Pfizer Financial Analysis
Pfizer Incorporated (PFE) was established in 1849 in Brooklyn, New York. Charles Pfizer and Charles Erhardt, two German-American cousins, founded a chemicals business and produced an anti-parasitic- Santorin, which was a great success. Pfizer’s business began to grow with production of citric acid in 1880s. Total sales of Pfizer had reached almost $3 million by 1910. By 1950s, Pfizer had set up business in countries like Belgium, Canada, Iran, Panama, Turkey, and United Kingdom. Pfizer is a pharmaceutical company ranking number one in sales in the world.
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The company is based in New York City, with its research headquarters in Groton, Connecticut. Its headquarters are in Midtown Manhattan, New York City. Pfizer owes a lot of its success to its number-one drug, Lipitor. This drug is used to lower blood cholesterol. Accupril and Viagra are two other major products offered by Pfizer. In 2007, total sales of Pfizer amounted to $48. 82 billion while it rounded to be about 50 billion in 2009. Profits made by this firm were worth nearly $10. 562 billion. Total assets held by Pfizer were worth around $115. 46 billion. Total employee count of Pfizer was around 86,600. As we take a look at the different ratios of the company. Pfizer Inc. ‘s current ratio deteriorated from 2007 (2. 15) to 2008 (1. 59) but then slightly improved from 2008 to 2009 from 1. 59 to 1. 66. If we compare these numbers to the industry average of health care, overall Pfizer is performing better to the industry and Pfizer current ratio is higher than the industry in 2007 and 2008. While in 2009 it is closer to the industry average of 1. 72.
Liquidity ratios are used to evaluate the firm’s ability to pay its short-term debt obligations such as Accounts Payable and accrued taxes and wages. So far from these numbers, we can predict that Pfizer is meeting its ability to pay short term debt to its creditors and suppliers in the market. As current ratio, the Quick Ratio of Pfizer is also higher than the industry average in 2007 and 2008 and is a little below in 2009. The declining curve in the current ratio of Pfizer may be the result of decreasing cash flow from operations.
However the cash flow liquidity ratio of Pfizer has declined from 0. 43 in 2007 to 0. 26 in 2008. The declining cash flow from operations is forcing Pfizer to borrow to cover its bills. Overall the liquidity of Pfizer still looks quite sound compared to the industry. Now as we look at the Average collection period and day’s inventory held for Pfizer, we notice a dramatic change the average collection period of Pfizer has increased about 112% from 2007 to 2009 while the days inventory held for Pfizer has also increased about 189% from 2007 to 2009.
This raises a caution flag about the increase in these ratios. Pfizer may be too lenient to its creditors. If we compare the increase in these values to the increase in Pfizer’s Sales, the sales only increased by about 3%. As we move to analyze the efficiency of Pfizer, we see that account receivable turnover has decreased about 53% from 4. 92 times in 2007 to about 2. 31 times in 2009. Yet again this major decrease in turnover of accounts receivables shows the inefficiency of Pfizer in collecting cash from creditors.
The average collection period has increased dramatically from about 74 days in 2007 to almost 160 days in 2009, rounding to 115% change in the two years. However, apart from the decrease in ratios in the past few years Pfizer is still close to the industry average so we cannot predict that Pfizer is under performing compared to its competitors. Pfizer’s fixed asset turnover and total asset turnover has remained almost the same between 2007 and 2008 but has declined by almost 39. 57% in 2009 (3. 63 to 2. 20).
This indicates the increase in fixed assets without a proportional increase in sales. Pfizer is a capital intensive firm and has invested more than 40% in its fixed assets. The increase in fixed assets from 2007 to 2009 is about 71%, clearly indicating that Pfizer is trying to expand more. The decrease in the ratios is rather of the heavy increase in the fixed assets while not sufficient increase in sales. Looking into the leverage of Pfizer, long term debt has increased 600% from 2007 to 2009 but the debt to assets ratios has not increased much in 2008 compared to 2007.
The overall change in debt ratio is about 30% increase from 2007 to 2009. This ratio has not increased in the same capacity as the Long term debt has increased. This explains the increase in the asset of Pfizer. As Pfizer is expanding, the overall debt ratio has still not increased a lot compared to the industry average and even though the long term debt has increased extra ordinarily, the ratio of debt to equity ratio is still stable due to the increase in Pfizer’s total fixed assets.
Looking at the times interest earned we notice that it has decreased from 19 times to about 9 times from 2007 to 2009 respectively. This decrease is mainly because of the increase in interest charged on the higher borrowings in the two years. The cash flow from operations in this respect is still increasing and the total increase from 2007 to 2009 of the CFO is about 24%. To analyze the profitability break down, Pfizer’s gross profit margin has increase from 76. 79% in 2007 to about 83% in 2009. The operating profit margin increased from 15. % in 2007 to about 23% in 2009. Also the cash flow margin increased from 27% in 2007 to about 33% in 2009 and is almost close to the industry averages. This indicates that Pfizer has the ability to turn sales dollar into profits and has maintained its performance relatively to the industry. Return on assets and return on equity both have decreased from 7% to 4% and from 12. 5% to 10% respectively which is far below from the industry average of 10% and 20%. This decrease may be due to the increase in assets of about 85% in the recent years that was discussed earlier.
The return on asset could not be realized so soon in the industry of Pfizer. This, no doubt indicates the poor management of the assets but if we look at the figures they are actually increasing level of assets which clearly gives us the image of expansion of Pfizer Inc as they have recently spent over 68 billion dollars on the purchase of Wyeth. After looking into the key financials of the company we see that the total liabilities have increased over 100% which clearly shows the increase on the company’s interest as well.
Their overall investment has increased by 170% mainly because of the purchase of Wyeth. The cash flow from operations and operations revenues have increased by 24% and 48% respectively. The liquidity ratios and profitability ratios are stable if we compare it to the industry but still the efficiency ratios are declining. The variance in the figures is mostly between 2008 and 2009. The criminal penalties on Pfizer in 2009 have also damaged the company’s image and have affected its revenues. From the financials, Pfizer still does not look a weak stock if compared to the industry.
The idea of buying and holding the stock also depends on the patent expiration in November, 2011 of its top selling drug “Lipitor”. Pfizer has to invest more in research and development for creating new drugs. Creating new drugs may seem an obvious goal for a drug maker. The New York-based Pfizer, however, has grown into a giant not by discovering new blockbusters but by buying three competitors and their product lines.