EXECUTIVE SUMMARY

Pharmaceutical companies worldwide are working double time due to COVID-19 elapsing in 2020,
specifically with the research and development of vaccines against the said virus. With this drastic and
unexpected global problem, the 2020 financials of companies in the pharmaceutical industry surely have
been affected, thus, chosen to have an analysis. This report discusses the comparative analysis of the
2020 financial position as well as financial ratios of two (2) big players in the pharmaceutical industry -
AstraZeneca PLC (AZN.UK) and GlaxoSmithKline PLC (GSK.UK) – both founded in the United Kingdom.

The financial positions (in GBP millions) of AstraZeneca PLC and GlaxoSmithKline PLC as of December 31,
2020 exported from Wall Street Journal – Market Data, shows total of the following:

Table 1: Summary of Assets, Liabilities and Shareholders’ Equity

AZN.UK GSK.UK
Assets 48,816 80,431
Liabilities 37,376 59,623
Shareholders’ Equity 11,440 20,808

Basing on the above figures alone, we can automatically say that the assets of GlaxoSmithKline PLC is
two times (2x) the assets of AZN, making GSK better. In terms of liabilities, on the other hand, the
amount of AZN.UK is lower than the amount of GSK, making AZN better. Lastly, the equity of GSK is
higher than of AZN, making GSK better again than AZN. However, just looking at the figures is not the
correct analysis of two perfectly similar companies. One of the tools in financial statements analysis is
the use of Vertical Analysis. Vertical Analysis expresses each item in a financial statement as a percent
of a base amount. Items are measured as a percent of total assets for financial position while percent of
total sales for income statement.
(Financial Statement Analysis, 21 pages, 07 March 2020,
http://accioneduca.org/admin/archivos/clases/material/financial-analysis-in-vertical_1564010300.pdf)

With the use of vertical analysis, it allows us the compare the two companies with different sizes and
account balances, which we encountered with the figure of assets, liabilities and equity. For the purpose
of this report, we will focus mainly on the vertical analysis of the two companies as of December 31,
2020. Applying the vertical analysis, the result for the financial positions of AZN and GSK is as follows:

Table 2: 2020 Vertical Analysis

AZN GSK
ASSETS    
Current Assets    
Cash & Short Term Investments 11.98% 7.92%
Total accounts receivables 8.47% 9.48%
Inventories 6.03% 7.45%
Other Current Assets 2.81% 0.32%
Total Current Assets 29.29% 25.17%
Non-current Assets    
Net Property, Plant & Equipment 12.37% 13.68%
Total Investments and Advances 1.98% 4.26%
Long-Term Note Receivable 0.49% 0.00%
 Intangible Assets 49.14% 50.26%
Other Assets 6.74% 6.62%
Total Non-current Assets 70.71% 74.83%
TOTAL ASSETS 100.00% 100.00%
   
LIABILITIES & SHAREHOLDERS' EQUITY    
Current Liabilities    
ST Debt & Current Portion LT Debt 3.58% 4.63%
Accounts Payable 3.52% 19.69%
Income Tax Payable 1.69% 0.68%
Other Current Liabilities 21.65% 2.53%
Total Current Liabilities 30.43% 27.54%
Non-current Liabilities    
Long-Term Debt excl. Capitalized Leases 26.23% 29.12%
Provision for Risks & Charges 5.67% 5.42%
Deferred Taxes -0.78% -0.85%
Other Liabilities 15.00% 12.91%
Total Non-current Liabilities 46.13% 46.59%
TOTAL LIABILITIES 76.57% 74.13%
Shareholders' Equity    
Common Equity (Total) 23.41% 18.14%
Accumulated Minority Interest 0.02% 7.73%
Total Equity 23.43% 25.87%
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY 100.00% 100.00%

Interpretation: Despite the material differences in the figures of the companies’ assets liabilities and
equity, using the vertical analysis, we can confirm that both are performing almost the same as one
another proven by the percentages of their financial positions. First, as to current assets, AZN shows a
better composition with the percentages of cash, accounts receivables and inventories. While this will
be discussed in the financial ratios, it can be initially conclude that the liquidity and turnover of AZN is
better than of GSK. Major differences of the two as to non-current assets is the long-term investments
and intangible assets. It can show that GSK invested more on capital earning investments and on its
intangible assets which is the core factor of a pharmaceutical company. Liabilities of GSK in percentage
is lower of AZN which shows that GSK is more capital structured than AZN.

COMPARATIVE ANALYSIS

Ratio analysis is one of the quantitative techniques of gaining insight into a company’s liquidity, financial
leverage and efficiency, and profitability using the components of financial statements – financial
position, income statements and cash flows. Ratio analysis is effective if two companies to be compared
are in the same industry. Investors and financial analysts use ratio analysis to evaluate the financial
condition of companies by interpreting the historical and current financial reports. Comparative financial
data can show how a company is doing over the period of time and can be used to estimate likely future
performance. Financial ratios of AZN and GSK for the year 2020 and computed and interpreted as
follows:

Table 3: 2020 Liquidity ratios analysis

    AZN GSK
LIQUIDITY RATIOS    
1 Current ratio 0.96 0.91
2 Quick ratio 0.76 0.64
 3 Operating cash flow ratio 0.25 0.35

Liquidity ratios measure the company’s ability to pay-off its short-term debts. Based on the table below,
the current and quick ratio of AZN is higher than of GSK while operating cash flow is better of GSK. As
mentioned earlier in the vertical analysis, the liquidity of AZN is better which the liquidity ratios have
proven.

Table 4: 2020 Liquidity ratios analysis

    AZN GSK
LEVERAGE FINANCIAL RATIOS    
4 Debt ratio 76.57% 74.13%
5 Debt to equity ratio 327.06% 408.74%
3 Times-interest-earned ratio 8.97 8.97

Different to liquidity ratios, leverage financial ratios or also known as solvency ratios measure the ability
of the company to pay-off its long-term debts. It also determines the capital structure of the company.
Based on the above data, we can say that both AZN and GSK are debt-structured having their liabilities
3x and 4x of their equity. As to times-interest-earned ratio, both companies can pay the interest on their
debts 8.97x.

Table 5: 2020 Efficiency ratios analysis

    AZN GSK
EFFICIENCY RATIOS    
Net sales / Average total 0.44 0.43
7
assets
8 Inventory turnover ratio 2.07 1.85
9 Days sales in inventory ratio 176.33 197.48

Efficiency ratios evaluate how efficiently a company uses its assets and liabilities to generate sales and
maximize profits. As to inventory turnover, AZN is better in managing its stock of inventories as
compared to GSK. It means that the idle inventories at year-end of AZN is lesser of GSK. Therefore,
bringing us to a better days sales in inventory turnover ratio of AZN.

Table 6: 2020 Profitability ratios analysis

    AZN GSK
PROFITABILITY RATIOS    
10 Gross margin ratio 73.06% 67.63%
11 Operating margin ratio 13.93% 21.62%
12 Return on assets ratio 5.10% 7.15%
13 Return on equity ratio 21.81% 39.41%

This is the first set of ratios investors will look into as these shows how the company perform during the
year, how much revenue and net income it earns for a period. Looking at the above data, the gross
margin ratio of ASN is higher than of GSK. However, the operating margin is the other way around. It
means that AZN has higher operating expenses compared to GSK in which AZN should look into. Similar
to ROA and ROE, the income generates through the use of assets and the use of shareholders’ capital in
the operations are higher in GSK compared to AZN. It means that GSK is more efficient.

Table 7: 2020 Market value analysis

    AZN GSK
MARKET VALUE RATIOS    
14 Book value per share ratio 8.71 2.93
15 Earnings per share ratio 1.90 1.16

The book value per share of AZN is almost 4x of GSK and the former’s earnings per share is higher than
of the latter. Another ratios that will look specifically is the value of ownership in the company and how
the company perform in terms of sales and expenses during a period. Looking at these two ratios, AZN is
better than GSK.

POTENTIAL INVESTORS

There are several factors that potential investors should consider in a company they want to invest with.
The vertical analysis and financial ratio analysis are not sufficient for the potential investors to say that
this company is better than another. In addition, a one-year financial analysis is not enough in
determining which company is better. The name of the company, news regarding it and the status of
industry it belongs with as well as the status of the economy should be considered and take into
consideration. AZN, who was able to establish its reputation when it produced a string of blockbuster
cancer drug, can be a very good company. This just means that even if GSK was established earlier than
AZN, another factors can should also be considered.

Basing purely on the vertical analysis and financial ratio analysis for the year 2020, both AZN and GSK
have good and bad sides. As to financial performance, GSK is better. Its return on operating margin is
higher than AZN. Adding the good result of ROA and ROE, GSK has out-performed AZN. However,
looking at the big picture, considering the other factors and data, the liquidity, efficiency and market
value, AZN is better than GSK.

PROBLEMS ENCOUNTERED IN THE COMPUTATION AND INTERPRETATION OF RATIOS

While doing the report, I encountered some problems as follows:

 Gathering the source of information was easy since the latest data are available in Wall Street
Journal. However, upon further looking into it, I have noted that the balance sheet of both
companies are not even balance. In order not to disrupt the presentation and the totals of
assets, liabilities and equity, inconsistencies were adjusted in the other assets and other
liabilities.
 I was able to compute for fifteen (15) financial ratios. I could have computed more supposed
detailed figures of the two companies are given. For example, the average receivables turnover
cannot be computed since the credit sales are not available. Only the total sales which includes
both the cash and credit sales are available. Another is the dividend yield ratio, dividends paid
and declared for 2020 are not yet available.
Sources:

https://www.wsj.com/market-data/quotes/UK/XLON/AZN/

https://www.wsj.com/market-data/quotes/UK/XLON/GSK/