The Pakistan Pharmaceutical Industry

Published Date: 02 Nov 2017

The topic selected for this Oxford Brookes university research and analysis project is Topic 8:"An Analysis and Evaluation of Business and Financial Performance of an Organization". This was a natural choice as throughout academic studies of ACCA, thefinancial analysis was greatly focused but OBU provided this opportunity for practical application of theoretical knowledge on an original company.

This in-depth research into financial and business performance of a company immensely enhancedthe analytical skill which is a core requirement of a finance person. Being an ACCA student, the topic will be imperative for excelling in accountancy career.

REASON FOR CHOOSING THE COMPANY

The Pakistan Pharmaceutical industry meets 90% of the finished medicine demand in the country.(Daily Times, 2012)The company chosen is a Pharmaceutical giant "GlaxoSmithKline Ltd". GSK is the largest pharmaceutical company in Pakistan and over the decades it has remained a market leader.(Business Recorder, 2012).

The special aspect about GSK is that it is amongthe world top leading research-based pharmaceutical company(World Pharma News, 2013) and has more than 20 research and development (R&D) facilities around the world with an annual budget around $7 billion for R&D.(GSK, 2013) Selection of GSK for this project was a natural curiosity to research on this strong blue chip company.

INDUSTRY ANALYSIS

ABOUT THE COMPANY:

GSK Pakistan Limited was created on 1st January 2001 through the merger of Smithkline, French of Pakistan Limited, Beecham Pakistan private limited and Glaxo welcome Pakistan Limited. The ultimate parent in GSK Plc. UK.(GSK, 2011). GSK today is Pakistan’s well known pharmaceutical industry leader in terms of volume, value and prescriptions, providingitsinnovative health care products to its consumers.(Business Recorder, 2012)

The company operates in two segments within the pharmaceutical sector , pharmaceuticals which include prescription drugs and vaccines and the other segment of consumer health care which include over the counter OTC medicine, oral care and nutrition.(Pakistan Press International, 2012)

The products of GSK Pakistan ranges from anti-infectives, analgesics, anti-virals, vaccines etc. Some of the well known medicines of GSk are Calpol, Duricef, Augmentin, Velosef etc. During the preceding year, in the history of the pharmaceutical industry , Augmentin was the first to cross a three billion rupee mark.(Pakistan Press International, 2012)

ABOUT THE INDUSTRY:

Pakistan is among the few companies in the world who have their own pharmaceutical industry. Its strategic importance lies in the fact that it is considered as a second line of defense of Pakistan and provides employment to 4 million people and exporting medicines to more than 60 countries.(Daily Times, 2012).

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(Economic Survey of Pakistan, 2012)

According to Economic Survey of Pakistan, the growth of Pakistan Pharma industry is shown above. The graph clearly depicts that the industry has grown in this year 2012.

(Economic Survey of Pakistan, 2012)

Expenditure on health as a % of GNP has increased in 2011. This indicates more opportunities and better future prospects of the pharma industry.

(Economic Survey of Pakistan, 2012)

There are 600 licensed companies in this sector with 53% market share in the hands of multinationals and local market of Rs178.7 billion and export market share of $168 billion, reported by Joint Secretary Ministry of National Regulations and Services, Arshad Farooq Faheem.(Lillah, 2012)

The pharma industry today, is facing several challenges such as increased buyer-cost sensitivity, global competition and technological advancement. The industry is complex and knowledge intensive.Industry is lacking in research promotion and local raw material production.(Medicine Pakistan, 2011).Global recession and electricity shortages have greatly affected the industry.(GSK annual report, 2011)Currently, the industry manufactures many products ranging from simple pills to Oncology, Biotech and Value added Generic Compounds.(PPMA, 2008)

Total health expenditures(both federal and provincial) have been increased during the year 2012 as shown below.

(Economic Survey of Pakistan, 2012)

The key players among Pharmaceutical companies are as follows:

(Annual reports of GSK, Abbot, Sanofi Aventis Pakistan for FY 2010, 2011 & 2012)

It is evident from the above graph that GSK Pakistan Ltd leads the Pakistan pharmaceutical industry in terms of value, volume and prescription.

RAP OBJECTIVES

Following are the objectives of this Research and Analysis Project:

To Analyze the financial performance of GSK through horizontal and ratio analysis and to find out how the company is still profitable despite of strong price controls by government.

To conduct a position analysis of the company using SWOT models to identify strengths, weakness, opportunities and threats effecting GSK.

To analyze the political, economical, social and technological environment in which GSK Pakistan is operating and evaluating its suitability.

To analyze performance by comparison of GSK with its competitor Sanofi Aventis Pakistan Ltd.

To identify how much the organization is contributing towards social welfare charity and how well it is fulfilling its Corporate Social Responsibility.

RAP FRAMEWORK

The above stated research objectives are met through a in depth financial analysis of GlaxoSmithKline using widely used financial tools such as ratio analysis and horizontal analysis. This was aided by the use of excel spreadsheets. Formulas for ratios calculation have been stated in the annexures. The Project further distills essential insight into the business performance of the company using SWOT and PEST model to assess both internal and external environment affecting the company. The industry analysis laid down a foundation and provided empirical evidence about the nature of the pharmaceutical sector.

Thorough financial analysis of GlaxoSmithKline Pakistan Limited, along with its business analysis would answer the above stated research aims and objectives. Sanofi Aventis Pakistan’s Limited financials have to used for comparison purpose so as to achieve meaningful analysis with regard to financial and business performance of GSK Pakistan Ltd.

Information gathering was done using various secondary sources keeping its limitations and ethical issues in mind .Finally, in the end a conclusion is drawn about the company’s overall performance and recommendations for further improvements are given as well.

PART 2 - INFORMATION GATHERING AND ACCOUNTING / BUSINESS TECHNIQUES - 1,496 WORDS

INFORMATION GATHERING AND ITS LIMITATIONS

One of the most imperative steps in writing a research project is information gathering. Relevant and reliable information is the foundation of research analysis. There are mainly two types of sources of information gathering: Primary and Secondary. This project uses the secondary sources of information as shown below:

SOURCES OF INFORMATION GATHERING:

Company Official website:

The official website of GlaxoSmithKline www.gsk.com.pkis a vital source. It contains valuable information about the company products, financial performance, history, Research and development activities and contribution towards CSR etc.

Annual Reports:

Major sources of information, mainly for the financial analysis of GSK were company’s Annual reports for the financial year ended 2010, 2011 and 2012. Moreover, for the sake of comparison, annual reports of Sanofi Aventis for the same three years were also used. Annual reports are essential sources as they are officially and legally produced document by the company. They provide a great volume of quality information pertaining to company’s operations, financials, human resources, marketing strategies etc. This information fulfills the varying needs of company’s stakeholders and is therefore valuable for the purpose of this research.

Books:

The most important theoretical knowledge about financial and business analysis tools were taken from the ACCA academic books including F7 (Financial Reporting) and P3 (Business Analysis). Furthermore, other books include Peter Stimpsons business studies etc. Books lays strong basis for concepts to be applied to real life companies such as GSK in this project.

Internet and Other Sites:

With the world becoming a global village, internet has allowed the bulk of information from all over the world to be accessed. Google Search Engine helped a lot in searching out reports, statistics, articles about the pharma industry. This was the most significant source with most aid taken from websites such as PPMA, World Pharma News, official government site www.finance.gov.pk etc.

News and Media:

In conjunction with above sources, daily times and business recorder were of great help and many facts about GSK were extracted from their official website updates. Updates with regard to current trends in Pharmaceuticals and the general wellbeing of the economy are usually highlighted in the news and media.

LIMITATIONS OF INFORMATION GATHERING

Searching on internet is a time consuming process with difficulty in finding the relevant information from bulk of websites available. In addition, authentic relevant and reliable data is usually found in expensive articles and journals which could increase the research cost.

Official company websites and Annual reports are often accused of giving biased information. Furthermore, with differences in accounting policies and practices in different companies, comparison becomes difficult.

Academic Books used in this RAP provided only theoretical and conceptual knowledge and lacks practical exposure. This limits the usefulness of books in application of business and financial models to real life scenarios.

News and media often exaggerates the company and industry news in order to make them more interesting. They usually highlights weak points and unfavorable situations.

Facts and figures from news and other official publications were often outdated which hindered accurate analysis.

ACCOUNTING AND BUSINESS TECHNIQUES USED

FINANCIAL ANALYSIS

For financial analysis two commonly used techniques are used namely horizontal (Trend analysis) and ratio analysis.

Horizontal Analysis:

It is defined as "Comparative study of a balance sheet or income statement for two or more accounting periods, to compute both total and relative variances for each line item". (BusinessDictionary, 2013). The main advantage of this tool is that it identifies the direction towards which the company is moving by highlighting upward, downward or static trends. This is sometimes also called "direction-oriented analysis".(Sinha, 2009)

Limitations of horizontal analysis are:

One base year can give wrong indication of high growth in future because of the increase in prices.(Sinha, 2009)

If firm has achieved negative growth in past and it has positive growth in current year, then there is a possibility that horizontal analysis shows negative growth because we compare the current year with the base year.(Sinha, 2009)

It only identifies the percentage increase and decrease and does not highlight the actual underlying causes behind the variances. (Sinha, 2009)

Ratio Analysis:

"Ratio analysis is designed to reveal a company’s strengths and weaknesses as compared with other companies in the same industry, and to show whether its financial position has been improving or deteriorating over time." Ratios are helpful in analyzing the profitability, liquidity, efficiency and financial position of the company. Ratios are the most common and readily used technique for analyzing financial statements and comparison with previous year, competitors or industry averages reveals interesting information about the company performance.(F.Brigham, 2001)

Profitability Ratios: This category of ratios assess the success of the company in generating earnings as compared to its sales, assets and equity. (Financial Analysis and Accounting book of reference, 2013)

Liquidity Ratios: Liquidity ratios measures the ability of the company to payoff its short-term debts and financial obligations. (F.Brigham, 2001)

Activity Ratios:Activity ratios highlight the efficiency of the company’s management with regard to realization of cash from accounts receivables and subsequently or simulateneously paying its payables and/ or for inventory. (Khan & Jain, 2006)

Investor Ratios: These ratios provides an indication of prospects for future financial gains (both capital gain and financial return in the form of dividends) from investments. These are of particular interest to the investors and shareholders. (All Business, 2013)

Gearing Ratio: Gearing ratios determine the financial risk to which the company is exposed. It highlights the extent to which firm’s assets are funded by debt as opposed to equity.(Investopedia, 2013)

The diagram below shows the ratios used in this RAP.

There are many limitations of ratio analysis, some of them are:

Differences in accounting methods of two companies make comparison difficult.

Comparison with industry ratios is difficult if the company operates in more than one category.

Seasonal factors can also disturb ratio analysis.

It is based on past performance, so it becomes difficult to predict how company will perform in future.

It ignores the effect of inflation

It only focuses on quantitative aspects and ignores qualitative aspects such as employee morale etc.(Kaplan, 2012)

BUSINESS ANALYSIS

Following models are used for business analysis for GSK.

SWOT:

SWOT analysis is a technique used to evaluate a firm by its strengths, weaknesses, opportunities and threats. It determines the current position of company in the market and analyze the main factors that influence the future success and direction of the company. (Stimpson, 2002)

Strengths: Strengths are qualities that enable a firm to accomplish its mission.

Weaknesses: Weaknesses are qualities that restricts the company from accomplishing its mission.

Opportunities: Opportunities are presented by environment, the firm must capitalize on opportunities.

Threats: Threats arise when conditions in external environment restrict you. (ManagementStudyGuide, 2013)

Limitations: Some limitations of SWOT analysis are:

Every issue/opportunity has its own importance, SWOT analysis doesn't prioritize issues/opportunities.

It doesn't provide solutions to problems/opportunities identified.

It can generate too many ideas but not help you choose which one is best

Can produce a lot of information, but not all of it is useful. (Benefits and Limitations of Swot Analysis, 2013)

PEST Analysis:

PEST stands for Political, Economic, Social and Technological external environmental factors which effect or may effect the operation of the company’s business activities. It is an essential macro-environmental audit tool that helps in analyzing the external environment. (BPP, 2012)

Political: The political condition means the political order and stability of a country.

Economic: The economic factors of a country greatly affect the scope and the chances of a business.

Social: Social factors are the norms or the way that a society operates.

Technological: With the increasing globalization, technological changes are affecting the ways and nature of a business. (BPP, 2012)

Some of the limitations of PEST analysis are as follow:

The external factors that PEST measures are very dynamic and keep on changing, therefore, it is very hard to predict the reliability of these factors over a long time.

The factors that need to be analyzed are not easily available and therefore lead to making too many assumptions which again as mentioned above are dangerous for a business.

It is insufficient for strategic planning as it eliminates the analysis of internal factors of the business.

PEST analysis requires too much information to be collected and then properly analyzed, causing researchers to be confused and not properly use the information. (Thakur, 2010)

ETHICAL ISSUES

Ethical issues are bound to be faced while preparing research reports of this kind. Research runs the risk of using information without acknowledging the work of others and using that information to own’s advantage. To avoid this flaw, and issues of plagiarism, proper referencing is done using Harvard Referencing System and all work is presented objectively without any manipulation. The research information in this report was purely based for academic purpose, and no financial or other intention was involved behind the research.