Abbott Laboratories is a highly diversified global health care company devoted to the discovery, development, manufacture and marketing of pharmaceutical, nutritional and medical products, including 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 health care 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 comprise a work force of over 1500 employees. Its shares are now quoted at all exchanges of Pakistan. It has the honor 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, anaesthesia, medical nutrition, anti-infectives and diagnostics. Their wide-range of products is managed and marketed through four marketing arms. The diagnostic division operates from its office located at Korangi, Karachi. With the leading products in several key segments of the diagnostic market, sales and support staff are available in all major cities of the country.
INDUSTRY ANALYSIS
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 370 pharmaceutical manufacturing units including those operated by 30 multinationals present in the country. The local companies can be classified into three categories:
1. Manufacturing Units
2. Importers that import drugs in finished form
3. Franchisors
The prevailing market size of the industry is worth Rs 80.11 billion, of this total the market share of local pharma companies is 59%.
The Pakistan Pharmaceutical Industry meets around 70% of 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 is a developing pharmaceutical market, with a large population and economic progress evident, but per capita drug spending has been low at around US $9.30 in 2007. Private spending accounts for 65% of total healthcare expenditure sourced through out-of pocket payments, international aid and religious or charitable institutions. Public spending on the other hand accounts only 1% of total GDP. The forecast period is likely to witness the marginal strengthening of the generics sector, albeit more in terms of volumes than values. The share of generics is also likely to increase further as major drugs become off-patent in the near term, to the likely benefit of the generics-dominated local industry.
Pakistan pharma industry is relatively young in the international markets with an export turnover of over US $100 million as of 2007. Pakistan pharma industry boasts of quality producers and many units are approved by regulatory authorities all over the world. Like domestic market the sales in international market have gone almost double during last five years. Pharma industry is focusing to an export vision of USD 500 million by 2013. In the meantime, exports are also likely to be boosted by new regional and global opportunities.
According to the IMS (November 2009, 12 months), Abbott Pakistan has a market share of 5.2% of Pakistan pharmaceutical market. Abbott has been doing better than the average pharmaceutical company over the 8 years under observation. In 2001, Abbott performed much better than the industry average, an 84% difference in profit margin, in favour of Abbott. After 2001, the industry's rate of change of profit margin was greater than that of Abbott, bring the two closer to each other. However, 2003, the difference began to increase again and still it operates above average.
RECENT RESULTS (3Q10)
The sales of the pharmaceutical products increased by 4%, while the sale of nutritional and other segments increased by 22%. The sales overall increased by 19.4% to be Rs 7.3 billion with major contribution coming from local sales. GPM increased from 28% to 34% in 3Q10 as compared to 3Q09. Selling and distribution expenses increased by 23%, due to difficulties in the transport because of the floods. Other operating income decreased by 30.6% while financial charges showed an increase.
PAT was recorded at Rs 838 million as compared to Rs 544 million in the same period last year, an increase of 54%. EPS was Rs 8.56 as compared to Rs 5.56 in the same period last year.
OPERATING PERFORMANCE
Net sales for the year registered an increase of 19% over prior year. Gross profit was 29% of sales versus 30% last year primarily due to depreciation of Pak rupee and inflation with no corresponding increase in selling prices of pharmaceutical products by the Government. Profit for the year after tax was Rs 826 million (2008: Rs 344 million). Increase in current year's profit is attributable to actuarial gain recognized on the improved performance of Pension fund investments.
The profit margins have improved from FY08 from 5% to 10% in FY09, specifically due to better efficiency in selling and distribution, expenses of which reduced by 17%, and also an increase in other income of PKR 36 million thus easing the pressure on profitability which Abbott has experienced in the past two years. However Abbott has still got to recover to the level it had achieved in the FY07.
The company's profitability had been on a constant rise till 2007 (except in 2006), indicating that the costs are under control, as the net income had been increasing by a greater proportion than its sales.
However, net sales for FY06 had increased by only 13 % as compared to FY05. The pharmaceutical segment (representing almost 85% of the company's business) is starting to get adversely affected by the lack of price increase for registered products by the government. With almost a double-digit inflation and the Rupee significantly depreciating particularly against the major European currencies, the cost pressures are beginning to hurt the company's profitability. Consequently its gross profit and net profit margins both declined in FY06, despite improvement in both sales mix and plant efficiencies. The profit margin increased by 32% between 2003 and 2004, where as the gross profit increased by around 40% in 2007, the largest increase experienced in the 8 years under observation.
ROA and ROE trend show that it increased 26% and 32% respectively in 2007, however it declined sharply in FY08 to 6.81% and 10% respectively, specifically due to an increase in cost of goods sold of 30% attributed by a devaluation of the rupee. However it improved from these levels to resume at a much better rate of 17% and 26% respectively.
FY06 had experienced a major decline because of the greater proportionate increase in assets compared to an increase in net income. The net income increase was lower because of higher selling, administrative and distribution expenses driven mainly by increased promotional expenses relating to consumerization of selective nutritional products and higher pension charge. Slight increase in financial costs combined with inflation and Rupee depreciation caused the net income to increase only slightly compared to total assets increase. However, the situation improved in FY07 showing an increase in ROA.
LIQUIDITY POSITION
The liquidity position is not highly worrying though it isn't so rosy like it used to be before FY07 as both the current and quick ratio have declined to 2.03 and 0.94 respectively from levels as high as 4.76 and 3 in FY06. The decline in mostly associated with the decline in cash and bank balances plus a rise in creditors.
All the liquidity ratios indicate that the company has expanded over the 8 years. The current ratio has increased from 1.83 in 2000 to 4.76 in 2006. However, it declined in FY07 again due to combined effects of lower CA and higher CL.
Abbott's current ratio trend has been in line with the increasing industry trend, with the exception of the year 2005, where the current ratio fell from 4.26 to 4.18, a result of the higher proportionate increase in current liabilities, including creditors, accrued and other liabilities (25% compared to 23%). But this decline is quite meagre.
The currents assets have been increasing constantly till 2006, however the rate of increase has been very variable, ranging from 68% between 2000 and 2001, from 0.4% between 2001 and 2002 and ultimately declining in FY07.
On the other hand, current liabilities have experienced a very fluctuating trend, ranging from a 45% increase between 2000 and 2001, to a 15% decrease over the next year. The current ratio rose sharply between 2002 and 2004 because the current assets increased by 37%, mainly due to an increase in cash balances and recoverable taxation, while the current liabilities decreased by 20%, because a decline in the short-term finances and proposed dividends.
In fact, current liabilities fell from 2001 to 2003. While in 2000, the ratio of 0.61:1 showed that the company might become insolvent, it further implied that its stock-in-trade was above the industry average. In subsequent periods it improved its liquidity position with respect to this particular ratio. The company's movement is similar to that of the industry's, with the exception of 2005. The drop can be attributed to the 33% increase in inventory that year.
Although the increased current ratio over the six years reflects an increase in Abbott's ability to pay off its short-term obligations, it also indicates an excess of nonproductive assets such as cash and inventory.
Quick ratio followed a similar trend to that of current ratios, being on a constant rise till 2004, while suffering a fall in the consequent periods. The rise for the first four periods can be attributed to the proportionate increase in current assets, excluding inventory, being higher than the proportionate increase liabilities.
ENCOURAGING SIGNS IN ASSET MANAGEMENT
Inventory Turnover (ITO) ratio depicts how quickly the company is able to sell off its inventory. For Abbott, this has always been greater than that of the industry's average as its undergoing a capital expansion program over past few years.
ITO had been declining until 2004, after which it started rising. The decline is to be explained by the proportionate increase in net sales being higher than the increase in average inventory kept by the company. This is a good sign because a decline in inventory turnover indicates that the company efficiently selling off its inventory and hence is not facing a risk of obsolescence of inventory further showing that demand is high. However the ratio's increase 2004 onwards is because the net sales are not increasing by a high percentage while inventory increases. This can be attributed to company's plant expansion and up-gradation project that has been commissioned in phases till 2007.
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. The trend line indicates a decline in this ratio for the first two years due to the proportionate increase in net sales being higher than that in trade debts indicating that the company is facing higher risk of debt evasion and it needs to reformulate its credit policy. Then there were some fluctuations after which this ratio experienced a rapid rise in 2005 and 2006 due to 67% and 43% rise in trade debts (credit sales) with only modest increase of 13% and 14% in net sales respectively. The operating cycle of Abbot hence showed an increase in FY05 and FY06 due to rise in ITO and DSO in the respective years. However, DSO declined again in FY07 like ITO thus lowering the overall operating cycle, which is a good sign. Currently in FY09 it stands at 10 days which is pretty efficient as well.
Moreover, it must be noted that Abbott's DSO is far below the industry average, depicting its healthy status. It can use this advantage over the average pharmaceutical company, as it receives cash much earlier than the others. This cash can be used for further investment in more assets, such as inventory, as well as for further expansion.
TATO, a reflector of the company's assets' revenue generation capability, decreased in FY06 only to increase in FY07 but after that the ratio shows a positive trend. Now it stands at 1.7 which is the best Abbott has achieved. The reason for the decline in FY06 can be the percentage increases in net sales of 13% and 14% being lower than the percentage increases in total assets of 23% and 22% in 2005 and 2006 respectively.
This decline is due to the fact that the company has been investing in its fixed assets, mainly in plant, machinery and infrastructure up gradation. Capital expenditure of Rs 365 million was made to improve compliance with the latest GMP and EHS requirements.
Sales/equity ratio also follows the exactly same pattern as that of TATO. This is showing a declining trend FY06 onwards because of increasing equity base of the company both due to increasing reserves and paid-up capital over the years. However, the situation reversed and both TATO and sales/equity ratios improved in FY07 on the account of a much higher increase in sales.
MORE RELIANCE ON TRADE FINANCING
As far as debt management is concerned, Abbott has followed a very similar trend to that of the industry. The trend line that Abbott is increasing its reliance more on debt as the debt to asset and debt to equity both have increased consistently. The current liabilities increased by 16% and non-current liabilities increased by 19% in FY09. The long term liabilities solely include deferred taxation which has been on the rise due lesser taxable income over the years compared to the accounting income.
After the stock exchange crash of 2008 Abbott stock prices declined 41% in 2008 and by a further 12% in 2009. Although the EPS has seemed to resume at the previous levels but the investors' confidence in the stock market and the economy has yet to be established. Thus the P/E ratio that shows the confidence of investors on the company's future growth potential has also declined considerably as the stock valued at Rs 96.5 at the end of 2009 as compared to Rs 188 in 2007. Abbott's EPS had been on a constant rise from 2000 right until 2006. This drastic increase can be attributed to a higher increase in net sales, while the number of shares remained either constant or increased slightly. In FY06 the EPS declined to a greater number of shares issued.
The investors showed low confidence in the stock market and due to political uncertainty and energy crisis; the stock market plunged from a high 10000 to 9200 points, adversely affected stock prices of Abbott industries. The stock prices decreased from a high Rs 119 to a low Rs 87 despite a positive approach in the 1Q10.
Consequently, the P/E ratio also followed a rising trend due to a higher increase (or smaller decline in case of FY06) in market price than the proportionate increase (or decline in FY06) in EPS.
Till 2005 the shares of Abbot have outperformed the 100 index but later the trend has been volatile as evident from the price chart below.
The dividend per share was the highest in 2009 at Rs 12 per share. The high dividend per share is signal for investors to keep faith in the company as the prospects look good for the company.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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