Index trend analysis is used for predicting the environment in which a business operates. It shows how the financial statement items in the income statement namely revenues and expenses changed from year to year. It helps the management to view and create strategies and also in making decisions for the company. With this index analysis, a base year is selected and in this report for PXS, the year 2006 is selected to be the base year.
PHARMAXIS LTD
PROFIT AND LOSS ACCOUNT
Revenue from sales of goods
From the index analysis, it can be clearly seen that the revenue for Pharmaxis Ltd (PXS) from sales of goods is increasing each year. From total revenue of $8,000 in year 2006, it has increased to $205,000 in year 2007 and it further increases into the future during year 2008 and 2009. The lower amount of revenue in 2006 is because PXS has just started their first commercial operations which are selling their new product, Aridol. The revenue actually increases by a large amount in year 2007 mainly due to the fact that Aridol’s sales have penetrated the global market. It is sold in Australia, Europe, Sweden and a US biopharmaceutical company. The sales of Aridol further increase the revenue of PXS until year 2009, which is approximately $595,000 compared to $8,000 in year 2006. Referring to the index, this is a good sign for PXS as their product is accepted worldwide. Although it can be seen that the revenue is slowing down from year 2008-2009, however, PXS is going to commercialized another product of theirs which is Bronchitol into the market. For now, PXS does not expect any revenue from Bronchitol as they have not completed the Bronchitol research and development.
Cost of goods sold
The cost of goods sold is increasing from year to year mainly due to the number of sales that Aridol made in the market. This product first started in Australia and then it is expanded internationally into Europe, Sweden, United States, Korea and other Asian countries. Moreover, it is also delivered to other pharmaceutical companies around the globe. Hence the gross profit increases from $6,000 in year 2006 to $442,000 in year 2009.
Interest income
The interest income is $4,282,000 in year 2006 and it increases over the subsequent years. However, it can be noticed that by comparing year 2008 and 2009, the index actually drops as the income interest decreases between the years. During year 2006-2007, the reason for the increment of the interest incomes is due to the higher level of funds invested by PXS. The funds invested are held in banks and other investments. However, the index between year 2008 and 2009 drops because of the lower level of funds invested in year 2009 and also lower interest rates. Overall, an increment of this interest income comparing to the base year 2006 can meant that PXS is doing well as they have a lot of funds invested. It also means that at least PXS is saving up part of their revenue for future and in any case of emergency purposes.
Other income
Other income for PXS consists of grant income and amount paid to PXS because the company sent sales representatives to help certain pharmaceuticals companies by promoting their products. The index shows that the other income increases from year 2006 to 2007, but however, it slowly decreases from year 2008 and 2009. When PXS deals with research and development, this will caused a rise in the R&D expenditure. Therefore, there is a need of grant income to cover up part of the expenses. PXS gets the grant income from Pharmaceutical Partnerships Program (P3) and R&D Start Grant in year 2006. This grant income increases in year 2007 due to higher level of research expenditure. Also in year 2007, PXS received an Export Market Development Grant. For year 2008 and 2009, the grant income decreases mainly due to some of the studies on preclinical development group have been completed in the previous year and the size of the clinical trials has decreased. Although the grant income is decreasing compared to year 2006, this does not signifies a negative sign. It is because this shows that PXS has completed their studies and this will significantly lower down the cost of R&D for the particular year. It also shows that PXS can prepare on new projects for the year as recent studies on clinical trials is already on its closing stage.
Operating Expenses
From this graph, it can be clearly seen that the operating expenses from year to year is increasing. The following index analysis will be focused on the reason on why the expenses are higher than it did before in year 2006. .
Research and Development (R&D)
The expenses for R&D for year 2006 are $16,978,000 and it increases in year 2007 to $23,840,000. However, it decreases in year 2008 and there is a huge increase in year 2009. In year 2007, the research expenditure increases 40% compared to year 2006 is because the number of clinical trials on that year increases. PXS also expands its drug discovery unit in North Ryde. There is an increase in staffs employed and the level of research activities carried out. They also start with the Bronchitol long term safety studies. In year 2008, R&D expenses decreases due to the preclinical development group and clinical trial groups are on the closing stage. Most of these studies have been completed in year 2007 hence the decrease in expenditure. However, the R&D expenses increase in a large amount in year 2009. This is because PXS plans to move their product through the product development pipeline. Also, in 2009, PXS undertakes toxicology studies which resulted in a higher R&D expenditure. The uneven increment and decrement in the R&D expenses means that PXS is ready to invest any amount of cash into doing and completing a research. This is good for the company as a whole as PXS started as a research company at its early stages in this industry. However, it would be wise for PXS to budget a certain amount of funds into the R&D exploration so as to continue developing products for the company.
Commercial expenses
Commercial expenses for PXS increases over the years. In year 2006, commercial expenses alone amounted to $1,951,000 and increased to $6,202,000 in year 2009. For year 2006, expenses are focused on the sales and marketing of Aridol since it is the first time of the commercial launch. The expenses include hiring sales and marketing managers to monitor the sales of Aridol. The expenses increased because PXS is interested in selling Aridol internationally. Therefore, it has its full commercial launch in Australia and Europe. Other than this, the sales and marketing managers had to obtain detailed global information about bronchitasis to prepare for their launching of their new product, Bronchitol. The increase in year 2008 comparing to 2006 is mainly due to the employees share options and PXS is opening an office in US. The commercial expense in year 2009 is the highest because of the preparation to launch Bronchitol in the US and Europe. Other than this, there is also an increase in the number of sales representatives in US. Here, it is clearly seen that PXS regarded employee stock options as an expense to the company. Hence, in order to lower down these expenses, PXS should choose another way of motivating their employees instead of offering a lot of share options. The increase in commercial expenses is co-related to the sales revenue. Thus, it is perfectly normal to have high expenses in order to receive maximum expected sales revenue.
Administration expenses
Administration expenses for PXS consists of salaries, professional service fees, and accounting, office and public company costs. The administration expense increased steadily over the years. From the index trend analysis, the increment to each year using year 2006 as the base year is 13% per year from 2007-2009. Administration expenses in year 2006 are due to the incremental cost of being listed on ASX and NASDAQ. It increases again in year 2007 because PXS purchased equipments, computers and conducts additional research activities. In year 2008 where PXS operates in US, the administration expense is mainly because of the expansion of business and they were operating is a very demanding legal environment. PXS has to confine with the US rules and regulations. Higher expenses in 2009 is because PXS is getting ready for the launching of Bronchitol is the US and Europe. By analyzing the trend, this can be safely said that PXS has budgeted an amount on how much they should spend on administration. This is a good and effective way to ensure that the company did not under or overspend on this particular area.
Income tax expenses
Since year 2006, the income tax expense for PXs is gradually increasing. In 2006, the expense amounted to $5,000 and in 2009, the expense increased to $51,000. This implies that PXS is making losses over the years in its operations. The losses increased because of increment in the operating expenses and the decrease in interest income in year 2009. Although the loss is high, this is actually good for the company as a whole. PXS can actually use the tax loss to deduct their income tax in the future when they are making profits.
Net profit/loss
The following is the graph on the net profit/loss for PXS for the overall four years.
