The November 2018 Strategic Case Study (SCS) centres on Novak, a large pharmaceutical company. Over the course of this article we will analyse the financial statements of both Novak and one of its main rivals, PosterRend.
Starting with the consolidated statement of profit or loss, and it's evident that the loss of two key, patented drugs in 2016 has hurt Novak with revenues declining 5% between 2016 and 2017. The fact that cost of sales has declined less slowly means profits are down by even more and once we get to the net profit figure we see a very disappointing decline of 19%. Novak may be cutting corners in research which is a critical success factor for any pharmaceutical company - expenditure on R&D fell 2% in 2017. Novak also seems to be paying very high corporate tax, which stood at 37% in 2016 and 36% in 2017 compared to the OECD average of about 25%. Overall, financial performance for the year has been disappointing and Novak needs at least one of the three drugs its board is hopeful about to turn into a blockbuster to get them back on track.
In comparison, PosterRend's financial performance, while not likely to set the pulse racing, is at least going in the right direction. Revenues rose by 2% in 2017 and net profit is up 1.4%. Between 2016 and 2017 PosterRend actually overtook Novak and its revenues are now 5% higher than Novak's while its net profit is now 15% above Novak's. PosterRend seems to be taking its research function more seriously with R&D expenditure representing 20% of their revenues while Novak's R&D expense represents just 17% of their smaller revenue figure. Another notable difference comes in the form of the royalty income which pharmaceutical companies receive for licencing out the right to produce patented medicines to other firms. PosterRend's royalty income is 55% higher than Novak's.
Novak's balance sheet shrunk in 2017 with Novak opting to hold off on major investment. Instead, Novak has paid down debt with gearing falling from 57% in 2016 to 47% in 2017. That certainly seems like a prudent move given the fact that the firm was so indebted in 2016, although even after having paid off C$5,000 million in loans, there is little room to take out more loans for investment opportunities. Instead, a rights issue may be the better funding option should Novak need to make a big investment in the coming year. Cash fell by 11% and the company has opted to allocate 89% of its net profit to paying dividends to shareholders instead of looking to reinvest earnings in new assets, acquisitions etc. It may be that Novak is under pressure from shareholders who are looking for some kind of return on their investment and given the fact that the share price is down 43% over the last five or so years, that dividend payments represent the only way shareholders can make a return.
PosterRend's consolidated statement of financial position looks more robust than Novak's. Clearly PosterRend is investing for future growth with property, plant and equipment rising 29% since 2016. Overall, total assets are up 9.6%. PosterRend has funded that increase with internal funding and debt. PosterRend is in a position to pay less in the way of dividends to its shareholders given the doubling in their share price over the last 5+ years. As a result, PosterRend has paid out 69% of its net profit in dividends in 2017 leaving more internal funds for investment. Long-term loans rose by C$5,000 million in 2017 but their level of gearing is still more comfortable than Novak's, standing at 33% in 2017.
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