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

2. 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

3. 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

4. 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

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

6. 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)

7. 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

8. 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

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

10. 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

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

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

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

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

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

16. 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

17. 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

18. 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

19. Quick Ratio Vs Inv. Turnover

20. M/B Value vs. Profit Margin

21. ROA vs. M/B

22. P/E vs. M/B

23. 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

24. Questions??