Write your key forecasting assumptions with bullet points in one page only (refer to appendix if you need further details).
- The company for this is Biogen and the competitor is
BRISTOL MYERS SQUIBB. Refer to attachment for details.
BIOGEN, INC. Ratios Analysis (Part II) Biogen, Inc (NASDAQ:BIIB) and Bristol Myers Squibb (NYSE:BMY) are two of the leading biopharmaceutical companies who are in transition periods. Biogen is expanding beyond its core focus on multiple sclerosis. Bristol Myers Squibb has moved into new areas thanks to its acquisition of Celgene in November 2019. This transitional period for Biogen and Bristol Myers Squibb has not rendered promising news for investors during 2020. Both companies’ stocks are down more than 9% year to date. However, both biopharmaceutical companies have key opportunities to turn things around in the near future. For investors who may be considering investing in a biopharmaceutical company, it is important to closely examine financials. Below are a series of financial ratios and analyses to evaluate operating efficiencies, investing performance and financial strategy for Biogen and Bristol Myers Squibb. (Source: The Motley Fool, Keith Speights, Better Buy: Biogen vs. Bristol Myers Squibb, June 21, 2020) Key Profitability Ratios Financial Ratio Analysis Ratio As Reported Biogen Bristol Myers Squibb Industry Average 2017 2018 2019 2019 Latest Ov Overall Profitability R ROE Decomposition Traditional 29.19 34.33 44.14 6.69 21.51 RO ROE Decomposition Alternative 20.15 34.00 44.14 6.65 - Inc Income Statement Ratios Net Net profit Margin 20.69 32.93 40.96 13.15 13.97 Gro Gross Profit Margin 86.72 86.50 86.40 69.1031 67.53 NO NOPAT Margin 2783.02 4465.91 5898.18 4166.56 - EBI EBITDA Margin 52% 51% 54% 26% 16.79 Calculation of ROE Decomposition Alternative Eq Equity Multiplier 1.88 1.94 2.04 2.51 To Total Assets 23652.6 25288.9 27234.3 129944 To Total Shareholders’ Equity 12598.1 13031.6 13339.1 51698 Ass Asset Turnover 0.52 0.53 0.53 0.20 The ROE decomposition tradition is simply the return on equity of Biogen. It is calculated by dividing the Net Income by the shareholders equity. It is actually the measure of the business profitability with relation to the equity of the company. The higher is the ROE the better it is for a company. For Biogen it can be observed that the ROE traditional is much higher when compared to its competitor Bristol Myers Squibb. For Biogen the ROE is 44.14 whereas for Bristol Myers Squibb it is reflected at 6.69 only. It depicts how much more profitable Biogen is compared to Bristol Myers Squibb in the year 2019. ROE Decomposition Alternative is the same as ROE Traditional which is used to measure the profitability of the company but it is not calculated only by deploying the shareholders’ equity but also the profit margin, asset turnover and equity multiplier. To calculate the ROE Decomposition Alternative we have multiplied profit margin x asset turnover X equity multiplier to arrive at ROE Alternative. As per the above chart we can observe that the ROE Decomposition Alternative of Biogen is 44.14 when compared to Bristol Myers Squibb which is the competitor of Biogen at 6.65 only. Hence, based on this rate we can state that the ROE Decomposition Alternative of Biogen is far better and generates huge profitability for the company. We could find only the industry average of the pharmaceutical industry based on the ROE Decomposition Traditional which illustrates the industry average at 21.51 but still lower than Biogen. Thus, it can be stated that Biogen is far better than the industry average also. The Net profit margin of Biogen is 40.96 in 2019 compared to the Bristol Myers Squibb rate of 13.15 only. Net profit margin helps to determine the amount of net profit earned as a percentage of sales or revenue after deduction of the operating expenses of the company. The higher this ratio the better is the company being performing. Biogen in this case is performing far better and efficiently than its competitor Bristol Myers Squibb in 2019. Also, comparing the net profit margin of Biogen to the industry average depicts that Biogen is performing extremely well compared to the entire US pharmaceutical industry. This is because the industry average of net margin is 13.97 while that of Biogen is at 40.96. The Gross profit margin illustrates the gross profitability of the company in terms of the revenues generated. Gross profit is the difference between revenue and the cost of goods sold and is further divided by the revenue to estimate the gross profit margin of the organization. As per the Biogen Gross profit margin it can be observed that it is valued at 86.40 in 2019 as against 69.10 of Bristol Myers Squibb. The higher the ratio, the better the company performs towards achieving the profitability. Therefore, it can be stated that Biogen’s Gross profit margin is much better than its competitor Bristol Myers Squibb. Also, the industry average is 67.53 of the pharmaceutical industry of the USA. It is observed that the Gross profit margin of Biogen is still better compared to the industry average. Hence, it can be stated that Biogen is performing much better in the US pharmaceutical industry. NOPAT or Net Operating profit after tax is the measure of an organization's profit which is calculated excluding the impact of the leverage that company does not have any debt in the capital. It also does not consider the interest payments as well as the tax benefits which are obtained by the company while issuing the debt in the capital. The formula for deriving NOPAT is Earnings before interest and tax (EBIT) * (1 – Tax Rate). The company tax rate is the annual tax rate. The higher the NOPAT the better is the company operating position in terms of its profitability. Thus, it is a good representation of the operating profitability and performance of the company. In this case we can observe that the NOPAT of Biogen is valued at $5898.18 million while that of its competitor Bristol Myers Squibb is valued at $4166.56 million. Hence, as per the chart we can see that the NOPAT is Biogen is far better than Bristol Myers Squibb in the year 2019 and hence, it depicts the high profitability of Biogen. We are unable to determine the NOPAT of the industry average as it will be very difficult to derive such a calculation. But, by observing the performance of Biogen in terms of NOPAT it can be stated that it will outperform the NOPAT of the pharmaceutical industry also. The EBITDA is Earnings before interest, tax, depreciation and amortization. It is the measurement of the operating profits of the company in terms of percentage when compared to the revenue or sales of the company. This is a good measurement ratio to analyze the position of the company in terms of its competitors in the same industry. The chart depicts that Biogen’s EBITDA is 54% compared to the EBITDA of Bristol Myers Squibb of only 26% which is almost half of the EBITDA of Biogen. This illustrates how efficiently Biogen is performing in terms of its EBITDA compared to the competitors in the year 2019. Working Capital Management and Turnover Ratios: Financial Ratio Analysis Ratios As Reported Biogen Bristol Myers Squibb Industry Average 2018 2019 2019 Most Recent Accounts Receivable Turnover 7.18 7.49 4.01 55 Inventory Turnover 1.98 2.26 2.94 153 Accounts Payable Turnover 35.13 31.9 12.06 - Days Receivable 53.14 47.74 107.29 - Days Inventory 181.14 161.85 123.99 - Days Payable 76.97 84.12 97.98 - Operating Cycle 8.78 7.63 1.08 - Cash Cycle 154.98 126.46 119.77 - Accounts Receivable turnover: The accounts receivable turnover ratio measures a company's effectiveness in collecting its receivables (money owed by clients). It shows how well a company uses and manages the credit it extends to customers and how quickly that short-term debt is collected or being paid. It is calculated by dividing the sales by the accounts receivable. For Biogen, you see that they are 7.18 and 7.49 for 2018 and 2019, respectively. In contrast, Bristol Myers Squibb, has a ratio of 4.01. Lower numbers mean that a company should reassess its credit policies, since their receivables are not being collected in a timely manner. In relation to their ratios, Biogen has a better collection of receivables. Inventory Turnover: Inventory turnover is a ratio showing how many times a company has sold and replaced inventory during a certain amount of time. A lower inventory turnover implies that the company has weak sales as well an excess in their inventory. In this matter, Biogen has lower ratios than Bristol Myers Squibb. Accounts Payable Turnover: This is a measure that shows the rate at which a company pays off its suppliers. A lower accounts payable turnover ratio indicates that the company is taking longer to pay off its supplier. If a ratio is decreasing over time, this could mean financial distress. This is calculated by the purchases, or cost of goods sold, divided by their accounts payable. It seems that in this comparison, Bristol Myers Squibb is the worst off with 12.06 in 2019 and Biogen is 35.13 and 31.9 in 2018 and 2019. Days Receivable Turnover: This ratio is calculated by dividing accounts receivable by the average sales per day. The lower the number, the less days a company takes to collect its account receivables. Bristol Myers Squibb has a high 107.29, while Biogen shows 53.14 and 47.74 in 2018 and 2019. In this comparison, Biogen seems to continue a decreasing trend in collecting their receivables, while Bristol Myers Squibb has almost double the ratio of Biogen. Days Inventory: Days inventory is a efficiency ratio that measures the average number of days the company holds its inventory before selling it. This is calculated by dividing inventory by average cost of goods sold per day. To compare, Biogen is at a high of 181.14 and 161.85 in 2018 and 2019, respectively. Bristol Myers Squibb is at 123.99. Although Biogen has decreased its ratio, it is still higher than its competitor. This shows that Bristol Myers Squibb manages their inventory more effectively. Days Payable: This indicates the average amount of days that a company takes to pay its bills and invoices to its suppliers and vendors. A high ratio means the company is taking longer to pay its suppliers. Biogen’s ratios are 76.97 and 84.12 in 2018 and 2019 respectively, and Bristol Myers Squibb is at 97.98. Both companies are around the same level. Operating Cycle: This is the average period of time required for a business to make their cash to produce goods, sell the goods, and receive cash from their customers in exchange for these goods. Bristol Myers Squibb seems to have a shorter operating cycle at 1.08, while Biogen is at 8.78 and