Different Areas of Astra Zeneca - Essay Example

Financial strategy of AstraZeneca Plc

Table of Contents

1.0 Introduction4

1.1 Background of the company4

1.2 Research Purpose5

2.0 Mission of the company and its impact5

2.1 Impact on employees5

2.2 Impact on shareholders6

2.3 Impact on customers6

3.0 Identifying the strategy of Astra Zeneca and recommendations7

3.1 Current red ocean strategy7

3.2 Porter’s five forces analysis7

3.3 Blue Ocean strategy9

4.0 Corporate governance of Astra Zeneca10

4.1 Cadbury report 1992 and its compliance by Astra Zeneca10

4.2 Compliance with the U.K Corporate Governance Code13

5.0 Financial strategy of Astra Zeneca14

5.1 Ratio analysis14

6.0 Conclusion20

Reference List21

• 1.0 Introduction
  • 1.1 Background of the company

Astra Zeneca Plc is a multinational biologics and pharmaceutical company and is considered as the seventh largest pharmaceutical firm in the world (AstraZeneca, 2016). It has operations in more than 100 countries. Moreover, it has a portfolio of products for key disease areas comprising gastrointestinal, cardiovascular, neuroscience, inflammation, respiratory and infection (AstraZeneca, 2016). The company is being traded on London Stock Exchange, New York Stock Exchange and OMX Exchange. As on 2014, the total numbers of employees of the company were 50,000 (AstraZeneca, 2016).

Table 1: Key Financials of AstraZeneca PLC

Particulars

2013 ($millions)

2014 ($millions)

2015 ($millions)

Profit

2571

1235

2826

Revenue

25806

26547

24708

Asset

55899

58595

60124

Liabilities

32646

21619

26746

Basic Earnings per share

2.04

0.98

2.23

Equity

23253

19646

18509

(Source: AstraZeneca, 2015)

• • 1.2 Research Purpose

The study will be focusing on different areas of Astra Zeneca. The mission statement of the company and its impact on the employees, shareholders and consumers will be explained.

• 2.0 Mission of the company and its impact

Mission statements act as broad guidelines for long term decision making for the board members and senior management of an organisation. It facilitates the management to take decisions that are aligned with main objectives. It offers an insight regarding the broad activities of an organisation (Wright, 2007).

The mission statement of Astra Zeneca is “making the most meaningful difference to patient health through great medicines” (AstraZeneca, 2015b).

• • 2.1 Impact on employees

For the success of a company, it is important to relate its staff with the mission statement of the organisation (Rust, Lemon and Zeithaml, 2012). In other ways, it can be stated that the employees of the company are required to be committed to achieve the mission, set up by its management. In this case, the mission statement of Astra Zeneca is focused to develop new medicines that can make differences for the patients. Hence, its employees are primarily concentrated on discovering, formulating and delivering innovative and effective drugs. By giving enough importance on research and development, the company has created a work atmosphere that stimulates every employee to think about the offering effective solutions to the consumers. Thus, the employees in this organisation are supported through the educational programs, resources and tools. It has enabled the staff to become aware about the current trends in the pharmaceutical industry and the need of the customers. For achieving the mission statement, the company has created a challenging and rewarding work culture which has motivated the staff to perform better.

• • 2.2 Impact on shareholders

The shareholders of the company primarily look into the business performance in terms of the profitability (Arnould and Wallendorf, 2009). However, the investors are also impacted by the mission statement as it directly related to the companies’ business performance (Cavusgil and Zou, 2011). The mission statement formulated by Astra Zeneca has focused on achieving competitive advantage through innovative products. As stated by Jain (2009), in order to improve the financial performance in a highly concentrated market place, the companies are required to create competitive advantages over its rival firms. Hence, it can be inferred that the mission statement of Astra Zeneca may have encouraged its shareholders to invest more in this firm.

• • 2.3 Impact on customers

The business performance of the firms is highly dependent on the acceptance of the customers (Grönroos, 2010). Therefore, it is crucial for the management of the firms to evaluate the impact of mission statement on the potential customers (Ulaga and Chacour, 2011). As mentioned earlier that the mission statement of Astra Zeneca has focused on offering the best possible products to the customers. The customers of the company have been highly influenced by the assurance offered to deliver the most effective medicines. Most importantly, as the medicines are directly related to the safety of the health of the consumers, it is important for the pharmaceutical companies to achieve the trustworthiness of the consumers. Based on this circumstance, the mission statement of Astra Zeneca has been effective to create an impact over the customers. As a result of that, the business performance of the company has also been influenced significantly.

• 3.0 Identifying the strategy of Astra Zeneca and recommendations
  • 3.1 Current red ocean strategy

Due to high level of competition in the pharmaceutical industry, the growth of this sector has become saturated (McDaniel and Kolari, 2014). The situation can be described as ‘red ocean’ (Dickson and Ginter, 2007). Almost 6,000 pharmaceutical companies have been competing with each other to capture the market share of the UK and USA market. Expiration of the blockbuster drugs’ parents can be considered as one of the most significant factor that has imposed enough challenge for the drug companies over the recent few years (Leonidou, Katsikeas and Samiee, 2012). In addition, high cost involved in research and development and low return have also been affecting the performance of these companies (Manu and Sriram, 2008).

However, in spite of this adverse business environment, Astra Zeneca has experienced positive growth. In order to evaluate the business environment of the company, Porters’ five forces analysis can be an effective tool.

• • 3.2 Porter’s five forces analysis

Threat of new entrants: Low

Due to the huge initial investment and cost involved in the research and development, new players find it quite difficult to enter into the pharmaceutical market. In addition, other factors such as parents and licensing, presence of popular brands and essence of established distribution system also affect the entrance of the new companies in this sector (Wind and Robertson, 2013).

Bargaining power of the suppliers: Low

Astra Zeneca has more than over 50 suppliers including large vendors. In the recent times, the company has been restructuring and formulating the development programs for improving its relationship with the suppliers. It depicts that the company has been becoming more independent in the recent years.

Bargaining power of the customers: Low

Astra Zeneca manufactures different kinds of specialised drugs and it has enabled the company to enjoy leverage over the customers (AstraZeneca, 2015b). However, this power has been reduced due to the immense competition of the market. In the US and other emerging market, the company enjoys high power over the individual hospitals and pharmacies. However, in the European market, the company mostly deal with the largest clients such as the national health systems. Thus, it loses the monopoly like market in these parts of the world.

Threats of the substitutes: Low

Complementary and alternative medicines are considered as the major substitutes of Astra Zeneca. These are the most significant players in the homeopathy and acupuncture department. However, the effectiveness of such practices is not so widely popular among the customers. In most of the cases, these companies have been formed on the basis of personal experiences. In contrast, the approach of the firms like Astra Zeneca mostly depends on experimental researches and clinical trials. Hence, these companies do not impose a significant amount of risk on Astra Zeneca.

Competitive rivalry: Moderate

The key competitors of Astra Zeneca include GlaxoSmithKline, Novartis, Amgen and Genentech. Although, Astra Zeneca occupies 8th ranking in this industry, all the top twenty players in this industry, are almost equally powerful. It signifies the level of the competition in this sector (AstraZeneca, 2016).

Based on the analysis of the Porters’ five forces, it can be inferred that Astra Zeneca has high power over the customers and suppliers. In addition, stiff barriers for the new players have further eased the operation for the company. However, fierce competition in the market has been affecting the performance of the company. Hence, with the help of blue ocean strategy, Astra Zeneca may diversify the operation and minimise the impact of cut-throat competition.

• • 3.3 Blue Ocean strategy

As mentioned by Kim and Mauborgne (2009), the blue ocean strategy enabled the firms to reduce the effect of stiff competition in the market. Based on the above analysis, it can be stated that Astra Zeneca needs to enter in new markets. Apart from pharmaceutical market, the company can enter into the market of agrochemicals, big data and drone technologies. The blue ocean strategy of the firm can be termed as ‘D-cubed’ as it focuses on drugs, drones and delivery. With this strategy, the company has focused on the unexplored market which is different from the pharmaceutical market. Most significantly, the current competitors of the company have also changed with the diversification of the operation. D-cubed service initiated by Astra Zeneca focused on the farmers for surveying the crops, identifying plant diseases and deliver specific drugs. On the other hand, data collected in this process are studied and sold to the interested organisations. Overlapping the three different sectors can be effective for Astra Zeneca to reduce the risk factors associated with the business. For instance, agriculture has been closely connected with the pharmaceutical sector. On the other hand, agriculture also accumulates big data which is further used in drones. It has eventually increased the production of the agricultural segment. Due to the innovativeness, this strategy of Astra Zeneca can be termed as blue ocean strategy.

• 4.0 Corporate governance of Astra Zeneca
  • 4.1 Cadbury report 1992 and its compliance by Astra Zeneca

Cadbury report 1992 primarily highlights on the structure and responsibilities of boards of directors of a company (Cadbury, 1992). In addition, the report has also focused on the financial accountability of the companies. The rights of the shareholders and their roles have also been specified in this report.

Based on the chairman’s statement, it has been found that Astra Zeneca has prepared the annual report in accordance to the UK corporate governance Code published by the UK Financial Reporting Council in the year 2014 (AstraZeneca, 2015a). The corporate governance report of the company is an indicator of how it has followed the primary principles of Cadbury report and other major regulations specified in the UK corporate governance codes. One of the major points mentioned in the Cadbury report 1992 is the transparency of the companies to present the financial information to the stakeholders (Cadbury, 1992). Moreover, the report has mentioned that any non-compliance regarding the code of conduct is also required to be specified in the report with valid reasons. The audit committee of Astra Zeneca has played a vital role in reviewing financial reporting, risk management and financial controls. The audit committee of the organisation takes the additional responsibility of being transparent in reporting (AstraZeneca, 2015a).

Composition of board: The board of the company consists of 10 non-executive directors and 13 executive directors (AstraZeneca, 2015a).

Leadership and responsibilities: The role of the senior non-executive director of the company includes serving as an intermediary between the chairman and other directors. In addition, the senior non-executive director also deals with the critical issues related to the shareholders. The members of the board periodically reviews the matter related to the appointment, termination and remuneration of the director.

The CEO of the company is liable to the board for management, development and performance of the business. The CEO can take all vital decisions related to the business. The board organises meetings on the basis of regular review of the financial performance. In addition, the corporate strategies related to the business are also been formulated in these meetings. In the year 2015, the board has organised six meetings for the purpose of strategy review (AstraZeneca, 2015a). In the current year, the board is also scheduled to conduct six meetings for reviewing the financial performance and other critical factors related to the business. The board also takes the responsibility in conducting interactive session with the shareholders.

In the Cadbury report 1992, protection of the shareholders’ right has been given as a major importance. The corporate governance body of Astra Zeneca also stresses on this factor. In order to disclose the information related to interest of the shareholders, the company has framed a separate disclosure committee. The disclosure committee regularly meets with the shareholders and other concerned bodies for sharing the relevant information and disclosures. This committee also reviews the genuineness of the disclosed statements. The members of the disclosure committee ensure that the shareholders can access the audited financial statement.

Integrity and ethical issues in sharing the financial information has also been prioritised in the Cadbury report 1992 and other code of conducts. For that purpose, the members of the corporate governance body of Astra Zeneca has set up a global compliance board. This board reviews that the business of the firm has been conducted in a right way. The board has also worked with the issues related to the external risk factors, anti-bribery and anti-corruption. With the help of effective training, the corporate governance members have learnt to monitor the compliances of the policies. Moreover, with the help of this committee, the co-ordination among the compliance activities has been formulated.

It has been mentioned in the Cadbury report 1992 that any issues related to the non-compliances of the code of conduct are required to be mentioned and the necessary actions are also needed to be taken place in such cases. In Astra Zeneca non-compliances of the codes of conducts have been investigated by the global compliance committee and legal team. Astra Zeneca maintains the going concern concept (AstraZeneca, 2015a). The available financial resources of the companies have also been mentioned in the annual report of the company. This information has helped the investors to take the investment decisions. In addition, the information related to the merger and acquisition activities of the firm has also been mentioned in the report for the benefits of the stakeholders.

• • 4.2 Compliance with the U.K Corporate Governance Code

The U.K corporate governance code contains principles related to leadership, effectiveness, accountability, remuneration and relations with shareholders (Financial Reporting Council, 2014). Astra Zeneca keenly follows such principles. From the leadership perspective, the U.K governance code requires organisations to be led and governed by an effective board. The chairman of Astra Zeneca, Leif Johansson is mainly responsible for ensuring effectiveness of the board and overseeing that timely decisions are taken (AstraZeneca, 2014). Leif Johansson is supported and guided by a panel of executive and non executive directors. From the remuneration point of view the board oversees the activities of the remuneration committee. The committee reviews the short and long term incentive plans. In terms of accountability, the board member of Astra Zeneca ensures that all governance policies are kept transparent (AstraZeneca, 2014). Reporting the internal activities to stakeholders is considered to be essential in respect of accountability. The board also ensures that their communication with shareholders remains effective and strong mutual understanding is established. General meetings are held in a timely manner to communicate important decisions to the shareholders. In order to fulfill the organizational goals, Astra Zeneca’s board ensured that adequate balance of skills is present. Effectiveness can only be achieved if the board members are competent. Duties and responsibilities are assigned to the board on the basis of their expertise (AstraZeneca, 2014).

• 5.0 Financial strategy of Astra Zeneca
  • 5.1 Ratio analysis

Liquidity ratio

Current ratio

Table 2: Current ratio of Astra Zeneca

2013

2014

2015

1.27

0.96

1.08

(Source: Morningstar, 2016)

Current ratio is an indicator of the liquidity position of the company (Jensen, 2009). It primarily signifies the ability of the firm to repay its short-term debt obligations with the help of current assets. In the table 2, the recent trends of liquidity position of Astra Zeneca has been presented. Based on the above table, it can be inferred that Astra Zeneca has sound liquidity position over the last 3 years. However, the current ratio of the company has dropped in 2014 due to the increase of short-term obligations. In 2015, the firm has further improved the current ratio. Due to stable liquidity position, the company has maintained a smooth operation during this period of time.

Profitability ratio

Net profit margin

Table 3: Net profit margin of Astra Zeneca

2013

2014

2015

9.94%

4.73%

11.43%

(Source: Morningstar, 2016)

Net profit margin is considered as one of the most important financial parameters to attract the investors. In this regards, Stulz (2010) mentioned that net profit margin allows the investors and financial analysts to evaluate the operational efficiency of the firms. Table 3 represents the net profit margin of Astra Zeneca in 2015 has experienced a growth of 7.30%. However, due to slow down of the market, the net earnings of the company has dropped in 2014. On the other hand, due to increased expenses in the research and development, net earnings have been affected immensely in 2014 (AstraZeneca, 2015). However, in 2015, the company has managed to improve its sales figure and reduce the operational cost. As a result of that, net earnings have also improved significantly in the last year.

Return on assets.

Table 4: Return on assets of Astra Zeneca

2013

2014

2015

4.67

2.15

4.76

(Source: Morningstar, 2016)

Return on assets reveals the ability of the company to generate profits with the help of available assets (Williamson, 2008). As discussed earlier that increased research and development cost and economic slowdown are the major factors that has contributed to the declined return of the company in 2014, return on assets of the firm has also been affected due to the same reason. However, the company has improved the figure in 2015.

Investors’ ratio

Earnings per share

Table 5: Earnings per share (in USD) of Astra Zeneca

2013

2014

2015

1.02

0.49

1.11

(Source: Morningstar, 2016)

EPS is an important factor that stimulates the investment decisions of the investors (Smith and Watts, 2012). From the above table, it can be shown that EPS of the company has been stable in 2013 and 2015. However, due to reduction in net earnings, the EPS has also experienced a negative growth in the year 2014.

Dividend yield

Table 6: Dividend yield of Astra Zeneca

2013

2014

2015

1.40

1.40

1.40

(Source: Morningstar, 2016)

Dividend yield is an indicator of the dividend paid by the company with respect to its earnings (Mayer, 2008). From the above table, it has been found that Astra Zeneca has paid same amount of dividends for the last three years. Constant dividend growth model has been followed by the firm for the last three years. Hence, it can be considered as a positive factor for the companies.

Leverage ratio

Long-term debt/ equity

Table 7: Long-term debt/ equity of Astra Zeneca

2013

2014

2015

0.37

0.43

0.76

(Source: Morningstar, 2016)

Long-term debt/equity ratio is an indicator of the company’s risk factor (Cornell and Shapiro, 2007). Moreover, with the help of this ratio, the capital structure of the firms can be assessed. The above table indicates that debt/equity ratio for the firm has been increasing significantly for the last three years. It implies that Astra Zeneca is more focused on debt financing rather than equity financing. It can also be inferred that due to expansion of business, the company has procured additional debts in the recent years. However, it has enhanced the interest payment for the firm.

Efficiency ratio

Asset turnover ratio

Table 8: Asset turnover ratio of Astra Zeneca

2013

2014

2015

0.47

0.46

0.42

(Source: Morningstar, 2016)

The ability of the company to convert its assets into sales can be presented with the help of asset turnover ratio (Berger and Ofek, 2010). Moreover, this ratio also indicates the efficiency of the firm in asset management. From the above table it can be shown that the asset turnover for the firm has reduced slightly in 2015. Idle assets may affect the financial performance of the firm in the upcoming years.

Inventory turnover

Table 9: Inventory turnover of Astra Zeneca

2013

2014

2015

2.65

3.02

2.26

(Source: Morningstar, 2016)

The ability of the firm to convert inventory into sales, can be represented with the help of inventory turnover (Comment and Jarrell, 2010). Higher inventory turnover indicates that the company requires lesser time to convert its stock into sales. Due to high inventory, the inventory turnover ratio of Astra Zeneca has reduced in the last year. Overall, the inventory turnover ratio is quite low for the firm. It can increase the cost for the company to maintain the stocks. Hence, the net earnings may be affected due to higher amount of stocks.

• 6.0 Conclusion

Astra Zeneca enjoys a strong and competitive position in the market. However the rising competition and increase in the number of firms in the industry has led to the development of a various threats for Astra Zeneca in the industry. The firm may make use of the blue ocean strategy for improving performance and increasing market share. From the financial point of view, even though the firm is seen to have adequate net profit margins, Astra Zeneca’s efficiency ratios have been low. Nevertheless, Astra Zeneca enjoys a superior control over suppliers which safeguards their competitive advantages in respect of quality of production. New entrants in the industry require much time and financial strength to emerge as strong players. This eases the competition level for Astra Zeneca to a certain degree. Astra Zeneca must consider enhancing their innovation and researching related activities so that they can deliver better performance and enhance competitive advantages. Astra Zeneca’s internal corporate governance policies are seen to be sound and supportive of meeting the organizations goals.

• Reference List

Arnould, E.J. and Wallendorf, M., 2009. Market-oriented ethnography: interpretation building and marketing strategy formulation. Journal of marketing research, 12(1), pp.484-504.

AstraZeneca, 2014. Annual Report. [Online] Available at: <https://www.astrazeneca.com/content/dam/az/our-company/investor-relations/presentations-and-webcast/Annual-Reports/2014-Annual-report-Annual-Reports.pdf> [Accessed on 11 July 2016].

AstraZeneca, 2015a. AstraZeneca Annual Report and Form 20-F Information 2015. Available at: <http://www.astrazeneca-annualreports.com/2015/assets/pdf/AZ_Annual_Report_2015.pdf> [Accessed 9 July 2016].

AstraZeneca, 2015b. Our Purpose and strategy. Available at: <http://www.astrazenecacareers.com/about-us/history/> [Accessed 9July 2016].

AstraZeneca, 2016. About Us. Available at: <http://www.astrazeneca.co.uk/home> [Accessed 9 July 2016].

Berger, P.G. and Ofek, E., 2010. Diversification's effect on firm value. Journal of financial economics, 37(1), pp.39-65.

Cadbury, A., 1992. The financial aspects of corporate governance. Available at: <http://www.ecgi.org/codes/documents/cadbury.pdf> [Accessed 9 July 2016].

Cavusgil, S.T. and Zou, S., 2011. Marketing strategy-performance relationship: an investigation of the empirical link in export market ventures. The Journal of Marketing, 8(1), pp.1-21.

Comment, R. and Jarrell, G.A., 2010. Corporate focus and stock returns. Journal of financial Economics, 37(1), pp.67-87.

Cornell, B. and Shapiro, A.C., 2007. Corporate stakeholders and corporate finance. Financial management, 8(1), pp.5-14.

Dickson, P.R. and Ginter, J.L., 2007. Market segmentation, product differentiation, and marketing strategy. The Journal of Marketing, 7(1), pp.1-10

Financial Reporting Council, 2014. The UK Corporate Governance Code. [Online] Available at: <https://www.esb.ie/docs/default-source/Corporate-Governance/uk-corporate-governance-code-2014> [Accessed on 11 July 2016].

Grönroos, C., 2010. Relationship marketing: the strategy continuum. Journal of the Academy of Marketing Science, 23(4), pp.252-254.

Jain, S.C., 2009. Standardization of international marketing strategy: some research hypotheses. The Journal of Marketing, 6(2), pp.70-79.

Jensen, M.C., 2009. Agency cost of free cash flow, corporate finance, and takeovers. Corporate Finance, and Takeovers. American Economic Review, 76(2), pp. 120-125.

Kim, W.C. and Mauborgne, R., 2009. Blue ocean strategy: from theory to practice. California Management Review, 47(3), pp.105-121.

Leonidou, L.C., Katsikeas, C.S. and Samiee, S., 2012. Marketing strategy determinants of export performance: a meta-analysis. Journal of Business research, 55(1), pp.51-67.

Manu, F.A. and Sriram, V., 2008. Innovation, marketing strategy, environment, and performance. Journal of business Research, 35(1), pp.79-91.

Mayer, C., 2008. New issues in corporate finance. European Economic Review, 32(5), pp.1167-1183.

McDaniel, S.W. and Kolari, J.W., 2014. Marketing strategy implications of the Miles and Snow strategic typology. The Journal of Marketing, 7(1), pp.19-30.

Morningstar, 2016. AstraZeneca PLC ADR. Available at: <http://financials.morningstar.com/ratios/r.html?t=AZN> [Accessed 9 July 2016].

Rust, R.T., Lemon, K.N. and Zeithaml, V.A., 2012. Return on marketing: Using customer equity to focus marketing strategy. Journal of marketing, 68(1), pp.109-127.

Smith, C.W. and Watts, R.L., 2012. The investment opportunity set and corporate financing, dividend, and compensation policies. Journal of financial Economics, 32(3), pp.263-292.

Stulz, R.M., 2010. Golbalization, corporate finance, and the cost of capital. Journal of applied corporate finance, 12(3), pp.8-25.

Ulaga, W. and Chacour, S., 2011. Measuring customer-perceived value in business markets: a prerequisite for marketing strategy development and implementation. Industrial marketing management, 30(6), pp.525-540.

Williamson, O.E., 2008. Corporate finance and corporate governance. The journal of finance, 43(3), pp.567-591.

Wind, Y. and Robertson, T.S., 2013. Marketing strategy: new directions for theory and research. The Journal of Marketing, 2(1), pp.12-25.

Wright, B.E., 2007. Public service and motivation: Does mission matter? Public administration review, 67(1), pp.54-64.