US-based and European-based Pharmaceutical Companies A Financial Comparison Neal Lewis Amit Patil Karla Niehaus

Hypothesis There are some significant differences between European and American Companies – American companies are there to make money – Europeans have multiple objectives – Different time horizons – Differences in corporate governance

Corporate governance U.S.: Board of Directors Europe: varies widely – U.K. similar to the U.S. – Germany: dual system, with Management board and Supervisory board – Switzerland: anything goes

Hypothesis: Due to these differences, we expect to see differences in financial performance: – Expect the U.S. to show better short-term profit performance – Expect the U.S. companies to be better short-term investment opportunities

The Companies U.S. – Pfizer – Merck – Bristol-Myers Squibb – Johnson & Johnson – Pharmacia Europe – Glaxo Smithkline – AstraZeneca – Aventis – Novartis – Roche

The European Companies Glaxo and AstraZeneca are based in England – both have management boards that include outside Directors – Both are the results of recent mergers (2000, 1999) – Both follow U.K. financial guidelines (not U.S. GAAP)

Aventis is a French/German company based in Strasbourg France – Recent merger of Rhone- Poulenc and Hoechst (1999) – Follows the German model – Has a supervisory board made up of 50% labor representation. Oversees the management board – Finances are in Euros

Novartis and Roche are Swiss – Novartis is a 1996 merger of Ciba and Sandoz, both of Basel. Roche is also based in Basel – Both companies have a management board, made up primarily of company executives – Finances are in Swiss Francs

Financial Analysis Use of Financial Ratios to see Operational Differences Comparing the results To check if hypothesis holds true

Financial Analysis (Cont.) Net Profit Margin Return on stockholder’s Equity Basic Earning Power Return on Assets Current Ratio Quick Ratio Debt to Assets Debt to Equity Times Interest Earned Inventory Turnover Days Sales Outstanding Fixed Assets Turnover Total Assets Turnover Dividend Yield Price Earnings Ratio Market/Book Ratio

Financial Analysis (Cont.) ROE = Net Income/Common Equity

Financial Analysis (Cont.) Return on Assets = Net Income/Total Assets

Financial Analysis (Cont.) TIE = EBIT/Interest Charges

Financial Analysis (Cont.) Inventory Turnover = Sales/Inventories

Financial Analysis (Cont.) Fixed Asset Turnover = Sales/Fixed Assets

Ratios reflecting difference in company objectives Profit margin – US 18% vs Euro 7% – Americans more concerned with profit – Europeans more willing to take on debt with interest expenses Debt ratios – Debt-to-Equity Euro 65% vs US 40% – Most of debt is not from stockholders

Ratios reflecting differences in timelines DSO – US 59 vs Euro 66 – Europeans wait a bit longer before recovering cash Inventory Turnover – US 14 vs Euro 7 – Europeans hold onto more inventory – English companies comparable to US

Ratios reflecting differences in governance English management structure similar to US – BEP, focus more on earnings – Total Asset Turnover, accountable for effective use of assets – M/B value, regarded highly from the outside Swiss management is primarily internal – High current and quick ratios – Good for credit approval – Stockholders like productive use of assets

Quick Ratio Vs Inv. Turnover

M/B Value vs. Profit Margin

ROA vs. M/B

P/E vs. M/B

Investing American companies are better short-term opportunities – Both perceived of high value – US more likely to make a profit in near future – US more stable management structures – US prioritize stockholder satisfaction

Questions??