Financial Management of GlaxoSmithKline Plc and AstraZeneca Plc - Case Study Example

Introduction This study is a comparative analysis of the strategic financial management and relative financial health of two large pharmaceutical producers, GlaxoSmithKline plc and AstraZeneca plc. The methods used to compare the two companies are horizontal and vertical analysis, ratio analysis, and the Altman Z-score analysis. The financial information for the two companies is primarily drawn from the annual Form 20-F filings of each as required by the US Securities and Exchange Commission, for the years 2005 through 2008. Company Overview: GlaxoSmithKline plc GlaxoSmithKline plc was incorporated in England in December 1999, in preparation for the formation of the company by the merger of GlaxoWellcome plc and SmithKline Beecham plc, both major pharmaceutical manufacturers, in December 2000. (GSK, 2005) The company is the producer of well-known prescription medicines such as Avandia, Tagamet, and Zantac, and also produces a number of consumer healthcare products, among which are Aquafresh toothpaste, Tums, and Lucozade. As of 2007, GSK was the second-largest pharmaceutical company in the world with a market share of 5.4%, just behind Pfizer (6.2%) and ahead of Roche (4.3%). It is forecast that GSK will surpass Pfizer by 2012. (Medical News Today, 2008) Company Overview: AstraZeneca plc AstraZeneca plc is also the product of a merger of two pharmaceutical firms, Astra AB of Sweden and Zeneca Group plc of the UK; the merger was completed in May 1999. (AZ, 2009) Among the medicines produced by AstraZeneca, the most familiar are Inderal, Prilosec, Nexium, and Xylocaine. According to Wood Mackenzie (2006), AstraZeneca is the sixth-largest pharmaceutical company in the world based on sales, and the second-largest behind GlaxoSmithKline in the UK. (Wood Mackenzie, 2006, and Ruddick, 2008) Key Business Strategies: GlaxoSmithKline plc GSK has dedicated itself to three strategic priorities: Grow a diversified global business, deliver more products of value, and to simplify its operating model. (GSK, 2009) Geographical expansion is focused on emerging markets, and particularly on Japan. Key product expansion is in the areas of vaccines and consumer healthcare products. Simplifying the operating model is planned through streamlining processes, developing a single commercial support structure for Europe and Asia/Japan, and centralising operational management in a single US headquarters for the North American market. Another key initiative is reducing the current working capital requirement, which was about £8 billion in 2008. (GSK, 2009) Key Business Strategies: AstraZeneca plc The key strategies at AstraZeneca are described as strengthening the pipeline, growing and re-shaping the business, and improving the culture of responsibility and accountability. (AZ, 2009) A major part of AstraZeneca’s strategic planning focus is a program called SEWS, which stands for Strategic Early Warning System; it is a program of intensive market and competitor analysis, designed to keep the company fully informed of developments and trends in the industry. (Gilad, 2003) The 2007 acquisition of biomedical firm MedImmune was one component of AZ’s expansion strategy; others included various organisational restructuring initiatives in a fashion similar to those pursued by GSK. Horizontal Analysis Comparison (Profit and Loss Accounts) [Tables 1.1 & 1.2]: Horizontal financial statement analyses permit the specific comparison of line items between companies. In the case of GSK and AZ, however, there is one obvious difficulty in this, because GSK’s financial information is presented in British Pounds (£) and AZ’s is in US Dollars ($). Accordingly, the vertical analyses of the profit and losses accounts and the balance sheets will provide a better direct comparison. Nonetheless, there are a number of conclusions that can be drawn from the horizontal analyses. Through 2005 and 2006 both companies showed a significant increase in gross revenue, gross profit, and net income, but there was an apparent downturn for both in 2007. GSK had a revenue dip of a little more than £500 million in 2007, which resulted in a drop of £56 million in net income from the previous year – although to be fair, the company still recorded an income of £5.45 billion. AZ on the other hand increased both its gross revenue and gross profit, but its net income was virtually flat, just $2 million higher than in 2006. Both companies underwent significant internal reorganisation during the year, which added to their expenses. AstraZeneca also acquired MedImmune early in 2007, which was an immediate $178 million loss, although the acquisition did help to boost overall sales by year’s end. (AZ 20-F, 2007) In the case of GlaxoSmithKline, the major problem seen during 2007 was a 22% drop in sales of Avandia, the company’s second-largest product, largely due to a publication in the New England Journal of Medicine in May 2007 that raised the possibility that the drug might lead to increased risk of cardio-vascular problems. This, along with pressure from generic drug manufacturers, led GSK executives to caution shareholders that growth was expected to be slow over the next several years. (GSK 20-F, 2007) 2008 saw AstraZeneca recover well from 2007, posting a $2 billion increase in gross revenue and a $330 million increase in net income from 2007. GlaxoSmithKline, however, had another declining year in 2008, which the company again attributed mostly to problems with the sales of Avandia, and increasing competition from generic products. (GSK, 20-F, 2008) Gross revenue and gross profit increased, but sharp increases in operating and sales costs drove another decline in net income, almost £250 million less than in 2007. The statements from the chairmen of the two companies which precede each of the annual reports also may give reliable clues to the health and future outlook of each. Financial analysis often focuses on the information presented in balance sheets, with the statements by the companies’ leaders being regarded as mere public relations propaganda. (Smith & Taffler, 2000) In study done in 1999-2000 of 33 pairs of publicly-traded British firms – each pair consisting of one bankrupt or otherwise failed company and one successful company – Smith & Taffler (2000) found that the clarity and directness of the statements of the chairmen or CEO of each company was a relatively reliable guide to the eventual outcome for the company. In other words, statements from successful companies tend to be far more detailed and direct than from troubled companies. This notion certainly seems to be supported by the information provided by the leaders of AstraZeneca and GlaxoSmithKline. For example, the joint statement of the chairman and CEO of GSK for 2008 contains the following disingenuous remark: “...EPS excluding major restructuring was 104.7p, a decrease of 9% over 2007 in CER terms.” (GSK 20-F, 2008) The earnings per share (EPS) were actually 88.6p for 2008, but “excluding” the “major restructuring” makes the bad news a little more palatable. Horizontal Analysis Comparison (Balance Sheet Items) [Tables 2.1 & 2.2]: As mentioned above, the differences in currency between the two companies make direct comparison of the balance sheet line items somewhat difficult. Both companies present their financial data in constant exchange rate (CER) format, which is defined as the end-of-year exchange rate for the previous year adjusted for hedging and other factors. Those calculations are different depending on the currency selected, so any conversion to reflect the financial data in the same currency for both companies would result in some inaccuracies. Also, the difference in size between the two companies, which is apparent from the amounts in the balance sheets, renders a strict quantitative comparison irrelevant. (Melse, 2004) What the horizontal analysis of the balance sheets can reveal are significant changes in the amounts of assets or liabilities in real terms. For GlaxoSmithKIine, there were significant increases between 2007 and 2008 in the amounts of property, plants, and equipment, intangible assets, goodwill, inventories, receivables, and cash. Current liabilities decreased slightly due to a significant drop in the amount of short-term borrowing, but non-current liabilities increased sharply because of a large increase in the amount of long-term financing. This might indicate that many short-term debts were restructured or refinanced during 2008, which could be a cautionary sign for investors regarding GSK’s future liabilities. AstraZeneca presents a much different picture with its balance sheet. Both assets and liabilities grew significantly between 2006 and 2007, which is almost certainly a reflection of the acquisition of MedImmune. The biggest increases on both sides of the balance sheet were in intangible assets and goodwill and short- and long-term borrowing, although both those liabilities were reduced between 2007 and 2008. Through the four-year period 2005-2008 the company’s net assets remained fairly stable, which presents an overall picture of consistency to AstraZeneca’s financial management. Vertical Analysis Comparison (Profit and Loss Accounts) [Tables 3.1 & 3.2]: Vertical analysis is the best tool for comparing companies of different sizes and using different currencies, because the entries on the profit and loss statements or balance sheets are expressed as percentages of a single factor. This allows for a direct comparison of accounting line items. For the profit and loss accounts, the gross revenue is used as the basis factor and is set to 100. The following table summarises the comparison between the two companies for 2008 as an example: GlaxoSmithKline AstraZeneca Revenue 100 100 Cost of Sales -26.34 -20.88 Gross Profit 73.66 79.12 Operating Costs -44.33 -51.84 Pre-tax Income 29.33 27.28 Net Income 21.33 19.21 Even though GSK has significantly higher cost of sales than AZ, it has significantly lower operating costs. The end result is that GlaxoSmithKline is a more profitable company than AstraZeneca. Vertical Analysis Comparison (Balance Sheet Items) [Tables 4.1 & 4.2]: The following table highlights some of the key differences between GSK and AZ among their 2008 balance sheet items: GlaxoSmithKline AstraZeneca Assets 100 100 Property, plant & equipment 24.57 15.05 Intangible Assets 14.90 26.34 Goodwill 5.33 21.11 Inventories 10.30 3.49 Cash & equivalents 14.27 6.30 Long-term borrowing -38.66 -23.20 Pensions & benefits -7.71 -5.84 The impression given by these figures is that GSK has a better asset position, with a far greater proportion of physical assets than AZ – property, plants, and equipment, products in inventory, and cash. By comparison, non-physical items – intangible assets and goodwill – account for nearly half of AZ’s assets. Intangible assets, which include things like patents, knowledge bases, research and development, and human resources (Sriram, 2008), would be expected to be large for pharmaceutical companies because of the nature of their activities and products. Intangible assets, however, are only valuable if they result in long-term revenues and profits. A product patent, for example, does have value because it represents a potential product which can be sold, but at some point that product would have to actually be made for the value of the intangible asset to be realised. (Sriram, 2008) Thus there are two ways to view the position of AZ relative to its high intangible assets: either the company is well-positioned for future growth and development because of the potential available in its intangible assets, or the current value of the company is unrealistic because of its high proportion of non-revenue generating assets. Profitability Ratio Analysis [Tables 5.1 & 5.2]: The profitability ratio analysis looks at two ratios for each company, the operating profit margin, which is revenue after cost of sales and operating costs, and the net profit margin. GSK consistently outperforms AZ in both areas, averaging approximately 4% higher operating profits and 2.8% higher net profits. Size and high profits do have a down-side, however: GSK’s tax liabilities, represented by the difference between operating and net profits, average 9.46% compared to 8.07% for AZ. Liquidity Ratio Analysis [Tables 5.1 & 5.2]: The current ratio and the acid-test ratio are two formulae which provide an indication of a company’s ability to meet its current obligations with its current resources. In general, a ratio of current assets to current liabilities of 1:1 is considered sound, although it is sometimes more practical to compare an individual company’s ratios with the average of its particular industry. In this regard both GSK and AZ compare favourably to the average, which ranges from 1:1 to about 1.4:1. Of the two formulae, the acid-test ratio is the more stringent, as it does not include inventories and pre-paid receivables. (CRF, 1999) A figure greater than one for either ratio is a positive sign, indicating that the company has more current assets than it needs to meet its current obligations. GSK is in a very sound position, having current and acid-test ratios of 1.64 and 1.31 respectively. The situation is not as positive for AZ, whose current ratio is an adequate 1.21 but whose acid-test ratio is 0.89. That means that AZ has only 89 cents with which to meet each dollar of its current liabilities, and that could be a signal of a future liquidity problem. Efficiency Ratio Analysis [Tables 5.1 & 5.2]: Three efficiency ratios are examined for GlaxoSmithKline and AstraZeneca: cash turnover ratio, total asset turnover ratio, and days’ sales in inventory. Cash turnover ratio is a measure of how effectively a company utilises its cash; the figure generated by the formula represents n units (in £ or $, as appropriate) of sales for each unit cash, and in general, the higher the number the better. For GSK a decline in the cash turnover is noted, from a high of 3.89 in 2006 to 1.27 in 2008. AZ has had a steady increase over the same three-year period, from 1.16 in 2006 to 2.01 in 2008. This indicates that AZ uses its cash assets comparatively more efficiently than GSK, although both companies are still in the positive range. Total asset turnover is a similar measurement of the performance of assets, but here the positive relationship is inverse; the lower number indicates better performance. A ratio over 1 would indicate a very bad condition indeed, as it would signify that the company is selling less than its total assets in a given period. The ratios for both GSK and AZ are similar over the entire four-year period, and nearly identical for 2008 at 0.181 for GSK and 0.184 for AZ. This indicates a comparable level of efficiency in the use of assets overall for both companies. Days’ sales in inventory measures how many days it would take for the company to clear its current (or in this case, ending) inventory. The conclusions to be drawn from comparing this ratio are not as clear-cut. As a gauge of inventory movement, a high figure would indicate a less-efficient condition. As an asset measure, however, a high figure would be more positive as it represents a larger useable current asset. In this regard, GSK is positioned much better than AZ, having about 60 more days’ worth of inventory on hand. Leverage Ratio Analysis [Tables 5.1 & 5.2]: Debt-to-equity ratio measures the amount of debt compared to the amount of shareholders’ equity, and is a guide to how well-protected the shareholders would be in case of the company’s insolvency. GSK’s 2008 debt-to-equity ratio of 1.95 is worrisome, because it means the company has debts that are nearly double its equity, signalling a serious loss for investors in case of insolvency. AZ on the other hand is in a safe position with regard to debts, having a ratio of only 0.738, meaning that shareholders’ equity exceeds the company’s debt liabilities. Capitalisation ratio is determined by dividing the company’s long-term debt by the long-term debt plus owners’ equity, and is a measure of how well long-term debt is used. (CRF, 1999) Just as with the debt-to-equity ratio, the figure indicates better performance as it decreases. AZ again surpasses GSK in performance in this measure, with a 2008 capitalisation ratio of 0.406 compared to GSK’s 0.66; this also reflects the comparatively poor debt position of GSK. Altman Z-score Analysis [Table 6]: The Altman Z-score analysis has proved to be an effective tool in forecasting the likelihood of a company’s bankruptcy, and has been tested to a near 90% efficacy rate. (Calandro, 2007, and CRF, 1999) Intuition would suggest that neither AstraZeneca or GlaxoSmithKline are in danger of going bankrupt, but since the Z-score formula results in a constant score, it can be used to compare the relative financial health of the two companies regardless of their position on the scoring scale. Certainly, neither company is in the “danger zone” but neither is in surely safe territory at present. GSK over the last four years has performed comparatively poorly, only registering a “safe” score of 3 or more in 2006. Prior to 2007, AZ performed very strongly but suffered a significant reduction of more than seven points, most likely because of its acquisition of MedImmune. But whereas AZ recovered somewhat from 2007 to 2008, raising its Z-score from 2.08 to 2.37, GSK continued to decline, reaching the near danger-level low of 1.88 in 2008. Conclusion Neither GlaxoSmithKline nor AstraZeneca emerges from the analysis as a clearly superior company; each balances its strengths with an almost equal number of deficiencies. On the whole, however, it would seem that AstraZeneca is perhaps in better shape financially than its larger competitor. Over the four-year period, the data reflects a more consistent management of the company finances, although the acid-test ratio is a troubling sign. Still, the company has shown a tendency to improve the figures following a decline, as evidenced by its Z-score among other factors. On this basis, it seems appropriate to declare AstraZeneca the winner, albeit not by much, in this particular exercise. References AstraZeneca plc. (2009). Annual Reports. (Website: http://www.astrazeneca.com/investors/ annual-reports?itemId=4169889). Calandro Jr., J. (2007). Considering the utility of Altman's Z-score as a strategic assessment and performance management tool. Strategy & Leadership, 35(5): 37-43. (Emerald: http://www.emeraldinsight.com/Insight/ViewContentServlet?contentType=Article&Filename=Published/EmeraldFullTextArticle/Articles/2610350506.html). Credit Research Foundation. (1999). Ratios and Formulas in Customer Financial Analysis. (http://www.crfonline.org/orc/cro/cro-16.html). Gilad, B. Early Warning. New York: AMACOM (American Management Association) Publishing. GlaxoSmithKline plc. (2009). Annual Reports. (Website: http://www.gsk.com/investors/annual-reports.htm). Ruddick, Graham. (2008). Pharmaceutical companies “delaying cheaper drugs”. Telegraph.co.uk [Internet], 28 November 2008. (http://www.telegraph.co.uk/finance/newsbysector/pharmaceuticalsandchemicals/3534740/Pharmaceutical-companies-delaying-cheaper-drugs.html). Medical News Today. (2008). GSK Will Overtake Pfizer To Become World's Largest Pharmaceutical Company By 2012 - URCH Publishing. [Internet] 11 November 2008. (http://www.medicalnewstoday.com/articles/128735.php). Melse, E. (2004). What color is your balance sheet? The relevance and explanatory power of wealth accounts. Balance Sheet, 12(4): 17-32. (Emerald: http://www.emeraldinsight.com/Insight/ViewContentServlet?contentType=Article&Filename=Published/EmeraldFullTextArticle/Articles/2650120403.html). Smith, M., and Taffler, R. J. (2000). The chairman’s statement – A content analysis of discretionary narrative disclosures. Accounting, Auditing & Accountability Journal, 13(5): 624-647. (Emerald: http://www.emeraldinsight.com/Insight/ViewContentServlet?contentType=Article&Filename=Published/EmeraldFullTextArticle/Articles/0590130503.html). Sriram, R. S. (2008). Relevance of intangible assets to evaluate financial health. Journal of Intellectual Capital, 9(3): 351-366. (Emerald: http://www.emeraldinsight.com/Insight/ViewContentServlet?contentType=Article&Filename=Published/EmeraldFullTextArticle/Articles/2500090302.html). Wood Mackenzie. (2006). Global Company Sales Summary. [Internet/PDF document] Pharma Documentation Ring, 3 March 2009. (http://www.p-d-r.com/ranking/ranking.html). Appendix Table 1.1: Horizontal Analysis (Profit & Loss Accounts) of GSK 2005-2008 (In £millions) 2008 2007 2006 2005 Revenue 24,352 22,716 23,225 21,660 Less: Cost of sales -6,415 -5,317 -5,010 -4,764 Gross profit 17,937 17,399 18,215 16,896 Less: Operating costs -10,796 -9,806 -10,407 -10,164 Income before taxation 7,141 7,593 7,808 6,732 Less: Taxation -1,947 -2,142 -2,301 -1,916 Income for the period 5,194 5,451 5,507 4,816 Table 1.2: Horizontal Analysis (Profit & Loss Accounts) of AZ 2005-2008 (In $millions) 2008 2007 2006 2005 Revenue 31,601 29,559 26,475 23,950 Less: Cost of sales -6,598 -6,419 -5,559 -5,356 Gross profit 25,003 23,140 20,916 18,594 Less: Operating costs -16,383 -15,046 -12,700 -12,092 Income before taxation 8,620 8,094 8,216 6,502 Less: Taxation -2,551 -2,356 -2,480 -1,943 Income for the period 6,069 5,738 5,736 4,559 Table 2.1: Horizontal Analysis (Balance Sheet) of GSK 2005-2008 (in £millions) 2008 2007 2006 2005 Assets Non-current assets Property, plant and equipment 9,678 7,821 6,930 6,652 Goodwill 2,101 1,370 758 696 Intangible assets 5,869 4,456 3,293 3,383 Investment in associates & joint ventures 552 329 295 276 Other investments 478 517 441 362 Other non-current & deferred tax assets 3,446 2,884 2,844 2,652 Total non-current assets 22,124 17,377 14,561 14,021 Current assets Inventories 4,056 3,062 2,437 2,177 Trade and other receivables 6,265 5,495 5,317 5,348 Liquid investments 1,247 1,153 1,035 1,025 Current tax recoverable 76 58 186 416 Cash and equivalents 5,623 3,379 2,005 4,209 Assets held for sale 2 4 12 2 Total current assets 16,413 13,626 10,992 13,177 Total assets 39,393 31,003 25,553 27,198 Liabilities Current liabilities Trade and other payables -6,075 -4,861 -4,871 -5,147 Short-term borrowing -956 -3,504 -718 -1,200 Current tax payables -780 -826 -621 -2,269 Short-term provisions -2,206 -1,154 -1,055 -895 Total current liabilities -10,017 -10,345 -7,265 -9,511 Non-current liabilities Long-term borrowing -15,231 -7,067 -4,772 -5,271 Deferred tax provision -714 -887 -595 -569 Pensions & other post-retirement benefits -3,039 -1,383 -2,339 -3,069 Other provisions -1,647 -1,043 -528 -741 Other non-current liabilities -427 -368 -406 -467 Total non-current liabilities -21,058 -10,748 -8,640 -10,177 Total liabilities -31,075 -21,093 -15,905 -19,628 Net assets 8,318 9,910 9,648 7,570 Equity GSK shareholders’ equity 7,931 9,603 9,386 7,311 Minority interest 387 307 262 259 Total equity 8,318 9,910 9,648 7,570 Table 2.2: Horizontal Analysis (Balance Sheet) of AZ 2005-2008 (in $millions) 2008 2007 2006 2005 Assets Non-current assets Property, plant and equipment 7,043 8,298 7,453 6,985 Intangible assets 12,323 11,467 3,107 1,759 Goodwill 9,874 9,884 1,097 953 Other investments 156 182 119 256 Other non-current & deferred tax assets 1,236 1,044 1,220 1,117 Total non-current assets 30,632 30,875 12,996 11,070 Current assets Inventories 1,636 2,119 2,250 2,206 Trade and other receivables 7,231 6,668 5,561 4,778 Liquid investments 388 177 657 1,624 Current tax recoverable 2,581 2,251 1,365 183 Cash and equivalents 4,286 5,867 7,103 4,979 Total current assets 16,152 17,082 16,936 13,770 Total assets 46,784 47,957 29,932 24,840 Liabilities Current liabilities Trade and other payables -7,778 -7,355 -6,334 -5,466 Short-term borrowing -993 -4,280 -136 -90 Current tax payables -4,549 -3,552 -2,977 -1,283 Total current liabilities -13,320 -15,187 -9,447 -6,839 Non-current liabilities Long-term borrowing -10,855 -10,876 -1,087 -1,111 Deferred tax provision -3,126 -4,159 -1,559 -1,112 Pensions & other post-retirement benefits -2,732 -1,998 -1,842 -1,706 Other provisions -542 -633 -327 -309 Other non-current liabilities -149 -229 -254 -72 Total non-current liabilities -17,404 -17,855 -5,069 -4,310 Total liabilities -30,724 -33,042 -14,516 -11,149 Net assets 16,060 14,915 15,416 13,691 Equity AZ shareholders’ equity 15,912 14,778 15,304 13,597 Minority interest 148 137 112 94 Total equity 16,060 14,915 15,416 13,691 Table 3.1: Vertical Analysis (Profit & Loss Accounts) of GSK 2005-2008 2008 2007 2006 2005 Revenue 100 100 100 100 Less: Cost of sales -26.34 -23.41 -21.57 -21.99 Gross profit 73.66 76.59 78.43 78.01 Less: Operating costs -44.33 -43.16 -44.81 -46.93 Income before taxation 29.33 33.43 33.62 31.08 Less: Taxation -8.00 -9.43 -9.91 -8.85 Income for the period 21.33 24.00 23.71 22.23 Table 3.2: Vertical Analysis (Profit & Loss Accounts) of AZ 2005-2008 2008 2007 2006 2005 Revenue 100 100 100 100 Less: Cost of sales -20.88 -21.72 -21.00 -22.36 Gross profit 79.12 78.28 79.00 77.64 Less: Operating costs -51.84 -50.90 -47.97 -50.49 Income before taxation 27.28 27.38 31.03 27.15 Less: Taxation -8.07 -7.97 -9.37 -8.11 Income for the period 19.21 19.41 21.66 19.04 Table 4.1: Vertical Analysis (Balance Sheet) of GSK 2005-2008 (in £millions) 2008 2007 2006 2005 Assets 100 100 100 100 Non-current assets Property, plant and equipment 24.57 25.23 27.12 24.46 Goodwill 5.33 4.42 2.97 2.56 Intangible assets 14.90 14.37 12.89 12.44 Investment in associates & joint ventures 1.40 1.06 1.15 1.01 Other investments 1.21 1.67 1.73 1.33 Other non-current & deferred tax assets 8.75 9.30 11.13 9.75 Total non-current assets 56.16 56.05 56.99 51.55 Current assets Inventories 10.30 9.88 9.53 8.00 Trade and other receivables 15.90 17.72 20.80 19.66 Liquid investments 3.16 3.72 4.05 3.77 Current tax recoverable 0.19 0.19 0.73 1.53 Cash and equivalents 14.27 10.90 7.84 15.48 Assets held for sale 0.02 0.01 0.06 0.01 Total current assets 43.84 43.95 43.01 48.45 Total assets 100 100 100 100 Liabilities Current liabilities Trade and other payables -15.42 -15.68 -19.06 -18.92 Short-term borrowing -2.43 -11.30 -2.80 -4.41 Current tax payables -1.98 -2.66 -2.43 -8.34 Short-term provisions -5.60 -3.72 -4.13 -3.29 Total current liabilities -25.43 -33.36 -28.42 -34.96 Non-current liabilities Long-term borrowing -38.66 -22.79 -18.67 -19.38 Deferred tax provision -1.81 -2.86 -2.33 -2.09 Pensions & other post-retirement benefits -7.71 -4.46 -9.15 -11.28 Other provisions -4.18 -3.36 -2.07 -2.72 Other non-current liabilities -1.08 -1.19 -1.59 -1.72 Total non-current liabilities -53.44 -34.66 -33.81 -37.19 Total liabilities -78.87 -68.02 -62.23 -72.15 Net assets 21.13 31.98 37.77 27.85 Equity GSK shareholders’ equity 20.15 30.99 36.74 26.88 Minority interest 0.98 0.99 1.03 0.97 Total equity 21.13 31.98 37.77 27.85 Table 4.2: Vertical Analysis (Balance Sheet) of AZ 2005-2008 (in $millions) 2008 2007 2006 2005 Assets 100 100 100 100 Non-current assets Property, plant and equipment 15.05 17.30 24.90 28.12 Intangible assets 26.34 23.91 10.38 7.08 Goodwill 21.11 20.61 3.66 3.84 Other investments 0.33 0.38 0.40 6.54 Other non-current & deferred tax assets 5.51 4.69 4.56 0.74 Total non-current assets 68.34 66.89 43.90 46.32 Current assets Inventories 3.49 4.42 7.51 8.88 Trade and other receivables 15.52 13.90 18.58 19.23 Liquid investments 0.83 0.37 2.19 6.54 Current tax recoverable 5.52 4.69 4.56 0.74 Cash and equivalents 6.30 9.73 23.26 18.29 Total current assets 31.66 33.11 56.10 53.68 Total assets 100 100 100 100 Liabilities Current liabilities Trade and other payables -15.34 -14.53 -21.03 -21.82 Short-term borrowing -2.12 -8.92 -0.45 -0.36 Current tax payables -9.72 -7.41 -9.94 -5.16 Total current liabilities -27.18 -30.86 -31.56 -27.53 Non-current liabilities Long-term borrowing -23.20 -22.68 -3.63 -4.47 Deferred tax provision -15.34 -14.53 -5.21 -4.47 Pensions & other post-retirement benefits -5.84 -4.17 -6.15 -6.87 Other provisions -1.16 -1.32 -1.09 -1.24 Other non-current liabilities -0.32 -0.48 -0.85 -0.29 Total non-current liabilities -45.86 -43.18 -16.93 -17.34 Total liabilities -73.04 -74.04 -48.49 -44.87 Net assets 26.96 25.96 51.51 55.13 Equity AZ shareholders’ equity 26.71 25.72 51.14 54.75 Minority interest 0.25 0.24 0.37 0.38 Total equity 26.96 25.96 51.51 55.13 Table 5.1: Ratio Analysis for GSK 2008 2007 2006 2005 Profitability ratios Operating profit margin 29.32% 34.91% 33.62% 31.74% Net profit margin 21.33% 24.52% 23.67% 22.23% Liquidity ratios Working capital (£million) 6,396 3,281 3,727 3,666 Current ratio 1.64 1.32 1.51 1.39 Acid test ratio 1.31 0.97 1.15 1.11 Efficiency ratios Cash turnover 1.27 2.25 3.89 1.60 Total asset turnover 0.181 0.245 0.306 0.248 Days’ sales in inventory 86.02 73.90 83.56 69.12 Leverage ratios Earnings per share (p) 88.6 94.4 95.5 82.6 Debt to equity ratio 1.95 1.07 0.57 0.85 Capitalisation ratio 0.66 0.42 0.34 0.42 Table 5.2: Ratio Analysis for AZ 2008 2007 2006 2005 Profitability ratios Operating profit margin 27.28% 27.38% 31.03% 27.15% Net profit margin 19.21% 19.41% 22.90% 19.04% Liquidity ratios Working capital ($million) 2,832 1,895 7,489 6,931 Current ratio 1.21 1.12 1.79 2.01 Acid test ratio 0.89 0.84 1.41 1.66 Efficiency ratios Cash turnover 2.01 1.38 1.16 1.31 Total asset turnover 0.184 0.169 0.274 0.261 Days’ sales in inventory 25.98 36.03 44.98 46.15 Leverage ratios Earnings per share (c) 420.00 374.00 386.00 291.00 Debt to equity ratio 0.738 1.016 0.079 0.088 Capitalisation ratio 0.406 0.424 0.066 0.076 Table 6: Z-score Analysis: Formula: Z = 1.2 x (working capital/total assets) + 1.4 x (retained earnings/total assets) + 0.6 x (market value of equity/book value of debt) + 0.999 x (sales/total assets) + 3.3 x (EBIT/total assets) Z-scores, 2005-2008 2008 2007 2006 2005 GlaxoSmithKline 1.88 2.48 3.37 2.75 AstraZeneca 2.37 2.08 9.63 9.16 If Z-score is less than 1.8, risk of failure is very great; if the Z-score is between 1.81 and 2.99, the prognosis is uncertain; if the Z-score is greater than 3.00, failure of the company is unlikely. 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