Actavis' Legacy Operations - Research Proposal Example

Finance and Accounting Analysis and Valuation of Actavis Plc Contents Contents 2 Company Overview 3 Competitors 3 Financial Analysis 3 Profitability Ratio 3 Profitability comparison with competitors 4 Liquidity Ratio 5 Liquidity comparison with competitors 6 Leverage Ratio 7 Leverage comparison with competitors 7 Earning Power Ratio 8 Earning power comparison with competitors 8 Actavis’s Growth Model 9 Actavis’s strategy 12 Valuation of Actavis 13 P/E Valuation 13 Gordon’s Dividend Growth Model of Actavis 14 Conclusion 14 References 17 Company Overview Actavis is considered as one of the largest forte pharmaceutical manufacturers. Nonexclusive medication assembling constitutes the vast majority of Actavis legacy operations, with around 40% of this current fragments income originating from markets outside the United States. Actavis marked pharmaceutical portion, which practices essentially in ladies wellbeing and urology, will make up about 25% of income after the procurement of Warner and almost half of income if the Woodland arrangement moves ahead. Anda, Actavis medication circulation auxiliary, will speak to almost 10% of sales. Competitors We have taken Abbott International and Mylan Inc as major competitors of Actavis Plc. Financial Analysis Profitability Ratio Profitability Ratio can be defined as financial a tool which is used to justify a company’s ability to generate revenue which is compared to the business’s expenses and other operational costs which are incurred during a specific time period. Ratios which are coming under profitability ratio can be judged by its higher value as compared to a competitor’s ratio or same ratio for previous period of time. If the ratios are higher, then it indicates that the company is doing well (Thukaram, 2007, p.99). Actavis Plc Particulars 2011 2012 2013 Gross Profit Margin 44.23 43.59 49.77 Net Profit Margin 5.69 1.64 -8.65 Operating Profit Margin 13.49 10.32 11.77 Return on Capital Employed 47.76 8.11 10.31 Gross profit margin is derived from the ratio of gross profit to sales or revenue. Gross profit margin shows the percentage by which gross profit has exceeded cost of production. It measures that how well a business can control its costs. Investors also use this ratio and compare with different companies in same industry and in different industry to decide which one is most profitable to invest. Higher gross profit means that the company is more efficient than its competitors (Drake, No Date). Net profit margin is a ratio under profitability ratios which can be calculated as net profit before interest and tax divide by sales. This ratio indicates the amount of sales is remaining after paying all expenses. It is very necessary to while comparing with other companies. Higher net profit indicates that a company is more competent than other companies at converting sales into profit (Drake, No Date). Operating profit margin measures the ability of the firm to earn operating profit out of its total revenue. ROCE measures the return of a business earned by capital employed. Return on Capital Employed is the ratio of Earnings before Interest and Tax (EBIT) to the capital invested. It measures the effectiveness and efficiency of the manager in using the available resources to them, irrespective of the way of financing the resources. This ratio is important when comparing a company with another company or during the comparison of performance of a company over a number of years (ACCAglobal, 2007). Profitability comparison with competitors Actavis Particulars 2013 Gross Profit Margin 49.77 Net Profit Margin -8.65 Operating Profit Margin 11.77 Return on Capital Employed 10.31 Abbott Particulars 2013 Gross Profit Margin 54.26 Net Profit Margin 11.79 Operating Profit Margin 12.46 Return on Capital Employed 32.89 Mylan Particulars 2013 Gross Profit Margin 44.98 Net Profit Margin 9.03 Operating Profit Margin 19.55 Return on Capital Employed 14.46 Liquidity Ratio Liquidity means the amount of cash that a company can have in hand to quickly meet its short term obligations. A reasonable amount of liquidity is important for the survival of every company and poor control of cash is the main reason behind business failure. It shows the liquidity position of the company (ACCAglobal, 2007). Actavis Particulars 2011 2012 2013 Current Ratio 1.40 1.40 1.35 Quick Ratio 0.91 0.83 0.80 Current Ratio can also be called as working capital ratio. It can be determined by current assets over current liabilities. It shows the financial performance of company’s liquidity. The ideal current ratio is 2:1 (Mittal, 2011, p.53). Quick ratio is also known as the acid test ratio. It can be calculated by (current assets – inventory)/current liabilities. Liquidity comparison with competitors Actavis Particulars 2013 Current Ratio 1.35 Quick Ratio 0.80 Abbott Particulars 2013 Current Ratio 2.02 Quick Ratio 1.74 Mylan Inc Particulars 2013 Current Ratio 1.51 Quick Ratio 0.95 Leverage Ratio It is also known as the solvency ratios. It is used to define the ability of a company to meet its long term debt. This ratio shows the company’s income after payment of taxes but excluding depreciation expenses which are non cash expenses compare to the firm’s total debt (ACCAglobal, 2007). Actavis Particulars 2011 2012 2013 Assets/Equity 1.88 3.66 2.38 Debt/Equity 0.36 1.95 1.04 Debt to equity ratio measures the financial leverage of the company and can be determined by dividing the long term total debts of the company by its shareholder’s equity. It indicates the amount of debt and equity the company is using to finance the assets (ACCAglobal, 2014). Asset to equity ratio determines portion of total assets and total equity in a company. Leverage comparison with competitors Actavis Particulars 2013 Assets/Equity 2.38 Debt/Equity 1.04 Abbott Particulars 2013 Assets/Equity 1.70 Debt/Equity 0.33 Mylan Particulars 2013 Assets/Equity 5.15 Debt/Equity 3.16 Earning Power Ratio Particulars 2011 2012 2013 Return on Equity 7.32 2.52 -7.87 Asset Turnover Ratio 0.68 0.42 0.38 ROE determines the amount of net income over the amount of equity shareholders. It shows the profit that a company has earned with compare to total equity on balance sheet (Demonstrating value.org, 2013). Asset turnover ratio measures the ability of the company to generate revenues out its fixed assets. Fixed asset turnover ratio can be calculated by dividing the total revenue by the amount of total fixed assets. Normally higher the ratio is better for the company but some analysts state that much higher ratio can cause problem for a business organization. Generally it has been seen that high fixed asset turnover ratio comes with low return on revenues and vice versa (ACCAglobal, 2014). Earning power comparison with competitors Actavis Particulars 2013 Return on Equity -7.87 Asset Turnover Ratio 0.38 Abbott Particulars 2013 Return on Equity 10.20 Asset Turnover Ratio 0.51 Mylan Particulars 2013 Return on Equity 21.07 Asset Turnover Ratio 2.21 Actavis’s Growth Model Actavis proceeds with its transformational arrangement making with a $66 billion offer for Allergan. We dont suspect Actavis $219 offer will goad an offering war with Valeant and its organization with Charge Ackmans Pershing Square, which was long ago seeking after a threatening takeover with a last official offer close $180. In spite of the fact that we dont see solid key cover in the middle of Actavis and Allergan, we think the evaluated $1.8 billion in expense collaborations, including lower tax breaks and conceivable changes to our expense of capital, will make shareholder esteem. Well likely build our reasonable worth evaluation for Actavis as we consolidate the arrangement in our model. Essentially because of Allergans constrained introduction to bland rivalry and solid pipeline, we think Actavis competitive favorable circumstances are reinforced by the arrangement, and we want to re-assess the organizations monetary canal with the possibility to build the rating to wide. Generally, we think this arrangement will make Actavis an especially interesting pharmaceutical organization with solid specialty competitive favorable circumstances from an industry heading vicinity in real money pay feel, far reaching essential consideration and ophthalmology establishments, and also a robust generics business concentrated on restricted rivalry items. Actavis arrangements to fund the arrangement with roughly $38 billion in trade (counting $27.5 billion in for money new debt issuance) and $28 billion in stock through 0.3683 Actavis offers for every Allergan offer. Administration envisions these cooperative energies in addition to different open doors for business extension in worldwide markets can push non-GAAP EPS to practically $25 by 2017. Investment Thesis  Actavis has quickly changed over the recent years on key acquisitions and corner item dispatches. Development difficulties stay from the U.S. patent bluff, valuing weight in Europe, and an indeterminate marked pipeline, yet Actavis long haul prospects have enhanced significantly because of more differentiated income streams and stretched scale, in our perspective. The decreasing wave of patent lapse opportunities will make development troublesome for non specific organizations, however Actavis stretching worldwide foot shaped impression and capacity to secure one of a kind dispatches, for example, nonexclusive variants of Lidoderm, Lovenox and Concerta ought to help keep up development and gainfulness. In our perspective, Actavis likewise has one of the stronger business associations with Amgen for creating biosimilars, which confront stringent assembling, administrative, and marketing obstacles. Their advancement association incorporates bio-similar renditions of Herceptin , Erbitux, Avastin, and Rituxan. The Actavis-Watson blend extended worldwide operations, giving the organization new development boulevards in Eastern Europe, Russia, Australia, and other developing markets. Somberness measures and global market movements to delicate frameworks remain an evaluating concern as administration has chosen to draw back from some Western European markets, yet we think scale picked up from worldwide extension gives Actavis an important competitive edge. It can be anticipated that Actavis will stay concentrated on boosting its marked pipeline and sales force benefit to abstain from mounting weights in the generics portion. Actavis acquisitions of Warner Chilcott and Backwoods Research centers will significantly extend the organizations marked medication portfolio with a noteworthy vicinity in the essential consideration market, through a ladies wellbeing, gastrointestinal, urology, and focal sensory system remedial centering. We keep on having unobtrusive desires for Actavis marked pharmaceuticals because of patent closes; a pipeline intensely centered on life-cycle items, and restricted valuing force with payers. In any case, potential expense collaborations, including a significantly lower duty rate, ought to drive solid income development in the close term while in-authorizing and acquisitions maintain the pipeline. Actavis’s strategy Actavis essentially infers its tight economic canal from economies of scale as one of the biggest forte pharmaceutical producers on the planet. The merger in the middle of Watson and Actavis further unites bland medication industry market impart and enhances Actavis economies of scale, which helps harden its restricted economic channel, as we would see it. In the mean time, the acquisitions of Warner and Woodland include critical enhancement and marketing scale to Actavis patent-ensured medication portfolio. After the end of the Watson-Actavis merger in the final quarter of 2012, Actavis turned into the third-biggest nonexclusive medication producer and cemented its positioning as an issue industry pioneer alongside Teva, Sandoz (an auxiliary of Novartis), and Mylan. We gauge these four organizations have about half of the worldwide retail non specific industry market impart and, on account of economies of scale, increase an ease assembling playing point over littler players in the business. The Actavis arrangement supported Watsons offer of the worldwide generics market to approximately 10%, by our appraisal. Nonetheless, Actavis still slacks its associates in certain ease fabricating capacities, as we would see it, basically on account of constrained vertically coordinated operations. As an issue, administration has sagaciously sought after corner drug classifications or complex generics, which have helped support the organizations development and productivity. Higher assembling or support necessities for these items help limit rivalry, which thus prompts longer times of benefit than regularly seen with more traditional bland medications. Despite the fact that we have a few reservations about development open doors and evaluating power in its marked medication fragment, Actavis moderately wide arrangement of patent-secured medications, which has ended up further differentiated through the Warner and Woods acquisitions, likewise adds backing to its slender economic channel. Licenses on Actavis marked medications help stronger estimating and profits for capital than non specific pharmaceuticals. Valuation of Actavis P/E Valuation Company Name Share Price EPS P/S P/E P/B Actavis 259.75 -3.01502 5.81 -86.15 2.3 Abbott 43.81 2.477015 2.97 17.69 2.9 Mylan Inc 55.79 1.876596 2.78 29.73 6.1 From the above table it can be seen that the share price of Actavis is higher among other companies. But the price earnings ratio of the company is negative as the EPS of Actavis is negative among others. Actavis Enterprise Value Actual Market Value 77575094000 685,156,500,000.00 From the above table it can be seen that the average enterprise value of Actavis is lower than the actual market capitalization of Actavis. Thus it can be stated that the company is undervalued. Gordon’s Dividend Growth Model of Actavis Dividend 0   WACC 4.25%   Growth Rate 9.80%   DDM Number of Shares Market Capitalization 0 248886998 685,156,500,000.00 From the above table it can be seen that the company has not paid any dividend. The company has not paid dividend for 2012 and 2013. The WACC of the company is 4.25% and the growth rate of the company is 9.80%. Thus the DDM of the company is zero, numbers of shares of the company is 248886998 and market capitalization of the company is 685,156,500,000.00. Conclusion Analysts are marginally raising their reasonable quality appraisal for Actavis to $210 for every offer from $200 in the wake of boosting our close term productivity suspicions. Weve left our long haul income and edge evaluates generally unaltered, in any case. Regardless we gauge yearly free money stream surpassing $4 billion because of $1 billion in expense collaborations after the Timberland Research facilities procurement. We dont join unannounced acquisitions in our gauge, which could make extra shareholder esteem. The decrease in the patent bluff and progressing rivalry from more diminutive associates will make development and benefit hard to support in Actavis nonexclusive fragment, in our perspective. Then again, Actavis offers of restricted rivalry nonexclusive items in the U.s. market, including Lidoderm, Adderall XR, Lovenox and Concerta ought to help maintain market offer and productivity. We accept U.S. bland deals development will remain sensibly solid through no less than 2016, and we show mid single-digit development in Actavis joined global non specific deals. Administrations late choice to strip subscale European operations ought to likewise help Actavis development and edge profile in its global nonexclusive medication operations contrasted with associates more uncovered with valuing weight in Western Europe. Our model additionally fuses a non specific fragment edge over 30% over the long haul as working power part of the way balances valuing weight. We anticipate that development and gainfulness will climb in Actavis marked portion through the mix of Warner and Woodland, dispatches of new items, and enhancements to working scale. The mix with Warner and Backwoods ought to bring Actavis aggregate marked deals to generally $7 billion, and we think the organization can keep up pretty nearly midsingle-digit natural development throughout the following five years through new item dispatches and progressing development in items like Tudorza, Bystolic, Viibryd and Linzess. We see constrained potential for income collaborations because of requirements from worldwide authorizing understandings. We anticipate that fragment edge will stay high as the organization picks up deals energy profit and in-permitting arrangements dont consume huge examination dollars. In the circulation section, we show mid-single-digit development over the rest of the patent bluff with a portion working edge close to 5%, which climaxes in a united working edge climbing almost 25%. Our gauge produces normal profits for capital in excess of 16%, and we gauge Actavis expense of value at 10%. References Thukaram, R., 2007. Management Accounting. 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Available at: http://www.infinancials.com/en/market%20valuation,Actavis%20PLC,30641NU.html. [Accessed on: 23rd November, 2014]. Read More