Pfizer Financial Statement Analysis Case Study

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1. Balance Sheet Observations

Sources of Funding:

Equity (89,288M USD in 2023, 95,916M USD in 2022) and long-term debt (61,538M USD in 2023; 32,884M USD in 2022).

Other sources of funds by short-term borrowings ($ 10,350 million, in 2023; $ 2,945 million in 2022).

Working Capital:

Taking the balance sheet ratios, it can be observed that current assets are much higher than the current liabilities which show a good working capital (Yenni et al., 2021).

Deployment of Funds:

The balance sheet is characterised by non-current assets, goodwill, and identifiable intangible assets, reflecting a high level of acquisition activity in 2023, with detailed analysis and interpretation supported by Our Assignment Help Online Service.

2. Working Capital Calculation

Working Capital=Current Assets−Current Liabilities

2023:

43,333−47,794=−4,461million

2022:

51,259−42,138=9,121million

A working capital decline in 2023 signifies a negative position where current liabilities are higher than current assets may be due to aggressive capital management or the use of short-term funds.

3. Property, Plant, and Equipment (PP&E) Cost

The gross cost would be derived by adding the accumulated depreciation to the net book values for the year $18,940M in 2023. The breakdown of the cost on historical cost is available in the footnotes and thus this is an important way through which the user can easily access it (Asefi-Najafabady, Villegas-Ortiz and Morgan, 2020).

4. Increase in Goodwill

2023 Goodwill: ; Total Revenue FY 2021: $67,783M; FY 2022 Goodwill: $51,375M

Increase: $16,408M

Cause: Chiefly because of Biohaven Pharmaceuticals' $11.6B, Global Blood Therapeutics' $5.4B, and Arena Pharmaceuticals' $6.7B acquisitions, goodwill relates to the amount paid for the acquisition exceeding the fair value of the net identifiable assets acquired.

5. Total Cost of Non-Current Assets Acquired

Key drivers: Increases in PP&E, goodwill, and identifiable intangible assets.

• Estimate for 2023:
• Goodwill increase: $16,408M
• Intangible asset increase: $21,530M
• PP&E increase: $2,666M
• Total: Approximately $40.6B

Financing: Acquired through debt (the long-term debt was up by $28,654 Million) and operating cash flows.

6. Tangible Asset Disposals

Tangible asset disposals would also be reported in the PP&E footnotes where the net book value of each of the sold assets would be presented (Penman, 2023). This may also in some cases point to disposals since there are changes in the other balance in the accumulated depreciation account.

7. Reformulated Statements

Reformulated Balance Sheet (2023 and 2022)

Category	2023 (Millions)	2022 (Millions)
Net Operating Assets (NOA)
Operating Assets
- Inventories	$10,189	$8,981
- Trade Accounts Receivable	$11,177	$10,952
- Goodwill	$67,783	$51,375
- Intangible Assets	$64,900	$43,370
- PP&E	$18,940	$16,274
- Deferred Tax Assets (R&D)	$6,275	$4,137
Total Operating Assets	$179,264	$135,089
Operating Liabilities
- Trade Payables	$6,710	$6,809
- Accrued Compensation	$2,776	$3,407
- Deferred Revenues	$2,700	$2,520
- Other Operating Liabilities	$5,000 (est.)	$5,000 (est.)
Total Operating Liabilities	$17,186	$17,736
Net Operating Assets (NOA)	$162,078	$117,353
Net Financial Obligations (NFO)
- Financial Assets (Cash)	$2,853	$416
- Financial Liabilities	$61,538	$32,884
- Deferred Tax Liabilities	$11,605	$6,288
Net Financial Obligations (NFO)	$70,290	$38,756
Common Shareholders’ Equity (CSE)	$89,014	$95,661

Reformulated Income Statement

Category	2023 (Millions)	2022 (Millions)
Revenue	$58,496	$100,330
Cost of Goods Sold (COGS)	$21,223	$37,421
Gross Profit	$37,273	$62,909
R&D Expenditures	$11,400 (estimated)	$10,000 (estimated)
SG&A Expenditures	$17,000 (estimated)	$16,500 (estimated)
Operating Income	$8,873	$36,409
Non-Operating Income (Expense)	$500 (estimated)	$600 (estimated)
Net Income	$6,500	$28,000

Revenue Decline:

It decreased to $37 billion in 2023 from $64 billion in 2022 mainly because Comirnaty; the COVID-19 vaccine and Paxlovid; a COVID-19 therapeutic were hit hardest.

Profitability Impact:

Gross profit was also down by 40.7% however the margins did not worsen greatly.

The change also implies that operating income declined dramatically mainly because of reduced revenues while SG&A and R & D costs remained almost similar (Canace et al., 2022).

R&D Focus:

R&S costs rose in 2023, corresponding to the company’s ‘more forward-looking’ approach in investing in new products.

Net Income:

The operating income, in particular, has reduced the net income by 76.8%.

8. Return Calculations

Metric	Formula	2023 (Millions)	2022 (Millions)	2023 (%)	2022 (%)
ROCE	Net Income / CSE	6,500 / 89,014	28,000 / 95,661	7.3%	29.3%
RNOA	Operating Income / NOA	8,873 / 162,078	36,409 / 117,353	5.5%	31.0%

Return on Common Equity (ROCE):

ROCE dropped from 29.3%in 2022 to 7.3% in 2023 because of reduced net income arising from reduced sales of COVID-19 products.

Return on Net Operating Assets (RNOA):

RNOA declined to 5.5% in 2023 from 31.0% in 2022 attributed to a decrease in operating income and an increase in NOA because of the acquisition of goodwill and other intangible assets.

9. Growth Rates

Metric	Formula	2023 Calculation	2022 Calculation	Growth (%)
Sales Growth Rate	(Current Revenue - Previous Revenue) / Previous Revenue * 100	(58,496 - 100,330) / 100,330 * 100	(100,330 - 81,288) / 81,288 * 100	-41.7% (2023), 23.4% (2022)
Operating Income Growth Rate	(Current Operating Income - Previous Operating Income) / Previous Operating Income * 100	(8,873 - 36,409) / 36,409 * 100	(36,409 - 29,000) / 29,000 * 100	-75.6% (2023), 25.5% (2022)

Sales Growth:

For 2022, the assessment of the increase came from the Global Pharmaceutical Sales by 23.4% due to the impactful requests of COVID-related products such as Comirnaty and Paxlovid. In the same year, the selling were extremely low and were down by 41.7% mainly because these goods are not as frequently used by people as they were during the lockdowns.

Operating Income Growth:

For EBITDA, operating income increased by 25.5% in 2022, to a further progress correspondent to the sales increase and the appropriate costs control. Gross operating revenue dramatically dropped to 24,780 thousand Baht, a decrease of 75.6% in 2023, attributable primarily to the consequences of a decline in sales and increasing pressures from a fixed cost structure.

10. Growth in Operating Assets

NOA (2023) = $162,078 million

NOA (2022) = $117,353 million

Substituting these values:

NOA Growth Rate = [(162,078 - 117,353) / 117,353] × 100

NOA Growth Rate = (44,725 / 117,353) × 100 ≈ 38.1%

Key drivers of NOA growth in 2023 include:

1. Goodwill was also up $16,408 million thanks to strategic acquisitions done throughout this year, including Biohaven Pharmaceuticals and Arena Pharmaceuticals.
2. Increasing the value of intangible assets was $21,530 million resulting from acquired intellectual property and product rights.
3. We observe that the Property, Plant, and Equipment (PP&E) have risen by $2,666 million of capital expenditure.
4. Gross inventories have also risen by $1,208 million reflecting operation adjustments to market conditions occasioned by the lifting of pandemic restrictions.

11. COVID-19 Impact

1. Revenue Impact: According to Pfizer's annual financial statement, Pfizer had a total of $100,330 million in the year 2022 due to high demand for COVID-19 products like Comirnaty and Paxlovid. In 2023, revenue was $58,496 million a 41.7% decrease from 2022 – as pandemic demand eased following the stabilization of vaccination rates around the world.

2. Gross Profit: Gross profit, in line with the existing trend for revenue, shrunk, due to reduced sales of high-margin COVID-19 products.

3. R&D and SG&A Expenses: In 2023, R&D expenses were higher demonstrating the company’s commitment to start creating new treatments to diversify sources of earnings. Other operating costs were also constant, which indicates marketing and administrative expenses were kept high despite the decrease in revenues (Liu et al., 2021).

12. RNOA Decomposition

Metric	2023 Calculation	2022 Calculation	Result
Operating Income (OI) Profit Margin	8,873 / 58,496 * 100	36,409 / 100,330 * 100	15.2% (2023), 36.3% (2022)
Asset Turnover (ATO)	58,496 / 162,078	100,330 / 117,353	0.36 (2023), 0.85 (2022)
RNOA	15.2% * 0.36	36.3% * 0.85	5.5% (2023), 31.0% (2022)

OI Profit Margin

Reduced from 36.3% in 2022 to 15.2% in 2023 due to decreased operating capacity when revenues were down and fixed costs more or less unchanged.

Asset Turnover (ATO)

ATO reduced from 0.85 in 2022 to 0.36 in 2023 demonstrating a lower turnover of operating assets, primarily explained by the rise of NOA from acquisitions and declined revenues.

Overall RNOA

RNOA reduced from 31,0% in 2022 to 5,5% in 2023 which can be attributed to a decline in profit margin and slower utilization of assets.

13. Profit Margin Analysis

Component	Formula	2023 Calculation	2022 Calculation
Gross Profit Margin	Gross Profit / Revenue * 100	37,273 / 58,496 * 100 = 63.7%	62,909 / 100,330 * 100 = 62.7%
R&D Expense Ratio	R&D Expenditures / Revenue * 100	11,400 / 58,496 * 100 = 19.5%	10,000 / 100,330 * 100 = 10.0%
SG&A Expense Ratio	SG&A Expenditures / Revenue * 100	17,000 / 58,496 * 100 = 29.1%	16,500 / 100,330 * 100 = 16.4%
OI Profit Margin	Operating Income / Revenue * 100	8,873 / 58,496 * 100 = 15.2%	36,409 / 100,330 * 100 = 36.3%

1. Gross Profit Margin:

Slightly higher than the previous year 62.7% in the year 2022 which turned to 63.7% in the year 2023 showing again improved cost control in the production line (Pfizer, 2022).

2. R&D Expense Ratio:

Compared to 10.0% in 2022 it rises to 19.5 % in 2023 in line with Pfizer’s long-term strategic direction of concentrating on innovation (Pfizer, 2022).

3. SG&A Expense Ratio:

Reduced from 16.4% in 2022 to 29.1% in 2023, primarily due to a decrease in the revenue whereas the fixed amount of SG&A expenses remained intact.

4. OI Profit Margin:

Dropped significantly from 36.3 % in 2022 to only 15.2% in 2023 based on the effects of decreasing revenue and increased cost proportions.

14. Operating Profit Margin

Operating Profit Margin (OPM) Calculations

Year	Formula	Result
2023	Operating Income / Revenue * 100 = 8,873 / 58,496 * 100	15.2%
2022	Operating Income / Revenue * 100 = 36,409 / 100,330 * 100	36.3%

Effect of OPM on RNOA

Year	Formula	Asset Turnover (ATO)	RNOA
2023	OPM * ATO = 15.2% * 0.36	0.36	5.5%
2022	OPM * ATO = 36.3% * 0.85	0.85	31.0%
2023 (Hypothetical)	Higher OPM * ATO = 36.3% * 0.36	0.36	13.1%

Decline in Operating Profit Margin:

OPM declined from 36.3% in 2022 to 15.2% in 2030 was due to a decrease in revenue with a corresponding increase in the R&M expense of R&D.

Impact on RNOA:

Since OPM was reduced, RNOA also came down from 31.0 % in 2022 to 5.5 % in 2023. The above table clearly shows that with an increase in the OPM, there would be a corresponding increase in the RNOA meaning there is a need to improve on operational efficiency (Pfizer, 2022).

R&D Investment Impact:

Although the current level of R&D investment cuts the firm’s immediate profit, it makes great sense in the long run, as it helps to broaden the company’s range of products (Alzoubi, 2022). Pfizer’s R&D increase to 19.5 % of its revenue in 2023 from a current mere 10.0% in 2022 shows that its is forward-looking and planning on future returns.

15. ATO Drivers

Metric	Formula	2023 Calculation	2022 Calculation
Total Asset Efficiency	Revenue / Total Operating Assets	58,496 / 179,264 ≈ 0.33	100,330 / 135,089 ≈ 0.74
Liability Efficiency (NOA Impact)	Revenue / NOA	58,496 / 162,078 ≈ 0.36	100,330 / 117,353 ≈ 0.85

 16. Operating Liability Leverage

Metric	Formula	2023 Calculation	2022 Calculation
OLLEV	Operating Liabilities / NOA	17,186 / 162,078 ≈ 10.6%	17,736 / 117,353 ≈ 15.1%
Working Capital (Approximation)	Current Operating Assets - Current Liabilities	43,333 - 47,794 = -4,461M	51,259 - 42,138 = 9,121M

17. Impact of RNOA Decline

ROCE is calculated using the formula:

ROCE = RNOA + (FLEV × SPREAD), where:

- FLEV: Financial Leverage = NFO / CSE.

- SPREAD: RNOA versus net borrowing cost.

Cutting RNOA means a direct reduction of ROCE because it is Cowan’s key factor of calculation (Parkin et al., 2022). Further, for a leveraged firm, decreasing its RNOA decreases the overall positives of leverage and can even turn into a negative ROCE if the cost of borrowing is more than the RNOA.

For instance, if RNOA in 2023 is $3.0%, then the ROCE would be lower due to a decrease in the operating profitability.

19. Cash Flow Statement Trends

1. Analysis of Operating Cash Flow:

The operating cash flow in the fiscal year ending 2023 was largely backed by revenues from the core products, and cost optimization, while declining revenues exposed the firm to poor cash inflows (Coleman and Wu, 2020).

In 2021, Operating cash flow remains robust supported by high demand of COVID-19 products including Comirnaty and Paxlovid.

2. Sufficiency of Operating Cash Flow:

For the years ended 2023 and 2022, operating cash flows were unable to meet cash investments mainly due to big acquisitions and escalated costs of research and development.

Further cash was generated through the issue of long-term debts which are realized in an enhanced debt in the balance sheet.

3. Excess Cash Usage:

While calculating 2021 ratios, excess profits have serviced share repurchase and dividend distribution due to high profitability and liquidity.

20. Liquidity Ratios

Metric	2023	2022
Current Ratio	0.91	1.22
Quick Ratio	0.69	1.00
Debt-to-Equity Ratio	0.69	0.34

1. Liquidity Deterioration:

Liquidity ratios as depicted by current and quick ratios reduced from 2022 to 2023 due to poor short-term solvency. The observed trends for 2023 indicate odd prospects for meeting current liabilities (Irwansyah Irwansyah et al., 2023).

Pfizer Financial Statement Analysis Case Study

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2. Increased Leverage:

A promising creditors’ leverage measure debt-to-equity ratio rose in 2023 1.98 times in comparison with 2022 caused by long-term debt usage in acquisitions and R&D financing.

3. Debt Servicing:

Accompanied by high debt levels, operating cash flow contraction may evolve into issues with punctual debt servicing (Serrano Hernández, 2023).

References

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