OBU Research 2015

1. 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”
Name:
ACCA Registration:
Word Count:

2. 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 TECHNIQUES7
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

3. 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

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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).

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

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them (Clive, 2009).
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

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

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

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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
the much cheaper drugs being produced by Canadian pharmaceutical companies.

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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
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
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

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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
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
2014 2013 2012 2014 2013 2012
GlaxoSmithkline Pfizer
Gross Profit Margin (%) 68% 68% 70% 81% 81% 82%
Net Profit Margin (%) 12% 21% 18% 18% 43% 27%
Return On Capital
Employed (%)
10% 20% 17% 6% 14% 9%
Asset Turnover (Times) 0.6 0.6 0.6 0.3 0.3 0.3
-
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Times
ProfitabilityRatios

23. 23
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 49,605 51,584 54,657
Selling and admin expenses 14,097 14,355 15,171
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.

25. 25
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
Source: Appendix 5
2014 2013 2012 2014 2013 2012
GlaxoSmithkline Pfizer
Inventory days
outstanding
211 166 183 216 231 246
Receivable days
outstanding
73 75 72 64 76 87
Payable days outstanding 397 354 371 131 111 137
Current Ratio (Times) 1.1 1.1 1.0 2.7 2.2 2.1
Quick Ratio (Times) 0.8 0.8 0.7 2.4 2.0 1.9
-
0.5
1.0
1.5
2.0
2.5
3.0
-
50
100
150
200
250
300
350
400
450
Times
Days
Liquidity Ratios

26. 26
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
struggling to sell its inventory. A closer look at the company shows that the

27. 27
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.

28. 28
3.2.3. Risk ratios
Figure 5: Risk ratios
Source: 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).
2014 2013 2012 2014 2013 2012
GlaxoSmithkline Pfizer
Debt-to-equity (%) 381% 234% 272% 51% 46% 47%
Interest Cover (Times) 4.9 9.2 9.0 9.7 8.1 7.3
Dividend Cover (Times) 1.0 1.8 2.1 2.0 2.3 2.4
-
2.0
4.0
6.0
8.0
10.0
12.0
0%
50%
100%
150%
200%
250%
300%
350%
400%
Times
Risk Ratios

29. 29
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

30. 30
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
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).
2013 2012 2011
Pfizer
Dividend Per Share ($) 0.97 0.88 0.80
Earnings Per Share ($) 3.2 2.0 1.3
-
0.50
1.00
1.50
2.00
2.50
3.00
3.50
$
Pfizer Shareholders Ratios

31. 31
Earnings per share
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
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.
2013 2012 2011
GlaxoSmithkline
Dividend Per Share (pence) 76 78 68
Earnings Per Share (pence) 112.5 91.6 103.6
-
20
40
60
80
100
120
Pence
GlaxoSmithKline Shareholders Ratios

32. 32
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.

33. 33
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
declared dividends from the profits it has generated without the need to rely on

34. 34
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.

35. 35
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.