Corporate Finance

Financial Performance of Pharmaceutical Companies 
 159

Exhibit 7.9 EBITDA margins

(in percent)

1997 1998

Cipla 22.6 24.2
DRL 20.6 21.9
Glaxo 13.7 13.5
Ranbaxy 18.6 19.3
Sun Pharma 29.1 25.1

Source: Merrill Lynch.

A few years ago, the analyst community expected these companies to do well because of rising margins,
healthy growth in demand, better realization of prices due to the relaxation of DPCO, move toward basic
research and formulation sales where the margins are much higher.^3 Test whether their predictions turned out
to be reasonably accurate.

EXERCISE

1. Evaluate each company in terms of growth in total assets, long-term debt, stockholders equity, sales, operating profit,
   pretax income, and net income for 2001.


2. See the common size balance sheets. Compare year 2000 to 2001. Why do current assets vary across firms? Why does
   borrowing vary from 1 percent to 35 percent across firms?


3. See the common size income statements. Compare year 2000 to 2001. Which firm is the most profitable? Why does net
   income vary from 4 percent to 22 percent across firms?


4. See the cash flow statements. Why did cash flow from operations increase from Rs 53.79 crore to Rs 212.09 crore for
   Glaxo? Did all the firms experience an increase in cash flow from operations? If not, why not? Is the cash flow from
   operations more or less than the cash flow from investing activities for these firms? If yes, why? If not, why not? For
   DRL the cash flow from operations in 2000 was Rs 86.63 crore whereas the cash flow from investing was Rs 110.18 crore.
   Where did DRL get the additional cash to finance the investment? Can this situation continue indefinitely?


5. Look at the financial ratios for these firms. Which firm has the most (least) liquidity as of 2001? Can a firm have too much
   liquidity? Which firm is best (worst) at managing assets as of 2001? Which firm is the most (least) financially leveraged as
   of 2001? Do you expect pharmaceutical firms to be highly leveraged? Why? Can a firm have too much or too little debt?


6. What were the factors that caused the change in return on equity for each company? Perform a DuPont Analysis.


7. Academic studies suggest the take over candidates are often firms with low leverage and poor operating performance. Are
   any of these firms good takeover candidates? Why?

(^3) See, for example, Jain, Manish and Paul Woodhouse (1998). ‘India: Pharmaceutical Sector’, Merrill Lynch, Equity
Research Report, August.