Identifying the key elements of financial performance of the pharmaceutical companies

of Pakistan:

A comparison of GSK and Abbott Ltd, Pakistan

By

A Major Project Thesis

Submitted in Partial Fulfilment of the Requirements

for the MSc Management Programme

Birmingham City University

Faculty of Business, Law and Social Sciences

January 2022

Under the supervision of

Dr Peter Samuels
 Acknowledgments

We are very grateful to Allah Almighty that with His grace, our report has reached to a fruitful
end. This is to recognize that the exploration report made couldn't have been imaginable without
the interminable exertion of ourselves and the hard work of a supervisor.

We are truly grateful to Dr. Peter Meus who helped us hugely in our examination work and
directed us through to make this report a success. We thank our personnel to be strong and
empowering towards our work. We might likewise want to thank our Evaluation Committee who
assisted us with filling the holes in our examination through helpful criticism.

2
 Abstract

This study will investigate key elements of the financial performance in the pharmaceutical
industry. It will analyze the financial statements of the two companies in the pharmaceutical
sector Abbott and GSK. Moreover, we will analyze them and compare the last year of GSK with
the Abbott financials to evaluate the performance of the companies. The methodology used will
be both qualitative and quantitative and the approach used is interpretvism. The data will be
gathered by different sources. As it’s a secondary research so different literatures and internet
sources have been studied. The data is also gathered by magazines and journal articles. To
analyze the financial statements of the companies the study has measure some financial ratios
to know the performance of the companies. Moreover, the Abbott is the first mover in nutritional
segment as people demand of immunity boosters during covid-19 and Abbott was the one to
meet the demands of the consumer. As the result Abbott performed better than GSK as its
ratios were higher as compared to GSK.

3
Contents
Acknowledgments.................................................................................................................................2
Abstract..................................................................................................................................................3
CHAPTER 1...........................................................................................................................................6
1.1 Introduction.....................................................................................................................................6
1.2 Background.....................................................................................................................................8
1.3 Aims and Objectives......................................................................................................................9
1.4 Research Questions....................................................................................................................10
CHAPTER 2.........................................................................................................................................11
2.1 Literature review...........................................................................................................................11
2.1 Financial performance review in pharmaceutical industry......................................................16
2.3 Key elements of financial performance in pharmaceutical industry......................................19
CHAPTER 3.........................................................................................................................................21
3.1 Methodology..................................................................................................................................21
3.2 Data collection..............................................................................................................................22
3.3 Conceptual framework.................................................................................................................25
CHAPTER 4.........................................................................................................................................26
Analysis, Evaluation, Conclusion and Recommendations............................................................26
4.1 SWOT analysis for Pharmaceutical Industry in Pakistan........................................................27
4.2 Porter’s five forces Analysis for Pharmaceutical Industry in Pakistan...................................30
4.3 Financial ratio analysis................................................................................................................34
Financial ratio analysis.......................................................................................................................35
3.3.1 Revenue Analysis:....................................................................................................................35
3.3.2 Profitability Ratios:....................................................................................................................38
3.3.3 Turnover Ratios:........................................................................................................................45
3.3.4 Liquidity Ratios:.........................................................................................................................48
3.3.5 Investors Ratios:.......................................................................................................................53
4.3.7 Conclusions and Recommendations......................................................................................57
CHAPTER 5.........................................................................................................................................59
References..........................................................................................................................................59

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CHAPTER 1

1.1 Introduction

This research thesis examines the key elements of

the financial performance of pharmaceutical
industry in Pakistan; as a sample case the financial
performance of Abbott Laboratories Pakistan for
last three years has been analysed and a
comparison has been drawn with its major
competitor (GSK) for the last year (FY 2020). To
highlight the key elements business analysis
comprising of SWOT analysis and Porter’s Five
Forces analysis has been included. The financial
performance can be measured by the analysis of
financial reports which are being considered as a
management tool to evaluate the company’s
strengths and weaknesses. Financial ratios play an
important role in assessing the financial health of
the company. The financial ratios are being
calculated by the published financial reports to
assess the company’s financial health. The
application of the measurement of the financial
performance identifies the weak and strong
financial performance. Annual financial statements
help the user to identify and differentiate between
the well performing companies and the companies
which are showing financial trouble, so the early
identification of financial difficulty helps to
overcome for future (Turley et al., 2014).

In the era of 2020, the pharmaceutical sector of

Pakistan values was assessed to be USD 3.2
billion, multiplying from USD 1.64 billion out of 2011
(Khan et al., n.d.) .The detailed study will be
conducted to give an in-depth overview and
analyze the future outlook of the pharmaceutical
sector of Pakistan. As a comprehensive
assessment has been conducted which helps the
Pakistan companies to become a cost-efficient
manufacturer with high-quality generic medications
and conceivably advance into more rewarding item
contributions like super-generics and
immunizations. This future outlook will help to make

6
key steps for further assisting the change in the
pharmaceutical sector for the next 5-10 years
(Khan et al., n.d.).

1.2 Background

Like any other country, in Pakistan pharmaceutical

industry is considered as the backbone of the
health services and it is very important for the well-
being of the people and to provide them with yet
good and affordable health care. Pharma industry
is growing in Pakistan and is developing to provide
with a high quality and cost-effective
medications(Ahmed and JALEES, 2008). Now a
days Pakistan is a very vibrant and forward looking
pharma industry. In 1947 at the time of
independence, there were hardly any
pharmaceutical industry in a country but now today
Pakistan has almost 400 manufacturing units of
pharmaceutical (Marcus Steinberg and Raheem
Ahmed, 2012). It also includes those 25
multinationals which are being operated currently in
a country. Now the pharmaceutical industry of

7
Pakistan meets the 70% of the demand of country
for the finished medicine (Marcus Steinberg and
Raheem Ahmed, 2012).

The pharmaceutical industry of Pakistan has now

become a success story which provides millions
with a high-quality drug at affordable prices. The
technology is getting so advanced, that the national
pharmaceutical industry is playing a key role in
promoting and sustaining the field of medicines.
Within a country, they are also well settled and
have affordable prices to take on to the
international markets (Marcus Steinberg and
Raheem Ahmed, 2012). It is important to identify
the key elements of financial performance of
Pharmaceutical industry of Pakistan; and to
suggest best practices and strategies for the
improvement of this performance and in order to
compete in the international markets.

8
1.3 Aims and Objectives

The research aim is to identify the key elements of

financial performance of the pharmaceutical
companies of Pakistan. We will be exploring the
financial performance of GSK and Abbott Ltd for
the last three years. For this research we have
developed some aims and objectives which are
presented below:

 To review the idea of financial performance in

the pharmaceutical industry
 To explore the key elements of performance in
financial aspects in the pharmaceutical industry
 To examine the financial performance of
Abbott (3 years) and GSK
 To identify the financial ratios of Abbott Ltd and
GSK
 To draw a comparison of the practices and
performance of Abbott Ltd with GSK
 To render feasible recommendations about the
effective financial performance and strategies

9
1.4 Research Questions

In order to attain the research objectives in

the alignment of the research topic, the following
are the key research questions that are developed
to undertake the presented study in an efficient and
effective manner:

R.Q.1 What are the core financial performance

elements of the pharmaceutical industry?

R.Q.2 What areas of the financial performance are

affected by the developing country's
pharmaceutical industry?

R.Q.3 What are the financial performance ratios for

the last three years of Abbott Ltd., Pakistan?

R.Q.4 What are the key financial performance

elements of Abbott Ltd., Pakistan and how can we
compare it GSK?

R.Q.5 What can be feasible recommendations to

improve the current financial performance?

10
CHAPTER 2

2.1 Literature review

Financial performance is normally defined as the

ability of an industry or company to manage its
operations with respect to productivity,
management, profits, market share and brand
positioning over a specific period of time, it covers
both the quantitative performance and performance
in terms of quality as well. Financial performance of
Pharmaceutical industry of Pakistan is improving as
the healthcare and pharmaceutical sectors are
expanding rapidly as modern medicines are not
being accessed by almost half of the population,
with an economic progress evident and large
population per capita drug was still low in 2007, it
was around US $9.3 (Ahmed and JALEES, 2008).
This shows an opportunity to evolve in the industry
and still more work is to be done by the industry’s
stakeholders and government. The value of
medicines increased by US $1.4 billion in 2007 and

11
are expected to be exceed the value of medicines
sold by 2012 to US $2.3 B. In the last few years the
industry upgraded itself by investing significantly
and now the industries are following GMP (good
manufacturing practices). As these are according to
the international and domestic practice guidance so
they have the capacity to manufacture variety of
products like going from simple pills to value-added
compounds (Zaman, 2011).

According to the reports of 2004, pharma sector of

Pakistan has a stunted progress, main reasons of
this progress are identified as under:

1. No proper regulations like there was no

control over inflation and there were no
adjustments in prices
2. No polices for over the counter drugs and
no policy of vitamins, as over the counter
drugs are a large segment for a global
pharma to add in to the profitability scale.
3. The procurement policies of the government
were very weak as they are not encouraged
to invest in the quality of the product and

12
 even the domestic regulations were also
poor.
4. Energy crisis is also the factor for stunted
growth which also affects the financial
performance, as they use the steam and
electricity which are the two exorbitant
inputs and are not supported on utilities,
even no grants on the R&D or tax benefits
to pharma(Marcus Steinberg and Raheem
Ahmed, 2012).

The pharmaceutical industry of Pakistan can be

termed as a success story as its providing millions
of people a high quality drugs at affordable prices.
National pharmaceutical industry is playing a key
role to promote and sustain the field of medicine
within the country and also covers the market
internationally as they are self-reliant and strong
technologically (Kemal, n.d.). The key success is
based on the simple formula with economical rates
and with high quality of production at current GMP.
Now most of the Pakistan pharmaceutical
companies have maintained their high standards to

13
 ensure that the production operations and the
quality control is as under the guidelines of current
good manufacturing practices. Now Pakistan is
successfully operating internationally and exporting
their products to various different territories. Abbott
Ltd. and GSK come in the top 10 multinational
pharmaceutical companies as shown in the list
below:

1. GSK 6. Novartis Pharma (Pakistan) Ltd

2. Sanofi Aventis 7. Bristol-Myers Squibb

3. Abbott Laboratories (Pakistan) 8. Pharmacia and Upjohn (Pvt.) Ltd

4. Merck Marker (Pvt.) Ltd 9. Parke-Davis

5. Roche Pharmaceuticals 10. Wyeth Pakistan Ltd

Figure 1 Rating of the Pharmaceutical companies in Pakistan

In 1991 IFC identified the equity market of Pakistan

as one of the twenty promising emerging market;
primarily due to performance of pharma industry.
According to the international magazine it has been

14
regarded as the best performing emerging market
in years of 2002-2004 [The International Magazine
Business Week]. As compared to other developing
countries like USA, India and Indonesia, Pakistan is
considered weak according to the corporate
governance. The future earnings in Pakistan
identify the firm size, cash balance, controlling
growth, market capitalization, retained earnings and
these factors are used to signal the dividends of the
company. This study will help us in understanding
the dividend policies of the pharmaceutical
companies within Pakistan (Rafique, 2012).

2.1 Financial performance review

in pharmaceutical industry

According to the 2015 sales quarter the

pharmaceutical sales index reported a growth of
11% as compare to the 10% in October 2014.
Abbott and GSK are in the top 5 pharmaceuticals
company and are developing day by day by gaining
an economic growth and high economic

15
importance. Further in 2016 the growth was 6.7%
as compare to the previous and in 2017 it
increased to 9.1% which is a remarkable growth
(Nisar and Zaki, 2018). As the Pakistan human
resources has been trained and developed in
various areas like production, marketing.
Assurance of quality and services, like this the
pharmaceutical industry of Pakistan is keep
growing. The challenges are faced when
unfavorable condition occurs like controlled prices
of medicines, then political influences in industry
and other external factors (Professor et al., 2016)

Pakistani pharmaceutical industry is an attraction

for the foreign investors as it covers almost $2.3
billion industry with a compound annual growth rate
(CAGR) of 15.69% and the total domestic
investment was $ 500 million and the foreign
investment was of $100 million (Marcus Steinberg
and Raheem Ahmed, 2012). It is anticipated that
the market share of the pharmaceutical industry will
grow between 2021 to 2028 at 11.34% CAGR This
is due to the massive transformation in the industry

16
in recent years in the forms of cost-effectiveness,
new technologies as well as efficient approaches to
manufacturing (Grandview Research, 2021).

As the current outbreak of the COVID-19 led to the

global crisis and new challenges for the
pharmaceutical industry, the magnitude of
overcoming the adversities is quite low in Pakistan
due to the extreme shortage levels of essential
medicines. Pakistan is unable to produce an
effective vaccine yet and relies upon the imports
from the developed nations for the purpose of
COVID-19 vaccinations, whereas, neighbor
countries like China and India are performing far
better than the pharmaceutical industry of Pakistan
due to abundant in essential medicines (Merchant
and Hussain, 2020). However, the nutritional
segment of Pakistan Pharmaceutical industry has
performed better during COVID-19 (Why Pakistan
cannot produce essential medicines - Pakistan -
DAWN.COM, n.d.).

Still the overall performance of pharmaceutical

industry declined during the COVID-19 and the

17
cash flows were decreased, this deterioration of the
internal cash flows of the pharmaceutical industry
might create difficulty in terms of managing
business operations. This enables the
pharmaceutical companies to borrow an additional
amount of funds from the financial institutions,
which in turn fosters the financing costs. It might
also lead to a high degree of financing leverage for
pharmaceutical companies. Furthermore, the
increase in debts may also create a burden on the
pharmaceutical companies in terms of meeting
business-related obligations in a timely manner
(Lee and Choi, 2015)

2.3 Key elements of financial

performance in pharmaceutical
industry

It is essential for the pharmaceutical industry to

maintain its financial position as it is a key element,
which directly affects credit rating. The deterioration

18
of the internal cash flows of the pharmaceutical
industry might create difficulty in terms of managing
business operations. This enables the
pharmaceutical companies to borrow an additional
amount of funds from the financial institutions,
which in turn fosters the financing costs. It might
also lead to a high degree of financing leverage for
pharmaceutical companies. Furthermore, the
increase in debts may also create a burden on the
pharmaceutical companies in terms of meeting
business-related obligations in a timely manner
(Lee and Choi, 2015). Furthermore, often the
companies use cash flows to carry out the analysis
by dividing the cash flow statement in different
sections to analyze the company’s performance
better. The cash flow statement is divided in
different sections as operating activities, investing
activities and financing activities to get more clear
to the readers of financial statements (WARREN,
2017).

Another key element to measure the financial

performance of the pharmaceutical company is the

19
optimal capital structure. In this equity is used to
analyze the financial performance of the company
and how it maximizes the profit. The effective use
of it will be productive to increase the profits and
the shareholders return (Rehan et al., n.d.). As this
helps the company to analyze where it stands and
what steps should be taken further to improve its
performance. And what structure will be beneficial
for the company.

CHAPTER 3

3.1 Methodology

There are three types of approaches to conduct a

research qualitative, quantitative and mixed.
Researchers select the type of research according
to their research study. These approaches are very
effective to carry out a research according to the
objectives of the research (Denzin and Lincoln,
2011). This research is qualitative and quantitative
in nature. Thus, the research will use interpretiyism

20
research philosophy for the purpose of identifying
the key elements of the financial performance of
the pharmaceutical companies of Pakistan. This
philosophy of research give preference to the
quantitative data and subjective view as it extracts
the information needed to evaluate the research
problem (Nicholson and Bennett, n.d.).

This research will be conducted through a literature

survey and the financial statements of the
companies. The research will be based on the
secondary data and no survey will be conducted in
this research. As to measure the financial
performance of the companies the ratios will be
calculated from the data provided by financial
statements. These ratios will help the research to
analyze the financial performance of the
pharmaceutical companies of the last recent years.
Moreover, the study will be conducted in an
efficient manner to get the direction of the research
according to its aims and objectives (Denzin and
Lincoln, 2011). this study will comprehend the

21
research problem in detail and directs the research
according to the research problem of the study.

3.2 Data collection

The data collected will be from different sources as

we have studied different literatures and financial
statements of the company. As these data will be
accumulated according to the design and approach
of the study and then will be analyzed according to
its research objectives. In this study no
questionnaires or interviews will be conducted as
this is a secondary research. As this research is
based on the secondary data and all the facts and
figures will be analyzed and will assist in getting
reliable data relevant to the study. As these facts
and figures have been researched before so we
can say that these facts will be authenticated and
are going to be researched again according to the
research objectives and this research will be more
accurate. Moreover, we will accumulate the data
from different literatures and the financial

22
statements of the company from their annual
reports.

Below are the main sources of data explained

briefly:

Journals and Reports: Different journals from

some reputed researchers have been studied to
make my research authentic so my finding will
support the experts’ opinions.

Articles/ Research Papers: For the collection of

secondary data and to develop understanding of
core concepts related to this project, many article
and research papers have been consulted. This
data is available online and is difficult to research
on different articles to study and then extract the
data from it to use in the project. Moreover, these
studies helped to improve the knowledge of
industry and companies.

Internet: As the world is transforming digitally, we

will be using an internet source as a data collection

23
tool to gather the data and the previous studies
related to it for the purpose of this research.

Company Annual reports: I have downloaded

financial reports of both companies to get the data
from it to analyze the financial performance. The
annual reports helped me to get the data of
financial statements and information from the notes
to statements. I get these reports from the stock
market.

Magazines and Newspapers: I used to study

different magazines of different years from that I
highlight some business performance of the
companies. Some magazines I read online to
gather the information from it about the company
and the industry.

3.3 Conceptual framework

In this conceptual framework we will be analyzing

how the independent factors like profitability,
leverage, turnover ratios and liquidity will affect the
financial performance of the company. It will be

24
analyzing how the profitability impacts the financial
performance and in which direction the company is
going. Secondly, the leverage of the company will
identify the earning per share and the market value
per share of the company. Moreover, the other two
ratios will also identify the performance of the
company. Different ratios will be calculated to
analyze the performance of the company.

25
 Independent
variables Dependent
variables
Profitability
Financial performance of
Leverage Abbottt (5 years) and GSK
(Last year)

Turnover ratios

Liquidity

Figure 2 Conceptual Framework

CHAPTER 4

Analysis, Evaluation, Conclusion

and Recommendations

This study will analyze the financial performance

key elements of the pharmaceutical industry.
Further the study will comprise of the financial ratio
analysis and the business analysis of the
pharmaceutical industry in Pakistan. The business

26
analysis will analyze by the SWOT and Porter
analysis in detail. While conducting the financial
ratio analysis Abbott has been analyzed for the last
three years as a benchmark to highlight the
financial performance according to the key
elements of the financials in the pharmaceutical
industry. We will be comparing the last year of GSK
and Abbott financial ratios to signify the different
strategies adopted by the company.

4.1 SWOT analysis for

Pharmaceutical Industry in
Pakistan

Strengths:

Pharmaceutical industry of Pakistan comprises of

well established companies like; Abbott is operating
since 1948 and has many strengths, as it has been
established that its operating in more than 160
countries in the world and GSK is considered as
the global giant of the pharmaceutical sector

27
(Bloomberg, n.d.). Around the fortune of 500
companies Abbott has been rated as 89 in the
strong distribution system and whereas the GSK is
at 304 in the list (Fortune 500 list of companies
2021 | Fortune, n.d.). Now the pharmaceuticals are
recognised by their nutritional brands since the
outbreak of covid-19, like the nutritional brands of
Abbott is Ensure and Pediasure (Ahmed and
Chandani, 2020a). Pharmaceutical industry can
increase its sales and profitability by capitalizing its
diversified portfolio with developed products of
brands in terms of the volume and brand
placement(Hecht et al., 2020).

Weaknesses: the weakness of the industry is that

the research and development is conducted by the
parent company and very minimal amount is spent
by the company to conduct the research.
Government have taken measurable steps to
eliminate this weakness, as Abbott and GSK are
also included in this. By taking the steps little work
gas been started as clinical trials have started in
Pakistan to alter the product range as they ae

28
bringing competitive products as before they were
dependent on the products whose patents are
going to be expire (AR 2020, n.d.)

Opportunities: Companies like Abbott and GSK

have an opportunity to lead in the market as during
this covid-breakout, the world emphasis on the
nutritional products to boost the immunity and
Abbott and GSK are highlighted as the good
nutritional product manufacturer providing with
multiple products with tremendous growth
opportunities. (Znad Darwish and Hussain Pahi,
n.d.). As the fast growing population of pakistan
requires a lot of improvement in the medical
facilities and to improve the standards of nutritional
products and this shows an opportunity to grow as
the medicines supplies are on rise (Ahmed and
Chandani, 2020b). The (DRAP) Drug Regulatory
authority of Pakistan has done much efforts to
involved major players of industry as a key
stakeholder to get an opportunity for the leading
pharmaceutical companies in Pakistan like Abbott
and GSK (Raheem and Article, n.d.).

29
Threats: After the covid -19 the pharmaceutical
industry have become unpredictable and the impact
of covid-19 is still in the companies and businesses
(AR 2020, n.d.). The prices of pharmaceutical are
set by the DRAP without their permission no one is
allowed to increase the prices. The DRAP work for
the pharmaceutical industry of Pakistan and take
decisions which are beneficial for them (DRAP,
2021). The threatening part of the industry is that
the currency devalues and it’s difficult to control the
margins during inflation. The devaluation of
currency affects the cost of production as it leads to
the decrease in profitability (Ahmed and Chandani,
2020b)

4.2 Porter’s five forces Analysis

for Pharmaceutical Industry in
Pakistan

Barriers to Entry: To enter the pharmaceutical

industry a company needs a huge capital

30
investment as this industry is a capital- intensive as
to launch the products the company needs to invest
in the significant amount in the research and
development of the product. Since Pakistan have
become the WTO signatory but still they face
hindrance for new entrants according to the
regulatory requirements (Asif and Awan, n.d.).
Some international business players are likely to
enter the market as the Government initiate to
facilitate them but it doesn’t affect the Abbott and
GSK as they have strong distribution channels and
large network of market (Interview, 2021). They
have good brand recognition and are backed with
the economies of scale and have good position in
the market financially as well (Hussain et al., 2020).
Therefore, it’s difficult for new competitors to enter
the market, hence it has high barrier to entry.

Competitive Rivalry: Large pharmaceutical

companies are operating in the market and are
competing for the large market share as there are
600 local players in the pharmaceutical industry.
(www.businesswire.com, 2019). As these local

31
companies adopt unethical means to gain a market
share and make difficult for the companies who are
established (Raheem and Article, n.d.). As there
are many local companies like Ferozsons,
Highnoon, Searle and they have high level of rivalry
in the industry (Interview, 2021). As the leading
company’s products are patented like ensure,
Pediasure so they are safe from the competitive
rivalry (Abbott, 2020). Pharmaceutical
manufacturers of Pakistan have a common platform
of association where companies negotiate and
collaborate with the government. (Samaa, 2017).
The first mover advantage in the pharmaceutical
industry of Pakistanis a big plus, Abbott is the first
mover in the nutritional products and so its rivalry
will be low. The overall intensity of rivalry in the
industry is medium to high.

Bargaining power of buyers: The medical

facilities are lower in Pakistan as compare to the
international standards and the customers are
widely spread due to which they have minimal
options so the power of buyers are low. As in

32
different industries pharmaceutical industry also
has a brand power (Lee et al., 2017). In the
pharmaceutical industry the bargaining power of
buyers are low because people have to buy the
medicines when they are sick at whatever price
they get. Sales of the medicines depend on the
doctors’ prescriptions. In past the prices of the
medicines get very high but still sales did not drop.
Government has make some interventions in the
interest of the public which raises the power of
public slightly high.

Bargaining power of suppliers: Bargaining power

of suppliers are low in this industry as there are
specific chemicals and salts for the medicines
which are available in large numbers to the
suppliers. As the companies can switch suppliers
without any extra cost as in Pakistan the
ingredients are not manufactured locally and are
often imported and many suppliers are available for
that (Khan et al., n.d.)In terms of the medicine
research and formula many supplies are controlled
by the Abbott Laboratories international and hence

33
the bargaining power of supplies is low (Interview,
2021).

Threat of substitute products: In terms of

pharmaceutical companies, the threat of substitutes
is low as medicines don’t have any substitute. As
people use alternative methods at macro level to
cure such as herbal treatments of Chinese and
Greek, acupressure and acupunctures etc. instead
of allopathic medicines but they are not as effective
as the business of pharmaceuticals (Znad Darwish
and Hussain Pahi, n.d.) The substitute methods are
not effective for diseases like AIDS, Hepatitis,
cancer etc. Overall, there is low risk of substitute
products.

4.3 Financial ratio analysis

In order to analyse the key elements of financial

performance of companies in the pharmaceutical
industry of Pakistan, a detailed analysis of financial
ratios for last five years for Abbott has been
performed in the section below. Further in order to

34
compare it with other companies a comparison of
last year for GSK and Abbott has been performed
in the section below:

Financial ratio analysis

3.3.1 Revenue Analysis:

Abbott 2020 Abbott 2019 Abbott 2018 Abbott 2017 Abbott 2016 GSK 2020
Sales - (000) 35,283,377 30,155,875 29,719,279 26,088,233 23,387,915 35,090,112
Abbott was basically operating in three segments;
Pharmaceutical, Nutritional and others. Its major
sales comprise pharmaceuticals. The Revenue for
Abbot increased from 23.3 billion in FY 2016 to 26
billion in FY 2017, which is around 11% increase,
this increase is attributed to the sustained
performance of established brands from Abbott.
The nutritional segment and the general health
segment performed well during the year. The
Revenue of Abbott increased to 30.1 billion in
FY2019 from Rs 29.7 billion in FY2018; Abbott’s
pharmaceuticals sales declined by 3% during the
year. The Nutritional segment sales rose by 16%.

35
With increasing awareness about health matters,
this segment is gaining popularity generally. The
main cause of the rise of Nutritional segment sales
was the popularity of Abbott’s flagship products –
Peidasure and Ensure. The government does not
regulate selling prices of this segment. The
increase is on account of both; price and quantity
for Nutritional segment of Abbott. The last segment
– Others – also registered 10% increase primarily
due to growth in demand of products related to
diabetic care (AR, 2019).
In FY2020, the sales increased to Rs. 35.2 billion,
since the Health Ministry allowed pharmaceutical
companies to increase prices of life saving drugs
(Govt. allowed rise in prices of 94 life-saving drugs,
2020) the revenue increased by 17%. The increase
in selling prices did not have effect volumes
because the demand of products in the
pharmaceutical industry of Pakistan is less elastic
(Najafi, et al., 2019). The product sales segments,
Abbott expanded to four segments in FY2020
rather three in FY2019. The biggest segment’s –
Pharmaceuticals – rose by 12% mainly due to
increase in selling prices allowed by the
government. The increase of sales in the Nutritional
segment witnessed by 37%, (contributing 24% of
total sales) mainly attributable to the outbreak out
of Covid-19, as there was a strong emphasis on
boost of immunity and thus the nutritional products
became high in demand (Orubu, et al., 2020).
Another increase in sales revenue of the

36
introduction Diagnostics segment and it quickly
accounted for 6% of the total sales. The segment –
Others – also increased by a meager 4.5% (AR,
2020).

Revenue Analysis
35,283,377 35,090,112
30,155,87529,719,279
26,088,233
23,387,915

Abbott Abbott Abbott Abbott Abbott GSK 2020

2020 2019 2018 2017 2016

Sales - (000)

The comparison of Abbott and GSK revenues in

FY2020, indicates that Abbott performed better as
compared to the GSK, whereby Abbott’s sales
increased by almost 17% but the sales for GSK got
down by 2% (GSK AR 2020, n.d.). Excluding the
impact of last year’s discontinuation of Ranitidine
based products, the Company has delivered a
healthy underlying pharmaceutical business growth
of 9%. GSK’s export of products decreased
significantly mainly due to the boarder closure as a
result of Covid-19 break out (AR, 2020). Another

37
factor is that GSK’s Nutritional segment is minimal,
therefore, its sales revenue could not grow as
Abbott’s did. Abbott fully capitalized the opportunity
and boosted the sales of Nutritional segment (AR,
2020).

3.3.2 Profitability Ratios:

Profitablity Ratios Abbott 2020 Abbott 2019 Abbott 2018 Abbott 2017 Abbott 2016 GSK 2020
Gross profit margin 34.64 28.28 32.98 38.67 40.05 21.47
Net profit margin 12.85 4.31 9.07 16.12 17.20 9.62
Return on Capital Employed 34.95 17.13 31.9 40.12 37.79 26.65

Gross profit margin:

The gross profit margin decreased slightly from

40% to 39 % approx. from FY 2016 and FY 2017,
the main reason for this decline was the increase of
cost of raw materials in the international markets.
This trend continued in FY 2018 and the GP margin
dropped further to 33%. The GP Margin again
decreased from 33% to 28% from FY2018 to
FY2019, though the revenue showed slight
increase. The cost of sales was 67% of the sales

38
volume in FY2018, while in FY2019 it has
increased to FY71.7% of the sales volume. Since
imported raw material comprises 78% of total raw
material consumed, devaluation of the Pakistan
currency against major foreign currencies (Azani, et
al., 2019) was the principal factor of increase in
cost of sales. Other reason was inflationary
pressure (Ali, K. and Khalid., 2019) due to
economic slowdown. Abbott could not make any
increase in sales price because government did not
allow it. The prices of pharmaceutical products are
not in control of the pharmaceutical industry and
are instead determined by DRAP. Since medical
facilities are a basic need, an increase of prices has
an impact of many folds on the public opinions
(Lee, et al., 2017). This dual effect resulted in
reduction in GP margin for FY2019.
Since Abbott is operating in different segments
(Pharmaceutical, Nutritional products and others), it
is important to analyze which segment had the
highest margins and which segment had the
highest cost of sales; the margins in
Pharmaceutical segment squeezed as the cost of
sales rose in higher percentage than the sales
(reasons explained above). However, the company
performed better in the Nutritional and Others
segment (includes diagnostic equipment, diabetes
care, molecular devices, their testing kits, general
healthcare products). As a strategy, Abbott has
started to focus significantly on other sources of
income like nutrition. Due to this strategy of Abbott,

39
the gross profit decrease was reduced in FY 2019
and the GP margin increased in FY 2020.
The gross margin has shown an increased from
28% to 35% from FY2019 to FY2020, while the
revenue showed a decent increase of 18%. We see
that cost of sales was 71.7% of the sales revenue
in FY2019 but in FY2020, things improved and the
cost of sales was reduced to 65.4% of the sales
figure (AR, 2020). Although there was devaluation
of Pak Rupee and inflation in FY2020 as well, the
government provided subsidy on the import of raw
material for pharmaceuticals to provide relief in
Covid-19 scenario (Ahmed, K.A. and Chandani, S.,
2020). This, coupled with permission in increase in
selling prices resulted in better GP margins.
The gross profit margin for Abbott is 35% for
FY2020, while it is 21.5% for GSK for the same
year. The sales growth rate for Pakistan
pharmaceutical industry has been around 12% on
average (Azam, et al., 2020.) but GSK actually
faced a revenue decline of about 2% in FY2020,
while Abbott made a growth of about 17%. GSK
discontinued a loss-making segment which
impacted positively on margins. Following the
industry trend as a result of import subsidy
package, the cost of sales was reduced for GSK
but it was not able catch higher profit segment of
nutritional products, while Abbott boosted the sales
of the high margins products (Nutrition segment)

40
and thus the gross profit margins were higher for
Abbott as compared to GSK in FY2020.

Profitability
40.117006922851
38.67 40.05
3 37.789811795401
34.64 34.95 32.98 31.9 5
28.28 26.65
21.47
17.13 16.12 17.20
12.85
9.07 9.62
4.31
Abbott Abbott Abbott Abbott Abbott GSK 2020
2020 2019 2018 2017 2016

Gross profit margin

Net Profit Margin:

The net profit margin for Abbot decreased from
17% to 16% from FY 16 to FY 17, mainly on
account of decrease of gross profit margin (reasons
explained above) and also due an increase of
selling and marketing expenses by approx. 10% as
compared to last year on account of company’s
efforts for growth of its nutritional segment. The net
profit margin of Abbott showed a decline from 9%
to 4.31% in FY2019. Despite the fact that the sales
revenue increased in FY2019 but without increase
in selling price, the net profit margin was reduced

41
significantly due to higher cost of sales caused by
the high inflation figures and devaluation of local
currency (Ullah, et al., 2020). The decrease in GP
coupled with increase in administration, selling
general expenses contributed to lesser net profit in
absolute as well as percentage terms. Sales of
pharmaceutical companies are highly dependent
upon marketing and generating prescriptions by
doctors in favor of a particular pharmaceutical
company. Companies have to heavily invest in the
marketing and distribution team to focus on
prescription generating activities such as visiting
doctors and handing out free samples (Ahmed,
R.R. and Jalees, T., 2008.), Abbott spent heavily on
selling, distribution expenses (Rs. 500 million
additional spending). The company offered good
employment terms and got leased vehicles for staff
members, which gave a boost to the finance cost of
the company for FY2019 as well (AR, 2019).

42
 Abbott GSK
PRO FIT AND LOSS A CCOUNT As At December 31
2020 2019 2018 2017 216 2020
(Rupees ‘000)
Sales - 35,283,377 30,155,875 29,719,279 26,088,233 23,387,915
35,090,112
Cost of goods sold 23,061,526 21,628,135 19,917,837 15,999,247 14,020,416
27,555,732
Gross profit 12,221,851 8,527,740 9,801,442 10,088,986 9,367,499
7,534,380
Selling and distribution expense 5,311,541 5,061,510 4,503,521 3,611,882 3,258,175
2,766,755
Administrative expenses 642,162 731,620 610,885 468,172 450,297
1,331,548
Other income 760,691 352,023 458,654 445,317 420,937
1,977,036
Other expenses 708,375 522,802 786,315 602,244 486,064
426,320
5,901,387 5,963,909 5,442,067 4,236,981 3,773,599
2,547,587
PBIT 6,320,464 2,563,831 4,359,375 5,852,005 5,593,900
4,986,793
Finance costs 76,905 53,090 15,606 10,060 6,759
84,111
Profit before taxation 6,243,559 2,510,741 4,343,769 5,841,945 5,587,141
4,902,682
Taxation 1,708,310 1,210,856 1,649,436 1,636,713 1,565,349
1,527,442
Profit for the year 4,535,249 1,299,885 2,694,333 4,205,232 4,021,792
3,375,240
Remeasurement of staff benefits 123,568
4,535,249 1,299,885 2,694,333 4,205,232 4,021,792 3,498,808

The net profit margin for Abbott increased

significantly to 12.85% in FY2020 from 4.3% in
FY2019 as the gross profit margins of the company
increased during the period due to lesser cost of
sales per unit as the government provided subsidy
on the import of raw material for pharmaceuticals
(Ahmed, K.A. and Chandani, S., 2020). The
regulators reviewed the prices of pharmaceutical
products and the impact to inflation and devaluation
of local currency was transferred to the consumer
to some extent in the form of increase of sales
prices (Irfan, 2020). The augmented GP in rupees
and percentage terms was the main contributor of
enhanced NP and related margins. On the
expenses side, we can see that in FY2020, Covid-
19 broke out which boosted the sales of Nutritional
segment of Abbott without much direct selling and

43
distribution cost. The administrative expenses were
also decreased mainly due to limited travelling
expenses as a result of pandemic. The increase in
operating expenses was balanced by other income
which doubled with respect to last year because
Abbott placed surplus funds in interest yielding
bank deposits.
Abbott has a net margin of 12.85%, whereas that of
GSK is 9.64% for FY2020. Following the industry
trends of boosted sales with little fluctuation in cost
of sales, both companies experienced improvement
in the profit margins. The trickle-down effect of the
gross margin can be seen in this case. Abbott
spends a lot more on advertising and sampling as
compared to GSK in order to generate almost
similar level of sales. GSK has higher
administrative cost structure as compared to
Abbott, despite the fact that the size of operations
for Abbott and GSK are not so different, the
salaries and wages expenses of GSK are almost
double as compared to Abbott. The major part of
other income of GSK includes reimbursement of
expense on account of promotional activities from
the parent company, the same being missing in
Abbott (AR, 2020).

Return on Capital Employed (ROCE)

ROCE from 32% in FY2018 to 17% in FY2019
mainly because of the decrease in profitability
(reasons explained above) as there was a
negligible change in the capital employed, which

44
comprises virtually equity because the company
has negligible long-term loans (AR, 2019).
ROCE increased from 17% in FY2019 to 35% in
FY2020, the increase being attributable to better
profitability. The equity increased by almost 16% for
Abbott in FY2020 due to higher retained profits
while long-term loans were negligible this year as
well. The increase profitability higher than the
increase of equity resulted in higher ROCE for
FY2020.
Following the industry pattern, ROCE increased for
both Abbott and GSK in FY2020, owing to
increased revenues and higher profitability. Abbott
recorded an equity increase by 16% while GSK
recorded an equity increase of 8.3% (AR, 2020).
Higher increase in profitability than the capital
employed resulted in higher returns on capital
employed for FY2020 for both companies.

3.3.3 Turnover Ratios:

Turnover ratios Abbott 2020 Abbott 2019 Abbott 2018 Abbott 2017 Abbott 2016 GSK 2020
Debtor days 21.30 27.06 28.18 21.69 23.21 30.10
Creditor days 40.54 41.55 60.68 58.44 64.10 26.88
Stock days 78.84 102.09 81.16 79.29 81.00 76.08
Debtor Days

45
The debtor days almost maintained when we move
form FY 2016 to 2017, while there was an increase
in debtor days for FY 2018 (28 Days), in FY 2019 it
was maintained however it improved in 2020 and
reached 21 days. As per the market conditions 2-3
weeks’ credit period is not much, still sales are
made through distributors who are working with
Abbott from a long time, resulting in very little risk of
bad debts (Interview).
Following the industry trends, the debtor’s days
increased due to higher demand for the nutritional
segment products for both GSK and Abbott in
FY2020.

Creditor Days
In the FY 2017 the creditors days moved as per the
industry trends, however the creditor days
decreased from 61 days in FY2018 to 42 days in
FY2019. There was a consignment received close
to the year end in FY2018 which resulted in
enhanced figure of creditors having a payment date
in FY2019 (Interview). No such abnormality
occurred in FY2019, and hence, creditor days
remained at almost last year’s level.
The was a decrease of just 1 day in creditor days in
FY2020 with respect to FY2019. The figure of
creditors almost remained same in both years while
cost of sales was a bit higher in FY2020 as
compared to FY2019.

46
As the government provided subsidy on the import
of raw material for pharmaceuticals (Ahmed, K.A.
and Chandani, S., 2020), the cost of sales per unit
for the pharmaceutical companies was lesser in
FY2020, this increased the creditor days for the
both companies in FY2020.

Turnover Ratios
102.09
93.09
78.84 81.16 79.29 76.08
60.68 64.10
58.44

40.54 41.55
27.06 28.18 30.10
26.88
21.30 21.69 23.21

Abbott Abbott Abbott Abbott Abbott GSK 2020

2020 2019 2018 2017 2016
Debtor days Creditor days Stock days

Stock days
The Stock days almost maintained from FY2016 to
FY2017, while The stock days increased from 81
days in FY2018 to 102 days in FY2019; due to the
inflationary pressures of devaluation for the local
currency the stock held by the company were
valued at higher costs (Ullah, et al., 2020), resulting
in higher stock in trade by 36% as compared to last
year. However, the cost sales did not register a

47
corresponding increase. These two factors
combined increased the stock days significantly
(AR, 2019).
The stock days decreased from 102 days in
FY2019 to 79 days in FY2020. The prime reasons
for this improvement is the lower stock in trade due
to subsidized purchasing of raw materials allowed
by the government. This year too, cost of sales did
not increase proportionately leading to a fall in
stock days (Wadani, et al., 2021).
Owing to the subsidy package announced by the
government of Pakistan, (Wadani, et al., 2021), the
raw material purchases for both companies in
FY2020 were cost effective and thus the stock in
trade was valued at lesser prices resulting in
improvement of stock days for both companies
(AR, 2020).

3.3.4 Liquidity Ratios:

Liquidity Ratios Abbott 2020 Abbott 2019 Abbott 2018 Abbott 2017 Abbott 2016 GSK 2020
Current ratio 2.30 1.80 1.96 2.96 4.62 1.27
Cash ratio 1.53 0.88 1.27 2.18 3.32 0.47
Current ratio
The Current ratio of the company has decreased
from 4.62 in FY 2016 to 2.96 in FY 2017 mainly on

48
account of increase Trade and other payables as a
result of increase in staff pension fund payable
due to re-measurement loss on company’s plan
assets. This trend continued in FY 2018 as well.
The current ratio decreased slightly from 1.96 in
FY2018 to 1.8 in FY2019. This decline was
primarily because the decrease in current assets,
mainly due to lower cash and bank balances
primarily on account of the decrease in profitability.
This decrease in cash and bank balances has been
offset by increased inventory because of higher
valuation. The current liabilities of the Abbott
increased marginally as there was no major change
in any of head of account (AR, 2019).
The current ratio for Abbott was almost improved
from 1.80 in FY2019 and 2.30 in FY2020. This
improvement was due to higher cash and bank
balances as a result or higher cash inflows from the
operating activities and increased profitability
during the FY2020. Despite an increase of 18%
current liabilities – basically due to enhanced
accrued liabilities – the increase in current assets
outweighed current liabilities, thereby improving the
current ratio.
The current ratio of Abbott and GSK were not much
different from each other in FY2020 as per the
industry trend. Both companies experienced
exorbitant cash balances as a result of favorable
operating activities of the business. Also, both
companies had moderately higher current liabilities,

49
on account of higher inflated liabilities for Abbott
and trade payables for GSK (AR, 2020).

Liquidity Ratios
4.62

3.32
2.96
2.30 2.18
1.80 1.96
1.53
1.27 1.27
0.88
0.47
Abbott Abbott Abbott Abbott Abbott GSK 2020
2020 2019 2018 2017 2016

Current ratio
Cash ratio

Cash ratio
The cash ratio declined from 3.32 in FY2016 to
2.18 in FY 2017 and to 1.27 in FY 2018 as per the
high payables (reasons explained above). The cash
ratio for Abbott decreased from 1.27 in FY2018 to
0.88 in FY2019. The numerator in cash ratio
excludes inventory which was much inflated in
FY2019 because of high valuation. The absence of
inventory figure was the principal factor in declining
cash ratio.

50
The cash ratio for Abbott increased from 0.88 in
FY2019 to 1.53 in FY2020. There was a huge
increase in current assets due to increase in cash
balances owing to hefty profitability. The current
liabilities also registered modest increase.
However, the decrease in inventory due to low
valuation, when subtracted from current assets,
improved the cash ratio (AR, 2020)
The movement in current assets and liabilities
followed exact trend for both companies in FY2020
i.e. Increase in current assets due to profits,
decrease in inventory and a modest increase in
current liabilities. This lead the cash ratio of both
companies to increase y-o-y. However, Abbot’s
cash ratio is slightly better than GSK (AR, 2020).

Leverage:
Liverage Abbott 2020 Abbott 2019 Abbott 2018 Abbott 2017 Abbott 2016 GSK 2020
Interest coverage 82 48 279 582 828 59
In all the five years, the interest coverage was
humungous because of the negligible amount of
borrowings, and consequently, finance costs.
Despite decrease in coverage over the years, the
lenders of finance are sufficiently covered as
regards the risk of default in interest payments by
Abbott is concerned.
Since pharmaceutical companies are generally
cash rich, they do not need any short or long-term

51
loans. When we compare the interest coverage
ratio of Abbott (82 times) in FY2020 with GSK (56
times), we see that Abbott had higher interest
coverage primarily due to higher profitability (AR,
2020). However, both companies have negligible
risk of default of interest payments.

Interest coverage
828

582

279

82 59
48
Abbott Abbott Abbott Abbott Abbott GSK 2020
2020 2019 2018 2017 2016

Interest coverage

Since both Abbott and GSK have negligible loans in

all five years, Debt/ Equity is approaching ‘zero’ for
all three years. This signifies that the company is
very strongly capitalized and has ample borrowing
capacity in case of need.

52
3.3.5 Investors Ratios:

Investor Ratios Abbott 2020 Abbott 2019 Abbott 2018 Abbott 2017 Abbott 2016 GSK 2020
Cash dividend per share 40.00 7.50 20.00 40.00 40.00 6.50
Earning per share 46.33 13.28 27.52 42.95 41.08 10.60
Market value per share 755 447 631 697 957 190

Earnings per Share (EPS)

The EPS improved from FY 2016 to FY2017 from
41.08 to 42.95 and decreased to 27.52 mainly on
account of changes in the profit after tax. The EPS
of Abbott further decreased from Rs. 27.52 in
FY2018 to Rs. 13.28 in FY2019 primarily due to the
decrease of profitability. The change in EPS is only
driven by changes in profits as there has been no
change in share capital in FY2019.
The Abbott of Abbott increased from Rs. 13.28 in
FY2019 to Rs. 46 in FY2020 primarily due to the
decrease in profitability. The change in EPS is only
driven by changes in profits as there has been no
change in share capital in FY2020.

53
 Investors
46.33
42.95 41.08
40.00 40.00 40.00

27.52
20.00
13.28
10.60
7.50 6.50
Abbott Abbott Abbott Abbott Abbott GSK 2020
2020 2019 2018 2017 2016

Cash dividend per share

Earning per share

The EPS of Abbott was much better than GSK in

FY2020. Abbott had an EPS of 46 as compared to
10 for GSK. The latter has issued more than three
times the number of shares in comparison with
Abbott. Less number of shares issued and higher
profitability of Abbott provided higher EPS to Abbott
as compared to GSK for FY2020.
Market value of Share:
The share price of Abbot was at Rs. 957 and it
dropped to Rs. 657 due to the overall drop in the
stock exchange mainly, the share price further
dropped to Rs. 631 due to drop of profitability. The
market value of share for Abbott was Rs. 631 in
FY2018, which came down to Rs. 447 in FY2019.

54
The reason of this decline in the share prices was
drop of profitability during FY2019 (AR, 2020). Also,
due to the macroeconomic factors, the Pakistan
stock exchange did not perform well in the FY2019
(Pasha, A. and Ramzan, M., 2019).

Market value per share

957

755
697
631
447

Abbott 2020 Abbott 2019 Abbott 2018 Abbott 2017 Abbott 2016

The share price of Abbott increased from Rs. 447 in

FY2019 to Rs. 755 in FY2020. This increase was
primarily credited to the increase of profitability.
Also, the stock exchange started to perform well
after the second quarter of FY2020 (AR, 2020).
Following the pattern of industry, the share prices
got increased for both Abbott and GSK in FY2020.
However, the share price for GSK did not rise as
much as Abbott and reached Rs. 192 only from Rs.
160 primarily due to less increase of profitability of
GSK as compared to Abbott.

55
Dividend payout:
The company paid Rs. 40 cash dividend in FY2016
and FY2107 and the payout ratio was almost
maintained, however, in FY2018, Abbott paid
dividend of Rs. 20 and the dividend payout ratio
decrease 73% due to decrease in profit after tax,
whereas in FY2019 the company paid a dividend of
Rs. 7.5 and had a dividend payout ratio of 56%; this
decline was in line with decrease in profitability for
the company due to reasons already explained
above. In FY2020, the company paid dividend of
Rs. 40, even surpassing FY2018, and had a payout
ratio of 86%. This was due to increase of
profitability and availability of adequate cash
balances (AR, 2020).
GSK paid a cash dividend of RS. 6.5 and had a
payout ratio of 60%, which is significantly low as
compared to Abbott because of lower profitability
and less cash reserves available as compared to
Abbott.

56
 Dividend payout ratio

0.9300 0.9700
0.8600
0.7300

0.5600 0.6000

Abbott Abbott Abbott Abbott Abbott GSK 2020

2020 2019 2018 2017 2016

Dividend payout ratio

4.3.7 Conclusions and

Recommendations

The pharmaceutical companies have improved in

the financial year of 2020 as revenue sales
increases; despite there have been increase in the
cost of raw materials, the pharmaceutical
companies have been able to pass this rise of price

57
to the final consumer thus profit margins of the
company has increased. We have analyzed the last
five years of financials of Abbott and then compare
it with the GSK 2020 with regards to the key
elements to measure the performance: profitability,
liquidity, leverage and turnover ratios. The analysis
reveals that Abbott and GSK are the top 10
pharmaceutical companies and Abbott is the first
mover in the nutritional segment. Abbott
performance is better than the GSK as in most of
the ratios it has been examined that the Abbott
performance is far better than the GSK. Since
Abbott was able to develop the nutritional segment,
as during covid-19 outbreak immunity boosters
were high in demand and Abbott took an advantage
of it and focus on the nutritional segment and gain
a market share in it while GSK couldn’t match the
demand. Thus we can conclude that the key
performance evaluation factors for the
pharmaceutical industry of Pakistan are research
and development, creation of new products, price
determination mechanisms and raw material
procurement decisions.

58
It is recommended that the pharmaceutical
companies reduce their dependencies over their
international parent companies for Research &
Development to improve cost controls over the raw
material procurement. Further it is recommended
that new segments and products should be
developed to cater the changing needs of
healthcare sector in Pakistan.

CHAPTER 5

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