Starting the project Choose a company or any organization, preferably a healthcare organization. Start your data search, Bloomberg, or SEC the Edger filing (10-K, 14-DEF) and annual reports. Examine...

Company
Pfizer is one of the biggest pharmaceutical companies in the world based out of the US and it has been majorly in the biopharma industry along with the vaccines and biosimilars too. Pfizer is one of the giants in the biopharma industry working towards the multiple areas of the pharmacy. As we know the healthcare industry has been very cyclical due to its nature of parents where after 20 years every patent expires and the product becomes a commodity. The firm has been one of the biggest and the oldest pharmaceutical company in the world and they have expanded their reach across the world by the means of the subsidiaries.
Industry Analysis
Industry analysis needs to be performed before the valuation to ensure the threat from the external factors and the lucrativeness of the industry. This can be performed using Porter’s five forces model. A spider chart for the same with 5 forces is shown below. Each value on the factor describes the degree of the threat. 5 stand for the highest threat and 1 for the lowest threat.
Barriers to entry - Healthcare industry is a capital intensive industry and hence it requires a humongous investment in order to establish and enter in the industry. Due to this we feel that the barriers to entry for the Pfizer are very high and the threat of the degree is very low.
Threat of substitutes - We feel that the threat of substitutes is currently high due to low switching costs and alternatives are available as far as the competition is concerned. For the non chronic or the diseases where patients need not be admitted can get the treatment form online and order the drugs from the pharmacies.
Bargaining power of buyers - The bargaining power of the buyers is very low due to the risks associated with the health and hence this industry has some advantages as far as this metric is concerned. The bargaining power decreases due to the severity and the seriousness and the damage that will it cause if it is not met with the urgent care. Hence, here even the buyers are one of the biggest stakeholders they can not wield the power here.
Bargaining power of the suppliers - In the hospital industry, if we closely look at the suppliers they are majorly comprise of the manufacturers of the drugs and the pharmacies which are there in the value chain. Due to higher bargaining power and the innovators innovating the life saving drugs the bargaining power of the suppliers is relatively high and the hospitals and the integrated delivery networks have to ensure that the relations with the hospitals are intact and they ensure that long term contracts are achieved.
Internal competition - As far as the internal competition is concerned it is more or less moderate not very low or very high. The competition is due to the expiration of the patents of the blockbuster drugs and the competition intensifies when all the players in the market tend to develop the same biologics or the biosimilars. Apart from this, for the rare diseases all the competitors are involved. However due to heavy risk of the failures and very high research and development costs involved in the industry the competition is more or less moderate. The competition is due to the expiration of the patents of the blockbuster drugs and the competition intensifies when all the players in the market tend to develop the same biologics or the biosimilars.
Financing -
A company can raise the funds by two means -1. Bonds or debt using the fixed income instruments, 2.Equity
For the bonds or banks loans the firms based on the interest rates have to pay a fixed interest charges. The more the debt the company has the riskier the firm becomes due to higher obligations to the borrowers and due to this the bankruptcy costs are high. Also with the more and more debt the costs of equity also increases for the shareholders due to the way the claims are settled in the case of bankruptcy. The shareholders are the last to receive any residual claims on the firm assets after the bankruptcy.
For the equity, it is limited liability for the shareholders and there is no obligation to pay a fixed amount to the shareholders. Based on the growth phase of the company, management may choose to indulge into one or another dividend policy and this will lead to fixed payments in the form of dividends. Generally, mature companies where the growth prospects are low, they tend to pay more dividend as compared to the companies which are currently in the growth phase.
As far as the pharmaceutical companies are concerned, they operate in a very capital intensive environment and for them the medium of debt is particularly important and hence these companies do exhibit very high debt to equity ratios. For example Pfizer has 82% debt to equity ratio. That means for almost every dollar which sucks financed by the equity 1 dollar is borrowed from the banks or the shareholders.
We can find the optimum amount of debt that the company should have in order to ensure that the weighted average cost of capital is the lowest. The reason behind this is that the cost of debt is always lower than the costs of equity. Due to this the companies tend to exhaust the limits of debt that they can undertake and then look for the equity medium. The more the debt you take the worse the credit rating of the firm becomes.
As compared to the peers, the Pfizer has been maintaining significantly high debt to equity ratio and they have been carrying very high debt on its balance sheet. At the same time the firm has been paying out a lot dividends for the last few years and they can change the policy to pay down the debt first and then shareholders can receive the dividends. As far as the pharmaceutical companies are concerned, they operate in a very capital intensive environment and for them the medium of debt is particularly important and hence these companies do exhibit very high debt to equity ratios. For example Pfizer has 82% debt to equity ratio.
DuPont Model -
Return on Equity = Net Revenue / Shareholder’s Equity
However, using DuPont Model, RoE can be broken down into multiple factors to understand the key driver of the change in return on equity. ROCE is a better measure when this ratio is compared across the countries, since it does not take the tax rates into consideration which might be different.
Net Profit Margin
The net profit margin is the ratio of bottom line profits compared to total revenue or total sales. This is one of the most basic measures of profitability.
This metric can further be broken down into three factors –
1. EBIT Margin - This ratio suggests how the what percentage of operating revenues is expensed into operating expenses and depreciation
2. Capital Structure Impact - Asset turnover ratio suggest how much sales the firm has been able to generate for the assets.
3. Tax Impact- This factor takes the amount of corporation...