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Phil's focus on the fiscal management (cash conversion cycle)of PFE, SP & Warner Lambert fails to recognize the importance of product pipeline (R&D)and marketing prowess. I think those two items are more important to the long-term viability of a pharmecutical company. Cash turnover is more important in the start up phase of an organization. It's possible that Warner's management has to focus on finances because it's the best tool in their tool box. My concern here is that I've seen companies run tight ships right onto the rocks.
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Greg,

The problems with PFE that Grape points out are real issues that PFE should address. I know PFE has great mkting prowess but that is unrelated to their ability to control their inventory and manage their payables. PFE is a rule maker now. But, and I repeat BUT, they can be much better from a fiscal standpoint than they are. If their management ever took on the CCC that Grape writes about and reduced it to near the level of Warner, can you imagine the affect on their stock.
I work for a pharmaceutical co and know that these are some of the most wasteful companies on earth. They don't manage their money wisely. I think because their margins are so high and competition with exclusive drugs is low IMO. Lack of competition tends to produce watsefullness, look at our government. The point is that the industry in general and PFE specifically, can benfit from some good cash management. I, for one, would like to see more Rx companies begin to pay more attention to their cash management.
Great analysis Grape

Mike
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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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Phil's focus on the fiscal management (cash conversion cycle)of PFE, SP & Warner Lambert fails to recognize the importance of product pipeline (R&D)and marketing
prowess. <<<

This is perhaps why he and the RM port aren't selling but concerned. Even though PFE spends the greatest percentage of revenues on R & D of any pharmaceutical company, we've not seen anything really big since viagra. It can take a long time to produce a paridigm shifting big sale drug. Nobody becomes number one just making "me too" copies of other companies products. Therefore while I appreciate Pfizers R and D efforts and recognize their overwhelming marketing ability I shares Phil's dismay with the balance sheet.

-MarkV
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I'm going to show my ignorance here. Hope you all don't mind. While, as a physician/scientist I feel I have a good understanding of what PFE is about I'm not sure what they need to do exactly to tighten up their cash flow problems. I "get" the problem as presented by Phil. What I'm unsure of is what exactly a company does to improve when it recognizes it. Do they start playing hardball with suppliers and customers? Do they slow production to let inventory sag? Is it more complicated than this?

-MarkV
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markv wrote <<While, as a physician/scientist I feel I have a good understanding of what PFE is about I'm not sure what they need to do exactly to tighten up their cash flow problems.>>

Mark-

You are definitely on the right track. Companies can negotiate more favorable terms with customers and suppliers. Many companies, for example, offer a discount on invoices paid with short terms. Pfizer's marketing arrangements have definitely expanded days sales outstanding (DSO) and the question investors need to ask is "Is the slower cash flow cycle worth the additional revenue?"

Where PFE and others can make the most impact, IMO, is inventory. If you compare Pfizers 1.xx turns per year to WLA's 3.xx turns, you will see that they have some catching up to do. For manufacturing companies, inventory serves one purpose-- to decouple supply from demand. Extra inventory demonstrates that Pfizer (1) does not have very good market information about what they are going to sell, (2) Does not have enough capacity to meet peak demand, or (3) Does not have good control of production facilities.

Just over 1 inventory turn per year is horrid. There may be some particulars about the Pharm industry I don't know, but the fact that their competition is 2-3 times as good definitely raises concerns with me. Inventory doesn't just tie up cash, it also poses other risks... spoilage, shrinkage (theft, loss), obsolesence. I have been studying the Pharm industry, and PFE in particular. After reading Phil's columns for the last few days and perusing PFE's financials, I think I'll sit tight and see how this shakes out.

Steve Wallen
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Phil's focus on the fiscal management (cash conversion cycle)of PFE, SP & Warner Lambert fails to recognize the importance of product pipeline (R&D)and marketing prowess. I think those two items are more important to the long-term viability of a pharmecutical company. Cash turnover is more important in the start up phase of an organization.

While I agree that it's true that pipeline and being able to successfully market a product are important, what's wrong with running the business more efficiently along the way. Just because these characteristics are important doesn't mean that money should be thrown away or wasted. IMHO, if you don't manage your cash flow well, then you're throwing your money away. The bottom line is that I believe that cash flow is ALWAYS important.

While it's in a different business, I thought this excerpt from an article in this week's Business Week on Gillette was particularly relevant to this subject:

"...At the end of June, Gillette had $1.3 billion of finished goods inventories, up 43% since the end of 1996, even though Gillette's sales have barely increased since then. And its customers' warehouses are bulging."

Now here's the part that I really liked:

"In the fourth quarter Gillette will cut customer inventories by reducing shipments. In effect Gillette will give up four weeks of razor-blade sales in Europe and two to three weeks globally. Hawley concedes that will produce an earnings decline in the 'mid- to high teens.' The payoff will come next year, when a similar attack on in-house inventories and receivables should free up $500 million in cash flow, much of which will be used to pay down debt. 'This is a big step towards becoming a much more efficient company,' says Steele.

Phil
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