Astra Zeneca Plc - Biopharmaceutical Company Case Study
Read the following excerpts from Astrazeneca plc’s financial statements for the year ending 31 December 2013 from the perspective of a potential investor. Perform basic ratio analysis to evaluate Astrazeneca’s financial statements and write a brief report (approx. 1,000 words) of your analysis. Aim to calculate approximately six to eight different ratios or measures and clearly define any formulae you use. Clearly state any additional information that you use from the Annual Report. You may draw on topics covered in the previous weeks to provide more meaningful insights. Obviously feel free to completely ignore accounting items we have not covered.
Astra Zeneca PLC is a British-Swedish biopharmaceutical company with operations in over 100 countries. It is one of the few companies to offer the entire value chain of a medicine from discovery and development to manufacturing and distribution. Its financial statements are published in accordance with IFRS and UK GAAP. During 2013, the company's performance and financial position deteriorated which can be partly explained by the economic conditions it faces at that time. The performance of AstraZeneca PLC in 2013 reflects the impact of the loss of exclusivity for several of its key brands. Some of the world's leading drugs have gone off patent and the availability of substitutes reduced the demand for AstraZeneca's products. Losses from products where they face competition from cheaper unbranded imitators offset the revenues from the ones for which sales grow. In the same time, the company feels the pressure from increasing R&D costs while the success of new medicine has not been growing at the same rate. In 2013 it also acquired several companies and increased its R&D expenses which all reflect on its bottom line and EPS. Moreover, a new CEO was appointed near the end of the year so the possibility of exaggeration of the worsened performance needs to be examined.
The gross profit margin calculated by the ratio of gross profit to sales has remained largely unchanged from 2012 (80.7%) to 2013 (79.5%). It shows that the company continues to retain a very high percentage of its earnings after the direct costs are incurred. The deterioration in profitability can be seen much more easily from the sharp decrease in both operating margin and net profit margin. The operating margin decreased from 27.3% in 2012 to 14.4% in 2013. This is largely due to the large increase in SGA costs caused by impairment charges for intangible assets. However, these numbers are based on mark-to-model fair value estimates - forecasting and discounting future free cash flows, which are inherently judgmental and are open to managerial manipulation and discretion. Moreover, given that the company is divided into just one cash generating unit, it might be even harder to estimate the value of those intangible assets and the size of the impairment as a result. Also, given the appointment of a new CEO in October, it is possible that there might have been attempts to exaggerate losses to make future profits larger and performance seemingly better. Also, unpredictable operating profit makes it harder for investors to value a stock because it is a main determinant in their analysis. Net profit margin decreased to 9.9% from 22.4% despite the decrease in the amount of tax expense of the company and this is where the deterioration in profitability can be seen clearly too. As far as other comprehensive income is concerned, it can be said that it is extremely volatile from 2011 to 2013 and can hardly contribute to the valuation of the company.
The current ratio (calculated as the ratio of current assets to current liabilities) has decreased slightly to 1.27 in 2013 from 1.35 a year earlier. Both figures are low and might raise concerns about the liquidity of the company. From the footnotes it is evident that the company is holding cash in order to meet its current liabilities so it might have to overlook some profitable investment opportunities. Since the inventory turnover period for 2013 is 137.7 days (calculated using the average inventory over 2012 and 2013), it is not clear how liquid the inventory of AstraZeneca Plc. is. Therefore, it might be appropriate to calculate quick ratio as well ((current assets-inventory)/current liabilities) in order to examine how well the company would be able to serve its short-term obligations. This ratio deteriorated a bit too between 2012 and 2013 from 1.22 to 1.15 - is still relatively low and raises concerns about short term liquidity. The leverage of the company has not changed significantly and is not a reason for worry. Also, the solvency of the company does not seem to be a problem at the moment. Its debt ratio (total liabilities over total assets) is 0.58 in 2013 and has deteriorated slightly from its 2012 value of 0.55. Therefore at the moment there is not a threat for the company in terms of sustaining its operations because of solvency issues and the going concern assumption is plausible. Also, the interest cover calculated as earnings before interest and tax divided by the finance expense is 7.5 times which can assure investors that the company is not likely to have problems servicing its debt.