Paul Beckel, Yolymar Cedeno-Leal, Charese Reviere, and Dina Rodriguez
May 18, 2015
Week 5 Reflection
The team viewed the video “Cost of Capital” as part of our weekly team discussion. In the video, Amil Singh discussed the cost of capital for Pfizer Inc. Pfizer Inc. is the world 's largest research-based pharmaceutical company that develops its own products in America. Pfizer revenue is about $65 billion with market gap close to $140 billion (John Wiley and Sons, 2012). The cost of capital is the "rate of return that capital could expect to earn in an alternative investment of equivalent risk" (Investopedia LLC, 2015). When the company researches and develops a new product it can take nearly eight to ten years before it hits the market and see a profit. In this paper, we will look at how Pfizer addresses its cost of capital and issues with research and development.
Pfizer has experienced challenges in recent years, with more than $2 billion in legal settlement payments over marketing practices for drugs in 2009. Additionally, Pfizer could face tremendous revenue loss as drug patents, which account for 40% of their sales, expire in the coming years. Pfizer will have to face some corporate finance challenges which include litigation, discontinued projects, focus on blockbusters, loss of revenue, exposure to generic drugs and FDA regulatory oversight.
Pfizer has been involved in numerous litigations, which resulted in two things: damaged reputation and enormous payouts. The two biggest litigations concerned the pain killer Bextra and related off-label promotions and illegal drug testing on seriously ill children in Nigeria during a meningitis epidemic. The first was settled in 2008 by paying $2.3 billion in charges and the latter involved paying a fine of $75 million in April 2009. The discontinued projects reflect a loss of resources and also in the perceived inability to complete research projects. From September 2008
References: Investopedia, LLC, 2015. Cost of Capital. Retrieved from: http://www.investopedia.com/terms/c/costofcapital.asp John Wiley and Sons (2012). Cost of Capital [Video podcast]. Retrieved from http://phoenix.edu Ly, K. (2010). Investor relations level and cost of capital: Evidence from Japanese firms. Asia – Pacific Journal of Business Administration, 2(1), 88-104. doi:http://dx.doi.org/10.1108/17574321011028990 Parrino, R., Kidwell, D., & Bates, T. (2012). Fundamentals of Corporate Finance (2nd ed.). Hoboken, NJ: John Wiley & Sons, Inc.