1.1 REASONS FOR CHOOSING THE TOPIC
Business and financial analysis has been my area of interest during ACCA. I have already studied the models that I require to answer the research questions of this research project, namely Ratio analysis, PESTEL analysis, and SWOT analysis, RATIO analysis. This project came as a golden opportunity to demonstrate the practical application of my knowledge.
It has always aroused my curiosity why some businesses outperform and why some underperform financially. This topic will utilize the financial and business analytical skills I have acquired so far and prove my skills once I get the degree in applied accountancy to prospective employers. The research will give me an opportunity to brush up skills that require searching internet for information. It will also brush up my spreadsheet capabilities.
1.2 REASONS FOR CHOOSING THE ORGANIZATION
I want to work in my uncle’s pharmacy in future. Knowing the pharmaceutical sector will give me an edge in identifying the strengths and weaknesses of suppliers of medicines. Most of the medicines I have seen in my uncle’s pharmacy are by Wyeth, therefore it aroused my curiosity.
1.3 PROJECT OBJECTIVES AND RESEARCH QUESTIONS:
The aim of this report is to evaluate the effectiveness and efficiency with which Wyeth Pakistan Limited has been performing over the past 3 years in business and financial matters. The report will include the business analysis in terms of:
Assessment of the macro environment of Wyeth using PESTEL analysis.
Typical PESTEL factors to consider include: Factor Political
Could include: e.g. EU enlargement, the euro, international trade, taxation policy
e.g. interest rates, exchange rates, national income, inflation, unemployment, Stock Market
e.g. ageing population, attitudes to work, income distribution
e.g. innovation, new product development, rate of technological obsolescence
e.g. global warming, environmental issues
e.g. competition law, health and safety, employment law (PESTEL analysis of the macro-environment)
Assessment of the strategic capabilities of Wyeth using SWOT analysis
SWOT analysis is a basic, straightforward model that provides direction and serves as a basis for the development of marketing plans. It accomplishes this by assessing an organizations strengths (what an organization can do) and weaknesses (what an organization cannot do) in addition to opportunities (potential favorable conditions for an organization) and threats (potential unfavorable conditions for an organization). (DANCA, Anthony C.)
Assessment of Wyeth’s future prospects
The financial analysis will include:
Sales analysis: Sales analysis helps the company know it is meeting its sales objectives in a given timeframe. (MANDA, Gilbert)
The analysis will include sales revenue and growth.
Profitability Analysis: Every firm is most concerned with its profitability. One of the most frequently used tools of financial ratio analysis is profitability ratios which are used to determine the company’s bottom line. Profitability ratios show a company’s overall efficiency and performance. (PEAVLER, Rosemary)
The analysis will include Gross Profit (G.P) ratio, Net Profit (N.P) ratio and Return on Equity (ROE). Liquidity ratios: A class of financial metrics that is used to determine a company’s ability to pay off its short-terms debts obligations. Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts. (Liquidity Ratios)
The analysis will include Current ratio, quick ratio, debtor turnover ratio and inventory turnover ratio.
Investor ratios: The holders of the ordinary shares of a company (its equity) are interested in the return on their investment and the value of their shares. (Advanced Level Accounting, 1996) The analysis will include Earnings per share, Price Earning ratio, Dividend per share and dividend yield ratio.
The research questions for my research report are: The growth in sales between 1 January 2008 and 31 December 2009?
- What is the effect of Governments price freeze policy on profits of Wyeth?
- What is the effect of the economic crisis of Pakistan on the financial performance of Wyeth?
- What was the effect of changing the policy of selling on credit to selling on advance on the working capital of Wyeth and hence its liquidity position?
- What are the strengths and weaknesses of Wyeth?
- How well did Wyeth perform compared to its major competitor GSK?
- How well is Wyeth utilizing its strategic capabilities?
1.4 OVERALL RESEARCH APPROACH
I started my research by carrying out a financial analysis using ratios as the tool for my analysis. Most ratios can be calculated from information provided by the financial statements. Financial ratios can be used to analyze trends and to compare the firm’s financials to those of other firms. (Financial Ratios) Then I carried out an analysis of the environment of Wyeth using PESTEL analysis. This was followed by SWOT analysis to assess its strategic capabilities.
2. INFORMATION GATHERING
2.1 SOURCES OF INFORMATION
Information that has been collected at first hand. It involves measurement of some sort, whether by taking readings off instruments, sketching, counting, or conducting interviews (using questionnaires). (Primary Data) To gather primary data I tried reaching Mr. Khwaja Bakhtiar Ahmed, the company secretary, through his assistant. After persistent efforts I finally got an appointment. He was a charismatic person with a lot of knowledge. He enlightened me about Wyeth policies and answered many of my questions. He also handed me the annual reports of Wyeth and management accounts. For the purpose of collecting data I also emailed a questionnaire to a sample of employees of the organisation. The response was good.
Secondary data is data collected by someone other than the user. Common sources of secondary data for social science include censuses, surveys, organizational records and data collected through qualitative methodologies or qualitative research. (Secondary data, 2011) My secondary sources of information included the following:
- The annual reports of Wyeth and GSK.
- News papers such as Business recorder, pharmaceutical literatures.
- ACCA text books especially for Paper F1, F3, F7, P3 and P5.
- News websites such as “The news” and “Jang”.
- Books that I found in the library of Superior college.
2.2 METHODS USED TO COLLECT INFORMATION
2.2.1 Visiting stock Exchange:
I visited the stock exchange to get the hard copy of the annual reports of Wyeth and GSK.
My interviews with Mr. Khwaja Bakhtiar Ahmed, the company secretary and Mr. Imran Baig, my mentor proved to be a good source of information.
2.2.3 E-Mail survey:
I conducted an e-mail survey. The questionnaire was sent to different employees of the organization as a word attachment and asked them to fill up the word file and send it back as attachment
2.2.4 On-line Access:
Various websites were visited for the purpose of research. The most important ones were the website of Wyeth, Karachi stock exchange, and Pakistan Pharmaceutical Manufacturers Association. I also visited ACCA website for archives of student accountant articles.
2.3 QUESTIONNAIRE AND SAMPLING TECHNIQUES USED
The questionnaire was emailed after having it reviewed by the different department heads. The population I used was the one that was using an email. I had taken the email addresses from the records maintained by the company. The method I used for sampling was haphazard sampling. I chose the email addresses at random
2.4 LIMITATIONS OF INFORMATION GATHERED
Some information was collected from Wyeth website which may be favourably biased towards the organization. It is possible that in spite of all the efforts some information sources may not have been identified which could have lead to a different conclusion. The sample chosen for the email questionnaire might not be representative of the population The views of the company secretary about future prospects might be biased or over optimistic The information present on internet can be subject to the authors own judgements instead of presenting facts.
2.5 ETHICAL ISSUES DURING INFORMATION GATHERING
As per the guidelines of Oxford Brookes university I was supposed to disclose the full details of the information sources that I used, but it was in the best interest of the employees of the organization to have their names kept anonymous so they do not face problems with their employer. I put special care into making sure the questionnaire kept the identity anonymous. During the interview with Mr. Khwaja Bakhtiar Ahmed, the company secretary I asked some questions about the new product launch of ENBREL and ORISTIQ. He was hesitant in answering at first but then I assured him that this information was publicly available, after knowing this he co-operated.
2.6 ACCOUNTING / BUSINESS TECHNIQUES USED AND THEIR LIMITATION
The accounting/business techniques used for the project were as follows:
2.6.1 Ratio Analysis
The term “accounting ratios” is used to describe significant relationship between figures shown on a balance sheet, in a profit and loss account, in a budgetary control system or in any other part of accounting organization. Accounting ratios thus shows the relationship between accounting data. The ratios analysis is one of the most powerful tools of financial management. Though ratios are simple to calculate and easy to understand, they suffer from serious limitations.
- Limitations of financial statements: Ratios are based only on the information which has been recorded in the financial statements. Financial statements themselves are subject to several limitations. Thus ratios derived, there from, are also subject to those limitations. For example, non-financial changes though important for the business are not relevant by the financial statements. Financial statements are affected to a very great extent by accounting conventions and concepts. Personal judgment plays a great part in determining the figures for financial statements.
- Comparative study required: Ratios are useful in judging the efficiency of the business only when they are compared with past results of the business. However, such a comparison only provide glimpse of the past performance and forecasts for future may not prove correct since several other factors like market conditions, management policies, etc. may affect the future operations.
- Ratios alone are not adequate: Ratios are only indicators, they cannot be taken as final regarding good or bad financial position of the business. Other things have also to be seen.
- Problems of price level changes: A change in price level can affect the validity of ratios calculated for different time periods. In such a case the ratio analysis may not clearly indicate the trend in solvency and profitability of the company. The financial statements, therefore, be adjusted keeping in view the price level changes if a meaningful comparison is to be made through accounting ratios.
- Lack of adequate standard: No fixed standard can be laid down for ideal ratios. There are no well accepted standards or rule of thumb for all ratios which can be accepted as norm. It renders interpretation of the ratios difficult.
- Limited use of single ratios: A single ratio, usually, does not convey much of a sense. To make a better interpretation, a number of ratios have to be calculated which is likely to confuse the analyst than help him in making any good decision.
- Personal bias: Ratios are only means of financial analysis and not an end in itself. Ratios have to interpreted and different people may interpret the same ratio in different way.
- Incomparable: Not only industries differ in their nature, but also the firms of the similar business widely differ in their size and accounting procedures etc. It makes comparison of ratios difficult and misleading. (Accounting Ratios | Financial Ratios)
2.6.2 SWOT analysis
SWOT analysis is a tool that is used to evaluate the Strengths and Weaknesses of an organization and the external Opportunities and Threats faced by the organization in the external environment. Limitations of SWOT: The way SWOT analysis is often conducted does not allow for proper communication, discussion, and verification of all external and internal factors proposed by all involved. On such occasions, SWOT results prove less reliable an input to the strategy generation process than they are capable of being. Still worse, as documented later, the results of SWOT analysis are sometimes never meant to be used as an input to the strategy generation process. If that is known, or anticipated, by those involved in SWOT analysis, the quality of their inputs will most likely suffer and be lower than otherwise possible, and desirable.(KOCH, Adam J.)
2.6.3 Porter’s five forces analysis
Porter looked at the structure of industries. In particular, he was interested in assessing industryattractiveness, by which he meant how easy it would be to make above average profits (forshareholders and to fund adequate investment). He concluded that industry attractivenessdepends on five factors or forces:
- Competitive rivalry between existing firms
- Threats of new entrants
- Threats of substitute products
- Power of suppliers
- Power of customers
(Paper P3 Business Analysis Essential Text)
Limitations of five forces model:
Porter’s 5 forces of competition have a few weaknesses and limitations. The modelunderestimates the influence of a company’s core competencies on its ability to achieve profit.It, instead, assumes the industry structure is the sole determining factor. Porter’s 5 forcesdefinition is difficult to apply to large multinational corporations with synergies andinterdependencies achieved from a portfolio of businesses. Additionally, the five forcesframework assumes there is no collusion in the industry. Finally, Porter’s analysis doesn’tconsider the possibility of creating a new market. (Porter’s Five Forces of Competition , 2010)
3.1 PHARMACEUTICAL SECTOR
2009 was a challenging year and witnessed modest growth in Pakistan’s economy due to uncertain law and order situation and global economic recession. The economy continues to witness double digit inflation; low economic growth and continued depreciation of the rupee against major currencies. During this period the pharmaceutical industry has been adversely impacted by both inflationary trends as well as Rupee depreciation. The government has not allowed any across the board price adjustment to pharmaceutical industry for nine years. Growth in pharmaceutical markets is mainly volume growth. (BENGALI, Iqbal, 2010) Pharmaceutical Industry is one of the major manufacturing industries in Pakistan providing employment to thousands of people directly and indirectly. The industry, however, is facing many challenges, which are hindering its growth. The major challenge faced by the industry is the complete freezing of price of pharmaceutical products since 2001. Pakistan is the only country in the entire Asian region that has not given its pharma and biotech industry tax-breaks and R & D incentives.
Government’s requirement that drug production lines should be separate is raising cost and reducing the ability of local manufacturers to compete not only in the global market but even at home. (JAVED, Aamar, 2009) Pakistan has a very vibrant and forward looking Pharma Industry. At the time of independence in 1947, there was hardly any pharma industry in the country. Today Pakistan has about 400 pharmaceutical manufacturing units including those operated by 25 multinationals present in the country. The Pakistan Pharmaceutical Industry meets around 70% of the country’s demand of Finished Medicine. The domestic pharma market, in term of share market is almost evenly divided between the Nationals and the Multinationals.(Pakistan Pharmaceutical Industry) Pakistan’s $1.61 billion pharmaceutical market is now expected to post a five-year compound annual growth of 8.95 per cent, down from 9.39 per cent forecast in the previous quarter, according to Business Monitor International, a global business intelligence firm. (Pharmaceutical sector growth slowing down: BMI , 2010)
3.2 THE COMPANY
As a result of the global acquisition of Wyeth by Pfizer Inc.,on October 15, 2009, Wyeth has become a wholly owned subsidiary of Pfizer Inc.. Pfizer Inc has become the ultimate parent company of Wyeth Pakistan Limited. Wyeth however continues to be the principal shareholder of Wyeth Pakistan Limited. (AHMED, Khawaja Bakhtiar, 2010) Wyeth, with its pharmaceutical and over-the-counter divisions, is a leader in the research and development, manufacturing and marketing of a broad range of health care products. (WYETH PAKISTAN LIMITED )
3.3 RATIO ANALYSIS
The following ratio analysis is based on the Annual Reports of WYETH and GSK Pakistan. Comparison has been made with the results of GSK for FY2009 since these were the latest financials available. Ratios
3.3.1 SALES Analysis
Sales Revenue (Rs. in million)
Growth in revenue (%)
Cost of sales. (Rs. In million)
Growth in cost of sales.(%)
3.3.4 Investor’s Analysis
Earnings per Share (EPS)
PE Ratio (Times)
Dividend Per Share (Rs.)
Comments on Ratios
The operating results of currents year are for a 12 months period ended November 30, 2010 compared to the previous year which for an 11 months period ended November 30, 2009.
The growth in company’s net sales for the period ending 30 November 2009 reduced by 3.3% as sales were Rs. 2,384 million in year ending 31, December 2008 and in 2009 period it was Rs. 2,306 million which is due to challenging conditions of external environment in 2009. On the other hand cost of sales for year ending 2008 was Rs. 1,699 million which increased to Rs. 1,805 million in period ending 2009. It was an increase of 8% which shows that company does not have efficient policies to control its operational expenditure.
In year ending 2010 overall sales increased by 0.17% but as we mentioned above that this period comprises 12 months comparing last 11 month period and if we compare like with likes then sales reduced by 8%. This is due to due to uncertain law and order conditions of Pakistan. But this year company showed efficiency in controlling its costs as this year cost of sales increased by just 1.4%. This could be due to training and development of employees as training on six- sigma was conducted after the losses incurred by company in 2009. This training was to increase efficiencies of employees to control the cost.
GSK: Sales of GSK are in year ending 2009 were Rs. 14,719 million as compared to Rs. 2,310 million of Wyeth which is due to major market share of GSK. Out of to 20 products 9 are manufactured and sold by GSK.
In year ending 2010 gross profit margin reduced as it was 21.73% in year ending 2009 and it was 20.82% in year ending 2010. This decrease was mainly due to adverse economical conditions of country as inflation increased and cost of resources and operations increased accordingly.
In period ending 30 November 2009 the GP margin decreased from 29.87% in 2008 and 21.73% in 2009. In year 2009 the profit also reduced as compared to sales which is also mainly to due to increase in cost of operations. On the other hand the government has not allowed an increase in price since year 2001. The GP margin of GSK is 24.1% for year ending 2009 as Wyeth has GP margin 20.82% in year ending 2010 which shows that GSK has more ability to control its cost and transfer it to its customers.
In period ending 30 November 2009 the net profit margin reduced from 6.04% in 2008 to – 3.77%. The major cause of this reduction in profitability was the economical condition of Pakistan. Costs of operations increased due to inflation and at the same time the devaluation of currency. However, company maintained control on expenses as their advertising and promotion costs were in line with last year. Administrative cost increased due to cost of Voluntary Separation Scheme. Other operating expenses were lower than last year. NP margin for year ending 2010 increased to 1.13% from -3.77% in the last year. This improvement was due to increase in efficiency of employees and efficiently controlling the operational cost of company as the operating expenses reduced by 10% in year ending. There has been a long stand price freeze by the government since 2001 due to which company was not able to earn abnormal profits.
The net profit of GSK was 6.3% in year ending 2009 which also reduced as it was 14.6% in 2008. This shows that the industry was adversely affected by increase in operational costs and long standing price freeze by government due to which companies cannot pass their cost to customers.
Return on equity increased for year ending 2010 to 2.58% as it was -8.86% in year ending 2009 this increased was due to increased operational efficiency of organization. While in period ending 2009 the ROE reduced significantly from 12.73% to -8.86%. . ROE of GSK is 11.5% in year ending 2009 as compared to % of Wyeth. Liquidity analysis.
Current ratio indicates how many times the company’s current assents can meet company’s current liabilities. A ratio of 2 is considered sufficient for current ratio generally. In the period ending 30, November 2009 the current ratio reduced from 3.43 times to 2.71 times. This shows that the company can meet its current liabilities 2.71 times by its current assets.
This decreasing trend could cause an alarming situation for Wyeth because a company can survive without profits for some years but without cash it can’t survive more than one year. So worsening condition of Wyeth needs effective and efficient policies for fund management. Current ratio for year ending 2010 reduced to 2.56 times as it was 2.71 times in year ending 2009. This shows that now company can meet its current liabilities by 2.56 times. A ratio of 2 is a standard for current ratio. Company improved its working capital condition this year as they changed their sales and distribution model from credit to advance cash. Current ratio of GSK for year ending 2009 is 3.2 times which shows strong policies of funding are in place.
Quick ratio indicates how many times company’s current assets can fulfill its current liabilities but it ignores inventory from current assets because in some organizations inventory takes times before it can convert to sales. Quick ratio of Wyeth is reducing quicker than current ratio for years ending 2009Quick ratio for period ending 2009 also reduced from 1.38 to 0.98 times which was an alarming situation for Wyeth. It indicates that major part of current assets consist inventory and company’s inventory increased from last year due to increase in cost of materials. . Ratio of 1 is considered a standard for quick ratio so company’s liquidity is worsening. Quick ratio improved in year ending 2010 which is 1.01 times as it was 0.98 times in 2009. This is due to improved working capital management policies as company received cash in advance instead of credit. Due to which company earned interest on deposits too. Quick ratio of GSK for year ending 2009 was 1.6 which shows a healthy liquidity position.
Debtors turnover period indicates how many days debtors take to pay their debt to company. Debtors are part of working capital and for the successful operations of company good debtor management strategies need to be in place. In period ending 2009 the debtor’s turnover period increased by 9 days as these were 29 days in 2008 and 38 days in 2009. During this year due to inflation and devaluation of currency the company had to extend debtors turnover period as company made loss after tax this year. In year ending 2010 company’s debtor days reduced to 26 days as compared to 38 days in 2009 this also shows the improvement in fund management policies as this year company received advance cash from sales and distribution instead of credit. Debtor’s days of GSK for year ending 2009 were 25. This shows that debtor collection policies of GSK are more efficient than Wyeth.
Inventory days indicate the period during which inventory of a company remains in its warehouse or in work in progress before it is finally converted into sales. Inventory holding initiates many expenses like warehouse, damages etc. which can be mitigated by good inventory management policies in place. Inventory turnover period in 2009 increased by 1 day as it was 143 days in 2008 and became 144 days in 2009. This increase was nominal but instead improvement this increase was due to decreasing in underlying sales.
Inventory days increased this year too from 144 days in 2009 to 163 days in 2010. This increase was mainly due to increase in inflation and instability of prices in material. Sales for this year was lower than last year. Inventory turnover period of GSK in year ending 2009 was 67 days which is less than half of Wyeth. This shows that GSK has more efficient working capital policies and sales of GSK were more than Wyeth which is due to the higher market share of GSK. Investor’s analysis.
Earning per share can be used to indicate the profitability of a company. It shows the earning allocated to each common share. In period ending 2009 the EPS reduced badly by Rs.162 per share. In this year company’s EPS was -61.09. This major decrease was due to consistent inflation and devaluation of currency of
Pakistan. These factors became the reason for increase in operational cost. And due to the price freeze by government the company was not able to transfer the cost to customers. In year ending 2010 EPS increased from Rs. -61.09 last year to Rs. 18.61 this year. This year company made a net profit margin of 1.13% which was loss of (3.77) % in last year. This improvement is due to controlling the operational expenses of the company this year. The EPS of GSK for year ending 2009 was Rs. 5.5 which is consistent with previous years.
The PE ratio of Wyeth moved adversely during last years. In year ending 2008 the PE ratio was 25.62 times while In year ending 2009 the company’s made a loss. Which was due to increase in cost which company was not able to pass to customers. In year ending 2010 PE ratio improved to 49.08 times which was nil in last year this improvement also due to improvement in operational efficiency of company during 2010 as the company improved its cash position as well as its productivity. The PE ratio of GSK was 20 which show good performance of GSK compared to Wyeth. Dividend per share Dividend per share ratio indicates the dividend earned by an investor by holding one share of company.
There was no dividend per share in year ending 2009 as company was in loss. This loss was mainly due to adverse environmental, economical, and political situations. In year ending 2010 company announced the dividend of Rs. 10 per share which shows the attractive position of company in this year. Company improve its profitability as well as its operational efficiency during year ending 2010 as retrospective measures taken in 2010 like training on six-sigma plan. The dividend per share of GSK for year ending 2009 was Rs.5 which also indicates that company performed well in such crises. Dividend yield This ratio represents the cash flows earned by the investor by investing each rupee in form of shares.
In year ending 2010 earning yield improved to 0.92% as it was nil in year ending 2009. This improvement was due to improvement in operational efficiencies during year ending 2010 while economical and political instability remained consistent in year ending 2010. In the period ending 2009 company made a loss. While GSK’s dividend yield in this year was 4.6% which shows the good governance of GSK as compare to Wyeth.
3.4 PESTEL ANALYSIS
PESTEL analysis is a tool which is used to understand external environment. It deals with external environmental factors like political, economical, social and demographical, technological, environmental and legal. By considering these factors we can judge the influence of all above factors on the operations and profitability of any company. Political factors. In political factors we consider the government policies like tax policies, their stability, political environment and institutions. In 2008 there was instability in political conditions of Pakistan which adversely affected the pharmaceutical industry. Policies of government about electricity price raises also contributed adversely to pharmaceutical industry. Government’s price freeze policy since 2001 also reduced the profitability because firms were not able to transfer their increasing operational cost to the customers. In the last quarter of 2008 government gave some relaxation on price increase but that was for some products that did not contribute too much to improve the conditions of profitability.
Inflation (too much money chasing too few goods) remained the major problem of Pakistan in the last few years. Due to consistent rise in cost of electricity, labor, and fuel the profitability of pharmaceutical industry reduced as firms could not increase prices according to cost due to limitation by government policies. But demand in the public remained unchanged. Devaluation of Pakistan currency also adversely affected the industry as value of rupees consistently reduced against major currencies of world especially against US$. Due to which many firms had