Pharmaceutical Research and Manufacturers of America (PhRMA) member companies invested an estimated $48.5 billion in R&D.10 The probability creating a drug that makes it to market is very low. For every 5,000 to 10,000 compounds that enter the pipeline, only one receives approval. Even medicines that reach clinical trials only have a 16% chance of being approved.11 An organization considering entering into the market must have a huge financial backing to fund the required research and development, marketing, legal expenses, and waiting period for approval. Strict laws and regulations are also a deterrent for those considering entering in to this highly competitive industry.
BARGAINING POWER OF BUYERS-Buyers of the pharmaceutical industry are defined aswholesalers, retailers, hospitals, clinics, government agencies and pharmacies. Some buyers possess high purchasing power while others remain relatively low. The size of the buyer determines the influence they have over manufacturers. For instance, the U.S government has strong bargaining power by representing 50 million Medicare patients, where clinics that represent few thousand patients have weak bargaining power.12 The pharmaceutical industry is unique in regards to patented drugs. If a patented drug is in high demand or patients rely on the
10Tufts Center for the Study of Drug Development. Large Pharma Success Rate for Drugs Entering Clinical Trials in 19932004:
11Pharmaceutical Research and Manufacturers of America. PhRMA Annual Membership Survey. 2013.
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drug for survival, then the drug maker retains bargaining power regardless of the size of the buyer.
BARGAINING POWER OF SUPPLIERS-The bargaining power of suppliers in thepharmaceutical industry is relatively low. Seven major companies control 65.4% of the brand name pharmaceutical industry and three companies control the generic pharmaceuticals with 28.1% .13 These companies purchase extremely high volumes of supplies, thus enabling them to leverage lower prices from their suppliers. However, when supplies are scarce and/or unpredictable the supplier will have a higher bargaining power. This typically occurs when dealing with agricultural-based material.
Competitive Advantage
Pfizer has positioned themselves in their market by utilizing a differentiation business strategy. Their business model is supported by innovation, technical, and medical advances. Patent protected products and brand recognition have given Pfizer a competitive advantage over other pharmaceutical companies competing within their sector. Most of their strategic efforts are geared towards bringing something new to the market. Pfizers largest expenditure is research and development. They recruit the worlds most sought after scientists to help them achieve their goal of creating new, inimitable drugs to add to their portfolio. Pfizer is then able to charge premium prices for their products. Currently Pfizers drug Lipitor is the most profitable drug in
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the United States. Pfizer has successfully utilized a differentiation business strategy to earn its position as the largest and most recognized pharmaceutical company in the world.
SWOT Analysis
STRENGTHS- Pfizer is a marketing and sales powerhouse. They have mastered the art ofmarketing and have been able to achieve making some the most recognized drugs with Viagra, Lipitor and Lyrica to name a few. Other companies began lucrative partnership deals for Pfizer to market their medicines. Pfizer has numerous blockbuster drugs that have been the driving forces of their success. Although some of these drugs have lost their patents, they still maintain a strong portfolio of patent protected blockbusters. Pfizer employs some of the worlds most renowned scientists in the world which has and will continue to make them the leaders in industry of innovation and medical breakthroughs. Pfizer also has economy of scales on their side. They are able to use their bargaining power to drive down costs and increase profit margins.
WEAKNESSES- Over the next five years some of the worlds most profitable drugs patents willbe expiring. This opens the door for generics drugs to capitalize on this opportunity. However, Pfizer dedicated the majority of their resources towards their brand name division. Generics represent a $10 billion business for Pfizer but there has been speculation for some time that the company may decide to sell off the unit in order to fund the more profitable innovative medicines business.14 If Pfizer exits the generic drug market they will be exiting a market that will be realizing a large growth over the next five years. Pfizer has also been involved in many
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controversies including lawsuits that were filed against it for illegal marketing of the arthritis drug Bextra, experimenting a new drug during a cholera outbreak in Nigeria on children which led to the death of about 50 children and one of its acquired companies called Quigley which sold asbestos-containing insulation products for years; a settlement deal is being negotiated to date between the asbestos victims and Pfizer.15 Pfizer needs to rebuild their brand name and gain confidence back from consumers.
OPPORTUNITIES- From demographic viewpoint it can be stated that in the U.S. the aging babyboomer population in past 5 years and in next 15 years will have a significant impact on demand of pharmaceutical products, thus the whole pharmaceutical industry in U.S. has and will enjoy the economic increase in form of increasing scale of the market.16 As more global markets emerge pharmaceutical product demand will increase, thus presenting an opportunity for Pfizer to consume a greater market share. Pfizer is one of the few companies in the industry who has the resources to acquire struggling companies. Mergers, acquisitions, and partnerships could extend Pfizers consumer reach. Another opportunity will come from the implementation of the Patient Protection and Affordable Care Act (PPACA). The PPACA will expand coverage to 32 million Americans through state run Health Insurance Exchanges, which is expected to increase drug sales in 2015, when the act is up and running.17 Pfizer new drug, ofacitinib, which is an autoimmune drug, was adapted by the CDC as the recommended treatment for anyone over 19 with severe autoimmune problems. It was sanctioned by the CDC as the required treatment, thus
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creating a monopoly for Pfizer in regards to this particular market.18 Their rheumatoid arthritis and pneumonia drugs will help Pfizer regain market share lost with the recent patent expirations of multiple blockbuster drugs.
THREATS- Global brand name drugs sales is forecasted to lose over $227 billion in sales due togeneric erosion following patent expirations. Over the same time span, the generic pharmaceutical industry will have an annual growth of 6.3%. Pfizer will experience patient expirations on 14 of its key drugs over the next five years, which account for approximately 42% of their yearly revenue.19 With an extremely low stake in the generic sector, this possesses a great threat to Pfizer. The company faces legislative and regulatory action in several states of U.S. (its largest market by revenues 47%) could adversely affect companies business. Those actions could include changes in patent laws, the importation of prescription drugs from outside the U.S. at prices that are regulated by foreign governments, as well as restrictions to innovative products in form of abandoning direct to customer advertising or limitations on interactions with health care professionals.20If the healthcare reform is enacted, Pfizer could be faced with new government regulations and standards affecting pricing, patents, and greater government controls. These changes could reshape the manner in which the entire pharmaceutical industry operates.
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Values of Key Personnel
Pfizer is committed to applying science and their global resources to improve health and well-being at every stage of life. They strive to provide access to safe, effective and affordable medicines and related health care services to the people who need them.21 Pfizer values themselves on being a leader of industry in research and development, creating programs to provide medication to those who cannot afford, funding educational programs and reducing the impact of operations on the environment. Pfizer promotes a corporate culture that is aimed towards delivering and helping all those in need of preventing, managing and curing infections and/or diseases. The Global Health Fellows Program (GHF) is an international corporate volunteer program that places Pfizer colleagues and teams in short term assignments with leading international development organizations in key emerging markets.Since 2003, over 300 Pfizer colleagues, from offices around the world, have participated in the program working in close to 45 countries.. Via the program, Pfizer has partnered with over 40 international development organizations.22 Pfizer also contributes millions of dollars every year through education, training research and development grants. They believe in investing in other institutes (educational, non-profits and government) to make medical breakthrough, and to develop the talents of future leaders in the industry. Pfizer is very committed to delivering medications to those who cannot afford it. In the U.S., Pfizer has developed the U.S. Patent Assistance Program, which offers medicines for free or at a savings to patients who qualify. Some programs also offer reimbursement support services for people with insurance. Pfizer has also provided over $ 1.2 billion in medicine since 2000 to more than 2,400 sites in 63 countries in Africa, Asia, the
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Caribbean and Latin America.23 Pfizers key personnel have demonstrated how the importance of realizing a healthier world is their primary motivator.
Societal Expectation
The pharmaceutical industry is expected to provide safe, effective drugs, affordable drugs to the masses. Most societies view healthcare as something that should be offered to anyone who needs it. Many countries have a government sponsored healthcare system in which healthcare is provided to all citizens. More and more countries are starting to implement forms of universal healthcare. The expectation for the pharmaceutical companies is to work with agencies to provide medications to all who need it. Societies have pressured pharmaceutical companies to make world-wide efforts to cure and contain diseases that plague underdeveloped countries. In response to these demands Pfizer has donated more than 225 million Zithromax® treatments in 19 countries, trained over 6,500 healthcare workers from 27 African countries since 2004,
and provided quality care and treatment to over 31,154 African patients.24 Another important expectation from the global community is the environmental impact of a company. Pfizer is dedicated to not only minimizes their environmental impact, but also to provide green buildings, green chemistry, green biotechnology, green design, greening fleet, and greening their processes. Pfizer is very conscience about energy use and climate changes. Their Energy and Climate Change Program seeks to minimize the cost and operational restrictions arising from a carbon-constrained environment, reduce Pfizer’s contribution to GHG emissions, and assess the risk
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presented to Pfizer’s operations from the potential physical changes resulting from a warming global climate.25 Pfizer has responded very well to societal pressures while still being able to remain the most profitable company in their industry.
ACCOUNTING ANALYSIS
Revenue
Pfizer records revenues from product sales when the goods are shipped and title passes to the customer. At the time of sale, Pfizer also records estimates for a variety of sales deductions, such as sales rebates, discounts and incentives, and product returns. When Pfizer cannot reasonably estimate the amount of future product returns and/or other sales deductions, Pfizer records revenues when the risk of product return and/or additional sales deductions has been substantially eliminated. Pfizer records sales of certain of vaccines to the U.S. government as part of the Pediatric Vaccine Stockpile program, these rules require that for fixed commitments made by the U.S. government, Pfizer records revenues when risk of ownership for the completed product has been passed to the U.S. government.26 There are no specific performance obligations associated with products sold under this program.
Aggregate revenue is recognized during the period (derived from goods sold, services rendered, insurance premiums, or other activities that constitute an entity’s earning process). For financial services companies, this also includes investment and interest income, and sales and trading
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gains. Pfizer Inc.’s revenues increased from 2010 to 2011 but then declined significantly from 2011 to 2012.
Cash, Cash Equivalents and Investments
Many, but not all, of Pfizer’s financial instruments are carried at fair value. For example, substantially all of Pfizer’s cash equivalents, short-term investments and long-term investments are classified as available-for-sale securities and are carried at fair value, with changes in unrealized gains and losses, net of tax, reported in Other comprehensive loss. Derivative financial instruments are carried at fair value in various balance sheet categories, with changes in fair value reported in current earnings or deferred for qualifying hedging relationships. Virtually all of Pfizer’s valuation measurements for investments and derivative financial instruments are based on the use of quoted prices for similar instruments in active markets, or quoted prices for identical or similar instruments in markets that are not active or are directly or indirectly observable. Realized gains or losses on sales of investments are determined by using the specific identification cost method.
Investments where Pfizer has significant influence over the financial and operating policies of the investee are accounted for under the equity method. Under the equity method, Pfizer records share of the investee’s income and expenses, in other deductionsnet. The excess of the cost of the investment over Pfizer’s share of the equity of the investee as of the acquisition date is allocated to the identifiable assets of the investee, with any remaining allocated to goodwill.27
Such investments are initially recorded at cost, which typically does not include amounts of contingent consideration.
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Pfizer regularly evaluates all of financial assets for impairment. For investments in debt and equity securities, when a decline in fair value, if any, is determined to be other-than-temporary, an impairment charge is recorded in the statement of income, and a new cost basis in the investment is established. Impairment reviews can involve a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions