Research and Analysis Project for B.sc (Hons) In Applied Accounting
Business and Financial Performance Of
GlaxoSmithKline Pakistan Ltd (2007- 2009)
Prepared by Faisal Saleem Mentoring by Fahim Ahmed
This project is prepared in accordance with Oxford Brookes University guidelines.
Table of Contents
Topic & Company selection------------------------------------------------------------------------------3 About GlaxoSmithKline------------------------------------------------------------------------------------4 Overview of the Pharmaceutical Industry-------------------------------------------------------------5 Research Aims and Objectives--------------------------------------------------------------------------7 Information Gathering--------------------------------------------------------------------------------------8 Techniques used in RAP--------------------------------------------------------------------------------10 Limitations in RAP and Ethical issues----------------------------------------------------------------11 Financial Analysis-----------------------------------------------------------------------------------------12 Revenue trend Analysis----------------------------------------------------------------------------------12 Profitability and Return Ratios--------------------------------------------------------------------------14 Liquidity Ratios---------------------------------------------------------------------------------------------18 Interest Cover Ratio---------------------------------------------------------------------------------------23 Dividend Cover Ratio-------------------------------------------------------------------------------------25 SWOT Analysis--------------------------------------------------------------------------------------------27 Conclusion--------------------------------------------------------------------------------------------------31 Future Prospects------------------------------------------------------------------------------------------33 Appendix----------------------------------------------------------------------------------------------------34 Skills & Learning Statement----------------------------------------------------------------------------39 Presentation------------------------------------------------------------------------------------------------45 Bibliography-------------------------------------------------------------------------------------------------55
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INTRODUCTION Topic selection I have selected to conduct my research on the topic „Business and Financial performance of an Organization over a three year period‟. The reason was when I was doing my O‟ levels and A‟ levels I studied ratio analysis and their interpretation as part of my accounting curriculum and developed special interest towards it. Various stakeholders analyze company‟s financial and business performance before investing their time or money on it. Many ACCA papers (F5, F7 and F9) focus on calculating ratios, analyzing them and finding trends. By performing financial and business analysis of a real organization, it will give me an opportunity to apply my theoretical knowledge and help me in my finance career.
Company selection The company I selected is GlaxoSmithKline Pakistan Ltd (GSKP). The reason for choosing Pharmaceutical industry is my family‟s professional affiliation with it. My father is a doctor, my uncle is a pharmacist and my cousin manages his healthcare company. This led to genetic curiosity to know about the pharmacy business. The other reason was my mother who is suffering from high blood pressure and depressive illness. I have seen my father treating my family, suffering from serious illnesses with dozen of medicines. I consider pharmaceutical companies as no less than saviors of million lives. This is what GSK has a vision for as “to have an opportunity to make a difference to lives of billions of people” and mission „‟to advance the quality of human life by enabling people to do more, feel better and live longer‟‟ (Ref: GSK Pakistan Annual Report 2009).
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About GlaxoSmithKline (Ref: Annual Report 2008/09 + www.gsk.com.pk) History of GlaxoSmithKline In 1989 SmithKline Beckman and Beecham merged to form SmithKline Beecham plc. In 1995 Burroughs Wellcome & Co and Glaxo formed Glaxo Wellcome. In 2001, the merger b/w Glaxo Wellcome and SmithKline Beecham created GlaxoSmithKline. GSK Pakistan Ltd was formed on January 1st 2002 through merger of SmithKline and French of Pakistan Limited, Beecham Pakistan (Private) Limited and Glaxo Wellcome (Pakistan) Limited. GSK plc, UK is its ultimate parent company. GSK Pakistan is listed on Karachi and Lahore stock exchanges. (Ref: http://www.kse.com.pk/phps/analysisrpt1.php?sec=GLAXO)
The World of GlaxoSmithKline GSK employs over 99000 people in 114 countries from which 14500 employees work within R&D. Its global headquarters are GSK House in Brent ford, London, UK. It manufactures over 4 billion packs per year in 28000 different presentations, which are supplied to over 160 markets. It makes more than 100 prescription medicines and vaccines and distributes more than 32 doses of vaccines every second. It is the only pharmaceutical company tackling the three WHO priority diseases: AIDS, tuberculosis and malaria.
Leading Products of GlaxoSmithKline
Medicines of GlaxoSmithKline ♦Augmentin ♦Amoxil ♦Panadol ♦Ventolin ♦Ampiclox ♦Betnovate ♦Calpol ♦Zantac ♦Septran.
Vaccines of GlaxoSmithKline ♦Engerix ♦Typherix ♦Infanrix ♦Mencevax ♦Fluarix ♦Havrix ♦Varilrix ♦Hiberix ♦Tritanrix ♦Priorix.
Health Care Products of GlaxoSmithKline ♦Horlicks ♦ENO ♦Aquafresh ♦Macleans ♦Sensodyne.
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Overview of the Pharmaceutical Industry in Pakistan The Pharmaceutical industry in Pakistan is a $1.61 Bn market compared to global market of $770-780 Bn, which grew by 3-4% in 2009. The value of pharmaceuticals sold in 2007 exceeded $1.4 Bn (growing at 12.9% p.a with exports growing at 23% p.a) and expected to exceed $2.3Bn by 2012. Since 1999 the government has invested Rs 8 Bn in Pharmaceutical industry to guarantee good quality drugs at competitive prices. It contributes over 0.16% towards GDP and employs about 162000 people directly and 1 Bn indirectly. Today, it is producing 75 percent generic drugs and 25 percent research based brands serving an estimated 90% of the market. In last 10 years, the industry has invested substantially to upgrade itself and today majority industry is following Good Manufacturing Practices. Currently it has the capacity to manufacture products ranging from simple pills to sophisticated Biotech, Oncology and Value Added Generic compounds. There are 47000 registered products which are being produced by 525 Pharmaceutical companies including 30 multinationals who have 53% of the market share. Many units are ISO certified adhering to US and UK Pharmacopeia. Major players in Pakistan in terms of market share are GlaxoSmithKline (11.6%), Sanofi-Aventis (4.1%), Getz Pharma (3.9%), Abbott Lab (3.8%), Roche (3.1%) and Merck (2.9%). The industry is regulated under Drug Act 1976. The Government has set up an independent Drug Registration and Pricing Authority with the Ministry of Industries deciding upon pricing and registration of drugs granted by the Central Licensing and Registration Board. The Government has recently formed a policy allowing companies to produce raw material locally to reduce dependence on international producers like China, Japan and UK from which almost 95% of basic raw material is imported.
(Ref: http://www.ppma.org.pk/PPMAIndustry.aspx). (Ref: http://www.pk.all-biz.info/news/index.php?newsid=391). (Ref: http://www.dcomoh.gov.pk/about/overview.php). (Ref: http://www.scribd.com/doc/29916204/Pharma-Industry-Pakistan). (Ref: http://www.shvoong.com/medicine-and-health/1810555-importance-pharmaceutical-industry/). (Ref: http://www.pharmabiz.com/article/detnews.asp?articleid=28358§ionid=5 ) (Ref: http://healthnwfp.gov.pk/downloads/draft%20health%20policy.pdf, pg14)
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Pharmaceutical Industry Growth:
18% 16% 14% 12% 10% 8%
15.50%
6% 4%
9%
11%
2% 0% 2007
2008
2009
Industry Growth rate
(Ref: GSK Pakistan Annual report 2007+2008+2009)
The Pharmaceutical industry growth rate shows a positive increasing trend. In 2009 Pakistan became sixth most populous country in the world. The fertility rate is highest (4.2 Mn births every year) and lowest contraceptive prevalence rate (30%) whereas life expectancy has increased to 65 years. The increasing population requires increasing medicinal facilities. Diseases like coronary artery diseases, diabetes and high blood pressure have increased. Deteriorating political conditions including terrorist attacks have caused severe injuries and stress increasing the usage of medicines. The number of hospitals has increased recently even in rural areas (550 rural health centers) with 920 public hospitals and 800 private requiring medicines.
(Ref: http://www.mopw.gov.pk/TotalFertility,ContraceptivePrevalence.html) (Ref: http://www.mopw.gov.pk/INFANTMORTALITYANDLIFEEXPECTANCY,2010.html) (Ref: http://healthnwfp.gov.pk/downloads/draft%20health%20policy.pdf, pg 8, 9, 10 & 11)
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Research Aims and Objectives
Perform analysis of financial statement of GSKP from 2007-2009. Perform Competitor analysis by comparing the performance of the GSKP with its competitor. Perform Business analysis by using SWOT.
This analysis will help reader understand how financial and business performance of GSKP differed from its competitor and its future prospects. Practically such analysis facilitates institutional and private shareholders in making investment decisions.
Framework for RAP My project aims to find out about the financial and business performance of GSKP Ltd from 1.1.2007-31.12.2009. Financial statements are difficult to analyze and interpret without the use of ratios. I used profitability, liquidity, gearing and investment ratios. By defining the ratios, the reader will be able to comprehend their meaning and understand their usefulness. I have chosen Abbott Laboratories Pakistan as GSKP‟s competitor. I have verified the ratios and where applicable used my own assumptions in calculating them for comparability purposes. In my ratio analysis I have included reasons for particular ratios figures and trends of GSKP when compared to Abbott and mentioned the effects of both the average and closing figures in the ratios where applicable e.g. debtor and creditor turnover. I explained the ratios in ascending yearly format. The business performance is analyzed using SWOT model which involves analyzing strengths, weaknesses, opportunities and threats for the company. Then I provided conclusions of my analysis along with future prospects. I facilitated the analysis by financial charts and spreadsheets.
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INFORMATION GATHERING Sources of Information Information gathering is an arduous task. Extensive work is required to ensure information presented is appropriate, relevant, reliable and objective. The following sources were used for information gathering:
Internet: One of the most accessible methods of collecting information is internet, i.e. websites and search engines like Yahoo, Msn and particularly Google, was immensely helpful in finding websites that had information regarding my research. I started my research by visiting the company‟s website (www.gsk.com.pk). A company‟s website provides the user with relevant information about the company. GSKP‟s website, besides providing technical information, gave an overview on its history, products and future prospects. Other websites including regulatory websites mentioned in the references were helpful in substantiating the analysis. The Karachi stock exchange website (www.kse.com.pk) was used to find out about listed Pakistani pharmaceutical companies although financial statements of GSKP weren‟t published on it.
Annual Reports: An annual report, besides showing past financial performance and position of a company, is a communication to its stakeholders on the company‟s core values, vision, mission, objectives, activities, products, corporate social responsibilities, code of corporate governance, human resource development and awards and achievements. These are important to understand before analyzing company‟s financial and business performance. The annual reports of GSKP included audited financial statements, financial reports and financial ratios which were the subjects of my research. Notes to financial statements were used to understand figures in the financial statements and to make proper comparisons. Chairman‟s and Chief executive‟s review were also used highlighting the economic, market and regulatory environment.
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BPP, Kaplan and Economics Study text: ACCA approved texts like BPP and Kaplan, which I used in studying papers like F7 (Financial reporting), F9 (Financial management) and P3 (Business analysis), provided details on this topic regarding ratio analysis. They helped me revise certain concepts and made me perform this analysis effectively. I also used my A‟ levels Economics book in SWOT analysis as referenced. (Ref: Colin Bamford, Keith Brunskill, Gordon Chain, Sue Grant, Stephen Munday, Stephen Walton, (First Published 2002 Third Printing 2003), Economics, the Press Syndicate of the University of Cambridge.)
News: Pakistani pharmaceutical companies rarely make news headlines and the information I have obtained from (www.dailynews.com) and (www.brandsyanrio.com) for SWOT analysis has been referenced.
Draft National Health Policy Report 2009 (Ministry of Health, Pakistan): The national health policy draft report 2009, regarding the Pharmaceutical industry, contains growth of the sector in terms of revenue, health laws, pricing issues, history, alternate herbal & homeopathic treatments, competition and unethical practices, drug procurement issues and non-affordability and non-availability of essential medicines to the public and other health issues prevalent in the country. This gave me an important insight on the Pharmaceutical industry in Pakistan. (Ref: http://healthnwfp.gov.pk/downloads/draft%20health%20policy.pdf)
Graphical representation and Spreadsheets: Financial charts were used to facilitate the financial analysis by using Microsoft Word and Excel 2007. In addition I have used spreadsheets where I have made statement of comprehensive income and statement of financial position extracts and calculated ratios. I have given evidence of using the spread sheets in the appendix.
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Techniques used in RAP Financial Information Ratios are used to assess financial performance of a company. I have calculated the following ratios:
Profitability and Return ratios: a) b) c) d)
Sales growth Gross profit margin Net profit margin Return on equity
Liquidity ratios: a) b) c) d)
Current ratio Acid test ratio Accounts receivable collection period Accounts payable payment period
Gearing ratios:
a) Interest cover
Investor ratios:
a) Dividend cover b) Earnings per share
Non-Financial Information SWOT Analysis: For my business analysis, I have used SWOT model. This model links strengths of a business with the opportunities available to a company. Once categorized as an opportunity or threat the influences needs to be prioritized then the organization has to decide how to best grab the opportunities and defend against most serious threats. By working on internal components like strengths and weaknesses, a company could some way control external factors like opportunities and threats to its advantage. (Ref: Text book Kaplan P3 Chapter 2: The environment and competitive forces).
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Limitations in RAP and Ethical Issues Limitations in collecting information I have collected and used information from secondary sources like websites, annual reports and ACCA course books. It is important to mention that information regarding Pakistani Pharmaceutical companies is very difficult to obtain as they don‟t enjoy extensive media coverage therefore information regarding GSKP wasn‟t widely available on print/electronic media. There are inherent limitations due to which some websites are not updated. There weren‟t Pharmaceutical industry average ratios for comparison with GSKP. I didn‟t have access to any inside information as such information is strictly confidential and not disclosed for strategic purposes.
Limitations in using ratios Ratios are measurement of past performance of a company and merely indicators to its future performance. Problems in comparing ratios between similar businesses involve companies following different accounting policies and practices and calculating ratios on the basis of different definition. They operate under different business environment and are exposed to different risks. Inter-firm comparison and non-financial factors are important before final verdict about performance of a company can be given. Some of the same ratios are calculated by GSKP and Abbott using different formula e.g. interest cover and debtor turnover. In my analysis these ratios have been calculated based on same financial particulars for comparisons purposes. A particular ratio figure might not be suitable for every business e.g. 4:1 current ratio is considered high for FMCGs business but not for manufacturing business like pharmaceutical companies. (Ref: Text book P3 Kaplan Chapter 13: The role of finance in formulating and implementing business strategy).
Ethical issues During my information gathering I remained unbiased and objective. I reported facts and information objectively without any manipulation to them. I have, to the best of my knowledge, made references of the sources from where I have gathered information. References were made to acknowledge other‟s work. Information that hadn‟t been gathered from annual reports and official website has been properly referenced. I have, to the best of my ability, gathered information and performed financial analysis independently and objectively without favoring the organization.
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FINANCIAL ANALYSIS Profitability and Return Ratios:
Sales Revenue:
Sales Revenue Trend 16000
14719 13403
Rupees in Million
14000 12000
10088
10611
10000 8000 6000
8450 5914
6584
GSK Pakistan Abbott
7123
4000 2000 0 2006
2007
2008
2009
The sales of GSKP and Abbott show an upward trend for last four years. Sales growth has been mainly due to sales volume because of non-adjustments to selling price by the government. GSKP‟s sales growth has been due to strong performances from Antibiotics, Cardiovascular, Respiratory, Dermatology and Gastrointestinal medicines.
(Ref: GSK Pakistan Annual report 2009)
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Sales Growth Percentage:
Sales growth(%) 30.00%
26.30%
25.00% 20.00% 15.00%
18.60% GSK Pakistan
11.30%
Abbott
10.00% 5.00%
5.20%
8.20%
9.80%
0.00% 2007
2008
2009
In 2007 sales growth was the lowest mainly due to import restrictions placed on raw materials of few key products. Exports made to Sri Lanka and Afghanistan grew by 19.4% to Rs 256 Mn. The animal healthcare portfolio showed positive trend and achieved sales of Rs 99 Mn. However consumer healthcare business decreased by 24.5%. The reason for high sales growth in 2008 was due to GSKP‟s ability to obtain large competitive tenders in polio vaccines business. Products launched along with product promotion in 2007 increased sales. Few improvements to the products in the year also contributed towards growth. The raw material shortages problems were also resolved. The exports to Afghanistan, Sri Lanka and Syria grew by 13% to Rs 289.6 Mn. The consumer health care business showed 66.3% increase to Rs 233 Mn largely because of sales and distribution restructuring taken last year. The animal health care portfolio grew by 11.1% to Rs 110 Mn. In 2009 sales growth was 9.8% but underlying sales grew by 14.9% excluding the government contracts. The consumer health business grew by 28.2% with Eno and Iodex being the main growth drivers. The exports showed a positive trend achieving sales growth to Rs 390.4 Mn.
(Ref: GSK Pakistan Annual report 2007+2008+2009) (Ref: Abbott Pakistan Annual report 2008+2009)
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Gross Profit Margin (GPM): GPM is a financial metric used to assess a firm's financial health by revealing the proportion of money left over from revenues after accounting for cost of goods sold. The ratio expresses Gross profit as a percentage of Sales. (Ref: http://www.investopedia.com/terms/g/gross_profit_margin.asp)
Gross Profit Margin(%) 50.00%
41.90%
41%
38.30%
37.20%
40.00% 30.00%
29.90%
29.10% GSK Pakistan
28.80%
20.00%
24.10%
Abbott
10.00% 0.00% 2006
2007
2008
2009
The GPM ratios of GSKP and Abbott show a declining trend. GSKP‟s GPM ratio remained lower compared to Abbott despite GSKP sales in three years remained higher. This was due to better control over cost of production by Abbott. GSKP‟s GPM ratio declined from 38.3% to 37.2% in 2007 because sales increased by 5% whereas cost of production increased by 7%. This can be attributed to high inflation and increased raw and packaging material prices which the company was unable to transfer to the consumer due to price restrictions placed by the government. In 2008 GSKP‟s and Abbott‟s GPM ratios declined from 37.2% to 28.8% and 41% to 29.9% respectively. Sales increased by 23% while cost of production increased almost twice the sales resulting in a decreased GPM. The increase in international commodity prices, local inputs prices, fuel and power costs, weakening of PKR against USD bringing cost imported inflation, rising interest rates and large capital expenditure in 2007 on manufacturing facility had its effect in 2008 with largest increase in depreciation and increase in provision for obsolete stock contributed to increase in cost of production. Price increases were granted on loss making products but didn‟t have significant impact to improve the situation. In 2009 GPM declined from 28.8% to 24.1%. The reason was increase in cost of goods sold, due to adverse macroeconomic factors, which more than offset the increase in sales revenue with no price adjustments. It was also because of increasing competition in the Pharmaceutical business with over 500 companies working in a highly genericized market. (Ref: GSK Pakistan Annual report 2007+2008+2009) (Ref: Abbott Pakistan Annual report 2008+2009) (Ref: http://www.pide.org.pk/pdf/highlights/inflation.pdf, pg 5, 6, 8, 10, 12, 14)
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Net Profit Margin (NPM): Net Profit Margin is calculated by deducting all expenses from gross profit. It indicates company‟s cost control effectiveness. Higher the N.P margin, more effective the company is at converting revenue into actual profit. The ratio expresses Net profit as a percentage of Sales. (Ref: http://www.investorwords.com/3260/net_profit_margin.html)
Net Profit Margin (%) 20.00% 15.00%
16.90%
18% 14.60%
16.50%
15.70% 9.80%
10.00%
GSK Pakistan Abbott
5.00% 4.80%
6.30%
0.00% 2006
2007
2008
2009
In 2007 GSKP‟s NPM ratio declined from 16.5% to 15.7% whereas Abbott‟s NPM ratio increased from 16.9% to 18%. Despite Abbott achieving good sales growth in 2007 it was able to contain its operating expenses and therefore an increased NPM. The decline in GSKP‟S NPM was due to increase in selling, marketing, distribution and administration expenses by 15% and 11% respectively whereas the GPM only increased by 2.2%. Other operating income increased by 29% to Rs 639 Mn mainly from pension funds receivable which some how mitigated the effect of rising operating expenses.
In 2008 GSKP‟s NPM ratio declined from 15.7% to 14.6% whereas Abbott‟s NPM sharply declined from 18% to 4.8%. GSK‟s GPM decreased from the previous year which affected the NPM as well. Selling, marketing, distribution expenses and administration expenses increased by 9.8% and 6.9% respectively the lowest in the three years due to which operating profit increased by 15%. GSKP exercised tighter control over their operating expenses despite highest sales growth. Other operating income increased by 100% to Rs 1279 Mn mainly contribution by sale of a land. Finance charges increased by high 542% largely consisting of exchange losses affecting PAT.
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In 2009 GSKP‟s NPM ratio sharply fell from 14.6% to 6.3%. Abbott NPM increased from 4.8% to 9.8%. Selling, marketing and distribution expenses showed highest increase of 26% due to increased investment in core and new brands and increased freight cost (rising oil prices). Administrative expenses rose by 13% due to rising inflation which increased the labor, travelling and accommodation costs as indicated in the below regulatory reference. Increased employee development training expenses and legal costs also contributed to high operating expenditure. Other operating income decreased by 66% with income from financial assets decreasing by 8.9% due to dividend payment. Excluding the effect of sale of a land profit would have decreased by 16% instead 52.2%.
(Ref: GSK Pakistan Annual report 2007+2008+2009) (Ref: Abbott Pakistan Annual report 2008+2009) (http://www.pide.org.pk/pdf/highlights/inflation.pdf, pg 10, 14)
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Return on Equity (ROE): ROE ratio expresses Profit after tax (PAT) as a percentage of Shareholder‟s Equity. It tells how efficiently a business uses its resources. (Ref: Text Book F7 Kaplan 2009/2010 Chapter 19 Interpretation of Financial Statements)
Return on equity (%) 35.00% 30.00% 25.00% 20.00%
32.10% 23.60% 22.10%
15.00%
23.40%
25.50% GSK Pakistan
20.60%
10.00%
9.60%
11.50%
Abbott
5.00% 0.00% 2006
2007
2008
2009
GSKP‟s ROE stands higher in 2008 and Abbott‟s ROE stands higher in 2007 and 2009. GSKP‟s ROE decreased from 22.1% to 20.6% in 2007 because PAT increased by only 0.4% whereas Equity increased by 7.7%. Non-current assets showed highest increase (38%) including operating assets (54%) increasing equity whereas low sales growth with high cost of production and high operating expenses decreased PAT. A decrease in ROE is not necessarily bad as it might reflect investments made by the company which give returns later. In 2008 GSKP‟s ROE increased from 20.6% to 23.4% whereas Abbott‟s ROE declined sharply from 32.4% to 9.6%. Abbott‟s NPM ratio declined sharply in the same year. PAT increased by 17% and equity increased by only 2.9% leading to increase in ROE. Despite high % increase in cost of production and finance charges this was offset to extent by high sales growth, lowest increase in operating expenses, decrease in other operating expenses and increase in other operating income by almost 100% increasing ROE to 23.4%. In 2009 GSKP‟s ROE fell lowest to 11.5% because its PAT significantly decreased by 52.2% whereas equity decreased by just 3% whereas Abbott showed a sharp increase from 9.6% to 25% which is indicative of rising N.P margin in 2009. Selling and distribution and Administrative expenses increased the highest and other operating income decreased by 67% resulting in a decrease in operating profit by 49%. (Ref: GSK Pakistan Annual report 2007+2008+2009) (Ref: Abbott Pakistan Annual report 2008+2009)
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Liquidity Ratios: Current Ratio: It measures the adequacy of current assets to meet short term liabilities. It reflects whether a company is in a position to meet its liabilities as they fall due. (Ref: Text Book F7 Kaplan 2009/2010 Chapter 19 Interpretation of Financial Statements)
4.76 5 4
Current Ratio (Times) 4.3
4.1
4.4
3
3.2
3.55
GSK Pakistan 2.5
2
2.03
Abbott
1 0 2006
2007
2008
2009
The current ratio of GSKP declined from 2006 onwards but remained higher when compared to Abbott. In 2007 current liabilities increased by 3.5% because of the royalty and technical fees which increased by 60%. This can be expected due to the nature of the industry. Creditors and Bills payable by related parties decreased by 27% and 44% respectively. Current assets decreased by 0.1% including the stores and the spares that increased by 65%. Trade debts showed 40% increase and receivables due from related parties increased by a large 665% because of large amount due from staff provident fund. Investments in Bonds also contributed to high current ratio figure. Cash position declined by 8.9% mainly due to dividends payments and capital expenditure.
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In 2008 current assets increased by 6% whereas current liabilities increased by 10% offsetting the increase in current assets. Both stock-in-trade and trade debts have high figures constituting a ratio of 4.1:1. Trade debts increased by 770% majorly contributed by other trade debtors. The reason was large orders received in polio vaccines business. This sharp increase can be traced to highest sales growth. This large increase needs to be taken into account by management. Other receivables including related parties decreased by 60% because of payment from staff provident fund. Creditors increased by 16% whereas bills payable from associated companies increased by 90%. Cash position decreased by 36% mainly due to investments and capital expenditure on facility improvement, up gradation of plant and machinery and purchase of vehicles.
In 2009 current assets increased by just 2.5% and current liabilities increased by 30% resulting in current ratio of 3.2:1. Trade debts minimally declined by 2% indicating slow cash conversion and weak credit control. Debts will be paid over a period of time and for prompt payments GSKP might allow increased discounts. GSKP needs to reconsider their credit policy so debtors pay promptly but this may jeopardize good relationships. Bills payable by associated companies decreased by 87% constituted their payments. Cash position declined again by 36% due to dividend payments and decline in profitability. The declining cash position should be taken into account by management.
(Ref: GSK Pakistan Annual report 2007+2008+2009) (Ref: Abbott Pakistan Annual report 2008+2009)
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Quick Ratio: It is also known as the acid test ratio because by eliminating inventory from current assets it provides the acid test of whether a company has sufficient liquid resources to settles its current liabilities. (Ref: Text Book F7 Kaplan 2009/2010 Chapter 19 Interpretation of Financial Statements)
Quick/Acid test ratio (times) 3.5 3 2.5
3.1
3
3.01
2.3
2 1.6
1.95
1.5 1
1.24
GSK Pakistan Abbott
0.94
0.5 0 2006
2007
2008
2009
The quick ratio for GSKP declined from 2006 onwards but remained higher than Abbott. In 2007 stock represents 30% of the total current assets and after accounting for its deduction the remaining 70% of the quick assets can meet the short term liabilities. Trade debts, loans and advances and other receivables form 8% of the total current assets and don‟t pose significant threats to GSKP to meet its current liabilities in case funds from them don‟t materialize. However cash represents 57% of the total current asset which is a significant amount and therefore it seems GSKP is meeting current liabilities through this source. GSKP might keep healthy cash figure to meet unexpected liabilities or other sources don‟t materialize cash. In 2008 quick assets decreased by 15% where current liabilities increased by 10% resulting in a decreased ratio figure. Stock represents 44% of the total current assets and increased by 53% due to increasing raw and packing material prices by 77%. Trade debts, loans and advances and other receivables formed twice (16%) of the total current assets this year. Cash decreased by 36% and represented 34% of the total current assets and resulted in a decline in the ratio from 3:1 to 2.3:1. In 2009 quick assets decreased by 8% whereas current liabilities increased by 30% due to which the ratio declined sharply from 2.3:1 to 1.6:1. The ratios have been declining constantly because of increasing stock value and decreasing cash position, which represents only 21% of total current asset. Stock represents 50% of total current assets and remainder to meet current liabilities, which have been increasing which means lower current assets to cover them. (Ref: GSK Pakistan Annual report 2007+2008+2009) (Ref: Abbott Pakistan Annual report 2008+2009)
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Debtor Turnover: It is a rough measure of the average length of time it takes for a company‟s account receivable to pay what they owe. (Ref: Text book F9 BPP, Second edition 2008, Chapter 4 Working Capital)
Debtor turnover (days) 30 25
25
20 15
10.99
10 5
GSK Pakistan
15.4 9.36 8.79
2.7
3.5
Abbott
7.73
0 2006
2007
2008
2009
The debtor turnover days show an increasing trend for GSKP and for Abbott it increased from 2008. In 2007 the debtor days increased by 30% with trade debts increasing by 40% from previous year. In 2008 the debtor days increased significantly by 340% to 15.4 days. This can be traced back to current ratio above where trade debts increased very significantly by 770% and average trade debts increased by 463% whereas sales also increased the highest by 23%. If the closing trade debt figure would have been taken it would have shown even higher figure than 15.4 and average figures have been taken to smoothen the effect of large increases. In 2009 the debtor turnover figure showed an increase of 62% to 25 days. The trade debts decreased by small 2% and sales increased by 9% the ratio should have shown a decline if taken closing trade debt figure. The ratio has shown an increase because the average trade debts increased by 78% whereas sales by just 9%. The company significantly increased its trade debts in 2008 which had effects in 2009. Increasing days is a bad sign suggesting lack of proper credit control which may lead to irrecoverable debts. However this might be a deliberate policy by GSKP to attract more trade like major polio vaccine business by offering good credit terms. (Ref: Text Book F7 Kaplan 2009/2010 Chapter 19 Interpretation of Financial Statements) (Ref: GSK Pakistan Annual report 2007+2008+2009) (Ref: Abbott Pakistan Annual report 2008+2009)
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Creditor‟s turnover: It represents the credit period taken by the company from its suppliers. (Ref: Text Book F7 Kaplan 2009/2010 Chapter 19 Interpretation of Financial Statements) Abbott‟s ratio is based on formula in the appendix. The 2007 annual report wasn‟t available so 2007 figure wasn‟t calculated.
Creditor turnover (days) 30
25
25
25
27 21
20 15
22 GSK Pakistan
17
Abbott
10 5 0 2006
2007
2008
2009
GSKP maintains on average 25 or above days to pay creditors except in 2008 where the figure was 17 days. In 2007 the overall decrease in total trade creditors was by 35% due to the fact that company‟s had significant cash & bank balances to pay the debts. In 2008 the reason for decrease in creditor days was because average total trade creditors increased by 1% whereas cost of production increased by 43%. The ratio would have shown an increase if closing trade creditors would have been taken than the average figure as total creditors increase (52%) is more than increase in cost of production. GSKP is taking more days to pay debts than the average figure above suggests. If average figure is considered it means GSKP is paying its creditors quicker when in the same year debtor days have considerably increased. This represents in-disciplined working capital management policy. In 2009 the creditor figure showed a dramatic increase of 102% majorly due to introduction of associated creditors of Rs 879 Mn which more than offset bills payable by associated companies which decreased by 87%. On average total creditors figure increased by 82% whereas cost of goods sold only increased by 17% leading to increase in ratio figure. Increasing creditors may provide free finance but might jeopardize good credit terms. (Ref: GSK Pakistan Annual report 2007+2008+2009) (Ref: Abbott Pakistan Annual report 2008+2009) (Ref: Text Book F7 Kaplan 2009/2010 Chapter 19 Interpretation of Financial Statements)
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Interest Cover (I.C): It indicates the ability of the company to pay interest out of profits generated. (Ref: Text Book F7 Kaplan 2009/2010 Chapter 19 Interpretation of Financial Statements)
Interest cover (Times) 600 500
546 463
394
400
318 GSK Paksitan
300 200
244
280
Abbott
202 143
100 0 2006
2007
2008
2009
When companies issue loans they have to pay interest regardless of the profit. If the ratio is not a healthy one it deters lender to lend funds or lend it on high interest rates. (Text Book F9 Kaplan 2008/09 Chapter 16 Capital Structure and Financial Ratios)
An I.C ratio of less than 1 indicates that company is not generating enough cash to cover its payment and 1.5 is considered bare minimum. The ratios are seen to be high and may reflect the nature of the industry and indicate that finance charges are sufficiently covered by profits. (Ref: http://www.investopedia.com/articles/basics/04/040804.asp)
Abbott financial charges figure doesn‟t include exchange losses so they haven‟t been included in GSK‟s financial charges figure and included in operating expenses. The I.C ratio increased in 2007 to 546 times due to increase in operating profit by 1% and decrease in financial charges by 12%. Bank charges increased by a small 0.71% from the previous year but contributed about 73% to the total finance cost.
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In 2008 GSKP‟s I.C ratio increased while there was a severe decline in Abbott I.C ratio. GSKP‟s operating profit showed an increase of 13% from the previous year. The exchange loss of Rs 6.74 Mn was included in other operating expenses and financial charges instead of increasing decreased by small 0.6%. An increase in the I.C ratio is a good sign for shareholders as high financial charges may deter dividends being paid. Bank charges had increased by 4% from the previous year because of rise in interest rates in the country.
In 2009 operating profit decreased by 49% due to increased operating expenditure but finance cost increased by 16% from 2008 resulting in a decrease in I.C ratio. Bank charges increased by 26% from the previous year due to continuation of high interest rate policy (tight monetary policy) by State Bank of Pakistan to curb inflation.
(Ref: GSK Pakistan Annual report 2007+2008+2009) (Ref: Abbott Pakistan Annual report 2008+2009) Ref: http://www.pide.org.pk/pdf/highlights/inflation.pdf, pg 10, 12)
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Dividend Cover: It expresses the relationship between available profits and the dividends payable out of profits. The higher the ratio the more likely it is that the current dividend level can be sustained in the future. (Ref: Text Book F7 Kaplan 2009/2010 Chapter 19 Interpretation of Financial Statements)
Dividend Cover (Times) 4 3.5 3 2.5 2 1.5 1 0.5 0
3.4
GSK Pakistan 1.2
2006
1
1.2
0.67
0.7
2007
2008
1.1 0.7
Abbott
2009
Ordinary Shareholders are interested in capital growth and dividends. They want to know number of times a company can pay dividends after paying interest and tax as it help them decide further investments. From 2007-2009 GSKP‟s dividend cover remained higher and it has been able to maintain it more or less for four years. Only in 2006 was dividend cover for Abbott almost 3 times higher than GSKP. In 2007 there was a decrease in the ratio from 1.2 to 1 because PAT increased by a small 0.4% whereas dividend increased by 19%. In 2008 the ratio increased due to increase in PAT by 17% with no change in dividend and in 2009 with no change in dividend the ratio decreased due to decrease in PAT by 52%. In 2009 N.P margin declined severely but GSKP paid dividends because shareholders expect consistent dividend policy from the company. If a company cut dividends it sends signals in the stock market that its future prospects are weak and shareholders start selling their shares which puts a downward effect on the total market value of the company. This is signaling effect.
(Ref: Text book BPP F9, Second edition 2008, Chapter 13: Dividend policy) (Ref: GSK Pakistan Annual report 2007+2008+2009) (Ref: Abbott Pakistan Annual report 2008+2009)
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Earnings per Share (EPS): It is the portion of a company's profit allocated to each outstanding share of common stock. (Ref: http://www.investopedia.com/terms/e/eps.asp)
EPS (in Rs) 14 12
12.1
10.2
11.5
10 8
9.76
8.43
9.79
GSK Pakistan
6
5.5
4
Abbott
3.51
2 0 2006
2007
2008
2009
In 2006/07 GSKP maintained its EPS around Rs 9.7 but Abbott‟s EPS was higher in both years. In 2007 GSKP„s EPS slightly increased from 2006 because of a minor increase in PAT by 0.4% and swift increase in 2008 to Rs 11.5 as PAT increased by 17%. Whereas in 2009 PAT decreased by 52% reduced the EPS to Rs 5.5. The ordinary shares outstanding at the year end remained same for three years. The reasons for increase and decrease in PAT have been given in NPM ratio. (Ref: GSK Pakistan Annual report 2007+2008+2009) (Ref: Abbott Annual report 2008+2009)
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SWOT Analysis: Strengths: Market leader and Diversified: GSKP leads the industry in value, volume and prescription. Its 3 of the brands are in top10 product list by value, 7 by volume and 4 by prescription. It is also diversified into consumer health care products which have equally contributed towards the company‟s growth.
R&D facility: The highly established R&D centre ensures that it doesn‟t only provide new pharmaceutical and health care products but sustain its flow in the future. It has over 150 projects in clinical development-one of the largest pipelines in the industry. It has played a leading role by providing expertise, sharing practices and delivered training systems to other countries.
CSR Initiatives: The CSR initiatives taken for various health, women, education, social development and relief programs at grass root levels reflect GSKP‟s attitudes towards contributing to the environment and investing in society at large. This has built reputation and credibility of the company over the years among various stakeholders. (Ref: http://www.brandsynario.com/local-news/81_gsk-pakistan-s-services-acknowledged.aspx)
Motivated and Diversified workforce: GSKP employees‟ hard work, dedication and culture of respect and integrity and constant struggle for continuous improvement have made it a success story. The diversified work force brings different experience to the work place.
Well developed Infrastructure: GSKP has a Ministry of health approved Penicillin facility. It follows policy of Zero Waste, Zero Accidents and Zero Injuries by adhering to national environment quality standards and invested substantially in safety equipments for its employees‟ safety. GSK‟s Global Manufacturing and Supply capabilities in Pakistan comprises of the best quality processes and procedures associated with the production and supply of full-scale commercial manufacturing. (Ref: GSK Pakistan Annual report 2007+2008+2009)
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Weaknesses:
Increasing cost of production: GSKP didn‟t exercise tighter controls over its cost of production when compared to Abbott. From 2007-2009 COGS has increased by a greater % than sales increase. COGS represent a significant % of the total sales. This is unsustainable and calls for attention of the management of the company.
(Ref: GSK Pakistan Annual report 2007+2008+2009)
Lack of aggressive marketing in Consumer health care brands: The consumer health care products aren‟t aggressively marketed in the Pakistani market as international brands like Colgate and Close-up which are more popular among the youth and middle age.
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Opportunities: Increasing overall and urban population: Pakistan is facing a situation of increasing population. Urban population is growing with people migrating from villages to cities and emigrating from neighboring countries. Increasing healthcare facilities are required for them. Increasing vehicles required for increasing population has created noise and air pollution and increased respiratory and lung diseases. (Ref: http://www.dailytimes.com.pk/default.asp?page=2007\06\28\story_28-6-2007_pg7_9) (Ref: http://healthnwfp.gov.pk/downloads/draft%20health%20policy.pdf, pg 11)
Price inelastic demand for GSKP‟s products: Medicines are necessity. They don‟t have substitutes but there are substitutes for GSKP medicines with other company‟s medicines. Besides substitutability price elasticity depends on brand image, addictive properties, quality and accessibility of information regarding the product. Depending on creating attributes of GSKP‟s medicines this economic theory suggest that they might have inelastic demand and an opportunity to increase revenues by increasing their prices, if government allows in future, without decreasing the quantity demanded (sales volume) by more than proportional change. (Ref: Colin Bamford, Keith Brunskill, Gordon Chain, Sue Grant, Stephen Munday, Stephen Walton, (First Published 2002 Third Printing 2003), Economics, Chapter 2 The price system, the Press Syndicate of the University of Cambridge.)
Acquisition of Bristol Myers Squibb (Pvt) Ltd: The merger plan (March 2010) between GSKP and BMSP will increase product portfolio in antibiotics, vitamins and dermatology which are complementary to GSKP‟s current product portfolio and will provide opportunities in cardiovascular and oncology. Its sales revenue in 2007 of Rs 1.5 Bn and trade marks of over $36.5 Mn will add tremendously to company‟s strength. (Ref: http://www.gsk.com/media/pressreleases/2008/2008_pressrelease_10146.htm) (Ref: GSK Pakistan Annual report 2009)
Brand recognition: People have become brand conscious now which presents an opportunity for GSKP to increase customer loyalties and improve customer relationships in regards with healthcare products. It should also increase awareness about its medicines and their efficacy and effectiveness in rural areas as well because print and electronic media has expanded widely in Pakistan.
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Threats: Increasing Competition/Switching costs: The Pharmaceutical industry is divided equally among multinationals and local companies. The market is becoming highly genericized and people choosing the low priced generic medicines with no switching costs. The threat is also from well established international brands for consumer health care products.
Ref: http://www.pk.all-biz.info/news/index.php?newsid=391 Ref: http://www.shvoong.com/medicine-and-health/1810555-importance-pharmaceutical-industry/)
Adverse Macroeconomic Environment/ Highly regulated environment:: The adverse macroeconomic factors increased the cost of production along with strict regulatory requirements (no price adjustments) is unsustainable and poses significant threats to the company‟s ability to earn favorable margins and a threat to the going concern assumption of the business as a whole.
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Conclusion: As I have performed financial and business analysis (2007-2009) this brings me to the part where I draw conclusions about performance of the company. GSKP showed increasing sales trend but faced increasing cost of production because of adverse macroeconomic factors. The resulting decreasing G.P margin can be justified as there were no adjustments allowed in selling prices by the Government. The company was unable to effectively offset this by increased sales volume, simplification and rationalization in manufacturing and commercial operations. Therefore any increase in selling prices in future will have a favorable impact on G.P margins. The N.P margin showed declining trend due to operating expenses that increased by a greater % than the increase in G.P margin. ROE was good in 2007/08 which in 2009 declined majorly due to large increase in operating expenses in addition with investments by the company on new products. The liquidity position pointed towards substantial cash and bank balance in 2007. They were used to make necessary investments in business and pay dividends. They declined by 36% consecutively in 2008/09 being a reason for declining current and quick ratio. The stock figure contributed on average 40% of the total current asset and continuously increased. Both these issues should be considered by GSKP‟s management. Trade debts increased sharply in 2008 with minimal decline in 2009 and might become irrecoverable if not paid promptly. Average figures suggest working capital management seems in-disciplined in 2008 with increasing debtor and decreasing creditor days but without average figures creditor days increased with increasing debtor days. The I.C ratio is high for both companies and suggests that financial charges are easily covered by PBIT of the companies though it declined sharply in 2009 for GSKP due to high operating expenses. GSKP is able to pay dividend at least once as it has maintained good history of dividend payments. Despite N.P margin severely declined in 2009 it paid dividends due to signaling effect. The EPS increased in 2008 and declined in 2009 reflecting changes in PAT as there were no changes in ordinary shares. The declining margins and returns with increasing debtor days needs to be seen in relation to macroeconomic and regulatory environment along with strengths and opportunities available to the company to overcome threats and weaknesses in future.
(Ref: http://www.pide.org.pk/pdf/highlights/inflation.pdf)
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In few years large number of competitors has emerged in the market but GSKP continues to be the leader because it belongs to a large professional group GSK plc, UK. GSKP‟s aim is to deliver products of value and sustain it for years to come. Brands in pharmaceutical and consumer health have contributed towards growth and further research and advertisement will help counter the threats from its competitors. It believes simplifying the operating model will improve information flow, increase work productivity and bring cost efficiency which is important due to the price restrictions. Quality is equally important because of the sensitive nature of the product it deals with as reflected in the statement by its CEO. It is an equal opportunity employer investing on its employees and providing opportunities to grow in their field of expertise which ultimately will improve performance standards and achieve excellence. GSKP‟s CSR initiatives are commendable and praiseworthy. It has received many awards for it and truly fulfills its role as a good corporate citizen.
(Ref: GSK Pakistan Annual report 2007+2008+2009)
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Future Prospects: GSKP is in stages of developing products aimed at improving the quality of human life. Pakistan is a developing country where the health sector requires extensive contribution. GSKP can play its role in its development. It is maintaining growth of mature brands and equally spending on new products so they are launched once the mature brands reach their decline stage. A number of new products in the area of Oncology, Respiratory and Antibacterial are under registration and launch. GSKP‟s acquisition of BMSP will broaden its current product portfolio along with BMSP strong financials will help it achieve something remarkable and ground breaking in future. Presently Pakistan is hit with ravaging floods. Various life taking diseases are affecting people severely. GSKP is providing food, medicines and vaccines and doing utmost it can to help the victims of the flood.
(Ref: http://www.gsk.com/community/humanitarian-relief-pakistan.htm) (Ref: GSK Pakistan Annual report 2007+2008+2009)
End of Report
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Appendix GlaxoSmithKline SOCI Extract Rs (000) Sales Cost of sales Gross Profit Selling, marketing & distribution expenses Administrative expenses Other operating expenses Other operating income Operating profit Financial charges Profit before taxation Taxation Profit after taxation
2007 10,610,882 -6,658,753 3,952,129 -1,210,818 -486,721 -223,912 639,415 2,670,093 -11550 2,658,543 -988,018 1,670,525
2008 13,403,224 -9,547,619 3,855,605 -1,328,925 -520,216 -208,355 1,279,790 3,077,899 -76,859 3,001,040 -1,045,853 1,955,187
2009 14,719,132 -11,173,470 3,545,662 -1,673,809 -588,814 -138,585 436,615 1,581,069 -14,348 1,566,721 -632,791 933,930
2008 7,123,412 -4,991,510 2,131,902 -1,369,133 -255,737 -65,051 105,545 547,526 -2,704 544,822 -200,842 343,980
2009 8,450,118 -5,987,872 2,462,246 -1,137,813 -165,455 -132,246 141,890 1,168,622 -2,525 1,166,097 -340,421 825,676
Abbott SOCI Extract Rs (000) Sales Cost of sales Gross Profit Selling, marketing & distribution expenses Administrative expenses Other operating expenses Other operating income Operating profit Financial charges Profit before taxation Taxation Profit after taxation
2007 6,584,454 -3,856,736 2,727,718 -850,376 -123,478 -179,859 173,394 1,747,399 -3,202 1,744,197 -559,435 1,184,762
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GlaxoSmithKline & Abbott SFP Extracts
Rs (000) Share Capital and Reserves Share Capital Reserves Total equity Non-Current Liabilities Staff retirement benefit - staff gratuity Deferred taxation Current Liabilities Trade and other payables Taxation
Non-Current Assets Fixed Assets - property, plant and equipment Long term loans to employees Long term deposits Investments - available for sale Current Assets Stores and spares Stock -in- trade Trade debts Loans and advances Trade deposits and prepayments Accrued return Refunds due from government Other receivables Taxation - payments less provision Investments - available for sale Cash and bank balances
GlaxoSmithKline SFP Extract 2007
2008
2009
1,706,718 6,410,923 8,117,641
1,706,718 6,648,173 8,354,891
1,706,718 6,397,381 8,104,099
23,192 262,458 285,650
20,802 312,270 333,072
58,894 320,435 379,329
1,698,374 62,844 1,761,218 2,046,868
1,867,275 70,387 1,937,662 2,270,734
2,524,426 2,524,426 2,903,755
10,164,509
10,625,625
11,007,854
2,236,720 53,755 6,808 346,824 2,644,107
2,415,255 61,666 6,788 171,855 2,655,564
2,600,814 61,299 7,027 168,687 2,837,827
107,199 2,277,175 116,847 81,039 84,348 109,851 14,898
116,084 3,494,054 1,016,968 119,242 93,377 80,596 15,468
129,239 4,061,840 996,915 91,315 87,754 21,503 15,436
378,071
153,864
98,229 4,252,745 7,520,402
155,511 2,724,897 7,970,061
129,156 252,744 644,889 1,739,236 8,170,027
10,164,509
10,625,625
11,007,854
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Rs (000) Share capital and Reserves Share capital Reserves Total equity
Abbott SFP Extract 2007
2008
2009
979,003 2,710,270 3,689,273
979,003 2,589,509 3,568,512
979,003 2,259,457 3,238,460
Non-Current liability Deferred taxation
110,414
100,606
119,627
Current liabilities Trade and other payables
881,681
1,380,592
1,606,489
992,095
1,481,198
1,726,116
4,681,368
5,049,710
4,964,576
1,516,821 25,892 4,393 5,133 1,552,239
1,560,835 23,580 4,393 5,773 1,594,581
1,662,785 31,779 4,393 6,434 1,705,391
Total equity and liabilities
Non-Current Assets Fixed Assets - property, plant and equipment Long term loans and advances Long term deposits Long term prepayments
Current Assets Stores and spares Stock -in-trade Trade debts Loans and advances Trade deposits and short term prepayments Accrued profit Other receivables Taxation recoverable Other financial assets Cash and bank balances Total Current Assets
47,875 1,363,508 128,817 33,369
47,747 1,696,200 172,825 21,316
69,097 1,675,000 234,185 41,277
101,988 5,576 197,280 154,598 600,000 496,118 3,129,129
164,785 6,594 35,465 258,708
90,634 1,425 81,053 295,730
1,051,489 3,455,129
770,784 3,259,185
Total Assets
4,681,368
5,049,710
4,964,576
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Ratios:
Ratios Sales growth (%) G.P Margin (%) N.P Margin (%) ROE (%) Current ratio (times) Acid test ratio (times) Debtor turnover (days)* Creditor turnover (days)* Interest cover (times)** Dividend cover (times) EPS
Glaxo Smith Kline Pakistan Ratios 2007 2008 2009 5 26.3158331 9.8178468 37.245999 28.7662506 24.088798 15.743507 14.5874381 6.3450073 20.578947 23.4017057 11.524168 4.2700006 4.11323595 3.23639 2.977046 2.31000402 1.6273747 3.4664206 15.438169 24.969791 25 17 27 -280.4348 -318.26821 -143.18359 1 1.2 1.1 9.787938 11.4558293 5.4720815
Abbott Pakistan Ratios 2007 2008 11.3 8 41.42663917 29.9281 17.99332185 4.828866 32.11369828 9.639312 3.549048919 2.502643 2.002562151 1.27404 9.36 7.727991 21 -545.721112 -202.487 0.67 0.7 12.10171981 3.513575
2009 18.62459 29.1386 9.771177 25.49595 2.028763 0.986116 8.79033 22 -462.821 0.7 8.433845
* Average figures have been taken as per the formula below for both the companies for comparison purposes. ** Exchange losses have been excluded from GSK Pakistan financial charges when calculating I.C ratio as there are no exchange losses in Abbott's financial charges for comparison purposes. I.C ratio is not negative but because of the using the spread sheet as the financial charges had a negative sign.
I have made the SOCI and SFP extracts on Microsoft Excel 2007 and used the spread sheet formulas for additions, subtractions, multiplication and division. For example G.P was calculated by using the formula =SUM (J3+J4). Sales was in the row J3 and Cost of goods sold was in the row J4. I added both the figures because I put a negative sign for cost of goods sold. This formula was inserted in the row J5. Operating profit was calculated by deducting total operating expenses from gross profit. For this I used the formula =SUM (J5+J6+J7+J8+J9) as the operating expenses were negative so they were added. I calculated the ratio G.P margin by going back to previous sheet and using the formula by =SUM (sheet1!K3 sheet1!J3/sheet1!J3*100).
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Ratio Formulas:
Ratio Sales growth (%) G.P Margin (%) N.P Margin (%) ROE (%) Current ratio (times) Acid test ratio (times) Debtor turnover (days) Creditor turnover (days) Interest cover (times) Dividend cover (times) EPS
Formula {(Current year sales - Last year sales) / Last year sales}*100 (Gross profit / Sales)*100 (Net profit / Sales)*100 (PAT / Equity)*100 (Current assets / Current liabilities) {(Current assets - Stock in trade) / Current liabilities} {(Opening trade debts + Closing trade debts) / 2} / Sales} * 365 {(Opening Creditors + Opening BP*+ Closing creditors + Closing BP)/2}/COGS}*365 {(Operating profit - exchange losses) / (financial charges - exchange losses)} (PAT / Dividends including bonus shares) (PAT / No of Ordinary shares outstanding at the year end)
*BP= bills payable.
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Skill and learning statement (SLS): This is an important part of RAP where I will discuss my experience of undertaking it and particularly what I learned out of this experience and how it has enhanced my communication skills and questioning abilities and how it added value to my present skills and will help me in future.
The SLS answers these questions? What did I learn from the meetings with the project Mentor? How did I answer my research questions? Did I demonstrate any communication skills? Has undertaking RAP helped me in understanding the world of accountancy better and will this project help me in my future employment?
What did I learn from the meetings with the project mentor? My project mentor was Mr. Fahim Ahmed, who is an ACCA teacher. The reason for choosing Mr. Fahim was his helpful personality which I knew as a result of the past experience of studying with him. His role in the RAP is of utmost importance.
Before the meetings an orientation class was held in which an introduction about the B.sc program was given. Mr. Fahim gave an information pack which contained the guidelines for the RAP. He briefly discussed different research topics and companies and limitations in gathering information about local companies.
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Meeting 1: My first meeting was held with Mr. Fahim on 31st July 2010, two weeks after the orientation meeting. Before the meeting, I was deciding and discussing the topic and the company with my father, uncle and cousin. In the first meeting I communicated my topic and company to Mr. Fahim. He asked me reasons for choosing this topic and company for which I gave him answer as provided in the RAP. In this meeting we discussed about competitor, information gathering sources, research aims and the framework and time table for completion of RAP. Though this was the first meeting was an important one as my mentor explained me the approach and structure to take for the RAP.
Meeting 2: Soon after my first meeting I started working on introduction and information gathering. In second meeting held on 31st August 2010 I showed my work to Mr. Fahim. This meeting was lengthy and important as we discussed different aspects of analysis like the ratios, comparisons with competitor, SWOT, conclusion and future prospects, referencing, financial charts and the use of spread sheets. I questioned him regarding problems I could face during the analysis and how to overcome them. He pointed out ratios of GSKP in the Annual report which are calculated based on company‟s own assumptions. He advised me to see their calculations and where possible calculate them using your own assumptions. This gave clearer picture of the financial performance of the company and enhanced my analytical capabilities.
Meeting 3: The third meeting took place at 25th October 2010 in which I gave 10-12 minute presentation. The presentation was a good experience as it gave me an opportunity to evaluate my presentation skills. The knowledge gained in the RAP process was reflected in my answers to questions posed by Mr. Fahim which made me more confident of the whole experience. Additionally we discussed ratio analysis as I was exceeding the word limit and guided on eliminating insignificant information. My mentor reviewed the spread sheet. He also reviewed the project as a whole to see if I had kept the right structure. I enquired from him the best way to present the RAP.
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In particular was the questioning ability that I enhanced during the meetings. I questioned my mentor regarding approach for analysis, information relevancy, user expectations and how to present the RAP to maximum facilitate user of the report. The meetings taught me asking right questions help in proceeding with the work swiftly and minimized understanding gap about particulars of the project. Therefore asking questions made me confident in my proceedings. The other important thing I learned during the meetings was to listen attentively to my mentor as he advised to write down questions during the discussion and ask them when he had finished explaining his point. This was an important professional aspect to learn because often in meetings interruptions are common which creates communication gap and wastes time. Attentive listening improved my work productivity. Robert Baden Powell said ‘If you make listening and observation your occupation you will gain much more than you can by talk‟. (Ref: http://3.brainyquote.com/quotes/keywords/listening_2.html)
Mr. Fahim, being a professional lecturer is keen on time strictness. I learned meeting the deadlines is very important. I learned to follow instructions as given by mentor and will help me in my practical life where I will be taking directions from my supervisor.
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How did I answer my research questions? From the start I remained honest with the project and did what ever it required. I gathered as much information from different sources in limited amount of time and make as proper references as possible. I did my best to stay within the word limit and explain the analysis effectively. I am studying for my ACCA papers so I always had time limitations. I have no work experience so my understanding of real organization issues is limited to this analysis.
I set specific research aims and objectives which I tried to achieve to the best of my knowledge and ability. This analysis will help users understanding financial and business performance of GSKP and help them in investment decisions. I explained the ratios, trends, movements and their reasons which I re-emphasized and briefly discussed in conclusion. I have mentioned effects of both the average and closing figures where applicable like debtor and creditor turnover. In the financial analysis the macroeconomic factors affecting the company is substantiated with a website (http://www.pide.org.pk/pdf/highlights/inflation.pdf). I referenced the sources from where I have gathered information as it is important to acknowledge other‟s work. I have never undertaken a research work and never of such a magnitude as it required tremendous amount of hard work, diligence and patience. There are always chances of errors in such research projects and tried my best ability to minimize them as Alexander pope said „to err is human, to forgive is divine‟. (Ref: http://www.brainyquote.com/quotes/quotes/a/alexanderp101451.html)
In my ratio analysis I have made some assumptions e.g. I.C ratio for comparability purposes. I also used my experience of local environment and business conditions e.g. In my SWOT analysis I have mentioned GSKP Consumer health care brands aren‟t advertised aggressively which I have experienced watching T.V.
I tried to perform best analysis possible as far as my knowledge and ability allowed me and from what I have learned over the years through my study and experience and tried to answer as research questions as properly as possible.
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Did I demonstrate any communication skills?
I prepared the presentation on Microsoft power point 2007 which lasted about 10-12 minutes. Before the presentation I practiced it in front of mirror and noted down all questions that could be asked by my mentor. By doing this I learned to effectively answer questions covering every aspect. I had prepared few notes which I used while giving the presentation. I started my presentation with brief introduction on the company followed by important points on the pharmaceutical industry and then covering financial and business analysis ending with company‟s responsibilities and future prospects. I explained my ratio analysis through the use of charts that I prepared using Microsoft Word and Microsoft Excel 2007. I particularly focused on figures and trends that behaved abnormally and gave reasons for such behavior. My presentation was more on the detail side and the questions posed by Mr. Fahim were confidently answered by me. My mentor questioned about pharmaceutical industry, sources of information, competitor figures and trends as its explanation enhanced my communication skills. I observed during the meetings how my mentor would explain me certain aspects of the project which I adopted and used while giving presentation to present my RAP in best possible manner. My mentor advice me on how to further improve presentation skills like making gestures to effectively communicate with the audience. This presentation enhanced my confidence and the advices given by my mentor would be used for my later presentations. The communication with Mr. Fahim on emails about the specifics of the project and constant progress gave me a real life experience situation with a business client where constant communication is a key to successful business strategy. This would help me in my career where meetings will be held with real clients and presentations given. I learned research like this enhances your answer giving capabilities as the research process itself provides vast knowledge and one can confidently answer questions posed to him. The gathering of knowledge from different sources and constant communication with mentor helps confidence building which was reflected in my presentation to the mentor. These interpersonal skills are very important to learn earlier where in practical life one has to be in constant communication with seniors and clients and these skills decide ones‟ success in the future.
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Has undertaking RAP helped me in understanding the world of accountancy better and will this project help me in my future employment?
This research has provided me an advantage over students who will be starting their practical life but will lack the added analytical capabilities that I have acquired through this project. Earlier when teachers would explain practical life examples and refer to particulars of annual reports I would have an understanding gap. But after analyzing real company‟s financial statements and understanding their structure I am able to better comprehend what my teacher would try explaining me. Things I have learned in paper F7 and F9 I applied them as I have given their references. E.g. in F9 I learned that company should have steady dividend policy to have steady share price and cut in dividends give signaling effects of weak future prospects which I have mentioned in my dividend cover ratio analysis. In paper P3 I studied SWOT analysis therefore I was able to distinguish different components like strengths, weaknesses, opportunities and threats for a real organization and by applying it on GSK I was able to revise and relate to what I have learned theoretically. At my school and early ACCA level, ratios analysis was limited to question scenarios, which could be an ideal situation, for exam purposes. However when analyzing real company ratios additional things have to be kept in mind e.g. in GSKP the reason for the decline in G.P and N.P margin had been adverse macroeconomic factors. This involved connecting both accountancy and economics knowledge. I plan to practice audit and the important thing regarding auditing is to be comfortable to the financial statements which RAP taught me. I have studied in my papers F8 and now P7 that auditors as part of analytical procedures calculate ratios and compare them to prior years in response to the assessed risk of material misstatement in the financial statements. So this has prepared me for what I will be doing later in my employment and relate to what I have learned in F8 and P7. Further my IT skills have considerably enhanced which will play a very important role in my future employment. Research like this requires patience and hard work. I had a fiasco relating my computer hard disk which stopped working in the middle of my research but fortunately I was able to recover the data. I learned that one shouldn‟t panic in these situations. This will help me in my future employment since I have had the experience of such situation. I have learned to manage time as apportioning time between RAP and exam preparation was always a difficult task. I will be well equipped to apportion time when I will pursue further studies during my employment. This RAP has improved my overall accountancy knowledge and has prepared me in advance for all the later bigger more difficult research and analysis that I will undertake in my future employment.
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Presentation
The business and financial performance
GSK Pakistan over a three year period (2007-2009)
By Faisal Saleem
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Purpose of Presentation About GSK Pakistan Information Gathering Techniques used in Analysis Financial position of GSK Pakistan SWOT Analysis GSK Pakistan future prospects
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About GlaxoSmithKline Pakistan
GSKP Limited was created on Janu 2002 through the merger of SmithKlin French of Pakistan Limited, Beecham Pakistan (Private) Limited and Glaxo Wellcome (Pakistan) Limited. GSKP operates in mainly two indus segments i.e. Pharmaceuticals (prescr drugs and vaccines) and consumer he
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Pharmaceutical Industry Over
Pakistani Pharmaceutical industry is a $1.61 Bn market which % with exports growing at 23% annually. It employs about 162000 people directly and 1 Bn indirectly. The industry has become highly genericized with about 75% g 25% research based brands. There are 47000 registered products with 525 Pharmaceutica including 30 operated by multinationals which have 53% of th It is a highly regulated industry with Ministry of industries dec pricing and registration granted by Central Licensing and Regis
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Information Gathering Internet GSK Pakistan official website (www.gsk.com.pk) Annual reports Study texts Draft National health policy report 2009
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Techniques for Analysis Competitive ratio analysis. Competitive trend analysis. Graphical representation for trends and ratios. SWOT Analysis.
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Financial Position
Increasing Sales Revenue trend with very sharp rise in 2008. Increasing Cost of production due to adverse macroeconomi Declining Gross profit margin and Net profit margin due to in of production with no price adjustments allowed by the g Expenditure on New Penicillin facility. Higher but declining Current ratio and Quick ratio. Stable Dividend cover with good payout to shareholders. Mixed trend in EPS.
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SWOT Analysis
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GSK Pakistan Responsibilities
A vision to have the opportunity to difference to the lives of billion of peop driving the mission to advance the qua human life by enabling to do more, fee and live longer. Identify opportunities for productiv efficiency through simplification and standardization. Deliver more products of value and to sustain it for the years to come to im
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Future Prospects
GSK Pakistan has made good progress in sales performance. Actively working on developing new products. Maintaining growth of mature brands to create value for sha to provide new and affordable health care to patients. A number of new products in the area of Oncology, Respirato Antibacterial are under registration and launch. Merger between GlaxoSmithKline Pakistan and formerly Brist Squibb Pakistan (Private) Ltd.
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Bibliography: Official sources GSK Pakistan Official website (http://www.gsk.com.pk/) GSK Parent Company (http://www.gsk.com/) GSK Pakistan Annual report 2007 GSK Pakistan Annual report 2008 GSK Pakistan Annual report 2009 Abbott Pakistan Official website (http://www.abbott.com.pk/) Abbott Pakistan Annual report 2008 Abbott Pakistan Annual report 2009 Karachi stock exchange (www.kse.com.pk)
Regulatory sources Pakistan Pharmaceutical manufacturer association (http://www.ppma.org.pk/)
Ministry of health (http://www.dcomoh.gov.pk/)
Ministry of population welfare (http://www.mopw.gov.pk/)
Draft National Health Policy Report 2009 (Ministry of health, Pakistan). (http://healthnwfp.gov.pk/downloads/draft%20health%20policy.pdf)
Pakistan Institute of Development Economics (http://www.pide.org.pk/pdf/highlights/inflation.pdf)
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Acca Text books Text Book Kaplan F7 Financial Reporting 2009/2010 Text Book Kaplan F9 Financial Management 2008/09 Text book BPP F9 Financial Management, Second edition 2008 Text Book BPP P3 Business Analysis
Other Books: Colin Bamford, Keith Brunskill, Gordon Chain, Sue Grant, Stephen Munday, Stephen Walton, (First Published 2002 Third Printing 2003), Economics, Chapter 2 The price system, the Press Syndicate of the University of Cambridge.
News: Daily times (http://www.dailytimes.com.pk/) Brand Synario (http://www.brandsynario.com)
Other Sources: All Biz (http://www.pk.all-biz.info/news/) Pharma Biz (http://www.pharmabiz.com/article/detnews.asp?articleid=28358§ionid=5) Shvoong-Free books reviews/summaries and reviews (http://www.shvoong.com/) Scribd (http://www.scribd.com/doc/29916204/Pharma-Industry-Pakistan) Investopedia (http://www.investopedia.com/) Inve stor words (http://www.investorwords.com/) Brainy quotes (http://www.brainyquote.com/)
Presentation images: GSK logo (http://www.gsk.com.pk/)
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Slide one GSK Penicillin Facility (GSK Pakistan Annual report 2009)
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