Healthcare: ABBOTT LABORATORIES PAKISTAN LIMITED - Analysis of Financial Statements November 2007 - November 2008

13 Nov, 2009

Abbott Laboratories is a highly diversified global healthcare company devoted to discovery, development, manufacture and marketing of pharmaceutical, nutritional and medical products, including the devices and diagnostics.
The company is principally engaged in the manufacturing, import and marketing of research-based pharmaceutical, nutritional, diagnostic, hospital and consumer products and in providing toll-manufacturing services. With over 70,000 employees worldwide and a global presence, in more than 130 countries, Abbott is committed to improving people's lives by providing cost-effective healthcare products and services that consistently meet the needs of its customers.
Abbott Pakistan is part of the global healthcare corporation of Abbott Laboratories Chicago, USA. Abbott started operations in Pakistan, as a marketing affiliate in 1948. The company has steadily expanded to a workforce of over 1500 employees. Its shares are quoted on all the three stock exchanges of Pakistan.
It has the honour of being the first pharmaceutical company in Pakistan to achieve Class-A certification by a world-renowned organization, Messrs. Oliver Wight. The company has also pioneered the concept of disease specific nutrition in Pakistan through introduction of specific products. Abbott Pakistan has leadership in the field of pain management, anesthesia, medical nutrition, anti-infectives and diagnostics. The company's wide range of products is managed and marketed through four marketing arms. The Diagnostic Division operates from its office located at Korangi, Karachi. With leading products in several key segments of the diagnostic market, sales and support staff is available in all the major cities of the country.
A continuous process of innovation, research and development, at Abbott's worldwide facilities, enables Abbott Pakistan to offer effective solutions for various healthcare challenges, with products and services that are well-focused within the customer's reach and contribute to improved healthcare of the people of Pakistan. Currently, two manufacturing facilities located at Landhi and Korangi in Karachi continue to use innovative technology to produce top quality pharmaceutical products.
The market for Abbott has been in a favourable trend. They have experienced growth in all their segments. However, this year Abbott was faced some restrains in its sales growth, with the figures mounting to double-digits, it was under constrained with limited to 4.3% growth in FY08 for nutritional sector, as sales volumes were adversely affected due to the regulatory duty and increase in customs duty on nutritional products. Similarly, their core field of pharmaceutical was also under stress, as it only grew by 6.5% in FY08 compared to FY07. Compared to last year, the net sales have increased in FY08 by 7.83%. The rate has though reduced to what was experienced in FY07 (11.19%). It still stays at a favourable condition for the firm.
Company's profitability has been an improvement on a year-on-year basis, as the company is able to minimise its cost structure and hence, post a profitable return. The gross profit margin for FY08 was 30%. Approximately 10% increase compared to the previous year FY07 (41.20%). Several factors contributed to this decline, as there was rupee devaluation, increase in international prices and inflationary pressures. Furthermore, the concern then lies with net profit margin, which has declined to 4.87% in FY08 from 18.48% in FY07. The basic reason for decline is an increase in cost of goods sold, along with lower other income earned during the period of FY08.
Return on Assets (ROA) has shown a considerable decrease in FY08. It has reduced from 25.86% in FY07 to 6.86% in FY08. This decline has mainly resulted in an increase in the cost of goods sold mentioned above. It has resulted in a low net income, which in turn, led to low ROA. Abbott had been performing well from the past few years with an increment of the ROA on year-on-year basis, however FY08 decline has dented the growth of the profits of Abbott. The net income of FY08 was 70.9% less compared to the net income in FY07. This shows the main reason of low ROA
Compared to other companies, Abbott has not performed well in terms of profitability, as it was in previous years. However, it has been able to control its selling and distribution costs, coupled with low interest charges. ROE (Return on Equity) has followed a similar trend as ROA has. This is because again the lower net income earned in the period, along with a very high increase in the reserves category, with its capital reserve increasing by 235% in FY08. This has resulted in a decline of 9.64% in FY08 from 32.79% in FY07.
Similar is the case with ROE, there has been an increase in the net equity, however, not a proportionate increase in the net income observed. In fact, in FY08, there has been a fall in net income. ROE has been on an increasing trend for the past half decade, with earnings on the rise plus stable increase in the equity. However, FY08 has made ratios growth under stress, because of rupee devaluation, inflationary pressures, which have affected the cost structures of the company, especially the cost of goods sold. Augmenting to this, are high selling and distributive expenses, which has resulted in further decline of net income.
Compared to the previous years, the current ratio has further deteriorated. In FY06, it was 4.76x, then declined to 3.15x in FY07 and further to 2.15 in FY08. The company has not been able to increase its current assets in line with the current liabilities. However, it remained in a strong competitive position in the market. Current Liabilities have again shown increasing trend. FY08 showed a substantial increase of 35.7%. This was mainly due to an increase in trade payables that was experienced by the company. The main category in trade and other payables were of accrued liabilities and advances from customers, which posted a total growth of payables of 52.7% in FY08 as compared to FY07. Abbott has not been able to actively manage its current ratio structure, hence faced a declining trend for the two consecutive years - FY07 and FY08.
Quick ratio has also shown a declining movement because an increase in stock-in-trade figures. The quick ratio declined to 1.25x in FY08 from 1.73x in FY07. This year, the reduction is basically attributed to an increase in the stock-in-trade values, which has increased by 24.3% in FY08. Hence, the liquidity condition for the company has been under stress as there has been decline of both current and quick ratios emanating because of increase in current liabilities and disproportionate increase in current assets. Keeping its previous years performance, the company has been a good performer in terms of fulfilment of debt obligations and still stands to be considering the current economy and market condition for the local firms to operate.
Inventory Turnover (ITO) ratio depicts how quickly the company is able to sell-off its inventory. Abbott has been able to perform better in this area. ITO has slightly deteriorated in FY08 from 74.79 days in FY07 to 80.46 days in FY08. This shows that the company has taken 5 days extra to sell-off its inventory, as a result reduced in their efficiency process. This could have been because there is an increase in sales, however the average inventory has been more than the last year's figures. This has resulted in the decline in the ITO. It is not been a significant increase however, compared to the industry, it has slightly deteriorated.
Days sales outstanding (DSO) shows how quickly the company is able to collect the dues from its debtors. It should be high enough for the company to avoid risks of bad debts. Abbott has kept its DSO on a very efficient level with 7.09 in FY08 compared to 7.08 in FY07. This shows that the company has employed reasonable measures to collect their debts from the customers and made sure that their customers do not take long enough to repay the debts of the company.Operating cycle tells us how the cycle from the production to sales and collection of revenues takes place. Abbott again has been able to do this efficiently with only 59 days in FY07, however slightly deteriorated in FY08 to 64 days.
This depicts that within 64days the company is able to do its cash generation. Analyzing it on the year basis, the company is able to do its cash turnover 5 times a year, which remains higher than the other competitor that Abbott faces. TATO, a reflector of the company's assets' revenue generation capability, has again showed a sustained growth of 1.41x in FY08 compared to 1.40x in FY07. This is resulted in because both total assets have increased as well as the sales volume. There has been a capital expenditure of Rs 255 million in FY08 which is part of the up gradation programme due in 2011, this along high sales volume achieved by the company has help company achieve a higher TATO compared to previous years where declining trend was observed.
Sales/Equity follows a similar trend as TATO. It posted 1.98x in FY08 compared to 1.77x in FY07. The increase in sales volume again assisted in increasing the rate of Sales/Equity. This shows that the company is able to have almost 2x the cash generation from the equity invested, which shows a positive sign for the shareholders, who have invested in the company. Moreover more capital reserve can put the ratio under stress in times contraction sales. Abbott has performed better than its counter companies in terms of both TATO and Sales/Equity.
Considering the debt management ratio, the company has performed slightly better than the previous year, but deteriorated in one of the sectors of debt management. The first would be Debt to Asset ratio. There has been a slight deterioration in this ratio as it has declined from 0.20x in FY07 to 0.29x in FY08. The ratio basically tells us that the company has been able to finance their assets through their debt (long-term plus short-term). A slight reduction could be because of the accrued liabilities that have increased in FY08.
The second ratio is Debt to Equity. This shows us that the financing of its assets are done through either certain percentage of debt and equity. There has been a decline in the ratio, 0.41x in FY08 from 0.21x in FY07. This tells us that the company has been relying more on debt to finance its assets than equity. However, they have maintained a healthy position by keeping the gearing ratio below 0.50x. The decline can again be attributed to the increase of Current liabilities that was observed during FY08. Moreover, the equity position is also seen strong, as there has been a considerable increase in their Capital Reserve for the year FY08.
Long-term Debt to Equity has been on a declining trend over the past 3 years. It has improved slightly from FY07. 2.99x (FY07) to 2.82x (FY08). However, the ratio has been a significant concern for the company. This is because of a significant increase in the Deferred Taxation, the company has accumulated defer taxes in the past two years, because of the tax liability that the company incurred. The company had been performing well in FY05 and FY06; however the condition deteriorated in FY07. The T.I.E ratio has been on a rise for the company for the past two years. There is a decline in T.I.E in FY08, 226.84 in FY08 from 853.81 in FY07.
Though it shows that the company has generated enough income to fulfil their financial cost obligations. However there was a decline because of a low EBIT compared to previous year. There has been a significant decline in EBIT in FY08 compared to FY07. The interest expense has been on declining however the EBIT has decrease by 78% in FY08. The (P/E) ratio shows how much investors are willing to pay per rupee of the reported profits, depends on the company's price per share and its the earnings per share (EPS). There is a sharp decline in the EPS observed in FY08. It has fallen from 12.36 in FY07 to 3.51 in FY08. This main reason for this decline is credited to decrease in the net income while the shares outstanding remained the same.
However, P/E has shown an increase in the value because the investors are still ready to pay a higher price for the shares of the company. This shows that the reliability of the company's performance with respect to local investors. Market price at the year-end showed a decline from Rs 188 in FY07 to Rs 110 in FY08. This could be because of the anticipation of volatility of the company's financial performance, which led to a lower demand for the market investment.
There has been a downward trend for the book value per share in FY08. A slight decline from Rs 37.68 in FY07 to Rs 36.45 in FY08, which could be seen as the company's shareholders equity has slightly reduced because of less Revenue Reserves accumulated in FY08. This is because of the dividend issue in FY08 mounted up to Rs 49m. Hence the book value per share reduced. The dividend per share showed a sharp increase in FY08, because of the rise in the dividend paid out for the year. This could be because the company was re-investing its profits for the expansionary purpose for the past 2-3 years.
However it has paid out dividends to their shareholders in order to promote as a profit sharing company and attracted other investors to keep investing in the company. One reason for doing this is that the company faced a competitive financial year, hence to keep trustworthy position of the company, this move can be beneficial to keep their healthy investors in tact rather than losing out on investments. Secondly, the company can argue that the investments made in previous year have paid off and that has resulted in dividend pay out for the shareholders.
FUTURE OUTLOOK
The company has been performing well even in the current economic condition. There has been rupee devaluation and inflationary pressures that has resulted in the increase of the cost of inputs. However the company as well as the industry has been demanding price settlements with the government so that the profitability of the industry is not affected. The company has invested in the cost-effective procedures that will result offset the cost pressures. Secondly the product portfolio is also given more importance so that the company does not rely on one set of products, rather than keep a balance portfolio that could hedge in terms of economic downturn.
The future outlook remains a cause of concern for the whole industry as the industry tends to be highly regulated by the government. A lack of negotiation will keep affecting the profitability of the industry and due to that the less incentive for the companies to keep a competitive market. FY09 brings a lot of opportunities and growth incentives for the company and the industry, if they achieve negotiation with the government. Secondly they could employ better cost initiatives to improve their cost structures which have resulted in low net-income in FY08. Finally the economy is showing a recovery sign globally as well as in Pakistan. There has been a decrease in inflation figures in Pakistan, which would result in better financial performance. Moreover, the global economic condition can help the company with a better imported raw material cost and the increasing demand.



=======================================================================================================================
ABBOTT LABORATORIES (PAKISTAN) LIMITED - FINANCIALS
=======================================================================================================================
Balance Sheet 2002 2003 2004 2005 2006 2007 2008
-----------------------------------------------------------------------------------------------------------------------
Cash and Bank Balances 468,259 697,047 1,083,182 1,160,775 1,608,841 496,118 1,051,489
Stocks and Spares 59,391 43,658 44,933 49,983 52,498 47,875 47,747
Stocks-In-Trade 825,268 757,948 917,621 1,217,900 1,256,141 1,363,508 1,696,200
Trade Debts/Accounts Receivables 76,839 97,057 88,050 147,297 208,742 128,817 139,004
Loans and Advances 27,550 25,215 17,444 19,429 21,812 33,369 21,316
Deposits and Prepayments 88,821 76,569 62,968 67,156 63,078 101,988 164,785
Interest Accrued - 2,094 491 - - - -
Accrued Profit - - - 8,111 11,739 5,576 -
Taxation Recovarable 58,927 237,449 135,478 131,233 295,934 154,598 258,708
Investments - - - - - - -
Other Receivables 124,785 42,679 14,219 106,139 45,384 197,280 35,465
CURRENT ASSETS 1,729,840 1,979,716 2,364,386 2,908,023 3,564,169 3,129,129 3,421,308
Operating Fixed Assets 744,625 805,219 819,481 823,498 963,726 1,516,821 1,358,355
Capital Work in Progress 93,169 138,027 153,487 364,251 473,297 202,480
Long Term Loans and Advances 30,497 31,304 27,937 28,336 25,306 25,892 23,580
Long Term Deposits 3,305 3,205 3,332 4,947 3,394 4,393 4,393
Long Term Prepayments 1,000 600 - - 5,533 5,133 5,773
-----------------------------------------------------------------------------------------------------------------------
Deferred Taxation
-----------------------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS 872,596 978,355 1,004,237 1,221,032 1,471,256 1,552,239 1,594,581
TOTAL ASSETS 2,602,436 2,958,071 3,368,623 4,129,055 5,035,425 4,681,368 5,015,889
STF under mark-up arrangements 52,465 3 - - - - -
Creditors, accrued and other liabilities 513,745 604,778 554,876 696,130 749,439 881,681 1,346,771
-----------------------------------------------------------------------------------------------------------------------
Taxation-net
-----------------------------------------------------------------------------------------------------------------------
Proposed Dividends 128,762 - - - - - -
CURRENT LIABILITIES 694,972 604,781 554,876 696,130 749,439 992,095 1,346,771
-----------------------------------------------------------------------------------------------------------------------
Long Term Loans
-----------------------------------------------------------------------------------------------------------------------
Deferred Liabilities 11,665 - - - - - -
Deferred Taxation 1,818 27,531 24,145 21,081 44,100 110,414 100,606
NON-CURRENT LIABILITIES 13,483 27,531 24,145 21,081 44,100 110,414 100,606
TOTAL LIABILITIES 708,455 632,312 579,021 717,211 793,539 992,095 1,447,377
SHAREHOLDERS' EQUITY 1,893,981 2,325,759 2,789,602 3,411,844 4,241,886 3,689,273 3,568,512
-----------------------------------------------------------------------------------------------------------------------
Income Statement 2002 2003 2004 2005 2006 2007 2008
-----------------------------------------------------------------------------------------------------------------------
Net Sales 4,004,210 4,277,322 4,598,074 5,176,264 5,887,748 5,887,748 7,059,011
Cost of Goods Sold 2,592,018 2,632,614 2,673,535 2,930,965 3,435,553 3,435,553 4,991,510
Gross Profit 1,462,004 1,681,967 1,985,390 2,296,119 2,478,628 2,478,628 2,069,509
Selling, General and Admin. Expenses 735,830 800,903 836,842 840,515 1,013,700 1,013,700 1,590,621
EBIT 758,580 902,774 1,174,956 1,504,668 1,573,650 1,573,650 3,660,130
Interest Expense 11,315 16,289 3,142 2,902 3,660 3,660 2,704
Net Income Before Taxation 688,647 817,820 1,079,823 1,366,179 1,439,970 1,439,970 544,822
Net Income After Taxation 439,250 526,203 747,119 962,172 1,000,008 1,000,008 343,980
-----------------------------------------------------------------------------------------------------------------------
PROFITABILITY RATIOS
-----------------------------------------------------------------------------------------------------------------------
Profit Margin 10.97% 12.30% 16.25% 18.59% 16.98% 18.48% 4.87%
Gross profit margin 36.51% 39.32% 43.18% 44.36% 42.10% 58.82% 70.71%
Return on Assets 16.88% 17.79% 22.18% 23.30% 19.86% 25.84% 6.86%
Return on Equity 23.19% 22.63% 26.78% 28.20% 23.57% 32.79% 9.64%
-----------------------------------------------------------------------------------------------------------------------
LIQUIDITY RATIOS
-----------------------------------------------------------------------------------------------------------------------
Quick Ratio 1.22 1.95 2.53 2.36 3.01 1.73 1.25
Current Ratio 2.49 3.27 4.26 4.18 4.76 3.15 2.54
-----------------------------------------------------------------------------------------------------------------------
ASSET MANAGEMENT RATIOS
-----------------------------------------------------------------------------------------------------------------------
Inventory Turnover(Days) 73.69 66.63 65.59 74.26 75.64 52.33 57.01
Day Sales Outstanding (Days) 6.91 8.17 6.89 10.24 12.76 7.08 7.09
Operating cycle (Days) 80.60 74.79 72.49 84.51 88.40 59.41 64.10
Total Asset Turnover 1.54 1.45 1.36 1.25 1.17 1.40 1.41
Sales/Equity 2.11 1.84 1.65 1.52 1.39 1.77 1.98
-----------------------------------------------------------------------------------------------------------------------
DEBT MANAGEMENT RATIOS
-----------------------------------------------------------------------------------------------------------------------
Debt to Asset 0.27 0.21 0.17 0.17 0.16 0.21 0.29
Debt to Equity Ratio 0.37 0.27 0.21 0.21 0.19 0.27 0.41
Long Term Debt to Equity(%) 0.01 0.01 0.01 0.01 0.01 2.99 2.82
Times Interest Earned 67.04 55.42 373.95 518.49 429.96 853.81 226.54
-----------------------------------------------------------------------------------------------------------------------
MARKET RATIOS
-----------------------------------------------------------------------------------------------------------------------
Earning per share 10.23 11.15 13.19 14.15 10.21 2.36 3.51
Price/Earnings Ratio 8.21 8.43 12.28 12.86 14.10 5.25 31.34
Dividend per share 3.30 3.00 3.00 2.50 - 2.00 5.02
Book value per share 44.13 49.26 49.24 50.18 43.33 37.68 36.45
No of Shares issued (in thousands) 42,921 47,213 56,655 67,986 97,900 97,900 97900.30
Market prices(Year End) 84 94 162 182 144 188.45 110.00
=======================================================================================================================

COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].

Read Comments