Merck vs Pfizer

Evaluating Merck & Co. , Inc vs. Pfizer, Inc. Amy Lan Lan Liu Connor Buestad Raghul Subramanian Natalia Cosa ACCT 831 March 16, 2011 Table of Contents expose 1 History, mise en scene and Core Business . 2 a. Merck & Co. , Inc. .. 2 b. Pfizer, Inc. 2 c.Core Business . 3 cherish Chain . 4 doorsill guards Five Forces . 6 SWOT psycho compend . 8 Part 2 monetary psycho psychoanalysis .. 5 a. netability Analysis .. 15 b. Liquidity Analysis . 18 c. Solvency Analysis .. 19 Part 3 military rating Analysis .. .. 20 a. eternal sleep Income . 20 b. Cost of Equity .. 21 c. Valuation . 22 d. aesthesia analysis . 23Part 4 Recommendations . 23 Appendix . 25 Appendix A Profitability Analysis. 25 Appendix B Liquidity Analysis .. 25 Appendix C Solvency Analysis .. 6 Appendix D Residual Income and Cost of Equity 26 Appendix E Sensitivity Analysis.. 27 References . 28 Part 1 History, context and Core Business a. Merck & Co. , Inc. History and Background breeding Merck is headquartered in Whiteho mapping Station, New Jersey. According to its website, the companion was origin in ally effected in 1891 as a US subsidiary of the Merck KGaA German party. Merck became an independent fraternity in 1917.In 1963 Merck launch the first measles vaccine, and, in 1967 launched a mumps vaccine. In 2009, Merck acquired Schering- handle and now represent the worlds third-largest pharmaceutic ac companionship by market sh ar. Today, the company has over 94,000 employees worldwide (2012). Merck is the third largest global wellnessc are company in the world. The company specializes in prescription medicines, vaccines, animal wellness, and consumer tuition products, that are marketed directly and through its joint ventures. The company operates intravenous feeding segments namely Pharmaceutical, Animal Health, Consumer Care, and Alliance segments (merck. om, 2012). Starting 2011, in hostelry to subscribe future emersion, Merck started focusing on reducing comprise, making st rategic investments in spick-and-span product launches, and improving its look into and maturation stemma. Mercks gross revenue worldwide r distri yetivelyed $48 one thousand thousand in 2011, which was a 4% subjoin from 2010. With two drugs be pitiable review with the FDA, the company has 19 other drugs in the Phase III of development. b. Pfizer Inc. History And Background Information Found by Charles Pfizer and Charles Erhart in 1849 Pfizer, Inc. is the largest pharmaceutic company in the world.Their main goal was to discover saucy drugs that would help improve the healthcare somewhat the world. Both Pfizer and Erhart were born and raised in Germany before travel upon Brooklyn, New York, where Pfizer first opened its doors as a fine-chemicals business. The first product launched by Pfizer was white plague to enteral worms, a disease that was prevalent in mid-19th century America (Pfizer. com, 2012). According to their website, in 1880, Pfizer shifted its focus to manu facturing citric acid which was the raw material for soft drink products much(prenominal) as Coca-Cola, Dr. Pepper, and Pepsi-Cola.In 1944, Pfizer succeeded in producing penicillin with was similarly called the miracle drug. By 1980, Pfizer was manufacturing an anti-inflammatory drug called Feldene (piroxicam), which was the first product to generate revenue of one billion dollars from gross revenue most the world. Today, Pfizer is known for its creation of drugs such as Lipitor apply for cholesterol, Viagra used for cavernous dysfunction, and Celebrex used as an anti-inflammatory (2012). The range of products sold by Pfizer has many applications in the health fabrication that serves in wellness prevention and discourse of a wide variety of diseases.Some of its promises drugs that are below review are potential cures for Alzheimers disease and roll in the haycer. c. Core Business Merck and Pfizer dispense the alike outcome business model of researching, development, and marketing pharmaceutical products. As with any business, Merck and Pfizer are facing increasing argument and challenges, not the least of which is the overtaking of palpable protections on key products. There are three tools that are increasingly useful in analyzing the core business and economic characteristics of an sedulousness. These include the de barrierine chain analysis, Porters Five Forces Model, and the SWOT analysis.The Value Chain The first tool, the determine chain analysis, represents the chain of activities problematical in the development, manufacturing, and distribution of products and/or armed services of a company. The value chain of pharmaceutical companies usually consists of research and development of drugs, drug thanksgiving by government regulators, manufacturing of drugs, creation of demand for drugs, and marketing to consumers. The analysis of each stage of the value chain can reveal the central focus and competencies of the firm, and can point t o the activities that drive meshing.According to Fortune 500, the leading pharmaceutical firms in 2011 were Pfizer, Johnson & Johnson, Merck, and Abbott Laboratories (CNN. com, 2011). The two companies we discuss in this paper, Merck and Pfizer, entertain similar value chains. Merck and Pfizer position themselves as companies that provide innovative and effective drugs and medical solutions globally. Due to the increasing threat of patent expiration and generic wine drug competition, some(prenominal) pharmaceutical companies focus extensively on research and development and brisk drug approval value chain activities.Both companies devote controlable internal resources on R&D, and continue to expand through accomplishments or by entering into agreements with other companies that focus on the disco actually and development of new drugs. In 2009, Pfizer acquired Wyeth for $68 billion, an acquisition that is considered the largest pharmaceutical uniting in nearly a decade (Hoove rs Company Records, 2012). In addition, Pfizer acquired Excaliard Pharmaceuticals in November 2011, and in September 2011 it gained 70% ownership of the outstanding shares of Icagen, Inc.Merck is also constantly seeking out collaborations, licensing, and outsourcing agreements in the area of Research and appendage (Datamonitor, 2011). In November 2009, it acquired Schering-Plough for $41 billion (Hoovers Company Records, 2012), and in May 2011 it acquired Inspire Pharmaceuticals. Pfizer and Merck focus heavily on the new drug approval process. In 2011, Merck had 2 drugs under review by government regulators and 19 drugs in last run phase, and it also planned to file 5 major products for approval between 2012 and 2013.Pfizer had 19 drugs submitted for FDA for approval, and 5 already approved for 2011. Both Merck and Pfizer benefit from using sophisticated and efficient manufacturing and supply chains. Both companies create, move and trade tremendous amounts of product each grade and therefore must(prenominal) rely on a just manufacturing system. Their manufacturing network consists of numerous manufacturing sites and distribution networks around the world. In addition to their internal manufacturing, pharmaceutical firms work with networks of impertinent spouses to produce lines of product, packaging, and active ingredients.To create demand for their products, twain(prenominal)(prenominal)(prenominal) companies market extensively in multiple media outlets and assist consumers to ask their doctors about different drugs. Merck markets its products in over 140 countries through direct sales forces and world(prenominal) distributors. Its customers are drug wholesalers, retailers, government agencies, and healthcare providers (Hoovers Company Records, 2012). Pfizer sells its products through wholesale distributors equivalent McKesson and Cardinal health and it markets its products directly to doctors, hospital, nurses, employer groups, and patients.P orters Five Forces The pharmaceutical patience is a highly dynamic with new technologies rising in the market quite often. Michael Porters Five Forces model can be used to study and verify the factors affecting the market performance of Merck & Co and Pfizer. This model focuses on the external forces that the companies must pay attention to in order to maintain their realizeability. The five forces of the pharmaceutical industry are canvass below. 1. Threat from new entrants is estimateed to be low in this industry delinquent to the following movements.The pharmaceutical industry is a high-tech industry and involves high capital cost. Economy of scale is required to keep the cost down and the establish firms (Merck & Co and Pfizer) are well known for excelling in this area. The existing drugs are safe-guarded by patents at least for a particular period of time before the generic drugs hit the market. This gives companies kindred Merck and Pfizer a considerable leg up on riv als. However, these patents do eventually expire, thus opening the door to more(prenominal) competition from generic drug makers. Product differentiation is necessary in order to pluck new customers.In the field of pharmaceuticals, it is very hard to bring a differentiated product to market. New drugs permit extensive testing by the FDA before entering the market. The drugs by the established firms get easily passed when compared to new entrants whose credibility is still uncertain. 2. Rivalry among established firms is high in the industry among players like Johnson & Johnson, Merck & Co, Pfizer, Abbott Laboratories etc. The pharmaceutical industry is high revenue industry and there is a tough competition to obtain more market share. No company owns more than 6-10 % of the market share.In addition, high cost of R and marketing are incurred by all the firms involved in this competition. 3. Buyer power would be classified as low to moderate in this industry ascribable to the foll owing reasons. The concentration of buyers relative to overall industry surface is low. The demand for chronic and lifesaving drugs is high collectible to the ageing baby-boom population. The buyers bind little knowledge about the industry cost structure and hence the pharmaceutical companies use this advantage to outlay their products higher. The patents protect the drugs from refuse priced competitor drugs, but many patents are expiring. . Supplier power is considered medium to low in the industry. The supplier chemise cost incurred by pharmaceutical companies like Merck and Pfizer is low. The threat of forward integrating by suppliers is low due(p) to lack of knowledge and expertise. Differentiation of the supplier products is low because they have a wide range of applications, with the biotech firms world one of them. 5. Substitute products always present a challenge to companies operating in the pharmaceutical industry. This can be attributed to the following factors.B iotech firms like Amgen are beginning to market their own products, unlike the traditional method acting of selling them to pharmaceutical companies like Merck and Pfizer. This presents a new segment of competitors that can provide substitutes. Increasingly, patients can use medical alternatives such as surgery, homeopathic remedies, acupuncture and herbal medicines. The overall healthcare industry is very dynamic and always changing. New products and healing methods are constantly being developed, some of which could serve as substitutes to existing treatments hitered by Merck and Pfizer.SWOT Analysis Merck & Co. SWOT Merck is the third largest healthcare company in the world. Over the years, a large investment in R has enhanced the companys top-line festering. However, new competitors and large cost of drug development could affect their revenue issue. Strengths Weaknesses Leading market position third largest healthcare company in Generic brand competition the world. High l itigation cost Successful launches of new products fusion with Schering-Plough strengthens their industry position Opportunities Threats Cost savings from internal restructure US regulatory set ventures Expansion in emerging markets Healthcare reform of US industrial-strength pipeline Strengths Leading Market Position troika Largest Healthcare Company in the World Merck is a well-known and respected company worldwide. One of their greatest strengths is their leading market position. Mercks worldwide sale essentialed $48 billion in 2011, an ontogenesis of 4% compared to 2010.The increase of revenue is mainly due to the companys signature products such as Singulair, Januvia, Remicade, Zetia, Vytorin, Janumet, Isentress, Nasonex, Gardasil, and Temodar (Datamonitor, 2011). Successful Launches of New Products Merck has a proven success record for launching new products. Since 2006, it has successfully launched 10 new therapeutics, including Victrelis, a treatment fo r chronic hepatitis C (2011), Elonva, a corifollitropin alpha injection (2010), Janumet, a treatment for diabetes, Isentress, an HIV integrase inhibitor (2007), Gardasil, a drug that could prevent diseases caused by HPV, and Januvia, a cure for type 2 diabetes (2006) (Datamonitor, 2011). nuclear fusion with Schering-Plough Strengthens Their Industry Position The merger with Schering-Plough has certainly strengthened Mercks industry position.Schering-Plough owned many frequent pharmaceutical drugs such as allergy drugs Claritin and Clarinex, anti-cholesterol drug Vytorin, and a brain tumor drug Temodar. Schering Plough had 1. 4% market share in the U. S. , 17th in the top 20 pharmaceutical confederation by sales (Datamonitor, 2011). Weaknesses Generic Brand Competition Merck pharmaceutical products have traditionally accounted for roughly of their total sales. One weakness is the competition Merck faces with generic brands. Due to the real economy, we tend to estimate people al low shift to more inexpensive and generic brand products. This can cause sizable losses for Mercks total revenue. High Litigation CostsMerck continues to face litigation tie in to their Vioxx recall, a drug that is used to cure arthritis and acute pain. In 2004, Merck withdrew Vioxx off the market because it cased potential cardiac attacks among the patients who took it regularly for a period of 18 months or capaciouser. During 2010, Merck was forced to spend around $140 million in legal defense costs (Datamonitor, 2011). Opportunities Cost Savings from Internal Restructure Merck has emphasized the idea of decreases costs in order to drive greater efficiencies within the company. According to Datamonitors SWOT analysis, Merck hopes to reduce costs by $3. 5 billion one-yearly beyond 2011 (2011). Expansion in Emerging MarketsMerck has strengthened its international market share by signing exclusive agreements with other established companies to co-promote and distribute a follow of products. For example, Merck and Johnson & Johnson agreed to govern the rights to distribution of Remicade and Simponi. Remicade is a treatment for nasal allergy and Simponi is an asthma treatment for patients above the age of three. According to the agreement with Johnson & Johnson, Merck is allowed to market Simponi and Remicade in Asia, Canada, Africa, The Middle East, and substitution and South America as of July 1, 2011. In addition, Merck exclusively markets these products in Turkey, Russia, and Europe.These two products brought in 70% of Mercks revenue from 2010 (Datamonitor, 2011). Strong Pipeline Datamonitor expects that Mercks 20 new products leaveinging add combined annual sales of more than $7 billion to its top-line by 2015 (2011). While Merck retains its internal focus on pipeline productivity, half of its new launches were obtained in the companys merger with Schering-Plough. Recently Merck has had considerable success with a turn of events of new launches si nce moving into its core portfolio. It volition look to replicate this success with the pipeline programs it has genic from Schering-Plough as well as with those it has been developing prior to the merger. Threats US Regulatory SetbacksUS regulatory setbacks include terminations of Mercks treatments such as for Tredaptive for atherosclerosis, and Taranabant for obesity. The potential for further setbacks and termination can be a concern for Mercks brand image during the drug development stage. There could also be threats for the clinical and regulatory failures with developing Saphiris (schizophrenia), boceprivir (hepatitis C) and TRA (Datamonitor, 2011). Healthcare Reform of US The recently enacted US Healthcare Reform could decrease Mercks profit coasts. According to Datamonitor, Merck incurred additional expenses from increases in Medicaid rebates, which increase from 15. 1% to 23. 1% for the branded prescription drugs.Being in the Medicare Part D coverage gap, Merck was requ ired to pay a 50% send away utilization required by law in 2011. In addition, Merck expects to Also, beginning in 2011, Merck expects that it pull up stakes pay an additional annual health care reform fee, which will be enumerated as a percentage of the industrys total sales of branded prescription drugs to specified government programs. The fee was $2. 5billion for 2011 (2011). Pfizer Inc. SWOT Pfizer is the worlds largest research- found pharmaceutical company and still remains the strongest industry player in terms of sales and marketing capability. However, Pfizer relies on a large M&A structure and lacks some key aspects of an organic sales egression model. Strengths Weaknesses M&A to gain economies of scale Difficulty in gaining market share due to already Strong advertising capabilities established position in the market Acquisition of Wyeth in 2009 Heavy reliance on Lipitor franchise Opportunities Threats Acquisition of power in 2010 Difficulties in achieving orga nic sales reaping Enhancing established products in emerging markets Development setbacks of Sutent and Chantix/Champix Decreasing cost structure Strengths M&A to Gain Economies of collection plate Pfizer has used large-scale acquisitions to establish and maintain its position as the biopharmaceutical industrys leading player. Since 2000, Pfizer acquired four big pharmaceutical companies Warner-Lambert, Pharmacia, Wyeth, and King Pharmaceuticals. Pfizer acquired Wyeth in 2009. Wyeth was known for manufacturing over-the-counter drugs such as Robitussin and Advil, around $3 billion in sales annually. The acquisition of Wyeth enhanced Pfizers position as the industrys largest prescription pharmaceutical manufacturer.According to an member from MarketWatch, Pfizers large economies of scale growth also enhanced the companys ability to implement restructuring programs designed to reduce costs and drive profitability, piece of music maintaining a steady increase in R expenditure (2 012). Strong publicise Capabilities According to MarketWatch, Pfizer has a strong marketing and sales infrastructure that helps grow sales for new products as well as mature product that face strong competition from generic competition. According to MarketWatch, The most visible illustration of Pfizers sales and marketing capability is the strong revenue stream recorded by Pfizer attributable to third party products marketed under-license in selected geographic markets. In mulct, Pfizer remains a marketing partner of choice for many medium and smaller sized prescription pharmaceutical players (2012). Acquisition of WyethThe acquisition of Wyeth gives Pfizer an speedy access to many well-known biologic and vaccine products such as Enbrel, an anti-inflammatory product and Prevnar, a vaccine. Pfizers financial statement 2011 stated the worldwide revenues from biopharmaceutical products in 2010 were $58. 5 billion. This was increase of 29% from 2009, primarily attributed to the add ition of operational revenues from Wyeth products of more or less $13. 7 billion (Datamonitor, 2011). Weaknesses Difficulty in Gaining Market Share disposed(p) Pfizers current market share (worlds largest research-based pharmaceutical company), it will be difficult for the company to continue to grow at the historical rate of sales without further use of large-scale M&A.According to MarketWatch, Pfizers 15 established blockbuster products in 2010, only a few products, including the neuropathic pain therapy Lyrica (pregabalin), are depend to deliver a positive sales growth contribution through to 2015 (2012). All other products, including Lipitor, will deliver net ostracise sales growth, primarily due to generic exposure. Heavy reliance on Lipitor franchise According to the analysis of MarketWatch, Pfizers blockbuster portfolio is dominated by the Lipitor franchise, which generated global sales of $10. 7 billion in 2010 (2012). However, Lipitor revenue growth slowed real(a)ly s ince mid-2006 due to the indirect generic impact of therapeutic substitution via loss of patent exclusivity for Merck & Co. s rival statin Zocor.With the Lipitor patent expiration set to occur in mid-2011, exposure of this one product to generic competition will have a significant impact on the overall performance of the company. Opportunities Acquisition of King in 2010 Pfizer acquired King Pharmaceuticals on Oct 12, 2010, the worlds 39th largest pharmaceutical company that focuses on pain management. Its product includes Altace for heart attack prevention, and Sonata, a sleeping aid. According to MarketWatch, the acquisition of King represents the latest stage in a diversification schema implemented by Pfizer over the past two years, as it seeks to prepare for the loss of patent exclusivity on its best-selling prescription pharmaceutical product Lipitor (atorvastatin) in late 2011.King is a leading developer of analgesics and its integration will broaden Pfizers pain offering to include opioid drugs with anti-abuse technologies (2012). Datamonitor currently expects that Kings total revenues will increase at a CAGR of 11. 3% during 2010-15, from $1. 2 billion to $2 billion (2011). Enhancing Established Products in Emerging Markets Pfizer established two independent business units, one focused on established products and the other focused in emerging markets. The goal is to bridge emerging markets with established products. Pfizer, like Merck, plans to expand to the emerging markets by collaborating with topical anaesthetic players to source branded generic products. Decreasing Cost StructurePfizers aim to grow profit will be depending on its continued use of a decreasing cost structure. According to MarketWatch, Pfizer forecasted the acquisition of Wyeth will save $3 billion by the end of 2012 (2012). Pfizers reason for the large-scale M&A is to cut cost substantially (by not having to invest in R&D and the development of new drugs) to drive increased pro fitability (by leveraging what other companies have developed). Threats Difficulties in achieving organic sales growth Pfizer success relies heavily on large-scale M&A and lacks organic sales growth. Datamonitor believes that further large-scale M&A activity will be undertaken by Pfizer because of growing competition of generics (2011).Pfizers own R operations will find it difficult to keep up with the historical M for its organic growth. Development setbacks of Sutent and Chantix/Champix Sutent, a treatment of advanced renal cell carcinoma, undergo development setbacks. Sutents revenue growth depends partially on approval in additional tumor types the termination of clinical trials in twain colon cancer and breast cancer indicates that the products performance in the marketplace could suffer. In addition, Pfizer also experienced setbacks in Chantix/Champix, smoking cessation therapy. Revenue declined mainly due to the updated labeling to warn of neuropsychiatric symptoms.As DataM onitor pointed out, further failures in clinical trials of Sutent and other products could significantly affect Pfizers sales growth (2011). Part 2 Financial Analysis a. Profitability Analysis (Appendix A) Using translate on assets (ROA), return on common equity (ROCE), and profits per share (EPS), one can properly illustrate the profitability of Merck and Pfizer. Mercks ROA fall significantly from 2009 to 2010, dropping from 16. 8% to 1. 29%. This decrease was attributed to a decline in net income and profit margin. by and by their acquisition of Schering-Plough, Merck was left with higher costs, such as an 88% increase in R expense and a 55% increase in Marketing and Administrative Expenses. Total costs increased by 265%, while sales increased by only 67%.Net income also decreased in 2010 due to an increase in Other Expenses attributable to the Schering-Plough merger, an exchange loss of $200 million due to two Venezuelan currency valuations, and a $950 million charge for the Vioxx Liability Reserve. The disaggregated ROA showed a decrease in profit margin as well, from 48. 9% in 2009 to 3. 06% in 2010. A year after the merger, Mercks ROA bounced back to 6. 7%, which is closer to the industry comely of 11% (CNN. com, 2011) by decreasing some expenses (R, Materials & Production) and an increase of $2 million in sales. Pfizers ROA shows a similar decreasing trend for 2010. Its ROA decreased from 9. 03% in 2009 to 4. % in 2010 due to deductions related to asset impairment charges that were $1. 3 billion higher in 2010 than in 2011, due to the Wyeth acquisition in 2009 and litigation related to their subsidiary Quigley Company, Inc. The ROA has increased in 2011 to 5. 83% because the costs and expenses decreased by $3 million. The disaggregated ROA shows both the decrease of asset turnover and profit margin from 2009 to 2010, and the increase in both for 2011, showing that the operation profitability is getting stronger. However, we believe that both firms profit margins are anicteric when compared to the industry average of 16. 7% (yahoofinance. com, 2012)After comparing the Asset Turnover, Profit Margin, and ROA for both companies, we can think that both are starting to improve in regards to profitability, after their acquisitions in 2009. However, Merck seemed to be using its assets more efficiently to generate sales than Pfizer in 2011. Merck also had a higher ROA. However, both companies are below the industry average ROA of 11% and below the ROAs of competitors (Johnson & Johnson ROA is 8. 5% and Abbott is 7. 8%) (CNN. com). Return on common equity helps to justify how well a company uses its investment dollars to generate profits. ROCE can be very important to shareholders as it informs common stock investors how effectively their capital is being reinvested.Mercks ROCE decreased significantly in 2010 due to the acquisition of Schering-Plough, which led to a decrease in Net Income due to the cost of acquisition (increase in R, and increase in marketing, administration, materials and production expenses), and an increase in Shareholders Equity. Pfizers ROCE declined marginally in 2010 as well, due to the acquisition of Wyeth. However, both companies were back to normal operations in 2011 and had similar ROCEs, around 11%, which is considered the average percent for publicly traded companies in the US. This means that both companies have rosy-cheeked ROCEs and are generating healthy returns to shareholders.The desegregated return on common shareholders equity reveals a decrease in the financial leverage of Pfizer from 2. 29 in 2010 to 2. 25 in 2011. Mercks financial leverage is constant, 1. 92 in 2010 and 1. 93 in 2011. We conclude that both companies are not heavily leveraged by short and long term debt, which shows that they are less(prenominal)(prenominal) risky financially. The disaggregated ROCE also reveals low asset turnover ratios for both companies and this is not uncommon for companies with h igh profit margins in the pharmaceutical industry. Finally, network per Share is also used to assess a companys profitability. EPS allow us to compare the companies power to make a profit. This means that Mercks determine Earnings balance performs founder than that of Pfizers.Whereas Pfizers EPS has been constant for the last three years (around 1), Merck experienced a significant decrease in 2010 to 0. 36 for diluted. The notes of their financial statements list the following reasons for the decrease R impairment charges, restructuring and merger with Wyeth (had to recognize a full year of amortization of intangible assets and inventory set-up), legal reserve deductions related to Vioxx, and the US healthcare legislation reform. Non GAAP results were evaluated as well, and we believe these results give a better grounds of the performance of the company as they exclude the non-recurring costs mentioned above. b.Liquidity Analysis (Appendix B) The following section analyzes the short term liquidity risk of Merck and Pfizer. The ongoing dimensions for both companies are healthy, above 1, which means that they both have substantial gold and near-cash assets available on their Balance Sheet to repay their obligations within the next year. The Quick Ratios for both companies is also healthy, above 0. 5, which means that both companies have liquid assets on hand to repay their short term obligations. The Operating hard currency Flow ratio is similar for both companies, above 0. 4, which means that both companies generate enough cash flow from operations after funding working capital needs.According to the notes of the financial statement, Pfizers lower rate in 2010 was attributed to certain tax payments made in connection with the increased tax costs associated with the Wyeth acquisition and therefore, the decrease in net cash flow from operations. From analyzing the Revenue to hard cash and Days Revenue Held in Cash ratios, it is noticeable that Pfizer ha s less cash on hand. Pfizer has less cash because they are more focused on M. Pfizer worn-out(a) 3. 3. billion on acquisitions in 2011, while Merck spent just 3. 7 million. Merck has a healthy ratio for accounts receivable turnover. Mercks accounts payable turnover is intimately double that of Pfizer.These findings show that Merck is paying their supplier twice as fast as Pfizer. Pfizers lower ratio might be due to the fact that its creditors allow more time to pay off its debt. The Accounts Receivable and Inventory Turnover ratios are also pretty high and pretty similar for both companies. This means that both firms are selling inventory and turning accounts receivable into cash relatively quickly. However, it looks like Merck is collecting money from customers faster and turns inventory over quicker than Pfizer. Overall, we believe that both firms have healthy short term liquidity. c. Solvency Analysis (Appendix C) The following section analyzes the long term solvency risk of Me rck and Pfizer.The Liabilities to Asset Ratio reveals that both Merck and Pfizer finance their companies with approximately 50% debt and 50% equity. However, Mercks ratio is a little lower, with around 45% debt and 55% equity financing. As can be noticed in the table, the Liabilities to Shareholders Equity, tenacious shape Debt to Long Term Capital, and Long Term Debt to Shareholders Equity ratios are healthy, which means that both companies will have no problems play offing long term obligations and are not heavily financed by debt. The Interest reportage ratios for 2011 reveal that both companies are able pay interest on outstanding debt and can pay additional debt as well.Therefore, their credit risk is considered low. The Operating Cash Flow to Total Liabilities ratios are around 20% or higher, which means that both firms generate enough cash flow from operations to service debt. Both firms experienced a lower ratio in 2010 due to increased tax costs for the acquisition of W yeth for Pfizer and due to increased costs associated with the Schering Plough merger and the Vioxx impairment charges for Merck. The liquidity and solvency analysis revel that both firms are not experiencing any financial distress. However, we consider Merck less risky that Pfizer because Merck relies less on debt and more on equity financing. Part 3 Valuation AnalysisAs outlined above, profitability, liquidity, and solvency all go a long way in providing analysts with viable information used to measure the performance of a firm. In addition to these measures, residual income, cost of equity, and valuation can also be used when analyzing companies such as Merck and Pfizer. a. Residual Income (Appendix D) We started our valuation analysis by calculating the residual income for both Merck and Pfizer. In order to achieve this, we used the companies 10K reports from 2009-2011 to project the forecast for 2012-2016, a five-year time frame. The method we used for this forecast was the un iform method used to project the residual income. Pfizers residual income for 2012 was $82,621million while Mercks was $54,517million.Please note that all military issues in our calculations are in millions. Our valuation was based on the assumption that both companies will grow by an average rate in the following years. We took into consideration three factors the current growth rate, past growth rate and macroeconomic factors. Both Merck and Pfizer are in the maturity phase of their growth cycles and show steady growth figures. Residual income growth for Merck was negative for 2010, withal we believe this was due to Mercks merger with Schering-Plough Corporation. In 2007 and 2008, Merck showed a positive double-digit growth. In 2011, residual income growth was virtually flat, at 0. %, however we believe this is also due to the Plough acquisition. For Pfizer, residual income growth figures for the previous three years averaged approximately 3%. Based on these values for residual income, we choose to be conservative and assume a 1% long-run growth rate for residual income for years 2012 to 2016 for both Merck and Pfizer. We chose this modest growth number because both companies are still adjusting to recent large-scale M activity. On a macroeconomic level, both Merck and Pfizers growth may be stunted by an overall down economy, the health care policy restructuring in the United States and the expiration of long-standing patents. b. Cost of Equity (Appendix D)After determining the 5 year forecast for each company, we next calculated the cost of equity. The capital asset pricing model was used to calculate the cost of equity. We used the yield on a ten-year Treasury Bill as the risk kick rate which was 1. 98% (US Department of Treasury, 2012). The betas we used to calculate these numbers were retrieved from a financial website index (yahoofinance. com, 2012). The beta for Pfizer was 0. 71 and for Merck it was 0. 8342. The return on market was set at 14. 50% for both companies (NYSE, 2012). Using the bivouacking Model, the cost of equity for Pfizer was determined to be 10. 869%, while for Merck it was 12. 424%. Therefore, stockholders of Merck require a larger return than stockholders of Pfizer.Given that Pfizer is the number one pharmaceutical company in the world, it is implied that investors require more return from Merck than from Pfizer. c. Valuation (Appendix D) Using the growth rate of 1%, we forecasted 2012s residual income by multiplying the growth rate by 2011 residual income. We performed the same calculation for the next five years until 2016, and then discounted it to get the present value. From 2016 on, we assumed a sempiternity growth rate, which means we assumed this company would grow forever. Therefore, we needed to calculate the current value for the company as if it were to grow at a rate of 1%, forever. We first calculated next years residual income by multiplying 2016s residual income by 1%, then dividing by 2.The reason we dissever by 2 was to account for the fact that the firm might not grow at a rate of 1% forever. In fact, in some cases, there might be negative growth, as Merck experienced from 2009 to 2010. Therefore, to be conservative, we divided the residual income in half, and then we discounted the value by the discount factor to get the present value. After we calculated the present values, we added all the values together and divided by the current number of shares outstanding to obtain the value per share. For Pfizer, the value per share was $79. 39 and for Merck $114. 93. The value we calculated is three times the amount of what the stock is currently trading at.We believe this number is high, but not unreasonable. Around the year 2000, Pfizer was trading near $50 and Merck was trading near $100. We think the current low share value is due to the overall weak economy and we believe that the share price will grow in the future. Please note that all the values of the calculation s are in millions still for value per share and current share value. d. Sensitivity Analysis (Appendix E) We performed a sensitivity analysis based on changing horizon growth factors and discount rates (cost of equity) to show the value per share. This gives investors the value per share for a different discount rate or growth factor. Part 4. RecommendationsAfter a thorough analysis of both Merck and Pfizer based on profitability, liquidity, and solvency evaluations, we found that both companies are preforming well financially. We found that both companies use assets and investments effectively to generate profit and their profitability growth seems to be steady. The analysis of short term and long term liquidity of both firms shows no risk in their ability to generate cash to meet working capital needs, and satisfy short term and long term debt. From the valuation analysis, we can predict that the future share values of both Pfizer and Merck seem to grow at a steady rate, assumpt ive that both companies grow at a rate of 1% each year.From an investors point of view, we consider that the earning per share, the price/earnings ratio, and the leverage are important factors to consider before making an investment. Company EPS Price/Earnings Ratio Leverage Pfizer 2. 14 10. 47 2. 25 Merck 3. 25 11. 95 1. 93 After analyzing both companies, on the basis on earning per share, the price/earnings ratio, and the leverage, we have the following recommendations for potential investors. comparing these values for both companies (table above), we found that Merck outperforms Pfizer marginally.We believe that investment in both companies is safe, however, investment in Merck will bring a higher earnings return than a similar investment in Pfizer in the future. In addition, the financial leverage shows that the financial risk investment in Merck is lower than Pfizers, which makes it an even better choice for investment. However, the investor should keep in mind that the ph armaceutical industry involves high risk due expiring patents and threats from generic drugs and their profitability can be highly impacted by these events. According to a recent article on Dailyfinance. com, we found that the patents for major drugs like Pfizers Lipitor and Protonix, and Mercks Singulair, which make up a large portion of the companies revenues, are about to expire(2011).These patent expirations cause uncertainty in the future growth of the companies and might have a substantial impact on their stock prices. Appendix A ROA Pfizer Merck & Co 2009 2010 2011 2009 2010 2011 Asset Turnover 0. 46 0. 32 0. 35 0. 34 0. 42 0. 45 Profit margin 19. 50% 14. 60% 16. 50% 48. 90% 3. 06% 14. 70% ROA 9. 03% 4. 80% 5. 38% 16. 80% 1. 29% 6. 70% ROCE Pfizer Merck & Co 2009 2010 2011 2009 2010 2011 10. 28% 9. 21% 11. 53% 33. 47% 1. 73% 11. 74% EPS Pfizer Merck & Co 2009 2010 2011 2009 2010 2011 GAAP $1. 24 $1. 09 $1. 10 $5. 65 $0. 36 $2. 01 Non GAAP 3. 77 3. 42 3. 25 Appendix B Pfizer Merck 2011 2010 2011 2010 Current Ratio 2. 0566461 2. 1306398 2. 0425362 1. 8581932 Quick Ratio 1. 438099 1. 4454533 1. 4301631 1. 2496004 Opr. CF to Current Liab. 0. 7210802 0. 399986 0. 7622653 0. 6918995 Revenue to Cash 19. 051992 38. 649568 3. 5508832 4. 2189908 Days Revenues Held in Cash 19. 158102 9. 438314 102. 79133 86. 51358 Accounts Payable Turnover 1. 67 2. 11 3. 77 3. 89 Days Accounts Payable 218 173 97 94 great(p) Accounts Receivable Turnover5 4. 79 6. 16 6. 59 Days Receivable Outstanding 73 76 59 55 Inventory Turnover 1. 88 1. 53 2. 78 2. 4 Days Inventory Held 194 238 131 138 Appendix C Pfizer Merck 2011 2010 2011 2010 Liabilities to Asset Ratio 0. 560 0. 540 0. 458 0. 463 Liabilities to Shareholders0. 583 0. 555 0. 300 0. 290 Equity Ratio Long Term Debt to Long-Term 0. 297 0. 303 0. 220 0. 220 Capital Ratios Long Term Debt to 0. 422 0. 435 0. 284 0. 84 Shareholders Equity Ratio Inter est reporting Ratio 8. 600 6. 180 10. 900 3. 480 Operating Cash Flow to Total0. 190 0. 099 0. 300 0. 120 Liabilities Ratio Appendix D 10 year Mercks BetaMercks Rm Treasury Bill 1. 98% 0. 8342 14. 50% CAPM 12. 2% Merck 2012 2011 2010 germ SE 54,517 54,376 59,058 Comprehensive Loss 3,132 3,216 2,767 Income Available to Com. 57,649 57,592 61,825 Shareholders Required Income -222 -222 -221 Residual Income 57,427 57,370 61,604 Changed in Residual Income 0. 10% -6. 7% 2012 2013 2014 2015 2016 CV Projected Residual Income 57,427 58,001 58,581 59,167 59,759 30,178 Discount Factor 1. 12424 1. 2639156 1. 420944 1. 5974826 1. 795954 0. 2051731 submit Value 51,081 45,890 41,227 37,038 33,274 147,086 Total Value 355,596 of Share Outstanding 3,094 Value per Share 114. 93 Current Share Value (5/4/12) 38. 84 10 year TreasuryPfizers Pfizers Rm Bill Beta 1. 98% 0. 71 14. 50% CAPM 10. 7% Pfizer 2012 2011 2010 Beginning SE $82,621 $87,813 90,014 Comprehensive Loss -4,129 -3,440 552 Preferred Dividends 45 52 62 Income Available to Com. $86,705 $91,201 89,400 Shareholders Required Income 3,142 4,520 4,510 Residual Income $89,847 $86,681 84,890 Changed in Residual Income 3. 65% 2. 1% 2012 2013 2014 2015 CV 2016 Projected Residual Income 89,847 90,745 91,653 92,569 93,495 47,215 Discount Factor 1. 10869 1. 22919352 1. 3627 1. 5109 1. 6751 0. 1653 Present Value 81,039 73,825 67,254 61,267 55,813