The Unemployment rate fell by 0.2 percent from 4.6 to 4.4. Productivity rose substantially during the third quarter compared to the second quarter, from 0.3 to 2.3 percentage change. The Consumer Price Index (CPI) measures price change from the purchaser's perspective. The Consumer Price Index for all urban consumers rose 0.2 percent in October, following no change in September. The index for medical care commodities -- prescription drugs, nonprescription drugs and medical supplies increased 0.1% during October. The Producer Price Index is a group of indexes that measures the aggregate changes over time in the selling prices received by domestic producers of goods and services. This is a measure of price change from the perspective of the seller. The PPI for prescription pharmaceutical increased 22.3% during the period of July 1997 to July 1997. During January 1997-1998 the overall prescription drugs index rose 3%, the rest of the increase was attributed to a drastic rise in psychotherapeutics. This drastic increase also effected the aggregate PPI by 0.3%.
Introduction:
Warner-Lambert's principal line of operation is pharmaceutical preparations. The firm is considered to be a key player in the Ethical Pharmaceutical industry. Pharmaceutical preparations, comprises of firms that manufacture, devise and process medicinal component into finished pharmaceuticals for human or veterinary use. Pharmaceutical preparations comprise ethical brand name and over-the-counter drugs and generic substances. The three main divisions of W-L are Consumer Healthcare business, Confectionery business and Pharmaceutical business.

Warner-Lambert Sales:

Warner-Lambert's sales achievements in the US, for 1997, are as follows: Pharmaceutical sales in the US increased 84% to $2,170 million. This increase was attributable to successful launch of the cholesterol-lowering drug LIPITOR and the type two diabetes drug Rezulin. Consumer Healthcare sales of $1,411 million were essentially unchanged. Shaving product's sales increased 22% to $199million due to the launch of the PROTECTOR shaving system and the newly designed Slim Twin disposable razor. The Confectionery sales increased 9% to $642 million in 1997 primarily due to the launch of Dentyne ICE gum, Halls Zinc Defense and Certs powerful mints. The Consumer Healthcare division achieved 44% of total sales, Confectionery came in second with 33% of sales and Pharmaceuticals faired at 22% of total Warner-Lambert sales (Figure 1: 1997 Product Line Sales). In terms of profit, Consumer Healthcare contributed 62.4% of total profits, Confectionery supplied 27.5% and Pharmaceuticals supplied 10.1% of total W-L profits (Figure 2: 1997 Product Line Profits).
In 1997, Net Income was $870 million which increased 11% and basic earning per share of $3.20, increased 10%. Warner-Lambert's primary market risk exposure consists of fluctuations in the interest rate, which is a common business risk for all businesses; and exchange rate risk, since it is a global corporation.

Industry Outlook:

Shipments of pharmaceutical preparations increased by approximately 8% in 1997, which was similar to the gains achieved in 1996. Forecasts for 1998-99 are projected to be similar to previous years', in the 7%-9% range. This increase is mainly a reflection of higher unit shipments, consistently strong demographics, steady flow of new premium-priced medications and improved implementation of cost-effective prescription drugs by managed care providers.
US demographic trends are expected to be highly lucrative, since over-65 age group of the population is anticipated to increase by 17% during1996 - 2010. The latest studies of drug usage in HMO plans have suggested that the over-65 patients are using roughly three times more prescription medication than patients under age 65.
Industry volume expansion is expected to heighten directly as a result of new breakthrough therapeutics. An example of such success would be W-L's cholesterol-reducing, 2-billion dollar drug, Lipitor. Another aspect contributing to the booming pharmaceutical industry is an increasingly efficient F.D.A approval process, partly due to increased funding. This improvement has resulted in shorter approval waiting period for both drugs and biological products since 1996 (Figure 3: New Drug Application Approval, Figure 4: Mean Approval Time).

Impact of Generic Drugs:

A fierce competitor of brand-name drugs is the chemical equivalent, commonly known as, generics. These chemical equivalents have pose a great threat in the past few years and continue to do so as they are projected to remain steadfast and gain market share. It is forecasted that generics will dictate two-thirds of all prescription drugs by the year 2000. The main force driving generic growth is substantially lower costs.

Measures of Evaluation:

In order to survive and remain competitive in the pharmaceutical industry, a firm must continuously measure and evaluate their performance with the norm. The industry's competitiveness is further augmented in the US because it is the worldwide leader in market share, R&D spending and innovation of therapeutics. R&D spending by US-based firms' accounts for roughly one-third of worldwide pharmaceutical research (Figure 5: Prescription Drug R&D Expenditure).
Corporations use Financial Ratio as a measuring tool to line up their performance with the industry's performance. These ratios also act as a competitive motivator for corporations to continue to excel. The analysis of ratios can be easily misinterpreted and as a result, their relation and importance can easily be overrated or underrated. Financial ratios represent a mathematical relationship between one variable and another, which allows analysts to detect with signs and symptoms of the underlying condition. Furthermore, if utilized properly, the ratios can also point the way to areas requiring further examination and scrutiny.

Analysis of Financial Ratio's:

Analysts apply financial ratios since financial statements, alone, do not provide analytical information that can be quantified and measured. Values such as Net Sales and Cost of Goods Sold simply provide a numerical figure of what it represents. Thus, ratios' are designed to offer a useful and meaningful relationship between two or more values.
It is essential for firms to measure up to the economy as a whole because firms operate within the context of the economy, not in a vacuum. As a result, firm is directly influenced by the existing economic conditions. When a firm's financial ratios are measured up with relevant economic ratios, the analyst is able to derive a good indication of the firm's present response to the business cycle as well as predictions about future performance.
A more common approach for comparison is a firm's performance with the industry it operates in. This approach is more useful because it allows you to compare apples to apples, rather than apples to oranges. One drawback of using industry averages is that not all firms within the industry are similar. Individual firms have a unique set of characteristics, for this reason, some firms may choose to compare themselves with firms that are closely similar in size and profit to their own.

Profitability Ratios:

The ratios in this group present two aspects of profitability, first the rate of profit on sales and second, the proportion of returns based on the capital that was expended. Net Profit margin shows the company's overall profitability. While the net profit margin for W-L has been consistently below the industry average for the past five years, it is improving gradually. Lower profitability mainly has been due to fierce competition in the industry as well as, a lack of highly successful and breakthrough drugs, in the past. Towards the end of 1997, the company showed signs of promising success with the launch of Lipitor and Rezulin. W-L's net profit margin faired at 11.5 while the industry average fell down to 15.0, compared to 1996 (Figure 6: Net Profit Margin).
Return on Assets (ROA) evaluates how effectively the total assets that are available are being used to create income for the firm. Devising the net income by total assets derives this value. A higher value of ROA is preferred, especially if it is above the industry average. For 1997, Warner-Lambert's ROA was equal to the industry norm, at 11.4. Over the past five years, W-L has fluctuated from being below the industry norm to achieving higher than industry returns (Figure 7: Return on Assets).

Liquidity Ratios:

Liquidity ratios evaluate the firm's capability to fulfill its short-term liabilities. These ratios compare short-term debt to short-term liquidity. A frequently used measure is the Current Ratio, which measures current assets to current liabilities. In the fiscal year ending in 1997, W-L's current ratio was 1.3 while the industry ratio was 1.4. For the past five years, W-L's current ratio has been less than or equal to the industry average (Figure 8: Current Ratio). Which suggests that W-L's liquidity has been consistently below the industry. Improving the liquidity of the firm has been a key concern for W-L during 1998. Fortunately, substantially higher sales in the pharmaceuticals sector, due to the success of Lipitor; the company has achieved the goal of a favorable current ratio. Improvements in W-L's current ratio compared to 1996 was partially attributable to an increase in Pharmaceutical sales with proportionally higher profit margins than Consumer Healthcare and a favorable product mix within the Pharmaceutical division
A similar ratio that some analyst's believe to be more accurate measure of liquidity is the Quick Ratio. This includes assets that are cash and cash equivalents (Marketable Securities, Accounts Receivable and Notes Receivable). Inventory is not readily sold when there is a need for cash therefore it is not included as a current asset. Quick ratio specifically measures the immediate financial liquidity of a firm; which gives an indication of extremely liquid assets available for use. W-L's quick ratio was 0.75 and the industry average was 1.2. This indicates that Warner Lambert has proportionally less readily available assets on-hand than other firms in the industry.

Leverage Ratios:

Ratios that ...