Explain how Pfizer can afford to sell drugs in Venezuela for 30 percent lower prices than it sells them for in the United States.
On September 20, 2008, The Wall Street Journal (WSJ) reported that Pfizer was going to discontinue efforts to develop drugs related to the treatment of heart disease, obesity, and bone health. Pfizer wanted to focus its resources on areas it thought would be more profitable (p. B-1). On January 17, 2009, the WSJ reported that Pfizer planned to lay off as many as 2,400 salespersons, which would be one-third of its sales force. As a part of its efforts to reduce costs, Pfizer had reduced its workforce by 35,000 employees from January 2007 to January 2009 (p. B-5). On July 7, 2009, the WSJ reported that Pfizer, along with other pharmaceutical companies, was increasing its efforts to sell patented durgs (versus generic drugs) to customers in poorer nations. To accomplish this they were offering these customers lower prices. For example, Pfizer sells drugs in Venezuela for 30 percent less than it sells the same drugs in the United States (p. A-1).
a. By stopping the development of drugs related to the treatment of heart disease, obesity, and bone health Pfizer hoped to reduce the amount spend on research and development. Relative to the level of sales, should R&D costs be considered:
¦ Fixed costs or variable costs
¦ Marginal costs or not
b. Were the R&D costs that Pfizer had spent in past years to develop drugs related to heart disease relevant to its decision to discontinue their future development? If they were not relevant costs, what kind of cost were they?
c. Explain how Pfizer can afford to sell drugs in Venezuela for 30 percent lower prices than it sells them for in the United States.
d. Obtain Pfizer’s annual report for 2008. Pfizer’s annual reports can be found at its website: www.pfizer.com. Calculate its operating costs as a percentage of revenue for 2006, 2007, and 2008. (The easiest way to do this is to calculate its ?oincome from continuing operations?? as a percentage of revenue, and subtract that amount from 1.0.) Does it appear that Pfizer is accomplishing its goal of reducing its cost? Show supporting computations.
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