Financial Analysis of Pfizer Inc. 2013

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Pfizer Inc. 2013 Financial Analysis

In 2013, Pfizer achieved solid results for patients,

consumers, and shareholders by maintaining our

focus on developing new therapies, driving growth,

and delivering value.

Ian C. Read

Chairman and CEO

Pfizer Annual Review 2013

CONTENTS

  1. COMPANY OVERVIEW .......................................4
  2. RATIO ANALYSIS ...........................................8

2.1. Profitability........................................8

2.2. Liquidity .................

2.3. Efficiency ................

2.4. Capital Structure ............

2.5. Investor Ratios .............

3. AUDITOR’S REPORT .............

4. REFERENCES ...................

1. COMPANY OVERVIEW

Pfizer Inc. is the world’s largest pharmaceutical company in terms of prescription sales revenue. Based on IMS data in 2012 Pfizer shows the best performance for Rx portfolio sales:

Sourse: IMS Pharmaceutical Executive May 2013

The New York City-based company generated more than 50 billion U.S. dollars of total revenue in 2013. Based on net income, Pfizer is also at the top globally (statista.com/topics/1394/pfizer). As of 2013, Pfizer had a market capitalization that exceeded 200 billion U.S. dollars (money.msn.com).

In 2013, Pfizer ranked #2 in global top 10 biotech and pharmaceutical companies worldwide, based on revenue. The values are based on the 2013 Financial Times Global 500 list and sometimes don’t meet companies’ official statistics. However, U.S. pharmaceutical company Johnson & Johnson was ranked first, with a total revenue of approximately 67 billion U.S. dollars.

Source: © Statista 2014

It is notable that two years earlier Pfizer was ranked #1 by the same statistical source:

Pfizer is a well-known worldwide pharmaceutical bestsellers manufacturer. The most famous of them – Lipitor – was Pfizer’s top drug for many years, but lost its patent in May 2012. Thus, Lipitor’s revenue decreased from around 10 billion U.S. dollars in 2011 to just four billion U.S. dollars in 2012. And for sure this was significantly reflected on the total Pfizer’s revenue. Other well-known drugs produced by Pfizer are Lyrica, Enbrel and Viagra. Now in the list of top 10 pharmaceutical products by sales worldwide in 2013 we can see only Enbrel ranked #4. First is Abbott’s Humira, and GlaxoSmithKline's pharmaceutical product Seretide was ranked second (one year before, Seretide was the world's leading drug).

Source: © Statista 2014

Pfizer generates around 40 percent of its revenue within the United States. As is common practice in the pharmaceutical industry, Pfizer spends a substantial part of its revenue on research and development. According to 2013 Annual Review, the company’s R&D expenditure stood at 6.7 billion U.S. dollars, or almost 13 percent of its total revenue.

Pfizer’s total employment significantly decreased over the last few years. From the beginning of cost-reduction/productivity initiatives in 2005 through December 31, 2013, Employee terminations represent the expected reduction of the workforce by approximately 65,100 employees, mainly in manufacturing, sales and research, of which approximately 56,500 employees have been terminated as of December 31, 2013. In 2013, substantially all employee termination costs represent additional costs with respect to approximately 2,900 employees (Pfizer 2013 Financial Report, p.73).

Pfizer’s consolidated financial statements include parent company and all subsidiaries, and are prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) (Pfizer 2013 Financial Report, p.61). Company’s fiscal year ends December 31st.

In 2013, Pfizer started transformation to the completely new commercial operating structure. This worldwide business model is based on three global commercial businesses.

The Global Innovative Pharmaceutical business (GIP) is focused on branded medicines and includes many of the new innovative products coming from the pipeline. The Global Established Pharmaceutical business (GEP) is a large profitable business with opportunities in both developed and emerging markets. It has a diverse portfolio of medicines that are no longer patent protected or are close to losing their patent protection. The Vaccines, Oncology and Consumer Healthcare business (VOC) comprises three separate, distinct businesses, each of which has the potential for steady growth worldwide (Pfizer 2013 Annual Report, p.4).

2. RATIO ANALYSIS

The main part of this study contains Ratio Analysis of the Pfizer based on historical data derived from company’s Annual Reports and other sources. This kind of analysis is very helpful for investors, because financial ratios provide a quick and relatively simple means of assessing the financial health of a business (Atrill & McLaney, p. 179).

There are several categories of ratios that can be utilized for financial analysis of any particular company. The most commonly used in practice are: Profitability Indicator Ratios, Liquidity Measurement Ratios, Efficiency Ratios, Ratios related to Capital Structure, Investment Valuation Ratios.

In this analysis above mentioned ratios calculated by investor’s approach. In each table all Ratios for Pfizer calculated for the last 3 years plus included Industry Average (if applicable) and Ratios for Merck & Co based on Company’s 2013 Annual Report on form 10K. Merck has been chosen as a most relevant Pfizer’s neighbor in the top list going in the completely the same environment and conditions (U.S. GAAP, currency, etc.).

2.1. Profitability

Profitability ratios provide an insight to the degree of success in achieving this purpose (Atrill & McLaney, p. 180).

PROFITABILITY

2013

2012

2011

2013

2013

PFIZER

PFIZER

PFIZER

MERCK

Industry Average

Gross margin %

81,42%

82,03%

79,52%

61,50%

53,78%

Return on sales

42,65%

26,66%

16,40%

10,00%

ROCE

10,29%

7,11%

7,04%

6,32%

ROA

8,78%

6,01%

6,00%

5,24%

13,53%

Pfizer’s Gross margin is almost on the same level during considered period – about 80%. At the same time it is significantly higher than Merck’s and Industry Average. It means that Pfizer has more capabilities to cover all operational expenses including Research and Development.

Return on sales level of Pfizer is very high in 2013 – more than 4 times higher in comparison with Merck.

That is because on June 24, 2013, Pfizer completed the full disposition of Animal Health business (Zoetis), and recognized a gain of approximately $10.3 billion, net of tax, in Gain on disposal of discontinued operations – net of tax in Pfizer’s consolidated statement of income for the year ended December 31, 2013. The operating results of this business are reported as Income from discontinued operations – net of tax in Pfizer’s consolidated statements of income through June 24, 2013, the date of disposal. In addition, in the consolidated balance sheet as of December 31, 2012, the assets and liabilities associated with this business are classified as Assets of discontinued operations and other assets held for sale and Liabilities of discontinued operations, as appropriate (Pfizer 2013 Financial Report, p.3; Also see Note 2B in Consolidated Financial Statements; Pfizer’s Zoetis IPO set to raise $2.2bn – Financial Times).

For previous periods Pfizer’s Return on sales is also higher, because of following discontinued operations:

  • On November 30, 2012, Pfizer completed the sale of Nutrition business to Nestle and recognized a gain of approximately $4.8 billion, net of tax.
  • On August 1, 2011, Pfizer completed the sale of Capsugel business and recognized a gain of approximately $1.3 billion, net of tax.

Pfizer demonstrates a high and fast growing ROCE which is very important for investors as it is a key ratio by many businesses (Atrill & McLaney, p. 198).

Pfizer’s ROA is also higher than Merck’s one, but significantly less than Industry Average. It means that competition in pharmaceutical industry going to be more and more aggressive especially by Gx and Company should prepare adequate action plans first of all for LOE (lost of exclusivity) and post-LOE products.

2.2. Liquidity

It is vital to the survival of a business for there to be sufficient liquid resources available to meet maturing obligations (Atrill & McLaney, p. 180). Liquidity ratios presented in the table below:

LIQUIDITY

2013

2012

2011

2013

2013

PFIZER

PFIZER

PFIZER

MERCK

Industry Average

Current ratio

2,30

2,12

2,09

1,95

2,50

Acid test

2,07

1,89

1,81

1,60

1,83

The dynamics of Current Ratio and Acid test shows positive growth of Pfizer’s liquidity year to year. Acid test is significantly higher than 1 which is very satisfactory. For the investors this is a good sign that Pfizer’s current assets can cover Company’s current liabilities and in 2013 its ability has grown by 8% in Current Ratio and by 10% in Acid test. Pfizer’s liquidity ratios are much higher than for Merck, but at the same time Pfizer’s current ratio is still not so positive in comparison with Industry Average.

2.3. Efficiency

Efficiency Ratios may be used to measure the efficiency with which particular resources have been used within the business (Atrill & McLaney, p. 180).

EFFICIENCY

2013

2012

2011

2013

2013

PFIZER

PFIZER

PFIZER

MERCK

Industry Average

DSO (days)

70,87

84,93

80,70

61,57

DPO (days)

117,18

147,58

114,32

43,34

Inventory turns

1,57

1,44

1,56

2,66

2,79

DIO (days)

233,07

254,08

234,24

137,35

Pfizer’s DSO is going to be less in 2013 which is very good but it is higher than Merck’s ratio. At the same time DPO is significantly higher than for Merck but it is less than in 2012 which could be a result of an inefficient credit management.

Pfizer’s Inventory turn is lower than for Merck and Industry Average. So it demonstrates higher inventories’ level for Pfizer but with positive dynamics. DIO also has a positive change in 2013 but still not satisfactory in comparison with Merck.

2.4. Capital Structure

Leverage Ratio and Interest Cover Ratio highlighting changes in the capital structure.

CAPITAL STRUCTURE

2013

2012

2011

2013

2013

PFIZER

PFIZER

PFIZER

MERCK

Industry Average

Leverage

46,72%

46,50%

38,81%

42,33%

94,80%

Interest cover

19,32

11,78

8,84

39,97

26,46

Actually we can see that Pfizer has no problems with Capital Structure and ratios demonstrate positive dynamics. Interest cover is in line with Industry Average but significantly lower than for Merck with almost the same Leverage.

2.5. Investor Ratios

Certain ratios are concerned with assessing the returns and performance of shares held in a particular business from the perspective of shareholders who are not involved with the management of the business (Atrill & McLaney, p. 180).

INVESTMENT

2013

2012

2011

2013

2013

PFIZER

PFIZER

PFIZER

MERCK

Industry Average

ROE

27,80%

17,74%

11,71%

8,17%

20,13%

Dividend yield

1,90%

3,32%

4,07%

2,93%

1,73%

EPS(basic)

3,45

2,03

1,33

1,23

1,65

PE

9,31

13,50

15,98

39,91

19,80

ROE shows how much the shareholders earned from their investment to the company. The table shows Pfizer’s ROE significantly increased in 2013 and very much higher than Merck’s ratio and Industry Average. That happens due to Pfizer’s Net Income increase for the same period of time based on above mentioned factors.

Dividend yield for Pfizer is in line with Industry Average but less than for Merck and shows negative dynamics during last 3 years.

Pfizer’s EPS is increasing and much higher than for Merck and Industry Average, first of all based on significant performance in terms of profitability.

PE for Pfizer decreasing during last 3 years and it is lower than both Merck and Industry Average so Pfizer has to do a lot of activities to return Investors’ confidence. Based on Macroaxis.com popularity rating, Pfizer Inc has a score of 23 on a scale of 0 to 100. This implies that the stock is not as attractive to investors as 77% of all other stocks in USA. 3. AUDITOR’S REPORT

Pfizer has its own Audit Committee which is a committee of the Board of Directors. As it is mentioned in the Audit Committee Charter, the Audit Committee consists of three Independent Directors in accordance with New York Stock Exchange listing standards. Each member shall, in the judgment of the Board of Directors, have the ability to read and understand the Company’s basic financial statements.

According to 2013 Financial Report Committee has recommended to the Board of Directors, and the Board has approved, that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, for filing with the SEC. The Committee has selected, and the Board of Directors has ratified, the selection of the Company’s independent registered public accounting firm for 2014.

Actually Pfizer’s consolidated financial statements and Internal Control Over Financial Reporting have been audited by KPMG. Below are some abstracts from the KPMG’s reports signed on February 28, 2014 and included in Pfizer 2013 Financial Report.

KPMG audited the accompanying consolidated balance sheets of Pfizer Inc. and Subsidiary Companies as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the years in the threeyear period ended December 31, 2013.

Audit process conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that auditor plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

In auditor’s opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Pfizer Inc. and Subsidiary Companies as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles (Pfizer 2013 Financial Report, p. 53).

KPMG’s report expressed an unqualified opinion on the effective operation of the Company’s internal control over financial reporting.

KPMG mentioned that because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In auditor’s opinion, Pfizer Inc. and Subsidiary Companies maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework (1992) issued by COSO.

KPMG also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Pfizer Inc. and Subsidiary Companies as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the years in the three-year period ended December 31, 2013, and KPMG’s report expressed an unqualified opinion on those consolidated financial statements (Pfizer 2013 Financial Report, p. 54).

4. REFERENCES

  1. Atrill, & McLaney, Accounting and Finance for Non-Specialists with MyAccountingLab access card, 8th edition, published 2013, Pearson
  2. Pfizer Annual Review 2013 [http://www.pfizer.com/files/investors/financial_reports/annual_reports/2013/index.htm] (Apr 2014)
  3. Pfizer 2013 10K form [http://services.corporate-ir.net/SEC/Document.Service?id=P3VybD1hSFIwY0RvdkwyRndhUzUwWlc1cmQybDZZWEprTG1OdmJTOWtiM2R1Ykc5aFpDNXdhSEEvWVdOMGFXOXVQVkJFUmlacGNHRm5aVDA1TkRNek16RTBKbk4xWW5OcFpEMDFOdz09JnR5cGU9MiZmbj05NDMzMzE0LnBkZg==] (Apr 2014)
  4. Pfizer 2013 Financial Report [http://www.pfizer.com/files/investors/presentations/FinancialReport2013.pdf] (Apr 2014)
  5. 2013 Merck Annual Report on form 10K [http://www.merck.com/investors/financials/annual-reports/home.html] (Apr 2014)
  6. IMS Pharmaceutical Executive May 2013 [http://www.imshealth.com/deployedfiles/consulting/Global/Content/How We Help/Strategy & Portfolio/PharmExec-pharma50.pdf] (Apr 2014)
  7. Pfizer Audit Committee Charter [http://www.pfizer.com/files/investors/corporate_governance/cg_charter_audit.pdf] (Apr 2014)
  8. Pfizer’s Zoetis IPO set to raise $2.2bn [http://www.ft.com/intl/cms/s/0/3ed81952-6192-11e2-9545-00144feab49a.html#axzz2zKKiH8FM] (Apr 2014)

Used websites and online tools

  1. Finance.yahoo.com
  2. Reuters.com
  3. Money.msn.com
  4. Macroaxis.com
  5. Statista.com

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