This financial report, prepared for investors, compares two leading Pharmaceutical firms, Glaxo-Smithkline [GSK] and AstraZeneca [AZ], performing critical financial evaluations that would help make investment decisions. Summary of the findings are presented below.
AZ has better gearing in comparison to GSK, and GSK may struggle to meet its debt, if its sales declined.
GSK's OP is likely to continue to be better than AZ's. However AZs OPM increased from '08 as a result of increased growth of sales and improved efficiencies across the cost base.
In '09 increased NPM for GSK in comparison to AZ resulted from increase in profit, beneficial exchange rate and reduced actuarial losses YOY.
AZ scores strongly against GSK on ROA, however, the stronger future increases in net income driven by stronger sales could reverse the trend for GSK.
ROCE for AZ was higher in '09 due to high sales. Many introduced products are yet to be studied. Therefore it is suggested not to make decisions based on huge increase in ROCE for AZ in '09.
In terms of Total Shareholders Return and ROE, AZ and GSK have done well comparing against industry peers. The reasons are high sales, good utilisation assets and capability in handling world markets.
Current levels of operating cash flow for GSK and AZ are enough to manage debt service costs and capital expenditure. Both have access to other sources of liquidity. However AZ would face challenges to meet the acquisitions related expenditures.
For working capital management, modern 'efficiency improvement model' adopted by GSK and 'traditional model' adopted by AZ are comparable in terms of the results they provided in the last 5 years and will not help in investment decisions.
2.0 Financial Highlights
AZ's sales have been fluctuating in the last five years with '09 showing 3.8% increase in sales. Operating profit [OP] in '09 was up 26.2% to £7.5b YOY. A 23% net profit [NP] for the year '09 is hugely welcome for AZ in-spite of humble sales, however Asset-base increased by 22.2% in '09. Earnings per share for '09 was £3.32 ['08:2.69] Hence the board recommended second interim dividend of £1.12 in '09, a 14% increase YOY. The cash distributions to shareholders through dividends totaled £1908m, a 'positive note' for investors.[Figs-1,2]
GSK delivered £19b sales during '09 with an increase of 16.4% YOY excluding genericised products. This confirms '09 has been good for GSK in-spite of strong uncertainty due to recession. Further, with 17% increase in OP to £5.47b YOY, GSK has shown strong resilience against powerful markets. An increase in total assets by 8% in '09 confirms a positive trend for the investors. [Table-1]
3.0 Ratio Analyses
3.1 Liquidity
In '09 Current ratio [CR] of GSK was >1 but decreased 16% YOY. For AZ ['09] there was an increase 14% YOY. [Table-2] CR for both firms was much lower than the industry average. [Table-3] Hence, investors should note that both these firms are able to meet their short-term payment needs by being able to meet current liabilities using their current assets. Quick Ratio [QR], for GSK and AZ were comparable, but there has been a decline in QR for AZ, YOY for 3 years in comparison to YOY for 3 years preceding '06. QR for these two firms is lower than the industrial average. [Table-2] Though there is no clear trend in gearing for GSK, there was 9% reduction in '09 YOY; 15% decline for AZ ['09] YOY. On the whole, AZ had better gearing in comparison to GSK and industry averages. [Figs-3-5] Investors should note that GSK would likely struggle to meet its debt obligations if it saw notable decline in sales. However, AZ would be able to meet its debt obligations because of relatively healthier gearing.
Explanation to liquidity and management ratios discussed in this report have been provided in Appendices-1&2 respectively.
3.2 Profitability
3.2.1 Gross profit margin [GPM]
In terms of GPM, GSK has done better than AZ in the last five years. [Fig-6] This increase of £8m in '09 YOY was because of increase in influenza vaccine and Synflorix stockbuilds.[1,2] Further Strategic stock-building to support growing EU market was another reason. However, lower GPM for AZ was because costs of the inventories have been impacted due to exchange rate, rather than by new products or by retention for the last 3 years.
3.2.2 Operating profit margin [OPM]
GSK has had higher OPM in the last 5 years in comparison to AZ, confirming higher overall operating efficiency income. [Fig-6] This income was generated by asset disposals of £579m ['08:£293m] [Wellbutrin and Aspen]. For a pharmaceutical firm, assets disposal assumes huge significance in OPM because of the intense contribution by patents, new products and associated goodwill.[16]
In '09 other operating income and profit on disposal of associates amounted to £1,250m. An income of around £800-900m is expected for '10. This indicates to the investors that GSK's OP would likely continue through the next few years and would be better than AZ's. The slight decline in margin for AZ for'09 YOY was due to generic competition in the USA, which impacted cost of goods and increased investment to support the group's diversification.[2] Furthermore, it is expected that generic competition would decline leading to stabilisation of investment levels resulting in GSK's OPM getting stronger in '10. Though lower than that of GSK, AZs OPM increased from '08 as a result of increased growth of sales, improved efficiencies across the cost base and lower expenditure on R&D[1,2]
3.2.3 Net profit margin [NPM]
GSKs NPM ['09:25.74] has been higher in the last five years compared to that of AZ ['09: 20.11]. [Fig-7] Effective tax rate for '09 was 28.2%.and after description of tax exposures; OP was partially offset by increased net expense. On the contrary, GSK' sales increased contributing to NPM's increase in '09 YOY. This was because of boost in revenue from strong growth of the Toprol-XL franchise in the US[2] and fresh orders for influenza vaccine. To summarise, in '09 increased NPM for GSK in comparison to AZ resulted from increase in profit, beneficial exchange rate and reduced actuarial losses YOY.
3.2.4 Return on Assets [ROA]
Both GSK and AZ are technology based and regulated. Hence there is inherent need to allocate resources to maintain property and equipment to avoid productive days due to disruption. In the last four years ROA for AZ has been comparable with GSK.[Fig-9] GSK could have done better on ROA, had it not been for its investment [£1,423m] in new and renewal property and plant and equipment with relation to a large number of projects across the globe. Furthermore, there is no substantial difference in net incomes between AZ and GSK in the last 2 years and hence the total assets these companies possess, or have invested in, have had a large bearing on the outcomes of their ROAs. The industry average for 5 years is 10.37[3] and both AZ and GSK have recorded higher figures confirming that they have been using their assets well to generate income. Investors may note that AZ scores strongly against GSK on ROA [due to investment discussed above], however, the stronger future increases [for GSK] in net income driven by stronger sales could change this figure.
3.2.5 Return on capital employed [ROCE]
ROCE for AZ and GSK have been comparable with the exception of '09 where AZ's ROCE was higher. [Fig-8] The primary reason is high sales recorded for a number of newly introduced products, mainly in the US, China, India and UK[4]. Investors need to note that several other products were introduced in '09 are yet to be tested in terms of their performance and sales. Therefore it would be safe not to make major decisions based on huge increase in ROCE for AZ in '09.
3.2.6 Return on Equity [ROE] and Total Shareholder Return [TSR]
Figure-10 presents TSR which represents company's shares in '09 indirectly reflecting equity market index. Both AZ and GSK are members of FTSE-100 index and comparisons have been made against industry peers. AZ and GSK hold 4th and 5th position respectively and shareholders need to note that there has been no substantial difference between these companies in terms of TSR in 2009. However, when compared with eleven industry peers, AZ and GSK have done extremely well. The major reasons are, high sales, good utilisation of assets and exceptional capability in handling competitive world markets.[5,6]
4.0 Analyses of funds flow
4.1 Analyses of flow of funds for GSK
GSK's net cash-outflow in '09 was £4013m due to investment activities. This increase of £2,864m from '08 was due to acquisition of Stiefel Laboratories [£1993m], businesses from UCB-S.A. [£472m] and AZ-Tika [£146m][1,2] However, during '08, GSK bought Sirtris Pharmaceuticals [£324m] and BMS [£130m], further, sales of liquid investments also contributed [£905m]. Consequently, the free cash flow [£5,254m] increased 12% over '08 due to higher OP and lower expenditure on intangible assets. Further, in '09, cash payments for tangible and intangible assets was lower compared to the previous years ['09:£1,873m; '08:£2,069m; '07:£2,143m]. Disposals contributed more in '09 ['09:£404m; '08:£191m; '07:£44m]. In '07 GSK held investments, including associates and joint ventures, ['07:£846m;'06:£736m], including equity stakes in companies where GSK had collaborations, which provide access to biotechnology developments of future potential.
However, the net cash inflow in '07 from operating activities was £6,161m, an increase of £1,804m YOY due to gross tax payments.[7-9] The net cash outflow from investing activities was £3,009m, an increase of £1,488m from '06 which resulted in increased capital expenditure and the purchase of businesses, [Reliant Pharmaceuticals [£794m]; Domantis [£218m]]. Further, cash payments for assets increased in '07 ['07:£2,143m; '06:£1,590m]. Disposals realised was £44m in '07 ['06:£218m]. Cash payments to acquire equity investments of £186m ['06: £57m] were made in '07 and sales of equity investments realised £45m ['06:£32m]. Looking back into '06, the net cash inflow from operating activities was £4,357m, a decrease of £1,601m YOY, due to taxation payment of $3.3b. The net cash outflow from investing activities was £1,521m, a decrease of £139m YOY which reflected increased capital expenditure and the purchase of CNS in '06 for £273m [purchases in '05 was >£1b [Corixa and ID Biomedical]]. In '06 free cash flow was £2,623m, a decrease of 44% YOY, due to tax payments and higher levels of capital expenditure. [Fig-11]
Investors may note that current levels of operating cash flow for GSK are sufficient to cope with debt service costs, normal levels of capital expenditure and expenditure for acquisitions. Further moving towards '10, GSK has access to other sources of liquidity from short and long-term capital markets and banks in addition to the cash flow from operations.
4.2 Analyses of flow of funds for AZ
Cash from operating activities have shown an upward trend in the last five years for AZ. ['08:£5682m; '07:£4881m] The increase of £801m in '09 was due to increase in OP and impairment costs apart from improvement in working capital flows.[11] However, there was net cash outflow due to investments ['09:£1609m; '08:£2532m]. The '08 cash outflows were effected by payment of £1709m. However, proceeds from sale of the Abraxaneâ„¢ and further outflows in '09, were due to increase in purchase of short term investments and fixed deposits. Shareholders may note that cash distributions via dividend payments, were £1935m in '09. However, gross debt such as loans, and 'Immediate needs' borrowings contributed £7190m ['08: £7701m]. The worry is, of this total debt, £1251m is due within1 year ['08: £645m], which AZ aims to repay from cash balances and short term investments of £7.54b and business cash flows[1,10]. Further, AZ would not need a support with re-finance, because, net funds of £347m have improved by £5010m from net debt of £4663m in '08.
In '08 cash generated from operating activities was £5682m ['07:£4881m]. The increase of £800.8m was because of increase in OP, amortisation and impairment costs of £1179m[10-12] a decrease in tax payments of £230m and lower working capital outflows of £151m. Net cash outflows from investing activities were £2532m in '08 YOY ['07:£9676m]. Further cash distributions to shareholders were £2176m through dividend payments of £1780m and share re-purchases of £396m. Gross debt (including loans, short-term borrowings and overdrafts) was £7701m in '08 ['07: £9851m].[11] Investors may note that of this debt, £645m was due within one year. Net debt of £4663m decreased in '08 by £1259m YOY. In '07 AZ bought MedImmune contributing to substantial investment affecting cash flow. Consequently, purchase price for outstanding shares of £9.035b was allocated between intangible assets of £5.265b, goodwill of £5.72b and net liabilities of £1.95b. Cash generated from operating activities was £4881m in '07, slightly lower than previous year ['06:£5000.45m]. However, this was compensated by increase in non-cash items. Net cash outflows from investing activities were £9676.5m in '07 ['06:£176.8m]. This was because of many acquisitions. Cash returns to shareholders were £4227m ['06:£4138.5m].
Investors may note that current levels of operating cash flow for AZ is sufficient to cope with normal levels of capital expenditure however, due to extensive acquisitions, it would likely face challenges to meet the acquisitions related expenditures. However, AZ does have access to other sources of liquidity from long-term capital markets and cash flow from operations.
5.0 Management of working capital
Generally, working capital ratios of GSK and AZ are comparable in the last 5 years [Figs 12-16], to improve on the efficiency of operations, GSK commenced a series of activities in '08. In particular, GSK emphasised on efforts to improve selling model and manufacturing. This is directly linked to GSK's ability to generate working capital savings. Weather this will affect the sales growth has remained a question for GSK and most companies working on changes in working capital.[14,15] However, reviewing the details of the model, my understanding is that the investors need not be worried about the reduction in sales. This is because, traditionally GSK have been focussing on delivering cost savings through normal business functions. Furthermore, currently, GSK is also perceived to adopt a pan-business model to cost saving options by making "cross-business processes and structures simpler and more cost-efficient."[7,13] AZ's working capital model has been interesting to study and compare, in that, it has followed traditional methods. A target is set and quarterly assessments are done to see what deviations need attention. The argument AZ makes is, though this might sound mundane, it is rigorous, quick day-to-day changes are possible to monitor, and corrective methods implemented on-site. Investors may note that this method while, not robust, is useful for close monitoring and quick implementation. In conclusion, modern 'efficiency improvement model' adopted by GSK and traditional model adopted by AZ are comparable in terms of the results they provided in the last 5 years.
6.0 Conclusion:
Due to stronger gearing, novel products in the market, increased growth in sales for several of its products, better ROA and several recent acquisitions, patents and associated goodwill, this report recommends to the investors, AstraZeneca over GlaxoSmithKline for short-term to medium-term future financial investments.
7.0 References:
[1] AstraZeneca annual report [2009]
[2] GlaxoSmithkline annual report [2009]
[3] Reuters financial report, Par Pharmaceutical Companies, Inc. (PRX) - year 2009
[4] Fiernce Biotech, Analysis of AstraZeneca Plc fourth quarter and full year results 2009
[5] ICIS financials- GSK; 2010
[6] ICIS financials-Astrazeneca; 2010
[7] GlaxoSmithkline annual report [2008]
[8] GlaxoSmithkline annual report [2007]
[9] GlaxoSmithkline annual report [2006]
[10] AstraZeneca annual report [2008]
[11] AstraZeneca annual report [2007]
[12] AstraZeneca annual report [2006]
[13] Businessday Onine- Nigeria:GSK looks to earn more from increased market share; 18th June 2009
[14] Deloof, M. (2003), "Does working capital management affect profitability of Belgian firms?", Journal of Business, Finance and Accounting, Vol. 30 pp.573-587
[15] Shin, H.H., Soenen, L. (1998), "Efficiency of working capital and corporate profitability", Financial Practice and Education, Vol. 8 pp.37-45
[16] Mahlich, J., The Japanese Pharmaceutical Industry in Transition: Has Higher Research Orientation Resulted in Higher Market Value?, Asian Business & Management (2007) 6, 75-94.
Figure 1: Comparison of Total Sales and Assets for five years preceding 2009
Figure 1; Z0916944; Executive MBA-Managing Finance
Figure 2: Comparison of Operating Profit and Net Profit for five years preceding 2009
Figure 2; Z0916944; Executive MBA-Managing Finance
Figure 3: Comparison of Current Ratio for six years preceding 2009
Figure 3; Z0916944; Executive MBA-Managing Finance
Figure 4: Comparison of Quick Ratio for six years preceding 2009
Figure 4; Z0916944; Executive MBA-Managing Finance
Figure 5: Comparison of Gearing for six years preceding 2009 [GSK Vs AZ]
Figure 5; Z0916944; Executive MBA-Managing Finance
Figure 6: Comparison of Operating Profit Margin, Profit before Interest and tax margin and Gross profit margin for five years preceding 2009
Figure 6; Z0916944; Executive MBA-Managing Finance
Figure 7: Comparison of Cash Profit Margin, Adjusted Cash Margin, Net Profit Margin, and Adjusted Net Profit Margin for five years preceding 2009
Figure 7; Z0916944; Executive MBA-Managing Finance
Figure 8: Comparison on Return on Capital Employed, Return on Net worth and Adjusted return on net worth for five years preceding 2009
Figure 8; Z0916944; Executive MBA-Managing Finance
Figure 9: Comparison on Return on Assets excluding revaluations, Return on Assets including revaluations and Return on Long term funds for five years preceding 2009
Figure 9; Z0916944; Executive MBA-Managing Finance
Figure 10: Total Shareholder Return [TSR] - GSK and AZ compared with peer group 1 Jan 2009 to 31 Dec 2009. The figure is adapted from AstraZeneca annual report [1]
Figure 10 Z0916944; Executive MBA-Managing Finance
Figure 11: Consolidated comparison of funds flow for five years preceding 2009
Figure 11; Z0916944; Executive MBA-Managing Finance
Figure 12: Trend analyses of Total Assets turnover ratio, Assets turnover ratio, Average raw material holding and Average finished goods held for GSK five years preceding 2009
Figure 12; Z0916944; Executive MBA-Managing Finance
Figure 13: Trend analysis of Inventory turnover ratio, Debtors turnover ratio, Investments turnover ratio and fixed assets turnover ratio for GSK five years preceding 2009
Figure 13; Z0916944; Executive MBA-Managing Finance
Figure 14: Trend analyses of Total Assets turnover ratio, Assets turnover ratio, Average raw material holding and Average finished goods held for AZ five years preceding 2009
Figure 14; Z0916944; Executive MBA-Managing Finance
Figure 15: Trend analysis of Inventory turnover ratio, Debtors turnover ratio, Investments turnover ratio and fixed assets turnover ratio for AZ five years preceding 2009
Figure 15; Z0916944; Executive MBA-Managing Finance
Figure 16: Comparison of number of days [working capital] for six years preceding 2009
Figure 16; Z0916944; Executive MBA-Managing Finance
2009
2008
2007
2006
2005
GSK
AZ
GSK
AZ
GSK
AZ
GSK
AZ
GSK
Sales (£m)
18439.20
21322.60
15828.80
20540.65
14765.40
19213.35
15096.25
17208.75
14079.00
Operating Profit (£m)
5476.25
7502.95
4641.65
5943.60
4935.45
5261.10
5075.20
5340.40
4468.10
Net Profit (£m)
3684.85
4903.60
3062.80
3984.50
3451.50
3657.55
3573.70
3940.95
3130.40
Total Assets (£m)
44990.00
35698.00
36814.00
30517.00
40004.00
31172.00
32532.00
29932.00
27198.00
Diluted earnings per share (£)
70.33
3.37
57.26
2.73
60.90
2.42
61.42
2.50
53.30
Number of Employees
99,000
65,000
99,003
67,000
103,483
67,900
102,695
66,600
100,728
Table 1
Consolidated Financial Analysis Chart for GSK and AZ for the 5 years preceding 2009
Table-1; Z0916944; Executive MBA-Managing Finance
Table 2
Liquidity Ratio analysis of GSK and AstraZeneca for the five years preceding 2009
Liquidity Ratio analysis of GSK for the five years preceding 2009
2009
2008
2007
2006
2005
2004
Current Ratio
1.449
[-15.9]
1.723
[+30.8]
1.317
[-12.9]
1.513
[+9.4]
1.385
[+10.0]
1.258
Quick Ratio
1.114
[-15.5]
1.319
[+29.1]
1.021
[-13.2]
1.177
[+1.8]
1.156
[+15.3]
1.002
Gearing [%]
65.05
[-9.2]
71.68
[+37.6]
52.08
[+10.2]
47.24
[-17.4]
57.20
[-2.5]
58.71
Liquidity Ratio analysis of Astrazeneca for the five years preceding 2009
2009
2008
2007
2006
2005
2004
Current Ratio
Quick Ratio
Gearing [%]
Note: The values in the square brackets show percentage increase or decrease in comparison to the immediately preceding previous year
Table-2; Z0916944; Executive MBA-Managing Finance
Table 3
Calculation of Industry averages for Liquidity Ratios
____________
Current Ratio
[2009]
__________
Quick Ratio
__________
Gearing[%]
Johnson & Johnson
1.81
1.58
30.65
Pfizer
1.65
1.32
48.77
Novartis
1.73
1.43
24.52
Sanofi-Aventis
1.59
1.19
30.24
Abbott Laboratories
1.78
1.53
41.94
Merck & Co
1.80
1.29
38.69
Bristol-Myers Squibb
2.21
1.98
39.89
Bayer HealthCare
1.89
1.21
54.90
Eli Lilly
1.90
1.46
54.41
Estimated Industry Average
1.818
1.445
40.445
Note: The raw data for these industry averages were obtained from Forbes magazine and further calculated and processed to obtain the ratios. The industry average was estimated based on nine leading firms mentioned in the table.
Table 3; Z0916944; Executive MBA-Managing Finance
Table 4
Profitability Ratio analysis of GSK and AstraZeneca for the five years preceding 2008
2009
2008
2007
2006
2005
GSK
AZ
GSK
AZ
GSK
AZ
GSK
AZ
GSK
AZ
Operating Profit Margin(%)
36.54
32.02
36.29
32.32
35.72
33.4
32.18
27.87
29.83
25.25
Profit Before Interest And Tax Margin(%)
33.77
29.21
33.24
32.00
33.12
31.33
29.62
25.05
27.72
22.6
Gross Profit Margin(%)
35.67
30.09
35.32
34.12
38.62
36.73
35.48
29.3
32.25
26.38
Cash Profit Margin(%)
27.16
21.62
27.01
31.00
33.48
31.23
34.61
20.95
33.85
15.44
Adjusted Cash Margin(%)
27.16
21.62
27.01
21.49
25.79
19.81
23.46
19.87
20.98
17.2
Net Profit Margin(%)
25.74
20.11
32.36
19.68
32.5
17.66
33.63
18.69
32.83
13.18
Adjusted Net Profit Margin(%)
25.74
20.11
32.36
27.82
24.81
23.0
22.48
17.62
19.96
14.93
Return On Capital Employed(%)
44.09
65.98
45.06
45.0
45.6
45.2
46.67
49.02
50.26
49.34
Return On Net Worth(%)
29.12
63.56
37.41
38.87
39.51
34.39
45.66
33.85
52.93
26.95
Adjusted Return on Net Worth(%)
29.79
62.4
30.16
38.45
30.16
34.52
30.52
31.9
32.17
30.53
Return on Assets Excluding Revaluations
25.1
25.39
25.27
24.64
26.7
20.05
30.7
24.08
33.19
15.38
Return on Assets Including Revaluations
23.2
25.39
25.27
24.64
26.7
20.05
30.7
24.08
33.19
15.38
Return on Long Term Funds(%)
44.09
65.98
45.06
59.72
45.6
53.02
46.67
49.02
50.26
49.34
Table 4; Z0916944; Executive MBA-Managing Finance
2009
2008
2007
2006
2005
2004
GSK
AZ
GSK
AZ
GSK
AZ
GSK
AZ
GSK
AZ
GSK
Inventory Turnover Ratio
7.71
7.75
7.85
11.79
8.03
7.32
6.73
8.11
7.01
9.17
8.32
Debtors Turnover Ratio
33.74
34.32
35.03
7.33
32.15
6.61
24.12
7.11
20.55
8.82
9.39
Investments Turnover Ratio
7.71
7.75
7.85
11.79
8.51
15.11
7.09
9.14
7.32
10.82
9.75
Fixed Assets Turnover Ratio
6.52
6.30
5.94
4.40
16.85
17.01
17.70
8.34
19.13
7.46
7.05
Total Assets Turnover Ratio
1.07
1.07
1.08
1.99
1.16
1.20
1.28
1.32
1.57
1.77
1.97
Asset Turnover Ratio
6.52
6.31
5.94
4.40
5.92
3.66
6.08
3.52
6.25
3.10
2.99
Average Raw Material Holding
66.98
72.10
87.21
57.65
66.56
46.54
74.12
59.32
71.87
67.57
69.75
Average Finished Goods Held
50.76
48.87
45.50
34.48
50.01
27.15
59.67
46.98
56.13
33.2
38.75
Number of Days In Working Capital
278.86
162.54
149.15
149.72
-13.58
149.75
-7.85
145.23
-13.81
153.11
135.75
Table 5
Management efficiency ratio analysis of GSK and AstraZeneca for the six years preceding 2009
Table-5; Z0916944; Executive MBA-Managing Finance
Table 6 Glaxo-Smithkline-Comprehensive Funds Flow Analysis 2009 and 2009
Funds Flow Impact
Year
Difference between the year and previous
What is it used for? /How did it come into being?
Specific information for investors
Gross Fixed Assets (Plant, Prop. & Equip.)
2009
1,423
For improvement and expansion of facilities at various worldwide sites
GSK had capital contractual commitments for future expenditure of £416m and operating lease commitments of £337m
2008
1,857
For improvement and expansion of facilities at various worldwide sites
GSK had capital contractual commitments for future expenditure of £489m and operating lease commitments of £448m
Goodwill
2009
1,260
A goodwill arose due to acquisition of Stiefel Laboratories, Inc. of £885m, the Pfizer HIV business of £255m and from UCB S.A. of £87m[2,7]
It augurs well for the investors and indicates a good return on investments because of likely profits
2008
731
Goodwill arose due to acquisition f Sirtris Pharmaceuticals Inc. of £242m and acquisition of the BMS Egypt business of £52m[8]
Intangible assets
2009
2,314
New computer software. The largest element of the additions is £1,513m relating to the acquisition of Stiefel Laboratories[8]
The acquisition of Stiefel laboratories augers well because with it is the brand name also acquired. In addition, £595m relates to the fair value of the Pfizer HIV intellectual property acquired following the creation of the ViiV Healthcare business during the year and a further £445m arises from the acquisition of certain businesses from UCB S.A.[2]
2008
1,413
The increase was due to currency movements partly offset by the amortisation and impairment of existing intangibles and acquisition of Sirtris Pharmaceuticals Inc., reflecting the existence of the technology and a large patent application portfolio covering areas of sirtuin biology[2]
The acquisition of Sirtris Pharmaceuticals Inc., with it the technology and a large patent application portfolio covering areas of sirtuin biology is excellent news for investors because of the addition of value base in a strongly technology driven market
Investments
2009
342
The largest of these investments are in two associates: Quest Diagnostics Inc., which had a book value £410m and Aspen Pharmacare Holdings Limited, acquired this year, which had a book value of £372m[2]
The investments include equity stakes in companies where the Group has research collaborations, which provide access to biotechnology developments of potential interest and interests in companies that arise from business divestments
2008
184
The largest of these investments is in an associate, Quest Diagnostics Inc., which had a book value of £463m('07: £299m)[7]
The investments include equity stakes in companies where the Group has research collaborations, which provide access to biotechnology developments of potential interest or interests in companies that arise from business divestments
Inventory
2009
8
The increase arises from H1N1 vaccine and Synflorix stockbuilds following regulatory approval in key markets; the acquisition of Stiefel Laboratories, Inc.;
Strategic stock building to support growth in Emerging Markets and Japan; weakening of overseas currencies; implementation of the working capital reduction programme
2008
994
The increase was caused partly strategic stock building to support growth in specific products
This has caused value of assets to increase and has put in a relatively stronger position of the firm
Trade and other receivables
2009
227
High vaccine sales of H1N1 vaccine together with the Stiefel acquisition.
This is a good news for the investors, these products are perceived as really strong on the market and H1N1 is perceived to do well in the market in future
2008
770
The increase was due to impact of strengthening overseas currencies on the translation of foreign currency receivables
This is a good news for the investors as it shows that the firm's strength on foreign currency receivables. This has a positive impact on the company in terms of trading too
Trade and other payables
2009
-697
Working capital improvement initiatives and the acquisition of Stiefel Laboratories Inc
This situation would change in the next couple of years because the contributions to be made by stiefel labs are expected to be huge. Hence, 'payables' would not be a serious problem for the investors
2008
-1184
Strengthening of overseas currencies
Net Debt
2009
-729
Borrowings repayable within one year and in the longer term
Investors need to note that a large part of the 'payables' are due within one year and this is something to look into
2008
-4134
Net debt increased due to share repurchases and further acquisition of businesses. Further acquisition was inevitable because with the acquisition comes the knowhow, patents, and in some aspects good will too
Though, the net debt is huge at this stage, the patents and the knowhow in this technology driven firm is very important. The firm is expected to benefit hugely because of this. This is a positive thing to note for the investors
Total Equity
2009
2424
There was a decrease in ordinary shares issued in '09 when compared to '08, however the total comprehensive income of the year was slightly higher in '09 .than the previous year[7,8]
The increase arises principally from retained profit
2008
-1592
The decrease could be attributed to further share repurchases, partially offset by recognised income and expenses for the year[8]
As was expected, this changed in the next year and is further expected to increase in the next few years
Table 7 AstraZeneca-Comprehensive Funds Flow Analysis 2009 and 2008
Funds Flow Impact
Year
Difference between this year and previous
What was it used for? /Why was it important?/ How did it come into being?
Specific information for investors to aid in decision making
Net outflow due to operational activities
2009
-923
[Major activity] The major outflow was because of payment of 1709m to Merck in 2008 as part of the partial retirement, and the proceeds from the disposal of the Abraxaneâ„¢[1]
This lead to acquiring the promotion rights of 174m received in 2009, countered by an increase in the purchase of short term investments and fixed deposits of 891 million
2008
-1690
AZ paid this to Merck
This payment resulted in AZ acquiring Merck's interests in certain AZ products including Pulmicort, Rhinocort, Symbicort and Toprol-XL. These are valuable drugs in the market and hence sales in the next several years are estimated to go up hugely
Net Assets
2009
10439
The increase was due to Group profit of 4888m was offset by dividends of 2119[1]
This increase has put AZ in a better position in terms of its ability to fuelled an expansion which is possible in the next several years
2008
744.25
The increase due to Group profit of 3965m was offset by dividends of 1798m and net share re-purchases of 293m[10]
This increase has put AZ in a better position in terms of its ability to fuelled an expansion which is possible in the next several years
Gross Fixed Assets (Plant, Prop. & Equip.)
2009
172
The increase was due to additions of 628m and exchange rate movements of 254m [offset by depreciation][1]
Investors need to note that this is expected to further increase in the next few years contributed largely by exchange rate movements
2008
816
The fall in this category was due to depreciation and impairments of 768m
Goodwill
2009
53
Goodwill increased due to the acquisition of MedImmune and on the restructuring of the US joint venture with Merck.
This is excellent news for investors; acquisition of Medimmune is great because of the large family of patents that they hold which come with the acquisition. Since this is a technology driven business, this 'value' is a huge plus for the investors
2008
550
The main components within goodwill are the amounts capitalised on acquisition of MedImmune and on the restructuring of AZ's US joint venture with Merck in 1998[10]
This is a good news for the investors because, of joint venture programmes with Merck. The profits are expected within next several years
Intangible assets
2009
-63
Additions totalled 651m, amortisation was 473m and impairments totalled 269m. Exchange rate impacts increased intangible assets
2008
556
This was due to amounts capitalised on acquisition of MedImmune and on the restructuring of US joint venture with Merck in 1998[11]
Additions to intangible assets in 2008 included a payment made to Merck under pre-existing arrangements under which Merck's interests in AZ products in the US will be terminated As a result of the payment AZ no longer has to pay contingent payments on these products to Merck and has obtained the ability to fully exploit these products and opportunities in the Respiratory therapy area that AZ was previously prevented from doing by Merck's interests in these products.
Inventory
2009
74
Increase was mainly due to exchange rate impacts.
Investors need to note that this trend is expected to continue in the next year too
2008
314
Caused due to exchange movements of 193m along with an underlying reduction in inventory of 120m[12]
Expectedly this changed in the year 2009
Trade and other receivables
2009
448
The increase was due to increased sales in the final quarter and an increase in insurance recoverable.
This trend will likely continue because of continued increases in insurance recoverable at least in the first 2 quarters of 2010
2008
593
This was caused by increased sales in Emerging Markets, the extension of major credit terms in the UK and increased insurance recoverable.
This continued in 2009 because of impacts from China, India and Japan
Trade and other payables
2009
1604
The increase was due to increases in US managed market accruals, accruals in respect of intangibles investments made in the fourth quarter and other accruals[,10]
The increase is likely to continue because of further increases in first 2 quarters in 2010
2008
130
This was caused by increases in US managed market accruals.
This was rather lower than what was perceived at the time; however, increased substantially due to market accruals in US
Appendix-1
Explanation to the Ratios:
Ratio
Formula
Discussion
Current Ratio
Current Ratio = _Current Assets_
Current Liabilities
It is also called as the 'liquidity ratio' or 'cash ratio' is the capability of the firm to pay back its short term liabilities [generally within a year] using its assets that it gains in the short term such as cash and account receivables. The general understanding in the industry is that a higher current ratio [>1] would generally mean that the firm is able to meet its payment needs by being able to convert its goods into cash. However, lower current ratio need not necessarily mean that the firm is closing down. Since all the businesses are diverse and direct comparison is generally almost impossible, it is prudent to compare firms that operate in the same industrial sector. In effect it is a ratio that is useful to estimate the working capital.
Quick Ratio
Quick Ratio = _Current Assets_- Inventory
Current Liabilities
[or]
Cash + Marketable securities + Accounts Receivables
Current Liabilities
In the industry language 'Quick ratio' is often referred to as 'Acid Test Ratio' because, it is a stringent and more rigorous test as it does not include the inventories and hence quick ratio will always be lesser than the corresponding current ratio. In effect it is a ratio that is useful to estimate the available immediate cash or the 'near easily accessible cash' to meet the short term needs
Gearing, %
Gearing = _Non current Liabilities X 100%
Non current Liabilities + Equity
Gearing represents levels of debt [expressed in percentage] in relation to its equity capital. It is hence an indication of a firm's ability of leveraging its assets using debts. Gearing assumes importance to investors as it provides an indication on how a firm could continue providing dividends or interest when there is a decline in profits during a defined period of time. The lower the gearing ratio, the better is the firm placed and hence considered less risky and vice versa.
Appendix 1; Z0916944; Executive MBA-Managing Finance
