Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
Individual Report of
Jerelynn B. Hipolito
Group 6
BSA
Hipolito, Jerelynn B.
12 November 2015
Executive Summary
American Home Products (AHP) is one of the largest pharmaceutical
companies in the United State. It has more than 1500 marketed brands in
four business lines which are prescription drugs, packaged drugs, food
products, housewares and household products. However, the main
profitable product of the company is prescription drugs. AHP has a tight
financial control and maintains a conservative capital structure policy. It has
no debt and excess liquidity. It aims to make money for stockholders and to
maximize profit by minimizing cost. Due to the tight financial control, the
company can reduce the short-term debt and risk orientation hence lowers
the investment relative to R&D. In addition, the company is risk-averse as it
always avoids taking risk in developing and introducing new products in the
volatile drug industry, which can save the cost of R&D. Most of AHPs new
products are acquired after the development other firms, imitated of new
products introduced by competitors or extended of existing products in the
company.
American Home Products Corporation (AHP) was founded in 1926
and has a history of continuous acquisitions of smaller companies that
made proprietary medicines. In 1931, AHP purchased John Wyeth &
Brother, Inc. from Harvard University. Another important acquisition was
that of Canadas Ayerst Laboratories in 1943. Ayerst was a large
pharmaceutical company that had introduced Premarin, the worlds first
conjugated estrogen product, and now the most widely prescribed product
in the United States (ahp.com). In March of 1982, Sherwood Medical was
acquired, enabling AHP to capture a share of the developing medical
devices market. In 1984, Whitehall, an original member of AHP, started to
market ibuprofen in the United States that was sold under the trademark
Advil.
Lawyer John Stafford became CEO in 1986 and soon after he
supervised the acquisition of Bristol-Meyers animal health division and
assimilated the new business into Fort Dodge, now Fort Dodge Animal
Health. In 1989, AHP bought A.H. Robins along with its popular consumer
products, including Chap Stick, Dimetapp, and Robitussin. AHP and
American Cyanamid merged in 1994 in a deal valued at $9.6 billion. AHP
introduced many new products in 1996, including Redux and Pondimin
(Phen-Phen), two weight-reduction drugs. These drugs were later pulled
from the market because of links to serious health problems and lawsuits
soon followed. When 1998 mega-merger plans with SmithKline Beecham
Hipolito, Jerelynn B.
12 November 2015
and Monsanto collapsed, AHP settled for the acquisition of New Jersey
based Solgar Vitamin and Herb Company for $425 million. Its clear to see
that AHPs history is comprised of acquisitions in the desire to be the
ultimate leader of the pharmaceutical industry.
Problem
Institutional
How much business risk does American Home Product Face? How
much financial risk would AHP face at each of the proposed levels of debt?
Operational
How much potential value, if any can AHP create for its shareholders
at each of the proposed level of debt?
Corporate Objectives
The Chief Executive Officer of the company, Mr. Laporte was
approaching retirement, and analysts speculated on the possibly of a more
aggressive capital structure. To minimize the combination of business risk
and financial risk.
Areas for Consideration
Environmental Opportunities and Threats
Micro Economic Indicator
Political
AHP should look into the political indicators such as establishing
international links and reaching out to international markets and dealers in
the event that AHP will create a more aggressive capital structure policy.
Economic
The economy was prosperous until the early 1970s, then faltered
under new foreign competition and high oil prices. By 1980 and the seizure
Hipolito, Jerelynn B.
12 November 2015
12 November 2015
Hipolito, Jerelynn B.
12 November 2015
Hipolito, Jerelynn B.
12 November 2015
In this figure, AHP cash was about 23% of total assets. It has enough cash
flow to finance its daily operation.
Also, return on asset can show that the ability of the company to cover its
operating cost by generating income. According to the calculation below.
12 November 2015
Capacity Utilization
According to ReadyRatios, Capacity utilization rate is a metric which is
used to compute the rate at which probable output levels are being met or
used. Although there was no definite value that the company seeks for its
capacity usage, AHM need to utilize their capacity and make sure to
increase its sales and corporate force, diversify and expand the production
facilities and increase the products in the product lines.
Financial Leverage
According to Investopedia, financial leverage is the degree to which a
company uses fixed-income securities such as debt and preferred equity.
The more debt financing a company uses, the higher its financial leverage.
A high degree of financial leverage means high interest payments, which
negatively affects the company's bottom-line earnings per share. The
financial leverage describes the companys dependency in using the
borrowed money. The more debt financing the company uses, the higher its
financial leverage. Leverage can be computed by dividing long term debt
by the equity. Based on the case. AHPs track record of almost no debt on
the balance sheet and a very substantial cash balance.
COMPETITIVE ADVANTAGE
STRENGTHS
* The company had an almost debt-free balance sheet and growing cash
reserves. At the end of 1980, AHP had almost no debt and a cash balance
equal to 40% of its net worth. Being debt-free gives AHP an advantage in
pricing that competitors will find challenging.
* AHP had a commendable marketing expertise in their prescription drugs.
Because of this, they are the preferred choice of consumers over their
competitors.
* AHP's managerial philosophy was frugality and tight financial control. It is
precisely because of this philosophy that they are debt-free and all
expenditures greater than $500 are personally approved by Laporte even if
authorized on the corporate budget.
Hipolito, Jerelynn B.
12 November 2015
WEAKNESSES
* AHP's culture of conservatism and risk aversion can be seen as strengths
but it can also be considered as weaknesses. In business, there should be
a calculated risk in venturing into expansion or into new products. But if a
business is too hesitant in taking risks, there is a possibility that their
products can stagnate and do not have innovation anymore.
* A substantial portion of AHP's new products were clever extensions of
existing products from competitors. Personally, since I work for Pfizer, I am
aware of the millions of dollars that pharmaceutical companies invest on
research, development, and patents. Once a patented product goes
generic, these companies lose a substantial amount in sales because
cheaper versions of their products come out, while these companies didn't
invest as much in R&D. AHP can do well to take risks and invest on R&D in
developing new products, so that its reputation as an innovator can also be
known.
OPPORTUNITIES
*The barriers to entry in the pharmaceutical industry are extremely high.
The regulatory hurdles represent a significant deterrent.
*Consumers becoming more discerning and active participants in their own
health care
*Strong brand name and credit rating facilitate acquisitions and takeovers
of promising small biotech firms.
*Strong drug pipeline garnered through mergers and acquisitions may
provide blockbuster drugs in the future.
THREATS
*The threat posed by potential substitutes for prescription pharmaceuticals
is low. Conventional medical options such as surgery, hospitalization, or
psychiatric care are often far less attractive on a cost to value basis.
*Despite pressure from internal rivalry and more aggressive suppliers and
buyers, the prescription pharmaceutical industry continues to be highly
Hipolito, Jerelynn B.
12 November 2015
profitable. This is primarily because of the lack of viable substitutes and the
extremely high barriers to competitive entry.
Conclusion and Strategic Decision
It illustrates the total debt and financial risk have straight correlation with
each other and AHPs total debt increased, so its financial risk would rise.
Then, if AHP could not pay its loan and interest by schedule, it would meet
the financial risk and the risk of bankruptcy. According to Exhibit 3 AHP
uses excess cash of 233 million dollars on each of the proposed levels if
repurchase stocks and remaining amounts were financed by debt; thus, its
common shares outstanding would decreased by 19.8 million shares on
30% debt ratio and 36.6 million shares on 70% debt ratio. It means that
equity will goes down, so its return on equity will rise. AHP should consider
about financial risk to change the capital structure.
Hipolito, Jerelynn B.
12 November 2015
Hipolito, Jerelynn B.
12 November 2015