American Home Products

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 AHP’s new products are acquired after the development other firms, imitated of new products introduced by competitors or extended of existing products in the company. Moreover, it relies on strong marketing skill to promote copies of new innovative drugs to reduce competition’s head start advantage. For the performance of the company, it is characterized by stable, consistent growth (10-15%) and profitability. Its ROE had risen from 25% in 1960 to 30% in 1980 because of its passion for parsimony, and finance this growth internally while paying out 60% of its annual earning as dividends. AHP’s stock is widely held by the major institutional investors. Furthermore, it has excess liquidity and low degree of leverage reflecting the good condition of the company. The company seems to have low business risk because of me-too strategy which reduces the cost of R&D, its stable growth and profitability, its stable demand for medicine and its diversification of operations. In addition, it has less financial risk as it has no debt; lots of cash balance and bond credit rating of AAA. The company is characterized

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