as traze neca
TRANSCRIPT
-
8/10/2019 As Traze Neca
1/60Electronic copy available at: http://ssrn.com/abstract=2015539
i
University of Strathclyde
Department of Accounting and Finance
M.Sc. in Finance
2009/2010
Project 2:
Financial Analysis and Valuation of
ASTRAZENECA
(Ticker: AZN)
Thanh Le
Reg. Number: 200965398
Barry Koch
-
8/10/2019 As Traze Neca
2/60Electronic copy available at: http://ssrn.com/abstract=2015539
ii
Table of content
Abstract
Chapter 1: Introduction 1
1.1 The UK economic environment 1
1.2 Five forces Porter Model 2
Chapter 2: Financial performance and position of AZN 5
Chapter 3: Dividend policy 12
Chapter 4: Capital structure 17
Chapter 5: Valuation 22
5.1 Valuation approaches from theoretical to empirical evidence 22
5.2 Valuation of AstraZeneca share 26
5.2.1 Asset-based valuation 26
5.2.2 Discounted cash flow model 27
5.2.2.1 Dividend discount model 27
5.2.2.2 Free Cash Flow to Equity 29
5.2.3 Relative valuation 35
Chapter 6: Conclusion 39
References 41
Appendix 44
-
8/10/2019 As Traze Neca
3/60
iii
List of Tables and Figures
Figure 1.1.1: GDP growth 1
Figure 1.1.2: UK Pharmaceutical Market Indicators 2
Figure 2.1: Development projects, new products and line extensions 5
Figure 2.2: ROE vs. ROCE year 20052009 7
Figure 2.3: Liquidity ratio 7
Figure 2.4: Cash conversion cycle days 8
Figure 2.5: Gross Profit Margin 8
Figure 2.6: Net Profit Margin 8
Figure 2.7: Cash conversion cycle day comparison 10
Figure 4.1: Leverage ratio comparison 18
Figure 4.2: Interest coverage ratio comparison 19
Figure 4.3: AZN share price performance 20
Figure 5.1.1: Phases in research and development in a pharmaceutical project 25
Figure 5.2.2.1.1: Dividend discount valuation 28
Table 1.2.1: Market shares of pharmaceutical companies in UK year 2007 3
Table 2.1 Profit and Loss Statement 6
Table 2.2: Liquidity ratio comparison 9
Table 2.3: R&D to sales ratio 10
Table 3.1 Dividend per share 12
Table 3.2: Dividend per share comparison 15
Table 3.3: Dividend yield 15
Table 5.2.1.1: Asset-based valuation 26
Table 5.2.2.2.1: Profit and Loss Statement Projection 31
Table 5.2.2.2.2: Balance Sheet Projection 32
Table 5.2.2.2.3: Free Cash Flow to Equity 34
Table 5.2.2.2.4: FCFE Valuation 34
Table 5.2.2.2.5 WACC, FCFF and PV of FCFF 35
Table: 5.2.3.1: P/E valuation 37
Table 5.2.3.2: P/B valuation result 37
Table 5.2.3.3: P/S valuation 37Table 6.1 Share performance 39
Table 6.2 Valuation results 40
-
8/10/2019 As Traze Neca
4/60
iv
Abstract
The project requires me to analyse a UK companyit is AstraZeneca. I first start by
introducing UK economic condition at the moment and then analysing the
pharmaceutical industry in UK by employing 5 forces Porter. When understanding
the macro-economics, I am able to explain the situation of AstraZeneca better. In
the second part of this project, I address the financial position of AstraZeneca by
scrutinising Income Statement and Balance Sheet. I also use ratio to comment on
the improvement or the stagnation of the company in either time order or a
comparison with its peers. The ratios are profitability ratio, liquidity ratio and
operation efficiency ratio. Other ratios such as dividend yield, leverage ratio and
interest coverage ratio will be discussed in the next two chapters which are
dividend policy and capital structure. In these chapters, I will approach relevant
literatures and then put them into the context of AstraZeneca to understand the
prevailing dividend policy and capital structure. The next part is valuation which is
supposed to be very diverse with different valuation approaches. They are asset-
based, discounted cash flow, relative and contingent claim valuation. After review
relevant valuation literature, I will apply them to value AZN equity. This result will
be combined with other fundamental analysis to propose investment or divestment
in the conclusion part.
-
8/10/2019 As Traze Neca
5/60
1
CHAPTER 1: INTRODUCTION
1.1The UK economic environment
Before the financial crisis, GDP growth rate was quite stable but then it plunged
dramatically (Figure 1.1 can show this clearly). The negative growth rate is now
over; manufacturing output increased considerably 1.4% and total gross operating
surplus of corporations increased by 1.2%.
Figure 1.1.1: GDP growth
(Source: Office for National Statistics, 2010)1
However, there are some threats that should be paid attention to such as the high
trade deficit of 10.4 billion in Q1.2010; lower household expenditure rate (quarter
over quarter) coupled with the declining growth rate of distribution sector;
unemployment is still high at 7.9%. The situation likely drives a gloomy economic
condition in UK.
In such a situation, how far the pharmaceutical and healthcare will be affected?
Looking at the drug expenditure in 2008 2009 (estimated by BMI), I can see that
the expenditure in pound increased regardless of negative GDP growth. However, in
term of USD, the drug expenditure fell during the period 20082010 (as expected).
Nevertheless, the fall was not severe. The per capita drug market expenditure is
US$ 295 at least and expected to rebound.
It is very easy to find that when GDP declines, the ratio between drug expenditure
and GDP increase because the decreasing rate of drug expenditure is lower that of
GDP.
1http://www.statistics.gov.uk/cci/nugget.asp?id=192
-
8/10/2019 As Traze Neca
6/60
2
Figure 1.1.2: UK Pharmaceutical Market Indicators
(Source: United Kingdom pharmaceuticals & Healthcare Report BMI, Q2.2010)
It seems the economic contraction does not affect the pharmaceutical and
healthcare industry considerably. However, does it mean the superiority
characteristic of the pharmaceutical industry will last long? Does it also mean all
pharmaceutical business will be successful? In order to answer these questions, it is
necessary to employ 5 forces Porter to analyse the pharmaceutical industry in U.K.
By using this analysis and the forecast of BMI for each category of drugs, I will shed
some light on the future of UK pharmaceutical sector.
1.2Five forces Portermodel
Before approaching the model, it is crucial to have some understanding in drug
categories. There are some ways to distinguish drugs. In term of intellectual
property right, they divide drugs into patented and generic drugs. The generic is
a term for drugs with expired patents. It means drug producers can manufacture
this type of drug without paying the patent royalty. In term of prescriptive
requirement, they divide drugs into prescriptive and OTC drugs. With OTC drugs,
end-users can purchase drugs (or functional products) at drugstore and pharmacy.
Pharmaceutical Industry in UK - Porter's Five Forces Analysis
Rivalry
There are two local considerable famous producers which are GlaxoSmithKline and
AstraZeneca. There are also multinational companies such as Pfizer, Novartis,
Sanofi-Aventis, Merck & Co. In analysing the competition level in the
pharmaceutical industry, I use the ratio called Concentration ratio (in this case, I
1.24
1.26
1.28
1.3
1.32
1.34
1.36
1.38
1.4
1.42
0
50
100
150200
250
300
350
400
Drug market
expenditure as % GDP
Per capita drug market
expenditure (US$)
-
8/10/2019 As Traze Neca
7/60
3
consider the ratio market share)which is the sales of a company divided by the
overall sales of the market.
Table 1.2.1: Market shares of pharmaceutical company in UK year 2007
(Source: United Kingdom pharmaceuticals & Healthcare ReportBMI, Q2.2010)
From the table, although the market in UK seems to be dominated by Pfizer and
GSK, the market indeed is very competitive because of the participation of several
market players which are always willing to take over the leading position. For
example, some year ago, Merck and Co. has higher market share than AstraZeneca,
but now the former ranks No. 8 and the latter ranks No. 4.
Supplier power
Power of suppliers is not usually mentioned in pharmaceutical sector2.
Nevertheless, with the development of genetic treatment, the development can be
constrained by some regulation on organ donation as well as the willingness of
giving organs for clinical experiment.
2http://www.best-information.eu/international-marketing-strategies/Appendix-B.html
http://www.best-information.eu/international-marketing-strategies/Appendix-B.htmlhttp://www.best-information.eu/international-marketing-strategies/Appendix-B.htmlhttp://www.best-information.eu/international-marketing-strategies/Appendix-B.htmlhttp://www.best-information.eu/international-marketing-strategies/Appendix-B.html -
8/10/2019 As Traze Neca
8/60
4
Barriers to entry
The participation into pharmaceutical industry requires companies to meet certain
conditions such as obtaining patents for drug production, spending capital on R&D
activities and investing in marketing activities. All these require capitals as well as
the reputation of producers to promote their products. For this reason, the business
of existing companies can be safe to some extent.
Buyer power
Understanding the buyers can help to foresee the sales in the future of companies.
Doctors are in charge of writing prescription but hospitals (institutional buyers) and
other stakeholders (for example, the reimbursement entities) can influence the
distribution process. Consumers usually passively purchase the products. Therefore,
some announcements such as that the government expenditure in UK will rise at
lower rate in previous year can give a clue that the local sales cannot be as strong as
they were (BMI, 2010); or the plan of NHS in reducing the lengths of hospital stays
and cutting costs can affect negatively the domestic sales (BMI, 2010)
Threat of substitute
In studying the threat of substitution, I find that there are three drivers for this
issue. They are alternative therapy, the health awareness of customers and generic
drugs. The innovation in treatment can lead to a new therapy which consequently
dismisses the drugs for old therapy. Besides this, the higher awareness of health can
reduce the spread of diseases and this could be a threat for drug manufacturers.
Finally but noticeably, the invasion of generic drugs can sweep out the profit of
patented products. For example, in year 2009, the sales of several products of
AstraZeneca (Nexium, Casodex and Prilosec) declined significantly due to the
participation of generic drugs. With the encouragement to use generic drugs in
order to reduce reimbursement for NHS, the sales of UK pharmaceutical companies
can be affected in the future.
In short, the pharmaceutical industry is very potential but also risky; if producers
are still innovative and dynamic to invent new drugs and approach new markets,
they can be winners.
-
8/10/2019 As Traze Neca
9/60
5
CHAPTER 2: FINANCIAL PERFORMANCE AND POSITION OF ASTRAZENECA
Last year AZNs sales increased 3.8% yoy; this growth was driven by the increase in
cardiovascular products (25%), infection (10%) and neuroscience (10%). The rise in
cardiovascular products was because of the sales of Crestor into Germany and Spain
under an approval to let AZN distribute Crestor in Europe countries. Other pipelines
such as Toprol-XL (cardiovascular product), Flumist (infection) and Seroquel
(neuroscience) also contributed to the revenue increase. Pharmaceutical business is
very risky. The sales into a market depend not only from the approval of the health
authorities but the efficacy of drugs. In year 2009, AZN was nearly stuck in a lawsuit
when lawyers sued AZN that it tried to hide the link between using Seroquel and the
side effects of gaining weight and causing diabetes. Even the sales on Seroquel in
year 2009 grew by 12% yoy, the cost to settle the lawsuit was 520 million US dollars.
By analysing both sales segment and AZNs strategy, I realise that the company has
been aiming at the emerging markets. The sales from these markets accounted for
13% of total revenue; last year the sales increased by 12% yoy (excluding the loss in
currency translation). If AZN can manage its currency translations loss, the emerging
markets are very promising.
In year 2009, the R&D cost noticeably decreased by 14.9%; this is because of both
the cost control efficiency and the lower costs due to some experiments having
entered the later stages of research.
Figure 2.1: Development projects, new products and line extensions
(Source: AstraZeneca Annual Report 2009)
-
8/10/2019 As Traze Neca
10/60
6
The following percentage table once again can help to see the good performance of
AZN in year 2009. The bottom line shows that the net profit margin rose
significantly last year. From the table, I can conclude that they are COGS and R&D
expenses improving the bottom line year 2009.
Table 2.1: Profit and Loss Statement
(Source: AstraZeneca Annual Report 2009)
Employing ratio analysis, I will follow the trend of numbers in time order as well as
in peer group. The ratio analysis includes profitability, liquidity and efficiency ratios(financial structure and dividend ratio will be analysed in chapter 3 and 4).
Firstly, from the below figure, I see that the ROE looks flat meanwhile the ROCE
roughly changes overtime. The ROCE noticeably dropped in year 2007; this is
because of the issue of corporate bonds (9 billion US dollars) to finance the
acquisitions of MedImmune and Cambridge Antibody Technology. These units focus
on infection drugs. Hopefully, the sales of infection drugs start compensating the
cost to acquire the entities. In year 2008, infection drug sales increased 41% yoy
and continued to rise by 10% year 2009 (excluding the currency translation loss). It
means the financial structure strategy of AZN is pretty efficient.
-
8/10/2019 As Traze Neca
11/60
7
Figure 2.2: ROE vs. ROCE year 2005 - 2009
The second ratio that I focus is the liquidity ratios which include the current ratio
and quick ratio. These two ratios looked very good in year 2005 and 2006 but
suddenly fell in year 2007 due to high amount of short term borrowings and higher
income tax payables. The short term borrowings initially financed the acquisition
and after issuing bonds, AZN used proceedings to refinance the overdraft.
Figure 2.3: Liquidity ratio
Last year, both the current ratio and quick ratio increased. This is because AZN
starts generating cash from its infection and cardiovascular pipeline. At the end of
year 2009, AZN held 10 billion pounds in cash and cash equivalent account. This
helps to guarantee the repayment ability of AZN. Nevertheless, in the following
part, I will compare this result with that of other peers so that I can see the
soundness of the business strategy of AZN.
For the working capital analysis, first of all, I notice that the company changed its
way in recording trade receivable. In year 2008 backward, AZN combined the credit
amount from suppliers and the price rebates & chargeback. But price rebates and
-
10.00
20.00
30.00
40.00
50.00
60.00
2005 2006 2007 2008 2009
ROCE
ROE
-
0.50
1.00
1.50
2.00
2.50
2005 2006 2007 2008 2009
Current ratio
Quick ratio
-
8/10/2019 As Traze Neca
12/60
8
chargeback relate to distributing drugs. Thus, it is inappropriate to combine it. For
this technical adjustment, I can only analyze the working capital cycle for last 3
years.
The longer the cash conversion cycle day (CCC days) turns out, the higher cost a
company has to bear. In year 2009, the CCC days continued dropping upon the
better trade credit balance versus moderate increase in inventories. Similar to
above part, it will be insufficient to comment on the efficiency of working capital
management if I only analyse AZN. In the following part, I will compare these results
with AZNs peers.
Figure 2.4: Cash conversion cycle days
Using data from GlaxoSmithKline (GSK), Pfizer Group and Abbott, I calculate the
Gross Profit Margin (GPM) and Net Profit Margin (NPM) as follows:
Figure 2.5: Gross Profit Margin Figure 2.6: Net Profit Margin
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
0.00
20.00
40.00
60.00
80.00
100.00
120.00
140.00
160.00
2007 2008 2009
Stock holding period
(days)
Debtor Payment
period (days)
Creditor Payment
Period (days)
CCC days
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2006 2007 2008 2009
GSK
AZN
Pfizer
Abbo
0%
5%
10%
15%
20%
25%
2006 2007 2008 2009
GSK
AZN
Pfizer
Abbott
-
8/10/2019 As Traze Neca
13/60
-
8/10/2019 As Traze Neca
14/60
10
own strategies as long as the companies still have sufficient capital to finance their
stocks, sustain good profit marginand generate enough cash to run their business.
And of course AZN satisfies these criteria; therefore, I can conclude that AZN
inventories level is sound and effective.
Using the cash conversion cycle days to measure the efficiency of working capital
management, I once again can see the superior of AZNs working capital policy in
recent years.
Figure 2.7: Cash conversion cycle day comparison
For pharmaceutical sector, it is important for analysts to consider the ratio R&D to
sales because it will give information about the inventiveness of the companies.
Table 2.3: R&D to sales ratio
(Source: Annual reports of AZN, GSK and Pfizer)
Comparing to GSK and Pfizer, the R&D to sales of AZN is lower in 2009 but higher in
2007. Actually, the changes in R&D to sales depend on the accounting policy which
determines what kind of R&D costs will be expenses in a year. Thus, the R&D to
sales is not really precise, but at least, looking at the ratio of AZN, GSK and Pfizer, I
can see that these three companies likely have the same R&D investing pace.
-
50.00
100.00
150.00
200.00
250.00
300.00
350.00
400.00
450.00
500.00
2007 2008 2009
GSK
Pfizer
Abbott
AZN
-
8/10/2019 As Traze Neca
15/60
11
Conclusion:
All the financial data shows that AZN has improved its business significantly this
year. This is because the company has a right strategy to launch some products into
new markets. The data also shows AZN outperform most of its peer in term of profit
margin and working capital management. The result implies that AZN is a promising
company. The following part, I will address the dividend policy to understand
whether a good company like AZN can attract investors with its dividend policy or
not. And the chapter after that, I will address the capital structure which will give in
insightful analysis about the change in risk appetite of managers so that I can
explain better the good performance last year and forecast the potential of AZN.
-
8/10/2019 As Traze Neca
16/60
12
CHAPTER 3: DIVIDEND POLICY
According to the Annual Report 2009, AZN Board of Management stated that they
would pay cash dividend regularly and possibly use share re-purchase when
needed. The company establish a progressive dividend policy which is also applied
by GSK. For this type of strategy, companies tend to sustain or increase the dividend
every year. AZN also declared that they would pay out 50% of its reported earnings.
After reinvesting the business, paying dividends, repaying debts, AZN also consider
to purchase shares back.
AZN has followed its policy closely; the following table will show their dividend
payment for last three years.
Table 3.1 Dividend per share
(Source: AstraZeneca Annual Report, 2009)
The question is that whether the dividend policy of AZN is reasonable or not. Why
does the Board of Management of AZN decide to adopt this type of policy? In order
to answer these questions, I review some literature about dividend (cash and share
purchase) then comment on the policy of AZN.
Miller and Modigliani (1961) showed that dividend payout policy did not affect the
firm value. Nevertheless, Ang and Ciccone (2009) conveyed some recent researches
to conclude that the irrelevance theorem is hardly applicable in practice. This is
because MM had limited tools to analyse the effects of dividend policy fully at that
time and their assumptions are now unrealistic.
As mentioned above, the financial world is imperfect and the irrelevance theoremwould be weakened if the free tax assumption is relaxed. The effect of tax on
dividend (also know clientele effects). Nevertheless, Saadi and Dutta (2009)
emphasized that most of research figuring out the relationship between share price
and tax rate but does not mention the effect of taxes on dividend policy.
-
8/10/2019 As Traze Neca
17/60
13
Mueller (1972) introduced a theory about life cycle of firms. Bulan, Subramanian,
and Tanlu (2007) found that companies tend to reduce their dividend when they
reached the maturity stage in the life cycle. Bulan (2009) concluded the relationship
between dividend policy and the choice of capital structure in different stage of a
life cycle by comparing the ROE with the cost of capital k. If the ROE is greater than
k, companies should not pay out dividend; otherwise, they should pay out dividend.
Butan (2009) also suggested that the change in dividend policy can signal a
transition in company life cycle.
There are two types of dividend policies including residual dividend policy and
managed dividend policy. Smith (2009) discussed that although it sounds
reasonable for companies to adopt a residual dividend policy so that the companies
can use their financial resources efficiently, managers still prefer a managed
dividend policy. Smith (2009) also stated that company using private bank loans
tend to use the residual dividend policy meanwhile those using public issue to raise
capital normally choose a managed dividend policy.
Employing catering theory of dividend, Rooij and Renneboog (2009) concludes that
the firms would consider the preference of investors a factor to determine the
dividend policy. The choice is between dividend-paying companies and non-
dividend paying companies. In addition, it is different from sectors to sectors and
from countries to countries, the catering theory will be considered differently.
Lintner (1956) discussed how the market price of stock moves upon changes in
dividend payout, this theory is then called the signalling theory of dividend. The
theory showed that conventionally the dividend will convey a signal of a future of
the company business and cash is a certain return, thus, it is difficult to manipulate
the benefit to investors. Nevertheless, Verminnen (2005) indicated that Telefonia
cut its dividend and invest this amount of money into a project in Latin America and
ultimately gain big success. There are many other researchers who showed that
there is possible success for companies cutting dividend. Filbeck (2009) conveyed
the researches of Healy and Palepu (1988), DeAngelo, and Skinner (1992); Benartzi
et al. (1997) and John, Lang, and Netter (1992), Iqbal and Rahman (2003) to
-
8/10/2019 As Traze Neca
18/60
14
conclude that cutting dividend together with some restructuring activities can help
to boost the earnings in the future; authors also find that if the cut in dividend with
no improvement in operation afterward would signal a bad future for earnings. It
means the application of signalling theory should be flexible.
Mukherjee (2009) discussed the agency cost which is a determinant of dividend
policy. He conveyed the research of Allen and Michael (2003) to conclude that the
dividend policy is to prevent managers from overinvesting in low profitable
projects. This is because the shareholders always have higher risk appetite than
managers do. Managers therefore tend to investment into low profitable projects
to be safe and also to beat the target so that they can gain bonus. Mukherjee (2009)
also employed Meggisons paper (1996) to come up with the popularity of using
agency theory to explain the dividend policy at the moment.
From the above literature, I think it is necessary to look at AstraZenecas life cycle
with regard to investment opportunity, the ability to reach financial resources when
needed, the dividend policy of rivals, and corporate governance in relation to
agency problem.
James (1973) clearly indicates that the life cycles of pharmaceutical companies vary
with inventiveness and the expiration of patents. It means as long as the company
still sustain its R&D activities, company can still grow or sustain its maturity. The
R&D activities of AZN are promising; at the moment, they have 103 clinical projects.
Besides this, in 1999, 55% of sales are threatened by patent expiry, and last year
approximately 50% of sales are threatened by the situation. It means AZN is
successful at innovating new products. With the aging situation in developed
countries and the increasing income for health care service in emerging markets,
AZN has a huge market to serve. It means the policy with dividend payout 50% of
profits can balance the demand of investing into new projects and the cash return
demand of investors.
Allen, Chui and Maddaloni (2004) indicate that UK financial market is mixed
between market-based and bank-based system. It means public companies like AZN
can raise capital from either banks or capital market. And it is fact that AZN
-
8/10/2019 As Traze Neca
19/60
15
successfully issued bonds to acquire MedImmune and Cambridge Antibody
Technology. Thus, it is not necessary for AZN to pay low dividends in order to create
a financial slack for future investment. The dividend policy of AZN which is a
managed dividend policy again seems to be right under the above findings of Smith
(2009).
As mentioned above, investors will choose companies with better dividends. The
following table will show the relevant data about dividends:
Table 3.2: Dividend per share comparison
(Source: Financial Statement of GSK, AZN and Pfizer)
Table 3.3: Dividend yield
(Source: Annual Report of GSK, AZN and Pfizer)
The tables can show that even AZN pays higher dividend per share than GSK does,
the dividend yield of AZN is still lower than that of GSK. Therefore, AZN needs to
increase its dividend yield. Thus, it is reasonable when AZN has plans to sustain its
high payout ratio and buy back its shares valued $1bn in this year. In addition, the
GSK dividend policy shares the same trait with AZN policy which is progressive
dividend policy. For this reason, it is reasonable for AZN to increase its dividend
every year to catch up with its rival.
The final considerable issue is corporate governance issue and the agency problem
in AstraZeneca. In year 2009, PIRC (Pensions Investment Research Consultants Ltd)
in UK points out that AZN gives lots of money to U.S politicians and its senior
-
8/10/2019 As Traze Neca
20/60
16
executives3. Thus, paying high dividends will help to reduce the pressure from
shareholders.
In conclusion, I think management team of AZN adopts a sound dividend policy to
meet the demand of investors and sustain its growing business.
3 http://industry.bnet.com/pharma/10001729/claim-astrazeneca-ceo-brennans-
pay-too-high-spends-too-much-on-lobbying/
http://industry.bnet.com/pharma/10001729/claim-astrazeneca-ceo-brennans-pay-too-high-spends-too-much-on-lobbying/http://industry.bnet.com/pharma/10001729/claim-astrazeneca-ceo-brennans-pay-too-high-spends-too-much-on-lobbying/http://industry.bnet.com/pharma/10001729/claim-astrazeneca-ceo-brennans-pay-too-high-spends-too-much-on-lobbying/http://industry.bnet.com/pharma/10001729/claim-astrazeneca-ceo-brennans-pay-too-high-spends-too-much-on-lobbying/http://industry.bnet.com/pharma/10001729/claim-astrazeneca-ceo-brennans-pay-too-high-spends-too-much-on-lobbying/ -
8/10/2019 As Traze Neca
21/60
17
CHAPTER 4: CAPITAL STRUCTURE
BrealeyMeyers (2003) defines the capital structure a combination of different
types of securities. The selection of securities will help to maximize the market
value of a company. The market value of a company obviously relates to returns to
stakeholders, cost of capital, taxes and bankruptcy cost. A CFO needs to decide a
capital structure to optimize the returns and costs. Theoretically, Brealey-Meyers
(2003) also convey the study of Miller and Modigliani (1958) and in order to point
out that the optimum capital structure is the point at which the firm value is the
highest and the tax benefit starts being eroded by the bankruptcy cost. This is called
Trade-off model. It means a company should have an ideal leverage level.
On the other hand, Graham and Harvey (1999) discuss Pecking Order Theory
which does not target a debt ratio. Brealey (2003) lists some implication such as
firms have a selection hierarchy of financing methods. In particular, the first choice
will be internal funding which is closely relevant to dividend policy. The second
choice can be debts, and followed by some hybrid securities (convertible bonds,
preference shares) and final choice will be common equity. The theory can explain
why high profitable companies have smaller debts, it also explain the balance
amongst internal cash flows, dividend paid and investment opportunities. If
companies are profitable, they will reduce their borrowings; and if they have more
investment opportunities, they need borrow additional money. By tracing the
growth of an industry, people can see how companies in that sector need to re-
invest into their business. In order to catch up with peers, some low profitable
companies need borrow relatively high amount of money. There is a supporting
evidence for this theory, Myers and Majluf (1984) find that share prices go down
when companies issue shares rather than using debts. In order to avoid this,
managers decide to have a financial slack to retain earnings for future investment
opportunities.
Ross (1977) discusses the signalling capital structure theorywhich points out that
the managers will receive a reward in term of an increase in companies market
-
8/10/2019 As Traze Neca
22/60
18
values when managers show that they can repay debts and generate big cash flows.
All these outcomes would be signalled through the choice of capital structure.
In practice, the above literature will be different from countries to countries and
from sectors to sectors. Brounen, Jong, Koedijk (2006) find that the trade-off model
has moderate effect on the capital structure decision in 4 Europe countries
including UK, France, Germany and Netherlands. In addition, they also realise that
financial flexibility is important for CFOs to determine the level of debts; and this
factor is not affected by the pecking order theory. The researchers also find that in
UK, CFOs pay attention to the share prices which are driven by diluted EPS as a
consequence of share issues. For the signalling theory, the researchers do not find
enough evidence to support this theory in 4 selected countries.
From the above literature, I will comment on the capital structure policy of AZN for
recent years. I will start comparing the leverage ratio and interest coverage ratio.
As mentioned in the above part, before 2007, AZN had very low borrowings which
were only $1 billion; then the acquisition led AZN into relatively high debt level
comparing to some other companies like Pfizer and Abbott. However, if looking at
GSK leverage ratio, AZN seems to be relatively conservative in their capital structure
strategy. In year 2009, the debt ratio of AZN was approximately equal to that of
Pfizer and Abbott and nearly a half of GSKs debt ratio.
Figure 4.1: Leverage ratio comparison
(Source: Data from GSK, AZN, Pfizer and Abbott Annual Report)
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
2006 2007 2008 2009
GSK
AZN
Pfizer
Abbott
-
8/10/2019 As Traze Neca
23/60
19
As the leverage ratio changed radically in 2007, the interest coverage ratio of AZN
dropped significantly from 123 times to 25 times. Nevertheless, looking at the
below chart, I can easily find that regardless of higher debt level, the interest
coverage ratio of AZN is the best amongst 4 companies.
Figure 4.2: Interest coverage ratio comparison
(Source: Data from GSK, AZN, Pfizer and Abbott Annual Report)
Even the current financial structure of AZN looks very reasonable comparing to its
peers. I still try to find what reasons drive AZN management team change its capital
structure which was heavily relied on equity into the one with higher leverage. I also
try to figure out what drove AZNs management team to adopt new capital strategy.
In year 2007, the acquisition decision came up very quickly; AZN used the
committed banking facility to finance the deal valued $15 billion. As observed, the
share price before the announcement of acquisition was declining as AZN had failed
its stroke drug trial (Oct 2006, Reuters) and its heart drug trial (Mar 2007).
Moreover, the acquisition itself had been criticised by many analysts about its
contribution into the bottom line of AZNs Income Statement (But the deal could
pay off five or 10 years in the future, Amusa4). The return of this investment had
probably seen by AZN executives and it would be difficult for them to persuade
investors to exercise a right upon a new share issue. In the meantime, the leverage
ratio of AZN was too low. For these reason, using up their committed banking
4http://money.cnn.com/2007/04/23/news/companies/astrazeneca/index.htm
23
123
28
6
2006 2007 2008 2009
GSK
AZN
Pfizer
Abbott
-
8/10/2019 As Traze Neca
24/60
20
facility to buy MedImmune seems to be a very wise decision. This new strategy can
clearly explained by the flexibility of credit as found above. And the decision would
not drive AZN into high risk of financial distress because comparing with its peers
the leverage ratio was not too different.
Figure 4.3: AZN share price performance
(Source: Bloomberg, as of 30 July 2010)
In term of financial distress issue, Passov (2003) says that pharmaceutical
companies have big intangible assets which are difficult to be valued; thus, these
companies are exposed to high risk of bankruptcy if they dont have enough cash to
meet its contingent demand. This drives a very typical capital structure of
pharmaceutical companies with relatively lower leverage ratio comparing to those
in other sectors. As mentioned about, the financial leverage of AZN after
restructuring looks similar its peers such as GSK and Abbott. Thus, the possibility for
AZN to get into bankruptcy with their financing decision was relatively. And as
known, AZN issued bonds in U.S to refinance its acquisition, at that moment, AZN
creditworthiness was rated stable (A1 by Moodys and AA- by Standard and
Poors5). This can also help to explain the trade-off model had taken effect into the
5http://www.fiercebiotech.com/press-releases/press-release-astrazeneca-launches-and-prices-6-9-
billion-bond-issue
-
8/10/2019 As Traze Neca
25/60
21
capital structure of AZN because the management team might have taken into
account the bankruptcy cost into their capital restructuring decision.
In short, the capital structure decision of AZN management team looks sound and
the company would not face trouble with this capital structure.
-
8/10/2019 As Traze Neca
26/60
22
CHAPTER 5: VALUATION
5.1 Valuation approaches from theoretical to empirical evidence
Hitchner (2003) says business valuation relates to the procedure of valuing the
enterprise or the ownership interest of that entity. There are several valuation
approaches. In particular, Graham and Dodd (1934) introduce the asset-based
valuation method. In addition, Damodaran (2002) outlines the purposes of valuation
including the portfolio management, acquisition analysis and wealth maximisation
in corporate finance. He also mentions three types of valuation approaches
including discounted cash flows valuation, relative valuationand contingence claim
valuation. Thesefourapproaches can be employed together at the same time. The
following part, I will try to describe concisely each method, then evaluating the
equity value estimation accuracy of each approach. This analysis in turn will lead to
the selection of valuation model to value AstraZeneca equity.
For the asset-based valuation method, the assets and liabilities are assigned fair
values and the equity value is calculated by subtracting liabilities from assets. In
calculating the fair value, analysts take into account the liquidation costs and
replacement costs which are quite difficult to be assessed.
About the discounted cash flow method, William (1938) introduces the mechanic of
valuing stocks by employing the following formula:
From this model, many researchers develop different versions such as dividend
discount model (Miller and Modigliani, 1961), free cash flows, residual income
model (Marshall, 1890). The differences amongst these models are the type of cash
flows. For dividend model, CF will be dividend paid out; the free cash flow model
takes into account the cash flow belonging to shareholders regardless of the
amount of money partially retained in the business. The residual income model uses
-
8/10/2019 As Traze Neca
27/60
23
book value, earnings, returns on equity and cost of capital to calculate the equity
value.
The formula can show that value of equity equal current book value of equity plus
the present value of abnormal earnings.
About the third valuation approach, Stowe et al. (2002) list some main model for
the relative valuation such as relative earnings valuation model, relative revenue
valuation model, relative cash flow valuation model and relative asset valuation
model. This method is based on an estimated average ratio in an industry; the
analysts then will work out the fair value of shares by using relevant individual
input data.
The last valuation approach, contingence claim valuation, is meaningful to value
companies of which patents matter the business (Damodaran, 2002). The idea is
based on option valuation originally developed by Black and Scholes (1972).
Nevertheless, Damodaran (2002) points out that it is difficult to value the option of
a non-traded asset. If the drug patents are not traded, it will be difficult to employ
this type of valuation.
There are some researches trying to compare these approaches. Kaplan and Ruback
(1995) find that both discounted cash flow valuation and comparative approach can
estimate the market value. Nevertheless, Berkman, Bradbury and Ferguson (2000)
point out that the methodology of Kaplan and Ruback (1995) is rather subjective. In
particular, the companies in their researches are those engaging in leveraged buy-
out transactions. For such companies, the cash flows are rather stable. In addition,
Kaplan and Ruback (1995) use companies cash flows rather than equity cash flows.
Berkman, Bradbury and Ferguson (2000) argue that the firms cash flows are more
stable than equities cash flows. The group of researchers also figure out that
Kaplan and Ruback (1995) do not choose the market value but they use the over the
counter prices of researched transactions; and Kaplan and Ruback (1995) conduct
their research with a seriously wrong assumption that the companies growth rate
-
8/10/2019 As Traze Neca
28/60
24
and their terminal values are independent. This assumption has been criticised
heavily by Berkman, Bradbury and Ferguson (1998). Regardless of many fallacies,
the result from Kaplan and Ruback (1995) research is still compatible to the recent
research of Berkman, Bradbury and Ferguson (2000). Berkman, Bradbury and
Ferguson (2000) use 45 companies in Auckland to compare the accuracy of two
approaches which are discounted cash flow and comparative. They find that there is
little difference between market-based discount cash flow model and market based
P/E model. In their papers, they also mention that the market-based model is
superior to the industry based model. The research of Berkman, Bradbury and
Ferguson (2000) seems to be persuasive but in fact the researched sample is just
limited in New Zealand market and in order to be listed new companies need to be
profitable for couple of years. It means that Berkman, Bradbury and Ferguson
(2000) paper also has some estimation biases. Froidevaux (2004) finds that the
discounted cash flow model can recognise the mispricing of shares by using data of
1,600 companies from U.S market during 19932002. He also finds that there are
few mispricing cases in consumer cyclical sector but many cases in technology
industry. It means the consistency between discounted cash flow and relative
approach can be different from industry to industry. Schreiner (2007) uses data of
600 European companies from 19962005 and finds that there are superior set of
multiples attaching to some specific industries. For example, Schreiner (2007)
shows that generally the two year forward P/E outperforms the trailing P/E. He also
points out that different industries will be have different best ratios, for example,
the best ratio can be trailing P/E in one industry but not that best in another sector.
Schreiner (2007) also employs fundamental valuation to determine intrinsic
multiples to strengthen his analysis. From these results, I think using cash flow
valuation approach to find fair value of firms is more reliable for some industries
with high volatility of cash flows.
Examining the role of asset-based valuation, Vardavaki and Mylonakis (2007) use
data from UK foods retail firms, and they find that asset-based valuation can explain
better than earnings model. And the combination of two models will be the best to
-
8/10/2019 As Traze Neca
29/60
25
estimate the firm value. Although the sample is very subjective, the result is still
considerable to evaluate the usefulness of asset-based valuation model.
For the contingence claim valuation, Kellogg and Charnes (2000) uses one company
to illustrate the possibility of using Real option valuation. They find that it is possible
to value biotechnology by taking account the option in some phases, such as before
phase II and after phase II of the R&D projects. Martn and Fernndez (2006)
confirm this result with a wider sample with more European firms. The result also
shows that it will be more reliable if analysts take into account value from real
option valuation model. However, Martn and Fernndez (2006) also accept that the
accuracy of this method is not really high. In addition, Hartmann and Hassan (2006)
also employ real option valuation method to value pharmaceutical R&D projects.
They find that the real option valuation method cannot replace the NPV approach
which is also a type of discounted cash flow valuation. It is also difficult to
standardise the valuation method because cases are complicated and distinguished.
Figure 5.1.1: Phases in research and development in a pharmaceutical project
(Source: EFPIA 2003)
In short, there are several ways to value equities; analysts can conduct all methods
because they are not mutually exclusive. Nevertheless, the discounted cash flow
valuation should be done for most cases. In addition, because each method has
different choices; analysts find it difficult to do all valuation. The selection of some
good methods to do will help to reduce working time.
-
8/10/2019 As Traze Neca
30/60
26
In the following part, I will apply different models to value AZNs equity; during this
valuation process, I also put some discussion over the assumptions and the
suitability of each model in valuing AZNs share. Nevertheless, I shall not use the
Contingent claim valuationbecause I am unable to assess the possibility of success
of each drug development project of AZN.
5.2. Valuation of AstraZeneca share
5.2.1 Asset-based valuation
In this part, I will use the data in year 2009 end of AZN to calculate fair price for a
stock. I make some assumptions for my calculation such as the value of assets and
value of liabilities in the balance sheet is fair value. It means I assume the
liquidation cost and replacement cost are zero; it also means the value of debts (or
other marketable liabilities) is unchanged.
Table 5.2.1.1 Asset-based valuation
Looking at the result of asset based valuation approach; people can think this
company is overvalued at the moment. Nevertheless, Vardavaki and Mylonakis
(2007) indicate that this model is suitable to companies with high fixed assets and
using simple technology. This model is not appropriate the biotechnology because it
will omit the knowledge assets which are R&D investment, drug invention,
development and distribution (Rasmussen,2007) and some intangible which is
unrecorded goodwill. In this valuation sheet, I did include R&D investment but I
believe this amount of money cannot reflect the huge return in the future when a
drug development program is successful. Vardavaki and Mylonakis (2007) also
-
8/10/2019 As Traze Neca
31/60
27
criticise that the method also does not include any expected future residual income
which is likely big for the very potential pharmaceutical company like AstraZeneca.
5.2.2 Discounted cash flow models
5.2.2.1 Dividend discount model
Domadoran (2002) says that there are 3 dividend discount models including Gordon
model, two-stage and three stage dividend discount model. The Gordon model is
suitable to companies with stable dividend payout policy; and normally the
companies have stable growth rate which is approximately equal to the growth rate
of the economy where the companies do business. Two stage and three stage
models relate to some fast growing period; after that period, the growth rate of
dividend will be sustainable. The multi-stage period is applicable to some
companies which are engaged in patent issue or market barrier for some period of
time. These attributes fit AZNs characteristics. For this reason, I adopt the multi -
stage model to value AZN share. Nevertheless, it is still tricky to choose between
two stages and three stages. However, the selection is now subjective because
there is no strong support to decide which model is suitable. Therefore, I adopt the
two stage model for my valuation.
When choosing two-stage model, I need deal with some conventional puzzles which
are the length of the high growth period; the sustainable growth and rate of return
on equity. Different from other business, the pharmaceutical companies do not
have specific life cycle (James, 1973); and the selection of high growth period only
comes from the valuation practice at the moment, i.e. 5 year forecast. During this 5
year period, I do not apply a constant growth rate but instead extract the dividend
from my 5 year forecast Profit and Loss Statement coupled with the payout policy
of the company. About the sustainable growth rate, it is not easy to compute by
using this formula: g = b x ROE (where b (retention rate) and ROE are sustainable). I
therefore use the guidance of Damodaran (2002) that suggests the sustainable
growth rate should be approximately equal to relevant GDP growth rate, in this case
UK GDP growth rate. I chose the average GDP growth rate in UK from BMI report
(Q2.2010) to compute g. The average GDP growth rate is 2.66%.
-
8/10/2019 As Traze Neca
32/60
28
In calculating the discount rate (r) which is rate of return on equity, I use the CAPM:
RjRf = (E(Rm)Rf) +
Market proxy: FTSE 100 Index
Securities: Astrazeneca stock in LSE
Risk free asset: UK Treasury Bond 30 years.
Using the market return and return on risk free asset (for weekly and monthly) for
10 years (from 2000 to 2010), I obtain two different models:
Weekly:
RjRf = 0.0006 + 0.858 (E(Rm)Rf) with R-square = 35.74%
Monthly:
RjRf = 0.0028 + 0.8259 ((E(Rm)Rf)) with R-square = 39.71%
I choose the beta of 0.8259 because the R-square is better. Then I come up the rate
of return on equity:
Annualised Rf = 4.750%
Annualised E(Rm) = 21.8%
Rj = 18.80%
The question now is whether I can use Rj (cost of equity) for sustainable growth rate
period? Revisit the formula:
r =
+ g
Given the sustainable g of 2.66%, the
is the dividend yield; and in the long
term, the dividend yield should be stable as the increase in dividend will lead to
higher stock price and vice versa. Deriving a sustainable dividend yield from
historical data, I came up with a yield of 3.4%. Thus, the sustainable r will be 6.06%.
Figure 5.2.2.1.1: Dividend discount valuation
Po = US$ 52.33
-
8/10/2019 As Traze Neca
33/60
29
5.2.2.2 Free Cash Flow to Equity
Damodaran (2002) introduces some types of Free cash flow to equity (FCFE)
model which is similar to Dividend discount model but the cash flow will be the
free cash flow to equity rather than dividend.
As there are also constant growth model, two-stage and three-stage earnings
model. I use the two-stage earning model with the same explanation in the dividend
model. In order to reach the FCFE, I need to forecast the Profit and Loss Statement
as well as the Balance Sheet. I do make several assumptions to build up a model.
The assumptions are based on both random walk and average basis whenever
applicable. (See the following pages for Income Statement and Balance Sheet). For
the first 5 year (stage 1), I assume a growth rate of 6.9% (same with growth rate in
year 2009), other items in Income statement is calculated as the same as the
percentage over revenue in year 2009 except the interest expenses which is
calculated by using the borrowing and repayment during the period. The capital
expenditure is based on the historical data and I use average number of the recent
years. The non cash working capital is based on the average working capital cash
conversion cycle days in last three years. The terminal price which is calculated as
follows:
In which sustainable g can be calculated similarly in dividend discount model part.
As the g in long run equal to GDP growth rate, and g = b * ROE; given the adjusted b
(which is now known as reinvestment rate) = 47.68%, the long term ROE = 5.3%. It
means the investment will reduce the value of the company. This is understandable
because in long run the abnormal ROE at the present will decline so that the g will
be equal to GDP growth rate. Because I use two-stage model, I also employed two
-
8/10/2019 As Traze Neca
34/60
30
cost of equity. The rate is similar to the rate that I applied in dividend discount
model. The first stage discount rate is 18.8% and the second stage discount rate is
6%.
Using this model, the intrinsic value of a share is US$ 64.12.
-
8/10/2019 As Traze Neca
35/60
31
Table 5.2.2.2.1 Profit and Loss Statement Projection
-
8/10/2019 As Traze Neca
36/60
-
8/10/2019 As Traze Neca
37/60
33
-
8/10/2019 As Traze Neca
38/60
34
Table 5.2.2.2.3: Free Cash Flow to Equity Table 5.2.2.2.4: FCFE Valuation
-
8/10/2019 As Traze Neca
39/60
35
From the FCFE, I can calculate Free Cash Flow to Firm (FCFF); and with the
calculated WACC, I derive the firm value of AZN.
FCCF = FCFE + Interest*(1-tax rate) + Debt repaymentNew debt borrowing
WACC is calculated as
WACC = Cost of debt*(1- tax rate)*weight of debt + Cost of equity * Weight of equity
For first 5 year period, I use the cost of debt applied for AZN (as stated in Annual
report), for long term cost of capital, I use the g = b * ROCE where g is sustainable
growth rate which is 2.66%, b (reinvestment rate) is 47.67% (for FCFE) which is now
applied for FCFF. ROCE = 5.58%.
Table 5.2.2.2.5 WACC, FCFF and PV of FCFF
From this result, I calculate a value of operating asset of firm = US$ 155,576 million.
5.2.3 Relative valuation
In this part, I use P/E, P/B and P/S multiplier to calculate the fair value of shares.
This valuation is based on assumption that the market could price stock wrongly but
will correct this mistake in the future. In addition, there are also implicit
assumptions when analysts choose stocks to create market multipliers. In particular,
the selection is very subjective and some analysts do not adjust relevant items on
Income Statement or Balance Sheet to make companies comparable. Amongst 4
companies (AstraZeneca, GlaxoSmithKline, Pfizer and Abbott), I find that the first
two use IFRS accounting system and the remaining ones use US GAAP. Although the
IFRS and US GAAP have certain differences, I find that the overall accounting
policies of 4 companies are not really divergent. In particular, I find that there are
just some clear differences such as the number of years applied for depreciation,
inventories costing method (AZN uses either First-in First-out; Abbott use average
-
8/10/2019 As Traze Neca
40/60
36
cost or market price, Pfizer uses average cost), the clarification of capitalisation of
in-process R&D cost, internal R&D cost.
Even companies using same accounting system, it does not mean that the sales,
earnings and book value of them can be comparable. This is because the existing
accounting systems (both IFRS and US GAAP) allow certain flexibility which helps
managers to manipulate the statements. In particular, the sales can be adjusted
deliberately if companies estimate a higher rebates or chargeback. In addition, for
the provision, it is possible for managers to decide to expense the provision upon
certain clues. If it is case, the expense items on Income Statement will be distorted.
The non-recurring items also concern the comparability of earnings; for some cases,
it is very easy to adjust these items (for example, companies sell their assets) but
some cases such as the financial losses, it is difficult to assess whether the loss is
recurring or non-recurring. For the book value, the decision to record the cost of
intangible assets such as internal generated intangible assets can make the book
value less comparable.
In order to make the sales, earnings, and book value comparable, it is necessary to
adjust the relevant items. There are some ways to carry out the adjustments such
as removing the non-recurring cost and income, adjust the length of depreciation
and amortisation, use the items which cannot be materially manipulated to
compare.
In this project, I dont adjust the earnings because the non-recurring items (such as
discontinued operation profit is not significant); in addition, I also dont adjust the
sales and book value because there are too many assumptions about rebates,
chargeback, provision and fair values. The following valuation result is for reference
and will be more reliable if it is combined with other valuation method results.
In order to estimate the fair price of shares, I need to calculate the multipliers which
are the average historical ratios of 4 companies.
Price-to-earnings ratio (P/E):
There are three types of P/E ratios which are historical P/E, trailing P/E and forward
P/E. The differences amongst them are the earnings employed in the ratios. In
-
8/10/2019 As Traze Neca
41/60
37
particular, the earning will be last year earnings, last 4 quarter earnings and this
year earnings in the above mentioned order. Investors care forward P/Ethe most
because they want to know the price of share with regard to the earnings in the
future. The earnings come from the forecast Income Statement that I have done
above. The valuation result is as follows:
Table: 5.2.3.1: P/E valuation
As the forecast earnings are $7,242 million, the projected outstanding shares are
1,418 million shares, the EPS is 5.107 and the price at the end of year 2010 would
be 11.91 x 5.107 = US$ 60.83
Price-to-book value ratio:
The approach of P/B is also similar to P/E, the book value is the total equity and in
order to calculate the price at the end of year 2010.
As the book value change at the year 2010 end, total book value would be US$
23,538 million, the BV per share is then 16. The share price is 16 x 3.52 = US$ 58.43
Table 5.2.3.2: P/B valuation
Price-to-sales ratio:
Table 5.2.3.3: P/S valuation
-
8/10/2019 As Traze Neca
42/60
-
8/10/2019 As Traze Neca
43/60
39
CHAPTER 6: CONCLUSION
Fundamental analysis summary:
AZN has a very successful year in 2009 regardless of some trouble with a lawsuit.
Last year profit rose 23.1% and AZN is expanding its market into both matured and
emerging markets. It is also very promising when AZN manages its COGS and
working capital better. This will help to reduce cost, borrowing cost to finance
working capital, and finally boost the bottom line. The product strategy of AZN
sounds to be right as participation into genetic treatment (infection drugs) starts
bring profits. This soon covers the cost to finance the acquisition of MedImmune
and Cambridge Antibody Technology.
The new capital structure now positively put some pressure on management team
so that they can work harder and generate enough cash to repay interest, dividend
and still have some money left to re-invest into its business.
In short, the fundamental analysis shows that AZN is a potential company.
Share price performance and dividend income:
In tracing the share performance of AZN for last three years, I find that AZN share
price outperform the market and its big rivalGSK.
Table 6.1 Share performance
With high capital gain and a progressive dividend policy, AZN stock looks attractive.
However, the AZN stock price could be over weighted upon recent the lawsuit
settlement.6 The valuation result can give a better idea about fair price for an AZN
share.
6 http://www.bloomberg.com/news/2010-07-30/astrazeneca-says-almost-4-000-seroquel-claims-
settled-through-mediation.html
-
8/10/2019 As Traze Neca
44/60
40
Valuation result:
The following table summarise the results which are derived by different valuation
methods:
Table 6.2 Valuation results
As discussed above, the asset based value does not reflect the intrinsic value of
shares because it does not include the knowledge assets. For this reason, I exclude
this result from my consideration. The fair price will fluctuate between US$52.33
and US$64.12. However, it is worth paying attention to the fair price which is
derived from FCFE. This fair price is more stable than other prices because the fair
price only changes when there is a fundamental change; meanwhile, the relative
fair price can fluctuate wildly due to the market sentiment.
Investment proposal:
In order to decide whether invest or divest share, it is necessary to consider the
current market price of the AZN and the share price of other companies.
AZN price as of July 31, 2010 is 50.440 US$ (US Market) and or 32.38 GBP (UK
Market). From my valuation result, I think AZN now is undervalued and it is possible
to invest into AZN stock.
-
8/10/2019 As Traze Neca
45/60
41
Reference:
Known authors:
Allen, F., M. Chui and A. Maddaloni, (2004), Financial Systems in Europe, the USA, and
Asia, Oxford Review of Economic Policy 20, 490-508.
Berkman B., Bradbury M. E., Ferguson J. (2000), The Accuracy of Price-Earnings and
Brealey R., S Myers S., (2003) Principles of CorporateFinance. 7th Ed., McGraw Hill,
Brounen D., Jong A. de, Koedijk K., (2006), Capital structure policies in Europe: Survey
evidence, Journal of Banking & Finance 30 (2006) 14091442,
Bulan, L., Subramanian N., and Lloyd D. T,.(2007), On the Timing of Dividend Initiations,
Financial Management 36:4, 3165.
Ciccone, S., Ang, J. S., (2009), Dividend Irrelevance Policy, in Baker H. K. (2009), in
Dividends and. Dividend policy, John Wiley & Sons
Damodaran A., (2002), Investment Valuation, 2nd edition, John Wiley & Son Inc.,
Discounted Cash Flow Methods of IPO Equity Valuation, Journal of International Financial
Management and Accounting 11:2 2000.
Filbeck G., (2009), Asymmetric Information and Signaling Theory, in Baker H. K. (2009), in
Dividends and. Dividend policy, John Wiley & Sons
Froidevaux P. S., (2004), Fundamental Equity Valuation Stock Selection based on
Discounted Cash Flow, http://ethesis.unifr.ch/theses/downloads.php?file=FroidevauxP.pdf
Graham B., Dodd D., (1934), Security Analysis: Principles and Technique, McGraw-Hill
Book Company, Inc.
Graham J. and Harvey C., The Theory and Practice of Corporate Finance: Evidence from the
Field, Journal of Financial Economics 60 (May/June 2001), pp. 187244.
Hartmann M., Hassan M., (2006), Application of real options analysis for pharmaceutical
R&D project valuationEmpirical results from a survey, Research Policy 35, 343354
Hitchner J. R., (2003), Financial Valuation: Applications and Models, Wiley, 1st edition
James B. G., (1973), The theory of the corporate life cycle, Long Range Planning
Volume 6, Issue 2, June 1973, Pages 68-74
-
8/10/2019 As Traze Neca
46/60
42
Kaplan S. N. and Ruback R. S. (1995), The Valuation of Cash Flow Forecasts: An Empirical
Analysis, The Journal of Finance, Vol. 50, No. 4. (Sep., 1995), pp. 1059-1093.
Kellogg D., Charnes J. M., (2000), Real-Options Valuation for a Biotechnology Company,
Association for Investment Management and Research
Lintner, J., (1956), Distribution of Incomes of Corporations among Dividends, Retained
Lintner, J., (1956), Distribution of Incomes of Corporations among Dividends, Retained
Earnings, and Taxes., American Economic Review 46:2, 97113.
Martn G. R., Fernndez P. L.,(2006), Real options in biotechnological firms valuation. An
empirical analysis of European firms, J. Technol. Manag. Innov., Vol. 1, No. 2.
Miller M. H. and Modigliani F., (1961), Dividend Policy, Growth, and the Valuation ofShares, Journal of Business, vol. XXXIV, October
Mueller, D. C., (1972) "A Life Cycle Theory of the Firm," Journal of Industrial Economics,
Blackwell Publishing, vol. 20(3), pages 199-219, July.
Mukherjee T., (2009), Agency Costs and the Free Cash Flow Hypothesis, in Baker H. K.
(2009), in Dividends and. Dividend policy, John Wiley & Sons
Rasmussen B.,(2007), Response of Pharmaceutical Companies to Biotechnology: Structure
and Business Models, Centre for Strategic Economic Studies Victoria University of
Technology, http://www.cfses.com/documents/pharma/33-
Pharmaceutical_Business_Models_Rasmussen.pdf
Rooij M. D., Renneboog L., (2009), The Catering Theory of Dividends, in Baker H. K.
(2009), in Dividends and. Dividend policy, John Wiley & Sons
Passov R., (2003), How Much Cash Does Your Company Need?, Harvard Business Review,
November 2003.
Saadi S., Dutta S. (2009), Taxes and Clientele Effects, in Baker H. K. (2009), in Dividends
and. Dividend policy, John Wiley & Sons
Schreiner A., (2007), Equity Valuation Using Multiples: An Empirical Investigation,
http://www1.unisg.ch/www/edis.nsf/wwwDisplayIdentifier/3313/$FILE/dis3313.pdf
Smith D. M. (2009), Residual dividend policy, in Baker H. K. (2009), in Dividends and.
Dividend policy, John Wiley & Sons
-
8/10/2019 As Traze Neca
47/60
43
Vardavaki A., Mylonakis J., (2007), Empirical Evidence on Retail Firms Equity Valuation
Models, International Research Journal of Finance and Economics, Issue 7
Anonymous
Abbott Laboratories, (2010), Annual Report
AstraZeneca, (2010), Annual Report
Business Monitor International, (2010), United Kingdom pharmaceuticals & Healthcare
Report, Quarter II
GlaxoSmithKline, (2010), Annual Report
Office for National Statistics, http://www.statistics.gov.uk/cci/nugget.asp?id=192Pfizer, (2010), Financial Statement
http://www.best-information.eu/international-marketing-strategies/Appendix-B.html
http://industry.bnet.com/pharma/10001729/claim-astrazeneca-ceo-brennans-pay-
too-high-spends-too-much-on-lobbying/
http://money.cnn.com/2007/04/23/news/companies/astrazeneca/index.htm
http://www.fiercebiotech.com/press-releases/press-release-astrazeneca-launches-and-
prices-6-9-billion-bond-issue
http://www.best-information.eu/international-marketing-strategies/Appendix-B.html
http://www.bloomberg.com/news/2010-07-30/astrazeneca-says-almost-4-000-seroquel-
claims-settled-through-mediation.html
http://www.best-information.eu/international-marketing-strategies/Appendix-B.htmlhttp://www.best-information.eu/international-marketing-strategies/Appendix-B.htmlhttp://industry.bnet.com/pharma/10001729/claim-astrazeneca-ceo-brennans-pay-too-high-spends-too-much-on-lobbying/http://industry.bnet.com/pharma/10001729/claim-astrazeneca-ceo-brennans-pay-too-high-spends-too-much-on-lobbying/http://industry.bnet.com/pharma/10001729/claim-astrazeneca-ceo-brennans-pay-too-high-spends-too-much-on-lobbying/http://money.cnn.com/2007/04/23/news/companies/astrazeneca/index.htmhttp://money.cnn.com/2007/04/23/news/companies/astrazeneca/index.htmhttp://www.fiercebiotech.com/press-releases/press-release-astrazeneca-launches-and-prices-6-9-billion-bond-issuehttp://www.fiercebiotech.com/press-releases/press-release-astrazeneca-launches-and-prices-6-9-billion-bond-issuehttp://www.fiercebiotech.com/press-releases/press-release-astrazeneca-launches-and-prices-6-9-billion-bond-issuehttp://www.best-information.eu/international-marketing-strategies/Appendix-B.htmlhttp://www.best-information.eu/international-marketing-strategies/Appendix-B.htmlhttp://www.bloomberg.com/news/2010-07-30/astrazeneca-says-almost-4-000-seroquel-claims-settled-through-mediation.htmlhttp://www.bloomberg.com/news/2010-07-30/astrazeneca-says-almost-4-000-seroquel-claims-settled-through-mediation.htmlhttp://www.bloomberg.com/news/2010-07-30/astrazeneca-says-almost-4-000-seroquel-claims-settled-through-mediation.htmlhttp://www.bloomberg.com/news/2010-07-30/astrazeneca-says-almost-4-000-seroquel-claims-settled-through-mediation.htmlhttp://www.bloomberg.com/news/2010-07-30/astrazeneca-says-almost-4-000-seroquel-claims-settled-through-mediation.htmlhttp://www.best-information.eu/international-marketing-strategies/Appendix-B.htmlhttp://www.fiercebiotech.com/press-releases/press-release-astrazeneca-launches-and-prices-6-9-billion-bond-issuehttp://www.fiercebiotech.com/press-releases/press-release-astrazeneca-launches-and-prices-6-9-billion-bond-issuehttp://money.cnn.com/2007/04/23/news/companies/astrazeneca/index.htmhttp://industry.bnet.com/pharma/10001729/claim-astrazeneca-ceo-brennans-pay-too-high-spends-too-much-on-lobbying/http://industry.bnet.com/pharma/10001729/claim-astrazeneca-ceo-brennans-pay-too-high-spends-too-much-on-lobbying/http://www.best-information.eu/international-marketing-strategies/Appendix-B.html -
8/10/2019 As Traze Neca
48/60
44
Appendix: Financial Statement of companies
ASTRAZENECA
-
8/10/2019 As Traze Neca
49/60
45
-
8/10/2019 As Traze Neca
50/60
46
-
8/10/2019 As Traze Neca
51/60
47
GLAXOSMITHKLINE
-
8/10/2019 As Traze Neca
52/60
-
8/10/2019 As Traze Neca
53/60
49
-
8/10/2019 As Traze Neca
54/60
50
PFIZER
-
8/10/2019 As Traze Neca
55/60
51
-
8/10/2019 As Traze Neca
56/60
52
-
8/10/2019 As Traze Neca
57/60
53
ABBOTT LABOTORIES
-
8/10/2019 As Traze Neca
58/60
54
-
8/10/2019 As Traze Neca
59/60
55
-
8/10/2019 As Traze Neca
60/60