You are on page 1of 29

Student Electronic Assignment Cover Sheet

Student (s) Number as per your student card:10332343

Course Title: MBA (FINANCE STREAM)

Lecturer Name: ENDA MURPHY

Module/Subject Code: B9AC106

Module/Subject Title: FINANCIAL ANALYSIS

Assignment Title: FINANCIAL ANALYSIS OF ASTRAZENECA AND GSK

No. of words:2956

Date of Submission: 20/03/2016

0|P a g e
TABLE OF CONTENTS:

INTRODUCTION……………………………………………………………2

FINANCIAL PERFORMANCE AND POSITION………………………….4

OPTION OF PURCHASING SHARES OF COMPETITOR……………….13

REASONS……………………………………………………………………15

CONCLUSION……………………………………………………………….19

BIBLIOGRAPHY…………………………………………………………….20

APPENDIX…………………………………………………………………22

Figures:12
Tables:5

1|P a g e
Introduction:

Astrazeneca plc is one of the biggest pharmaceutical companies in the


world. It is a British-Swedish company. Astra-AB of Sweden (founded in
1913) and Zeneca group plc of the UK (founded in 1993), who were long
established with a passion for science and a clear vision of the
pharmaceutical industry which led them to merge together, and a new
company, Astrazeneca plc, which was founded on April 6 th, 1999.It’s
headquarter is situated in London while the R & D are both in Sweden
and UK. Astrazeneca’s CEO is Pascal Soriot and Leif Johansson is the
Chairman.

Astrazeneca manufactures medicines for cardiovascular and metabolic


disorders, gastrointestinal and neuroscience and infection problems,
Autoimmunity inflammation and respiratory upsets, infection and
cancer.

Astrazeneca plc has also acquired companies which are as follows:

 2005-Kudos pharmaceutical company.(£120m)


 2006-Cambridge antibody technology.(£702m).
 2007-Arrow Therapeutics($150 m) & MedImmune($15.2m).
 2010-Novexel corp (antibiotic developing co.).
 2011-Guangdong Beijing (Chinese company).
The company has also had controversies where in, in the year 2010, it
2|P a g e
settled a lawsuit for $520m to settle allegations that the company
defrauded Medicaid and Medicare, and other government-funded
health care programs. In 2011, it settled a lawsuit of $68.5m in US.

Despite the uncertanities Astrazeneca faced in the past, it has managed


to keep up the good work and has continued effective research to cure
serious diseases.

The company operates in the UK, US, France, Sweden, Canada, Brazil,
China, Japan and India. The company’s largest single R & D site is based
at Alderly park, Cheshire, England with over 4,500 staff. All together,
there are over 50,000 people who work for Astrazeneca. Astrazeneca is
listed at #239 Global 2000.In 2014, company revenue was $26.09B and
net income was $1.23B. Today, Astrazeneca is listed in the 100 FTSE
index and it’s market capital is £54.8 billion which makes it 6 th in the
primary L.S.E.

Astrazeneca supplies medicines to over 100 countries and sells products


under brands Losec, Crestor, Entocort, Onglysa, Citanest, Atacand,
Nexium and Diprivan. It continues to do well in diabetes franchises and
has gained a lot of profit in the years compared to the other products.

3|P a g e
2.FINANCIAL PERFORMANCE AND POSITION:

Any company’s financial performance can be understood from the


financial statements issued by the company at the end of the fiscal year.
Current financial standings of this organisation are shown in these
statements. There is also an analysis carried out after a critical calculation
of various ratios such as Profitability, Liquidity, Effeciency ratios and so on.

Furthermore, these statements and ratios also help the shareholders and
the investors to understand the financial position of the company and
decide whether to invest or not.

We will now discuss some of these ratios to understand the financial


performance and position of Astrazeneca plc.

2.1 Profitability Ratios: These ratios help to calculate the profitability of


a company. Here, we will try and find out the ratios and the reasons for
their ups and downs during the last 4 years.

2011 2012 2013 2014


Gross profit % 82.06 80.72 79.54 77.61
net profit% 29.72 22.51 10.00 4.73
ROCE 33.35 19.47 8.20 3.02
ROA 23.41 14.28 5.84 2.13
Operating profit 36.82 27.33 12.71 4.77
TABLE 1: PROFITABILITY RATIOS

4|P a g e
FIGURE 1: GRAPH (PROFITABILITY RATIOS)

A. GROSS PROFIT:

We can see that the gross profit in the year 2011 was 82.06%
which is good. We see that from the years 2012 to 2014, there
has been a decline in the gross profit by 1% to 2% each year
largely because of the fall in revenue due to the loss of
individuality of it’s products such has Crestor, Atacand and
Seroquel as said by the Chairman.
(‘AZ_Annual_Report_2014_EN.pdf’, no date)Although, sales
declined by 3% in Japan,1 % in Europe and 4% in Rest of the
world, it was partially offset by the diabetes franchise sales which
had a huge increase by $644m.

B. NET PROFIT:

The net profit in the year 2011 was 29.72%. It has varied
distinctly in the years 2012-2014 due to the decreased revenues.
Also, due to the financial expenses that increased from $495m to
$963m have caused a drastic decrease in the net income from
$2571m in 2013 to $1235m in 2014 which has caused the net
profit to decline from 10% to 4% respectively. Maximising the
potentiality of the existing products and effective pricing can help

5|P a g e
the in the improvement of net profit.

C. RETURN ON CAPITAL EMPLOYED:

This ratio is used for the comparison of the profits of the


competing companies through the capital used by them.
We can see that the ROCE of Astrazeneca has been
decreasing from 2011 to 2014 which was 33.35% and
3.02% respectively. In my analysis, the ROCE has
declined due to less profits made and also the acquisitons
of Pearl Therapeutics for $569million, 100% of Omthera
pharmaceutical’s shares for $323million. Also, there was
an acquisition of Almirall Sofotec for $878million was
made in 2014. High investments tend to produce low
return on capital than the existing business.

D. RETURN ON ASSETS:

This ratio helps us to understand whether how profitable


a company is with relation to their assets. We can see
that Astrazeneca’s ROA has been low from 2012 to 2014
i.e 14.28% and 2.13% respectively. The reason for this
has been the share of after tax losses in it’s joint ventures
and also the financial expenses have been more in the
year 2014 of $963 million which has led to a decline in
the profit before tax.

6|P a g e
E. OPERATING PROFIT:

The operating profit from 2011 to 2014 was 36.82% to


4.77% respectively. The decline of operating profit was
due to the expenditure associated with the growth
platforms such as research and development expenses of
$5579m in 2014.The increase in selling, administrative
and distribution costs have led to a decline in the net
operating margin. One of the reasons for this is the
denominations in the currencies as the cash is converted
and held in US dollars. Thus, operating profit can be
affected in US dollars by movement in exchange rates.

2.2. LIQUIDITY RATIOS:

These ratios are used to determine a company’s ability to


pay off it’s short term debts. The margin of safety for the
company to cover it’s short-term debts is higher when the
value of the ratio is high. Testing a company’s liquidity is
an important step in it’s analysis. Here, we will calculate
the ratios which is Current ratio and Quick ratio (Acid test
ratio).

2011 2012 2013 2014

CURRENT RATIO 1.49 1.37 1.27 0.96

QUICK RATIO 1.37 1.22 1.15 0.85

7|P a g e
TABLE 2: LIQUIDITY RATIOS

FIGURE 2: GRAPH (LIQUIDITY RATIOS)

A: CURRENT RATIOS:

The company will be able to pay off it’s short term debts
if the current ratio is higher. Astrazeneca’s current ratio
from 2011 to 2013 has been more than 1 which is said to
be good. In the year 2014, it was slightly lower than
which is 0.96 for which the reason is that it’s liabilities are
greater than it’s assets and it is unable to pay off it’s
short-term debts at that time.

8|P a g e
B: QUICK RATIOS: (ACID-TEST RATIOS)

This ratio is the division of the current assets and current


liabilities by subtracting the stock(inventories). Similar to
the current ratio, Astrazeneca’s quick ratio from 2011 to
2013 has been more than 1 which means that it has the
liquid assets to pay it’s current liabilities. However, in the
year 2014, the quick ratio has been less than 1 which is
0.85% which is the reason it may not have been able to
pay it’s current liabilities. There are other reasons for this
which could be that the current liabilities such as the
trade payables, income tax , loans, provisions etc have
been more than the current assets such as the trade
receivables, income tax receivable etc.
Hence, as per my analysis from the financial statements,
if the current liabilities are controlled, it will be good for
the company.

LEVERAGE RATIOS:

Owner’s equity and debt are important aspects for a


company to carry out it’s operations through financing.
The changes in the earnings will be more rapid if the
leverage is high. Here, we use two methods for analysis
which is the gearing ratio and debt-equity ratio.

2011 2012 2013 2014

Gearing Ratios 0.24 0.32 0.27 0.30

Debt-equity Ratios 0.31 0.48 0.37 0.43


TABLE 3: LEVERAGE RATIOS

9|P a g e
FIGURE 3:GRAPH (LEVERAGE RATIOS)

A.GEARING RATIOS:

A company is considered more risky if it’s degree of


leverage is high. Also, if the gearing is high, the company
is prone to the downward side of the business cycle as it
has to continue to service it’s debt even if the sales are
bad. There have been ups and downs from year 2011 to
2013 with regards to the equity and debt. In year 2014,
there was a fall in both equity and debt which resulted in
gearing ratio to be higher which is 0.30% compared to
2013 which was 0.27%. Overall, the gearing ratios have
been low and in my analysis of the financial statements
the reason for this is that Astrazeneca requires more
redemption capital because of the merger acquisition it
has had and also the earnings need to be increased.

10 | P a g e
B. DEBT-EQUITY RATIOS:

This ratio means that if it is high, then the company has


been more aggressive and is heavily taking debt and is at
high risk. Here, Astrazeneca’s debt-equity ratio has
increased from 0.31 in 2011 to 0.43 in 2014. The reason
for this is that it had taken high debts in 2014 which was
$8,397million. The company uses high debts to increase
it’s earnings which can be bad.

INVESTMENT RATIOS:

When a person looks at the financial statements of a


company, he might get confused seeing so many
financial values that may add a lot of information. Some
of the examples are gross margins, EBIT, cash flow etc.
Comparing relevant data that helps users to get an
estimated value by a process of evaluating is what
investment ratios is all about.

2011 2012 2013 2014

EPS 7.34 4.99 2.04 0.98

P/E RATIO 5.78 9.82 31.9 66.15


TABLE 4: INVESTMENT RATIOS

11 | P a g e
FIGURE 4: GRAPH (INVESTMENT RATIOS)
EARNINGS PER SHARE:

This calculation is very important in calculating the share


price and also determining it. We can see that from the
year 2011 to 2014, EPS has been declining which is 7.34
and 0.98 respectively. As per my analysis, the reason for
this has been that the net income has declined in 2014
due to the increase in financial expenses, and also the
payments made to the merger companies. In addition to
this, there was more investment made this year which
was the result of the purchase of 1261 shares. EPS can be
improved if the profit making margin is increased and the
investment is decreased. This could make the company
more efficient.

P/E RATIO:

Valuation of a company is done with the help of P/E ratio.


It is the ratio which indicates the amount that a person
can receive from the earning’s of a company by investing
a certain amount. The P/E ratio has increased from 5.78%
in 2011 to 66.15% in 2014. The reason for this is that the
market value per share has increased over the years and

12 | P a g e
also the profit from the merger diabeties company has
been good. Also, it indicates that there is future increase
in earnings expected by investors.

EFFICIENCY RATIOS:

Good usage of assets and liabilities of a company within


is what efficiency ratio is about. Assets turnover, payable
days, receivable days etc. are efficiency ratios.

2011 2012 2013 2014

Assets turnover 0.64 0.52 0.46 0.45

Collection Days 72.76 75.16 79.19 67.36

Payable Days 130.53 165.75 173.38 218.18

Inventory days 112.18 139.49 132.44 122.46

FIGURE 5:GRAPH(EFFICIENCY RATIOS)

As we can see that from the year 2011 to 2014, the


collection days were lesser than the payable days. In my
analysis, this shows that AstraZeneca plc is in a good

13 | P a g e
position overall because they have been able to receive
the money earlier than the payment day arrives. This also
means that the investors can make investments in the
future. Although, the assets turnover has decreased
slightly from 2012 to 2014, it has been efficient enough
to generate sales. This is a good opportunity for the
investors to invest and hope for much better sales.

OPTION OF PURCHASING SHARES OF COMPETITOR:

Amongst the top 100 FTSE listed companies such as GSK


PLC, SHIRE PLC and HIKMA, who are the competitors of
ASTRAZENECA PLC, it is very evident that the main
competitor of Astrazeneca here is GSK. We can see the
market capital of GSK in the graph below which clearly
indicates that the market capital of GSK is huge, even
bigger than that of Astrazeneca. However, it does not
mean that if the market capital is high, it is ideal to invest
right away. There are various factors involved in it to look
upon.

FIGURE 6:GRAPH(MARKET CAPITAL 2014 of AZN AND COMPETITORS)

14 | P a g e
ESTIMATED PRICE TO PURCHASE 10% SHARES OF GSK:

AVG. OUTSTANDING SHARES: £4808 million

MARKET PRICE PER SHARE: £13.76

ESTIMATED VALUE 10% IN GSK: 4808*13.76*10%

= £6615.80

Figure 7: share price variation of GSK in the last 3 years


REASONS:

In my opinion, I would like to observe the performance of GSK for


some more time and would have to rethink on purchase of 10%
stock. The reason for this is, I have noticed inconsistency in GSK’s
performance in the last 4 years. In other words, there have been
ups and downs in the net income of GSK from 5,261 in 2011 to
2,831 in 2014 and the revenues have also gone down in the
years. We can also see from the below figure that the EPS has
been fluctuating from 2011 to 2014 which depicts the
inconsistency of the earnings per share of GSK. EPS of
AstraZeneca has been more than that of GSK in all the four years,
though the difference in the last two years hasn’t been much.

15 | P a g e
Figure 8: Graph (EPS Comparison of AZN and GSK)

Figure 9: Graph(EBIT Comparison of AZN and GSK)

From the above figure, we can see that the EBIT of GSK has been more than AZN
from 2012 to 2014. This could be good for AZN to invest, but, like I said, there has
been inconsistency in the EPS which is an important factor to look upon before
investing.

16 | P a g e
FIGURE 10: GRAPH(P/E RATIO COMPARISON OF AZN and GSK)

We can see that the the P/E ratio of GSK has been low compared to AstraZeneca
from 2013 to 2014, which was not the case in 2011 and 2012. This shows the ups
and downs of the price earnings of GSK. This is one of the reasons I would think
investing right now would not be a good idea. According to me, there has to be
consistency in the business in terms of growth.Thus, I would like to hold on and
wait before buy 10% of GSK’s stock.

Also, there is one reason I would like to give it a thought before investing in GSK
is that the HIV business has just started to grow and it has grown by 15% with
sales and the Chairman is happy about it. Also , Chairman has mentioned that the
three part transaction with Novartis by which GSK will acquire the vaccine
business is going to bring more balanced long term growth for the company.
(‘2014-Annual-report.pdf’, no date). According to me, long term growth is very
important for a company and a wait for about a year or two post the 3 part
transaction will be an ideal time to invest.

Hence, I would like to monitor the performance for some more


time before buying 10% stock of GSK as it is moving forward to
start it’s transaction to strive for a long term growth.

17 | P a g e
Book value is where the assets are carried on the balance sheet.
In other words, it is the total value of the company’s assets that
shareholder’s would theoretically receive in case the company is
liquidated. When a book value is compared to it’s market value,
there can be indications of the stock being under-priced or
overpriced.

ASTRAZENECA GSK

BOOK VALUE $19,627 $7143

MARKET VALUE $57,484 $95,737

We can see that the market value of GSK is much higher than it’s
book value.
It is a good sign for GSK as it shows it’s profit more than that of
AstraZeneca. However, there has to be more observation as there
is going to be a 3 part transaction as it could result positive or
negative. Hence, just because the share price is low , it does not
mean that it could possibly be a good time to invest as
investments are made to see a long time profit.

Figure 11: Graph (comparison of AZN and GSK’s book


Value and Market Value.

18 | P a g e
Figure 12: Graph( Book Value of AZN and GSK)

CONCLUSION:

A conclusion to this analysis is that the financial performance of Astrazeneca has


bhas not been that great keeping in mind the decrease in the profit. However, it’s
merger with the diabetic company has been a good result in increasing the profit.
Further more, when we see the market capital, it tells us that the company is
running in profit which is good.
We have also seen the performance of GSK which has been good in terms of the
market value. However, the sales have gone down in some areas and also resulting
in a slightly low net income. Thus, I would like to observe GSK’s performance for
some more time as it is going to go through a 3 part transaction with Novartis
which could be helpful in a balanced growth in a long run. It could be good to
invest after 1-2 years while it settles down post the transaction.

19 | P a g e
BIBLIOGRAPHY:

‘2014-Annual-report.pdf’ (no date). Available at:


https://www.astrazeneca.com/content/dam/az/our-company/Documents/2014-Annual-report.pdf
(Accessed: 18 March 2016).

‘annual-report-2013.pdf’ (no date). Available at: http://www.gsk.com/media/325156/annual-


report-2013.pdf (Accessed: 18 March 2016).

‘annual-report-2014.pdf’ (no date). Available at: https://www.gsk.com/media/603031/annual-


report-2014.pdf (Accessed: 18 March 2016).

AstraZeneca Annual Report 2013 (no date). Available at: http://www.astrazeneca-


annualreports.com/2013/ (Accessed: 18 March 2016).

‘AstraZeneca Annual Report and Form 20-F Information 2012 - 2012-Annual-report.pdf’ (no
date). Available at: https://www.astrazeneca.com/content/dam/az/our-company/investor-
relations/presentations-and-webcast/Annual-Reports/2012-Annual-report.pdf (Accessed: 18

20 | P a g e
March 2016).

‘AZ_Annual_Report_2011_EN.pdf’ (no date). Available at: http://www.astrazeneca-


annualreports.com/2011/AZ_Annual_Report_2011_EN.pdf (Accessed: 18 March 2016).

AZN AstraZeneca PLC XLON:AZN Stock Quote Price News (no date). Available at:
http://www.morningstar.com/stocks/XLON/AZN/quote.html (Accessed: 20 March 2016).

Debt Ratios: Debt-Equity Ratio (2007) Investopedia. Available at:


http://www.investopedia.com/university/ratios/debt/ratio3.asp (Accessed: 20 March 2016).

Earnings Per Share (EPS) Definition | Investopedia (no date). Available at:
http://www.investopedia.com/terms/e/eps.asp (Accessed: 20 March 2016).

‘Financial_Statements.pdf’ (no date). Available at: http://www.astrazeneca-


annualreports.com/2013/_assets/pdfs/Financial_Statements.pdf (Accessed: 18 March 2016).

Growth, Profitability, and Financial Ratios for GlaxoSmithKline PLC (GSK) from
Morningstar.com (no date). Available at: http://financials.morningstar.com/ratios/r.html?
t=GSK&region=gbr&culture=en-US (Accessed: 20 March 2016).

HannahBlake (no date) A history of... AstraZeneca, pharmaphorum. Available at:


http://www.pharmaphorum.com/articles/a-history-of-astrazeneca (Accessed: 20 March 2016).

‘GSK Annual Report & Accounts 2011 - annual-report-2011.pdf’ (no date). Available at:
http://www.gsk.com/media/325141/annual-report-2011.pdf (Accessed: 18 March 2016).

‘GSK Annual Report FINAL 07.03.13.pdf - annual-report-2012.pdf’ (no date). Available at:
http://www.gsk.com/media/279963/annual-report-2012.pdf (Accessed: 18 March 2016).

GSK GlaxoSmithKline PLC XLON:GSK Stock Quote Price News (no date). Available at:
http://www.morningstar.com/stocks/XLON/GSK/quote.html (Accessed: 20 March 2016).

Investopedia (2007) Investment Valuation Ratios: Introduction, Investopedia. Available at:


http://www.investopedia.com/university/ratios/investment-valuation/ (Accessed: 20 March
2016).

root (2003a) Book Value Definition, Investopedia. Available at:


http://www.investopedia.com/terms/b/bookvalue.asp (Accessed: 20 March 2016).

root (2003b) Current Ratio Definition, Investopedia. Available at:


http://www.investopedia.com/terms/c/currentratio.asp (Accessed: 20 March 2016).

root (2003c) Gearing Ratio Definition, Investopedia. Available at:


http://www.investopedia.com/terms/g/gearingratio.asp (Accessed: 20 March 2016).

root (2003d) Price-Earnings Ratio (P/E Ratio) Definition, Investopedia. Available at:
http://www.investopedia.com/terms/p/price-earningsratio.asp (Accessed: 20 March 2016).

21 | P a g e
root (2003e) Profit Margin Definition, Investopedia. Available at:
http://www.investopedia.com/terms/p/profitmargin.asp (Accessed: 20 March 2016).

root (2003f) Return On Assets (ROA) Definition, Investopedia. Available at:


http://www.investopedia.com/terms/r/returnonassets.asp (Accessed: 20 March 2016).

root (2007) Operating Profit Definition, Investopedia. Available at:


http://www.investopedia.com/terms/o/operating_profit.asp (Accessed: 20 March 2016).

root (2009) Gross Profit Definition, Investopedia. Available at:


http://www.investopedia.com/terms/g/grossprofit.asp (Accessed: 20 March 2016).

Staff, I. (2003a) Quick Ratio Definition, Investopedia. Available at:


http://www.investopedia.com/terms/q/quickratio.asp (Accessed: 20 March 2016).

Staff, I. (2003b) Return On Capital Employed (ROCE) Definition, Investopedia. Available at:
http://www.investopedia.com/terms/r/roce.asp (Accessed: 20 March 2016).

Mergers & Acquisitions - AstraZeneca (no date). Available at:


http://www.thepharmaletter.com/listing/mergers-acquisitions/astrazeneca?tagid%5B%5D=4977
(Accessed: 20 March 2016).

APPENDIX:

22 | P a g e
23 | P a g e
24 | P a g e
25 | P a g e
26 | P a g e
27 | P a g e
28 | P a g e