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It's an interesting point that is made on PFE that it is extremely important to review the R&D pipeline and marketing expenditures. One of the factors that hasn't been discussed is how small the inventory costs of a pharmaceutical product are compared to the enormous expenditures in R&D that can go on for years prior to a drug being released. Also, the large build-up in marketing expenditures that occurs over the months prior to the products release.

Once the product is released, PFE is trying to get as much revenue as possible to help cover the costs incurred years before. It would be interesting to see the cash conversion cycle for a given product over its entire life. The key issue for PFE and others in this industry may not be the inventory to sales conversion as much as the R&D, marketing and sales conversion that takes place over years. How PFE manages their R&D process and marketing would seem to be much more critical to their cash flow than the inventory portion of the cycle. However, since neither R&D or marketing costs previously incurred for these products show up on the balance sheet, it doesn't impact the flowie the way it might.

In this case, these affiliate revenues actually improve their conversion cycle on the extended product life by helping to keep their marketing costs in check.

It would be interesting to see, for a given product, the "days of product sales" previously spent in R&D costs and in product marketing costs. I'm sure that these would be signficantly more material to PFE than the inventory portion of the conversion cycle.

I hope I'm making this at least somewhat clear. My point is that the cash conversion cycle for PFE doesn't start with the purchase of the ingredients for the drug, it really starts with that first dollar spent on research continuing through clinical trials, and pre-release marketing. Hundreds of millions of dollars have already been spent before it gets to the point of buying inventory and managing this process is every bit as critical to Pfizer as managing the factors that influence their flow ratio more directly.

IMHO - Fool On!
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