Introduction and overview.
This report will analyse the financial statements of Pfizer and Roche, two of the
largest corporations operating within the pharmaceutical sector.
Pfizer Inc ( ticker symbol PFE) describes itself as the world‟s largest “research-based
biomedical and pharmaceutical company”. It “discovers, develops, manufactures and markets
prescription medicines for humans and animals”. Pfizer is listed on the New York Stock
Exchange and has 81,800 employees worldwide.
Roche Holding AG (ticker symbol RO) is a Switzerland-based pharmaceuticals and
diagnostics company. The company belongs to the Roche Group that operates through
numerous subsidiaries and associated companies located around the world. The company's
products and services cover every stage of the healthcare process, from identifying disease
susceptibilities and testing for disease in at-risk populations to prevention, diagnosis, therapy
and treatment monitoring. The company is listed on the Swiss exchange and has 80,800
employees worldwide.
A study in November 2008 by UCRH Publishing, "Pharmaceutical Market Trends,
2008- 2012 - Key market forecasts and growth opportunities (3rd Edition)", found that in
2007 Pfizer had 6.2% of the global pharmaceutical market share, with Roche securing 4.3%.
However both corporations are set to increase this share through consolidation with a
rival. On January 26th 2009 Pfizer announced that they would acquire Wyeth in a “cash-andstock transaction” which valued Wyeth at $68 billion. In 2007 Wyeth‟s share of the global
biomedical market was 3%.
Roche is about to make a similar acquisition, buying their rival Genentech for a
reported $47 billion. A third major consolidation also took place in 2009, though not
affecting the two companies examined in this report – Merck buying Schering-Plough for
$41.1 billion.
Therefore the pharmaceutical industry is currently undergoing major transformation
in response to circumstances described in „The Times‟ as the largest companies seeking to
“prop up profits amid the loss of patents on key block-buster drugs, falling prices and
increasing competition from generic drug makers.” Both Pfizer and Roche are at the forefront
of this trend, which will have a major impact on their future financial performance.
Pfizer
Roche
Equity structure
In 2008 Pfizer had 6.746 billion common shares
outstanding. This is a slight reduction from the
2007 figure which was 6.761 billion. Equity from
these shares reduced from $64.917 billion in
2007 to $57.483 billion in 2008.
In 2008 Roche Holding had 860 million common
shares outstanding compared to 859 million in
2007. Equity has been reduced in 2008 to 44,479
from 45,483 in 2007.
The company has no preference shares.
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In 2008 Pfizer had 1.804 billion preferred shares
outstanding. This compares to 2.302 billion in
2007. Equity from these shares reduced from
$93.0 billion in 2007 to $73.0 billion in 2008.
The reduction in Pfizer shares outstanding has
been due to a programme of repurchase by the
company.
Financial analysis
All numerical figures quoted are in millions of
US Dollars except for share prices.
All numerical figures are quoted in millions of
Swiss Francs except share prices.
Liquidity
Current Ratio
Current Assets
Current
Liabilities
Current Ratio
2007
46,849
21,835
2008
43,076
27,009
2.15
1.59
Current Assets
Current
Liabilities
Current Ratio
Thus the current ratio has decreased over the last
year but remains above 1. In fact it has returned
to a more historically normal level after being
very high in 2006 and 2007.
2007
42,834
14,454
2008
38,604
12,104
2.96
3.18
Roche‟s current ratio is above 1 and above
industry average which is around 1.5
Acid Test
Current assets
(Inventories)
(Prepaid
expenses)
(Other current
assets)
Current
liabilities
Ratio
2007
46,849
5,302
5,498
2008
43,076
4,381
114
5,182
35,935
21,835
33,513
27,009
1.65
1.24
Current assets
(Inventories)
(Prepaid
expenses)
(Other current
assets)
Current
liabilities
Ratio
2007
42,834
6,113
355
2008
38,604
5,830
452
2,290
1,534
34,076
14,454
30,788
12,104
2.35
2.54
Roche‟s liquidity ratio is one of the highest in the
industry with almost double the industry average.
In their annual report for 2008 Pfizer explain the
decrease in these liquidity ratios as being due to :
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an increase in liabilities relating to legal matters,
unfavourable impact of foreign exchange,
increased amounts of cash being used in longterm investments thus taking it out of current
assets, timing of accruals, cash receipts and p
This shows that management can balance really
well its assets with its liabilities.
Asset management
Inventory turnover
Cost of Sales
Ave.
Inventories
Inventory
turnover
2007 (m)
9,167
5,706.5
2008(m)
5,690
4,841.5
1.61
1.18
Cost of Sales
Ave.
Inventories
Inventory
turnover
The 2007 figure of 1.61 was very high by
comparison with previous years, due to the cost
of sales figure being much higher for that year.
The 2008 inventory turnover of 1.18 is more in
line with previous data. Thus although inventory
turnover reduced in 2008 compared to 2007, it
was still higher than any of the years between
2004-2006.
2007 (m)
13,743
5852.5
2008(m)
13,661
5971.5
2.34
2.29
In the period 2004-2007 we can see a 10%
growth year on year in inventories. In 2008 we
can see a 5% drop in inventories on previous year
and a break in the trend, but the cost of goods
sold figures also drops sp the inventory turnover
stay close.
Days in inventory
Ave
Inventories (a)
Cost of Sales
(b)
(a/b) * 360
2007
5,706.5
2008
4,841.5
9,167
5,690
224
306
Ave
Inventories (a)
Cost of Sales
(b)
(a/b) * 360
Again the abnormally high cost of sales figure for
2007 reduced the days in inventory figure for that
year to a very low figure compare to previous
data.
2007
5852.5
2008
5971.5
13,743
13,661
153
157
The days in inventory is very low compared to
industry and is in line with company averages
over the years
Average collection period
Receivables
Average daily
sales
ACP (days)
2007
10,460
134.5
2008
9,782
134.16
78
73
Receivables
Average daily
sales
ACP (days)
3
2007
9874
128.14
2008
10017
126.71
78
73
Pfizer‟s ACP was slightly improved in 2008
compared with the previous year.
ACP improved year on year and is about industry
average.
Fixed asset turnover
Sales
Net fixed
assets
Turnover
2007
48,418
15,734
2008
48,296
13,287
3.08
3.63
Sales
Net fixed
assets
Turnover
A reduction in the figure for net fixed assets in
2008 increased the turnover ratio compared to
2007 although the sales figure was very slightly
down on that year.
2007
46,133
35,531
2008
45,617
37,485
1.29
1.21
A decrease in sales combined with a higher
increase in net fixed assets contributed to a
decrease in revenue generated by fixed assets.
Total asset turnover
Sales
Total assets
Turnover
2007
48,418
115,268
0.42
2008
48,296
111,148
0.43
Sales
Total assets
Turnover
Total asset turnover improved very slightly in
2008, but the figure of around 0.4 remained
broadly in line with previous years.
2007
46,133
78,365
0.59
2008
45,617
76,089
0.60
Its turnover figure is above industry average and
compared to its American peers it seems to
employ fewer assets to attain similar levels of
sales.
Debt management
Debt ratio
Total
liabilities
Total assets
Ratio
2007
50,258
2008
53,592
115,268
0.44
111,148
0.48
Total
liabilities
Total assets
Ratio
An increase in liabilities and a decrease in assets
in 2008 took this ratio to 0.48, the highest figure
that it had been over the last five years.
2007
32,882
2008
31,610
78,365
0.41
76,089
0.41
This figure stabilizes in 2007 and 2008 after
being in the high 40‟s an low 50‟s during the
previous years. As a trend the company‟s
liabilities are decreasing overall.
Long term debt to total capitalisation
4
Long term
debt
Long term
debt + equity
Ratio
2007
7314
2008
7963
72324
65519
0.10
0.12
Long term
debt
Long term
debt + equity
Ratio
Long term debt as a proportion of total market
capitalisation increased during 2008 from 10% to
12%, but this remains a relatively low percentage,
both within the sector as a whole and compared
to other industries.
2007
3,834
2008
2,972
49,317
47,451
0.08
0.06
Long term debt as a proportion of total market
capitalisation decreased during 2008 from 8% to
6%, and remains very low compared to both
industry and market averages.
Debt to equity
Long and
short term
debt
Equity
Ratio
2007
13,139
2008
17,013
65,010
0.20
57,556
0.30
Long and
short term
debt
Equity
Ratio
Pfizer‟s ratio of debt to equity increased by 50%
during 2008 from 0.2 to 0.3. This was due to both
an increase in debt, particularly short-term debt,
and a reduction in equity. However the debt to
equity ratio remains low compared to other
pharmaceutical corporations and to other sectors.
2007
6,866
2008
4,089
45,483
0.15
44,479
0.09
The debt to equity ratio decreased by 40%
especially due to a 1 billion CHF reduction in its
long-term debt and equity, respectively.
Times interest covered
Operating
profit
Interest
expense
TIE
2007
9,675
2008
10,210
397
516
24.4
19.8
Operating
profit
Interest
expense
TIE
The increase in interest expense was
proportionally larger than the increase in
operating profit during 2008, hence the decrease
in the figure for times interest earned. However a
figure of 19.8 for this ratio means that Pfizer is
not in danger of any immediate solvency
2007
14,468
2008
13,924
281
214
51.4
65
Roche is in a very strong financial position
earning up to 65 times its interest expense. This
ratio is well above industry average.
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problems as a result of its interest liabilities.
Profitability
Profit margin on sales
Net income
for common
s/h
Sales
Margin
2007
8,209
2008
8,026
48,418
17.0%
48,296
16.6%
Net income
for common
s/h
Sales
Margin
Profit margin on sales remained broadly constant
between 2007 and 2008, with both years being
substantially down on 2006‟s figure of 40%
which was due to extremely high net income that
year. However a margin of 16-17% is, according
to the website advfn.com, broadly in line with the
industry average.
2007
9,761
2008
8,969
46,133
21%
45,617
19.6%
Profit margin on sales is one of the highest in the
industry and although having decreased, is
above the industry average of 16%.
Basic earning power
EBIT
Total assets
Ratio
2007
9,675
115,268
0.08
2008
10,210
111,148
0.09
EBIT
Total assets
Ratio
The basic earning power ratio for Pfizer increased
slightly during 2008.
2007
15,304
78,365
0.19
2008
14,161
76,089
0.19
EBIT is up year on year but assets have decreased
so the ratio remains the same.
Net profit margin
Net earnings
Net sales
Margin
2007
8,144
48,418
16.8%
2008
8,104
48,296
16.8%
Net earnings
Net sales
Margin
A small reduction in sales during 2008 was
reflected by a small decrease in net earnings,
however the net profit margin remained the same
between 2007 and 2008. This is reduced
compared to 2006 which was a year of high
earnings for Pfizer, but remains broadly in line
with the industry average which was 17.6% in
2008.
2007
9,761
46,133
21.1%
2008
8,969
45,617
19.6%
A reduction in sales contributed to a reduction in
margins. Even with this reduction Roche is
consistently above the industry average(16-17%),
and consistent with its own 5 year average of
21.65%.
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Return on assets (ROA)
Net income
for common
s/h
Total assets
ROA
2007
8,209
2008
8,026
115,268
7.12%
111,148
7.22%
Net income
for common
s/h
Total assets
ROA
2007
9,761
2008
8,969
78,365
12.4%
76,089
11.7%
There was a slight increase in Pfizer‟s return on
There was a slight decrease in ROA caused both
assets figure for 2008, due to the denominator
by a decrease in net income and total assets
figure for total assets being reduced, although net
income was also down during the year
Return on equity (ROE)
Net income
for common
s/h
Common
equity
ROE
2007
8,209
2008
8,026
64,917
57,483
12.64%
13.96%
Net income
for common
s/h
Common
equity
ROE
Return on equity increased during 2008 because
of the reduction in equity in the corporation after
a management buy back programme. It still
compares rather unfavourably to the industry
average, which according to advfn.com stood at
21.4% in 2008.
2007
9,761
2008
8,969
45,483
44,479
21.46%
20.16%
ROE decreased in 2008 but the decrease is
proportional to the decrease in income and
equity.
At this rate ROE is well within industry average.
Market ratios
Earnings per share (EPS)
Net earnings
No. of shares
EPS
2007
8,144
6,761
1.20
2008
8,104
6745.3
1.20
Net earnings
No. of shares
EPS
Pfizer‟s EPS remained constant between 2007
and 2008 at $1.20. Figures from advfn.com
suggest that this is only just over half of the
industry average.
2007
9,761
859
11.36
2008
8,969
860
10.42
Roche is the best performer in a group of five
representative peers with its EPS at 4 times the
industry average.
Price earnings (NB the share price used is the one at the end of the relevant reporting period).
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Share price
at end of
year
EPS
PE ratio
2007
23.28
2008
17.76
1.20
19.4
1.20
14.8
Share price
at end of
year
EPS
PE ratio
2007
206.5
2008
168.7
11.36
18.17
10.42
16.19
There were significant fluctuations in the price to
For Roche 2007 was a year of highs, having
earnings ratio for Pfizer, with 2008 seeing a high
achieved the peak of its shareprice during this
of 20.2 and a low of 11.9 before closing at 14.8.
year. This is reflected in its Price earnings figure.
Both years analysed were very similar to the
Share price declined during 2008 bringing down
ratios achieved in the rest of the sector.
with it the indicator.
Price cash flow
Share price
(year end)
Cash flow
per share
Price cash
flow
2007
23.28
2008
17.76
1.97
1.96
11.82
9.06
Share price
(year end)
Cash flow
per share
Price cash
flow
Pfizer‟s cash flow per share remained about the
same between 2007 and 2008 but the reduction in
share price was reflected in reduced price cash
flow. Pfizer was not unique in this aspect, indeed
their price cash flow relative to the industry
average actually increased from 92.0% to 93.8%.
2007
206.5
2008
168.7
14.1
15.67
14.64
9.68
In 2008, Roche increased its cash reserves by
1.16bn. The company earned 12,117 millions
from its operations compared with 11,728 in
2007, and a cash increase of 545 millions.
Dividend yield
Dividend
Share price
(year end)
Yield
2007
1.16
23.28
2008
1.28
17.76
5.0%
7.2%
Dividend
Share price
(year end)
Yield
Pfizer has been recognised among investors as
providing a particularly high dividend yield, and
this percentage increased as the share price fell
during 2008. Indeed by April 12th 2009 the share
price had fallen further to $13.55, giving a yield
on the 2008 dividend of 9.4%.
2007
4.6
206.5
2008
5
168.7
2.2%
2.9%
Roche provides quite a low yield due to its high
share price. We can see an increase in the yield
during 2008 due to the decline in share price from
the highs of 2007. To provide better perceived
value a share split would be recommended.
Book ratio
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Share price (year
end)
Book value per
share
Ratio
2007
23.28
2008
17.76
17.05
16.48
1.37
1.08
Share price
(year end)
Book value
per share
Ratio
The fall in share price experienced by Pfizer
during 2008 had a negative impact on the
corporation‟s book ratio. Given the general
adverse financial climate a reduction in this
figure towards 1 is to be expected
2007
206.5
2008
168.7
52.8
51.7
3.91
3.26
The change in the ratio expreses the volatility of
the share price during the bumper year of 2007.
The ratio tends towards 3, its average value for
the last 5 years
Analysis
Although both the current ratio and the acid test ratio were lower for Pfizer in 2008
than 2007, they both remained well above 1, suggesting that the company should not
encounter any liquidity problems in the immediate future. Indeed the 2008 current ratio of
1.59 matched the industry average exactly. Thus while it would be a concern if the negative
trend continued, the 2008 figure is not in itself a problem. Certain specific factors such as
increased investment in long-term assets and the negative impact of currency exchanges took
their toll in 2008, but did not drag the liquidity ratios into dangerous territory.
Similarly the financing structure for Pfizer seems to be reasonably sound. Long term
debt stands at 12% of total capitalisation which is not excessive when compared to most other
industries and should ensure that the company is not exposed to a high degree of risk.
Due to its ownership structure, the voting majority is still held by the founding family,
Roche behaved, until a few years ago, more like a family business than as a listed company.
Most of that behavior has come to an end with a wave of acquisitions in 2007, 2008 and a
massive acquisition of Genentech in 2009. For this acquisition Roche has tapped directly in
the bond market for $39 billion of the $47 billion it needs. It has used its AAA credit rating to
circumvent the banks and most of their fees, and save itself some money in the process.
Roche shows some significant strengths when compared to industry averages. For
example, its quick ratio is twice the industry average. Even if the revenue dropped in its last
year on year, on a five year average it grew 7.88% which is above industry average and its
dividend grew over 24% over 5 years. Management have made a mission out of increasing
the dividend year on year.
Its earnings per share is an industry leader indicator, its inventory turns around very
quick and its long term debt is very low (even though that will change drastically with the
integration of Genentech). Its profit margins are high and its strengths lie in cancer drugs,
which even though sounds unpleasant, are a growth industry with 1 out of 3 people now
estimated to suffer from some form of cancer during their life.
9
Some weaknesses might come from the fact that some of its patents are due to expire
in 3-5 years, and be available to generics manufacturers, but in their report they are sure that
they can replace them with new blockbusters which are in the pipeline.
Future developments in the pharmaceutical sector
The market for pharmaceutical products tends to be fairly constant and so Pfizer and
Roche are not over exposed to an economic downturn. Pharmaceutical companies also “have
strong cash flows".i However they do have a number of problems that are specific to their
industry which affect their outlook at the present time.
One of the biggest issues affecting the sector is competition from generic drugs
manufacturers. The big pharmaceutical concerns are heavily reliant on patent legislation to
give them exclusivity in producing and selling certain drugs. These patents sre time limited,
and when they expire, generic manufacturers are able to produce them at less cost, as thay do
not have the expense of research and development costs to cover. For example Pfizer‟s
cholesterol-reducing treatment Lipitor has annual sales of $12.8 billion, but its US patent runs
out in June 2011ii. After this date this income stream will drastically reduce, almost
immediately. The major pharmaceutical companies also often incur substantial legal costs
through establish and enforcing these patents.
Political changes in the United States could also have an impact for the major
pharmaceutical corporations. The website barackobama.com outlines the President‟s
approach as being in favour of : “Lower drug costs by allowing the importation of safe
medicines from other developed countries, increasing the use of generic drugs in public
programs and taking on drug companies that block cheaper generic medicines from the
market.iii” Similarly the European Union in November 2008 stated that pharmaceutical
companies were blocking the entry of new, cheaper drugs onto the market and that they
would : “not hesitate to open antitrust cases against companies where there are indications
that the antitrust rules may have been breached.iv”
Thus Pfizer, Roche and the other major pharmaceutical companies will have to
contend with threats from generic competition and also from a different political and
regulatory environment. Therefore the drugs companies are likely to seek to find new ways of
protecting revenue and margins, and it is likely that there are significant changes to the
landscape of the sector still to come even after the current wave of mergers.
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Sources used:
Pfizer .com
Roche.com
Advfn.com
Barackobama.com
Ft.com
Telegraph.co.uk
Independent.co.uk
Guardian.co.uk
i
"Big pharma deals distract from ills", Daily Telegraph, 16th March 2009
"Moody's cuts Pfizer as Lipitor patent nears expiry", uk.reuters.com, 13th March 2009
iii
www.barackobama.com/issues/healthcare
iv
"EU threatens drugmakers with antitrust action", guardian.co.uk/business, 28th November 2008
ii
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