ACADIA Pharmaceuticals Inc Finances - Case Study Example

Financial Research Report - Acadia Pharma Financial Research Report ACADIA Pharmaceuticals Inc. FIN 534 ACADIA Pharmaceuticals Inc. Financial Research Report 1.0. Introduction Pharmaceuticals Inc. is a publicly traded company in the United States of America in the biopharmaceutical industry. The company is devoted to discover, develop, and commercialize small molecule drugs that are useful in treating disorders in the central nervous system. The current engagement of the company is in treatment of induced dysfunction in Parkinsons disease, schizophrenia, neuropathic pain and glaucoma. All company product candidates are a product of discoveries made at the company’s discovery platform. There is a strong team with industry experience which is put in place to aid in the development of these products. This team work together with the company’s world-class scientific and clinical advisors who are also hired by the company. It was found in 1993 and has it’s headquarter situated in San Diego, in California. The aim of this paper is to evaluate the performance of the company using ratio and stock price analysis. The financial statements for the year ending 31st December 2012, 2011, and 2010 will be used in this analysis. These are complete financial statements covering the whole financial statements retrieved from yahoo finance. 2.0. Rationale for choosing the company for which to invest This company was selected because of interesting trend in the industry. For the past three years, from 2010 to 2012, the company has experienced an interesting trend, recording a poor performance in 2011 and 2012 but positive results in 2010. The company is one of the best performing in the pharmaceutical industry and its dealing with biopharmaceutical products makes it an interesting one to study in the industry. 3.0. Ratio analysis The ratio analysis is uses in financial analysis using the financial statements of a company. A ratio is basically one item in the financial statements expressed in terms of another. Ratios may be expressed in decimals, fractions or a statement expressing how one item related with another. The ratios make sense when compared with those of another company for the same period or for the same company in different periods (Belkaoui, 2003). The interpretation of ratios is used to measure how the company has performed relative to others or the industry standards. For this report, the liquidity ratios (current ratio, quick ratio, and cash ratio), profitability (gross profit margin, net profit margin, return on investment and return on equity), and shareholders ratios (earnings per share, and price earnings ratio). 4.1. Liquidity ratios These ratios measure the ability of a firm to pay for its short term financial obligations (Belkaoui, 2005). They are also called working capital ratios and they are calculated by comparing the items in the balance sheet, especially the current assets and the current liabilities. Liquidity Ratios | | Formula | 2012 | 2011 | 2010 | Current | Current Assets/current liabilities | 18.2495 | 5.18232 | 6.351569 | Quick | Current Assets-stock/current liabilities | 18.2495 | 5.18232 | 6.351569 | Cash | Liquid Funda/current liabilities | 9.734196 | 1.117437 | 1.149354 | 4.2.1. Current ratio: This is the least liquid measure of liquidity. This is because it includes all current assets, the most and least liquid. It indicates the extent to which the company is able to pay for its current liability using the available current assets. The recommended level of Current assets is 2.0, meaning that the company is able to pay for current liabilities twice using available resources. For ACADIA Pharmaceuticals Inc. the current ratio was far above the recommended level because it was above 2.0 for 2012 (18.2495), 2011 (5.18232), and 2010 (6.351569). The company will therefore have no problems settling the short-term debts comprising of current liabilities. The company seems to have performed better in 2012 than in 2011 and 2010. The current ratio for 2012 was higher (18.2495) than that of 2011(5.18232) and 2010 (6.351569). The liquidity strength of the company was therefore higher in 2012 than in 2011 and 2010. The trend of the ratio is as shown in the table below: 4.2.2. Quick Ratio This ratio is calculated the same way as the current ratio, except for the fact that the inventory is deducted from current assets. For ACADIA Pharmaceuticals Inc., the current ratios for the three years were the same as the current ratios because there was no inventory. It gives a more accurate picture of the situation of the company. The ratio should be 1.0 for the company liquidity to be healthy. For ACADIA Pharmaceuticals Inc., the ratio for 2012 was above 1.0 (18.2495). This is to mean that the resources available in the current assets are more than enough to pay for current liabilities. The year 2012 was better than year 2011 and 2010 because it had a higher ratio than them. 4.2.3. Cash Ratio This ratio is the most accurate since it entails the liquid funds and compared with the short term obligations of the company. The higher the quick ratio, the stronger is the company’s level of liquidity. For ACADIA Pharmaceuticals Inc., the cash ratio for 2012 was far too high (9.734196). For 2011 and 2010, the ratio was slightly above the recommended level (1.117437 and 1.149354 respectively). The company’s strong liquidity shows that the company is able to operate at no risk of liquidation in the short run. Weak liquidity is a forerunner to bankruptcy. Financing operations is a problem when the company is weak in its liquidity. The company should continue to promote sales to ensure more liquid assets are available in the company and this will improve the cash ratio. The company should also look for discounts from suppliers so that the creditors’ claims may reduce. Reducing the debt collection period will also ensure that there are more liquid funds in the company also improving the company’s liquidity strength. 4.2. Profitability Ratios These ratios measure the ability of the company to control the cost of sales and expenses in order to make sustainable earnings. They relate components in the profit and loss statement and sales or revenue. The survival of the firm in the long run is dependent on the level of profitability. It is , therefore, imperative to evaluate the performance of profitability to ensure the company is moving in the right direction. Profitability Ratios | Gross profit margin | Gross profit/sales*100 | 100% | 100% | 100% | Net profit | Net profit/sales*100 | -4.24883 | -11.0135 | 0.359297 | Return on Investment | Net Profit/total assets*100 | -19% | -71% | 39% | Return on Equity | Net Profit/Equity*100 | -25% | -97% | 51% | 4.3.4. Gross Profit margin The ratio assesses the efficiency of the company in production of goods and services (Pizzey, 2001). The level of control of cost of sales is very important in this case. For ACADIA Pharmaceuticals Inc., control of cost of sales was hard to measure because the company did not have cost of sales for that whole period of time. It was recorded at 100% because the financial statements did not have the cost of sales. The performance based on this measure was the same. If the company manages to control cost of sales efficiently, the gross profit will always be higher, and by extension the net profit will be higher (Stickney, 2010). It can be improved by getting suppliers of raw materials with better rates. The carriage inwards should also be reduced where possible to reduce the cost of sales. 4.3.5. Net Profit This ratio is the net profit expressed as a percentage of sales and it measures the ability of the firm to control the financing expenses (Oppermann, 2009). ACADIA Pharmaceuticals Inc. made loss in 2011 and 2012. The margin was negative because the costs exceeded the income for the two periods. However, the loss was higher in 2011 than 2012. In 2010, the company had a positive net profit margin. Making net loss means that the shareholders will not be compensated in those years. The company improved and was more efficient in controlling the expenses at a given level of interest rate in 2012 than in 2011. This is an encouraging trend to the shareholders because they are able to get more profits in the future should the trend continue. The expenses should as lower than the gross profit as possible so that it may result to high net profit. To improve on the net profit margin, the company should try to minimize the expenses that are incurred in running the business. 4.3.6. Return On investment (ROI). The ratio shows the amount of profit generated by every unit of total assets which have been utilized by the company (Kastantin, 1988). ACADIA Pharmaceuticals Inc. recorded losses in 2012 and 2011 and investment in the total assets did not yield profit. However, there was improvement between 2011 and 2012 from -71% to – 19%. This shows that there was more efficiency in utilizing total assets in 2012 than in 2011. In 2010, there was a positive Return on investment of 39% meaning that the company made 39% of net profit from utilization of total assets. The trend is illustrated below: 4.3.7. Return on Equity (ROE). According to Eisen (2007), this ratio shows how much of the profit was made from utilization of the equity capital. For ACADIA Pharmaceuticals Inc., investment of Equity capital yielded negative results in 2012 (-25%) and 2011 (-97%). However, the results of 2010 yielded positive results with ROE of 51%. There was a great improvement from ROE of -97% in 2011 to ROE of -25% in 2012. This is an improvement between the two years. Increase in ROE means that the company is performing better and Equity invested on the owners of the company is well invested in productive projects. The figure above shows the trend of the ROE for the three years. If the trend continues beyong 2012, the company is likely to make higher returns in the future and earn positive results for equity shareholders. 4.3. Shareholders Ratios 4.4.8. Earnings per share (EPS) The ratio is calculated as follows: EPS = = | 2012 | 2011 | 2010 | Net Income after extraodinaries | -20.85M | -22.77M | 15.14M | Preferred Dividends | 0.00 | 0.00 | 0.00 | Net Income available to common stock | -20.85M | -22.77M | 15.14M | Basic Outstanding shares | 55.12M | 52.18M | 38.72M | EPS | -0.38 | -0.44 | 0.39 | The EPS was negative in 2012 and 2011 meaning that it was not paying anything per share because the income that is distributable to common stock was negative. However, there was an improvement between 2011 and 2012 from -0.44 to -0.38. The year 2010 had positive EPS because the company had profit available for distribution to common stock. The trend is as shown in the graph below: The trend shows that if it continues as it is, the company will have positive EPS in future. There was a sharp decline between 2010 and 2011 but the situation showed an upward moving trend. 4.4.9. Price Earnings ratio (P/E Ratio) | 2012 | 2011 | 2010 | Price Per Share (PPS) | 23.29 | 23.19 | 22.95 | Earnings Per share (EPS) | -0.38 | -0.44 | 0.39 | P/E ratio | | | | The price earnings ratio of the company could not be computed for the past two years (2012 and 2011). This is because the company had no earnings on the outstanding shares. The company should strive to improve the share prices and the earnings to ensure that the company has ability to pay its shareholders for their investment. 4.0. Stock price analysis The price of socks of ACADIA Pharmaceuticals Inc. is analyzed for the same period 2010 to 2012 performance. The daily stock prices are obtained and their trends are shown in the graphs below: The prices was high in the first few days of the year but kept on declining towards re end of the year. On average, the price of the the stock kept decining throughout te year. The prices here seemed to be very volatile. It increased continually on average towards the mid year where it reached the highest point around the 175th day of the year. The prices then fall towards the end of the year and dropped almost the same level it was at the beginning of the year. The prices dropped sharply the fisr few days of the year but soon started to raise. The increasing trend continued to wards the last quarter of the year and setted between 1.2 and 1.4 towards the end of the year. The trend for year 2010 showed a relativey steady increase. For year 2011, the prices increased towards mid year but eventually towards the end of the year to hit a mark close to what it had from the beginning. The trend for 2012 showed a sharp decline throughout the year. Generally, the stocks of the company performed well in 2010 and 2011 tha in 2012. 5.0. Recommendations The company performance was not good in the year 2012 and 2011. However, the trend showed for all ration calculated indicated that there was generally an improvements in the results released in 2012 compared with those in 2011. The company should focus on strategies which improve the ratios or components used to calculate the ratios. For instance, for liquidity level of the company, the company must focus on strategies which will ensure that the company liquidity strength is sound. The ratios showed that the company was health based on the ratios calculated. The current assets must remain higher than the current liabilities for the company to have a healthy liquidity level. The profitability of the company also needs to be checked on. The profitability ratios did not give desirable results for the company. The company made losses in 2011 and 2012. This shows that the company was inefficient in controlling its cost of sales and daily expenses. However, there was an encouraging trend since there was an improvement between 2011 and 2012. The results remained negative but there was an improvement. The necessary strategies must be made to ensure that the cost of sales and expenses of the company are kept as low as possible in order to improve the profitability ratios. The stock prices of the company had a discouraging trend especially in 2012. The company needs to maintain its standard in the industry so as to improve the performance of the shares, although the price of shares may be influenced by external factors (Drury, 2007). What is within means should be done to improve stock prices. References: Belkaoui, A. (2003). Accounting: by principle or design?, Westport. Praeger, 8-233. Belkaoui, A. (2005) Accounting theory, London Thomson. 5-232. Drury, C. (2007). Management and cost accounting, London. Learning, 32-87. Eisen, P. (2007). Accounting, Hauppauge. Barrons Educational Series, 12- 321. Kastantin, J. (1988). Professional accounting practice management, New York. Quarum Books, 9-165. Oppermann, H. et al. (2009). Accounting standards, Lansdowne. Juta, 3-111. Pizzey, A. (2001). Accounting and finance: a firm foundation, London. Continuum, 1-221. Simanonvsky, S. (2010). Accounting for beginners, Grandville. Global Finance School. Stickney, C. (2010). Financial accounting : an introduction to concepts, methods, and uses, http://quotes.wsj.com/ACAD/historical-prices# http://www.marketwatch.com/investing/stock/acad/profile http://www.marketwatch.com/investing/stock/acad/historical http://www.nasdaq.com/symbol/acad http://www.bloomberg.com/quote/ACAD:US Read More