Pfizer: Digital Health Solutions
Pfizer should invest in digital health solutions to keep the positive momentum achieved in recent financial years. AI-based technologies are a potent source of added value to the company. Machine-learning software and supercomputers can accelerate the drug development process, improve the quality of regulatory submissions, and assist in decision-making (Pfizer, n.d.).
As a result, the company can introduce effective medications ahead of the competition, which is quickly reflected in financial statements. For example, PAXLOVID, Pfizer’s oral treatment for COVID-19 developed with AI assistance, earned $18.9 billion in 2022, or 19% of Pfizer’s annual revenue (Pfizer, 2022). Given such tremendous success, Pfizer should expand into digital health.
Funding Estimation
Pfizer already acknowledges the value of digital solutions in the pharmaceutical industry. In September 2022, the company signed a five-year extension of an AI-powered drug development deal with CytoReason. Pfizer invested approximately $110 million into the new agreement to fund the joint operation and licensing for AI platforms and disease models (Park, 2022). Based on this experience and PAXLOVID’s success, investing an additional $150 million into digital health solutions is justified.
Direct Costs
In general, the estimated funding can be divided into three primary categories. Firstly, further progress in AI applications in drug development will require hardware upgrades. The improvement of Pfizer’s supercomputing capabilities will cost approximately $75 million. An additional $50 million will be allocated to develop or purchase state-of-the-art AI and machine learning software tools. Finally, the remaining $25 million will be spent on wages and employee recruitment and training.
Potential Sources of Funding
Pfizer has three potential sources of project funding. First, the company can take out a loan and fund the project through debt. However, funding through loans or bonds might lead to potential complications, such as an inability to pay on time and subsequent liquidity issues and bankruptcy. Since Pfizer is an industry leader in solid financial shape, taking these risks might be unnecessary.
Secondly, Pfizer can rely on external equity by attracting funding from investors. While this option would lift the financial burden, funding the project this way would create additional shareholders whose interests must be considered in decision-making. As a result, Pfizer might lose a certain amount of influence over the project implementation. Such concessions to shareholders would be detrimental to taking an undisputed lead in the market.
Thirdly, Pfizer can entirely self-fund the project from its internal equity. This option would be more costly than external funding, but it would also leave Pfizer with all influence over the project development and implementation. As one of the industry leaders, Pfizer should strive to exercise complete control over its business project if the necessary amount of funding can be sourced from internal equity.
Source of Funding Selection
The COVID-19 pandemic and its aftermath created a favorable economic environment for Pfizer. Net income has increased from $9.6 billion to $31.3 billion throughout 2020-2022. In addition, Pfizer has $416 million of cash and cash equivalents and an end-of-period cash position of $468 million (Yahoo Finance, n.d.). Given these financial results, Pfizer has ample cash for an entirely self-funded investment in digital health solutions.
Weighted Average Cost of Capital (WACC)
WACC demonstrates the expenses a company incurs to fund its assets. Currently, Pfizer has a WACC of 7.5%, with the cost of debt at 4.45% and the cost of equity at 8% (ValueInvesting, n.d.). Since the project would be 100% self-funded, those funds are already included in this figure as part of the total equity variable. Hence, Pfizer’s WACC indicates that investment in the project should be quite safe.
Projected Income Statement
Pfizer finished the 2022 financial year with a total revenue of $100.3 billion and a net income of $31.3 billion. Compared to 2021, the revenue increased by $19 billion, and the net income increased by $9.3 billion, or 19% and 30%, respectively (Yahoo Finance, n.d.). However, one should not expect that global pandemics will break out consistently. Therefore, a 5% annual revenue increase and a 10% annual net income increase throughout 2023-2025 will be considered solid results.
Table 1. Projected Financial Statement, 2023-2025 (all numbers in billions)
References
Park, A. (2022). CytoReason, Pfizer ink $110M, 5-year extension of AI-powered drug development deal. Fierce Biotech. Web.
Pfizer. (2022). 2022 Annual review. Web.
Pfizer. (n.d.). Artificial intelligence: On a mission to make clinical drug development faster and smarter. Web.
ValueInvesting. (n.d.). Pfizer WACC. Web.
Yahoo Finance. (n.d.). Pfizer Inc. (PFE). Web.