Analysis Of Pfizer

Submitted By Frank-Jansen

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Cost of Capital

The pharmaceutical industry is often characterized as high risk, high rewards proposition. A company such as Pfizer has a reputation for successfully launching many blockbuster drugs and driving shareholder value. Perhaps less well known are the costs and risks associated with successfully bringing a drug to market. Promising compounds may take several years to emerge from the drug discovery process and then require expensive clinical trials before receiving FDA to sell the products. At any time in the development process, the drug could be found to be ineffective resulting in the manufacturer losing its R&D investment -- which can be as high as $1 billion -- as well as all the forecasted future cash flows.
One of the financial management challenges that Pfizer faces is optimizing its capital structure in this high risk/high reward, capital intensive environment. Drug companies may keep more cash reserves as an insurance policy to fund operations in the event of a revenue shortfall resulting from an R&D or to ride out cyclical downturns. Balancing this need for a safety margin are the opportunity costs of investing the excess cash in new projects, other assets to make them more profitable, or redistributing the reserves to shareholders. Complicating matters is a continually changing business environment. Currently Pfizer’s capital base consist of 40 million in debt and 8 billion shares get traded on a daily bases. With a broad combined

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