Introduction
To demonstrate the understanding of BTGs’ financial position in relevance
to the pharmaceutical and biotechnological industry this paper will
elaborate on its current position, confirmation with corporate governance
and suggest a strategy in line with the objective to double market capital
to be listed as a FTSE100 company.
What was a GBP 100 million IP commercialisation company in 2004 (UWE
Bristol, 2014), originally founded in 1981, grew under CEO Dame Louise
Makin to a GBP 2.5 billion in market capital specialist healthcare company
by the end of the financial year of 2017 (march 2017). BTG Plc is listed on
the London Stock Exchange and listed in the FTSE 250 index (Marketline,
2017), aiming to get into the FTSE 100 index according to Makin (UWE
Bristol, 2014).
BTG develops, manufactures and sells medicines and technology for acute
care, cancer and vascular diseases, obtained through the companies own
research and development (R&D) and various acquisitions. Next to the
special pharmaceutical products, BTG started specialising in interventional
medicine (IM) which today is the fastest growing business unit and largest
share of revenue, expected to be two-third of total revenues in five years
time. Last BTG also generates revenues from licensing operations. BTG
identified to be able to have a competitive advantage within the industry
by specialising on interventional technologies and medicines, and since
the start in 2011 five major acquisitions directly related to this strategy
have been completed with the most recent one being the Galil Medical
Technology acquisition. (BTG plc, 2017; Core Finance, 2017; Marketline,
2017)
In short interventional technology replaces major surgeries, by minimally
invasive procedures, which allow for much faster recovery of the patient
with comparable or improved results. This creates value to all
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stakeholders within the pharmaceutical industry, as well as for insurance
companies and last the patients themselves. Reduction of overall
healthcare costs for specific diseases treated with interventional
technology has been proven, providing a basis for wider adoption and
application to more diseases (BTG plc, 2017; Core Finance, 2017).
Pharmaceutical industry
The UK pharmaceutical market value in 2015 was EUR 27.65 billion
(Statista;2, 2017) which equals 2.02% of the gross domestic product in
2015 (Statista;1, 2017), ranking it the EU 4th biggest pharmaceutical
market (Statista;2, 2017). 482,000 jobs are represented by the life
science industry within the UK, averaging an added value (GVA) of GPB
104,000, being the highest within the EU and more than double of the
GBP 49,000 UK average. The industry accounted for a tax contribution of
GBP 8.6 billion in 2015 (PWC, 2017).
Research and development is a critical contributor to the performance
within the pharmaceutical industry and important intellectual capital
generally identified as an intangible asset (Mehralian et al., 2014). Figure
1 below shows the significance of R&D within the pharmaceutical and
biotechnology industry with on average 14,4% R&D spending as a
percentage of net sales (EFPIA, 2016). BTG’s average sales to R&D ratio
over the last 5 years is 17.97%, accumulating to GBP 87.8m in 2017FY.
R&D primarily focussed on premarket approval (PMA) of the FDA in the US
of various products as well as further product development of IM (BTG,
2017).
Financial performance
To review the last 5 years financial performance various indicators and
ratios will be reviewed, an income statement can be found in table 1 in
appendix 1. The performance will be reviewed over the last 5 years, as
well as in comparison to the industry performance against two other
FTSE250 pharmaceutical companies Genus (Marketline;4, 2017) and
Hikma (Marketline;5, 2017). And two international major competitors of
BTG as identified by Marketline;1 (2017). The first; being Baxter
International Inc. (Marketline;3, 2017) a US based competitor offering
similar interventional products for acute medical conditions to hospitals as
BTG and secondly F. Hoffmann-La Roche Ltd a Swiss company which is a
leading firm in innovative therapeutic and diagnostic products in the field
of IM (Marketline;2, 2017). All four companies referred to as ‘the
benchmark’. International Financial Reporting Standards (IFRS) figures
are used as reference unless mentioned otherwise.
Profitability
Looking at the profitability ratios of BTG, 2017 shows an improved results
with a double digit net profit margin of 13,52%, following 4 less profitable
years of a net profit margin of 7.41% in 2013 to 9.14% in 2016. The
increased net profit is due to an improved operating profit, GBP 57.5
million (10.07%) and GDP 129.6 million (22.72%) at actual exchange
rate. The Constant Exchange Rate (CER) rate growth is primarily driven by
a steady 14% organic revenue growth due to successful strategy
execution of the interventional products such as TheraSphere Beads (33%
growth) and EKOS (41% growth) complemented by a first year GBP 17.2
million revenue resulting from the in 2016 completed GALIL acquisition.
Further cost optimization, resulting primarily from reduces fixed cost
impacts due to increased scalability have further improved the operating
profit. A GDP 28m one-time settlement charge on the investigation of the
marketing into LC Bead had a negative impact on the IFRS operating
profit though.
Figure 4 below does however show a lower profit margin versus both
companies FTSE250 benchmark companies as well as international
competitors.
The return on capital employed (ROCE) ratio does allow one to measure
performance of a companies usage of it’s average long term employed
capital, compared to the generated operating profit specifically to ignore
any interest impact. It is essential to judge how effective the capital has
been employed (Atrill and Mclaney, 2015). BTG’s ROCE averaged at
4.64% over the last 5 years, significantly lower compared to the
benchmark as represented in figures 5 and 6. Yet as BTG does not have
any long-term debt we consequently look parallel at the return on equity,
which compares the net profit against the equity held within the company
to judge how profitable it is for equity investors. The benchmark shows
similar patterns amongst all five companies over the last five years; as
such we can conclude that debt is only a minor source of funds for these
five companies.
The lower ratio’s of Baxter or due to major CAPEX injections in
2013/14/15 of respectively 16.20%, 17.71% and 9.41% of annual sales
combined with operating margins below 6% in the same years
(Marketline;3, 2017). This graph would suggest BTG could use its longterm
capital more efficiently. However referring to an interview of BTG’s
CEO with Core Finance (2017) the current strategy is to use to free cash
flow to build up reserves from retained earnings to further grow the IM
representing two third of the companies portfolio by 2020. As such BTG
currently does not pay out any dividends to shareholders and keeps the
capital within the company for potential future higher profits.
Arrow (1962) already identified that high-risk investments, such as R&D
within the pharmaceutical industry could restrict external financing and as
supported by Kamien and Schwartz (1978) using free cash flow arising
from profits is important to support the necessary R&D investments. Both
supported by Lee and Choi (2015) claiming this is still relevant whilst
researching the correlation between R&D investments and profitability,
liquidity, sales growth and stability.
Efficiency ratios
As R&D and profitability have such a close correlation with each other (Lee
and Choi, 2015) R&D spending as a percentage of sales is considered to
be an important efficiency ratio. On average BTG spend 17.97% of sales
on R&D over the last 5 years, compared to an average of 9.16% of the
benchmark companies (Marketline, 2017). Figure 7 below represents the
R&D ratio for BTG compared to the benchmark companies.
One major reason for the continuous significant higher ratio compared to
Genus, Hikma and Baxter is the nature of the companies business. Both
BTG and La Roche invest in new and technologies whereas Genus, Hikma
and Baxter offer more conventional main stream products (Marketline,
2017) which generally have more patients and reimbursement codes
(where applicable) as these are further in the product life cycle range.
Figure 8 below identifies that products within the portfolio of BTG such as
Varithena, PneumRx Coils, Interventional vascular and oncology,
represent relatively lower sales contribution compared to pharmaceuticals
and licensing operation whilst the require a higher R&D intensity. The
actual revenue split can be found in table 2 in appendix 2. This suggest
that once these move to the established stage and are more widely
accepted, the sales volume will increase allowing the ratio to reduce for
these particular products and increase profitability (BTG, 2017).
Liquidity
Liquidity is concerned with the ability of BTG to meet its’ short term
obligations and compares current assets with current liabilities, whereas
current refers to less then one year (Atrill and Mclaney, 2015). BTG has
sufficient cash balances and equivalences to meet all short-term
obligations with a current ratio of 2.38 in 2017 and a quick ratio of 2.38.
An important factor to keep on supporting R&D investments, with a
positive correlation between the two according to a recent study based on
data between 2000 and 2012 of various pharmaceutical companies (Lee
and Choi, 2015). Compared over the years and against the industry
benchmark both ratios have normalised from a higher ratio to an industry
average as represented by figures 10 and 11 in appendix 3 (Marketline,
2017).
The lower ratios in 2016 and 2017 have been compensated by a GDP
100m multi currency credit facility to leverage the risk, which so far has
never been utilised. The major risks identified by BTG plc (2017) to its’
liquidity are failure of banks where current deposits are hold, or failure of
key licensees, distributors, partners, wholesalers or insurers, which are
currently not considered to be at risk. Moreover the recent Brexit has
proven to strengthen BTG’s results, as the trade balance reflects a higher
export balance represented by the major positive exchange rate
differences between actual and CER rates in the annual report (BTG plc,
2017).
Investment ratios
Investment ratios help investors measure the returns on their investments
(Atrill and Mclaney, 2015). As BTG is greatly equity funded, with a total of
61.83% of all shares held by only 6 investors who are closely monitoring
the performance (BTG plc, 2017). No dividend has been paid out by BTG,
and as such measuring the companies earnings available for dividend
versus the proportion of dividend (dividend cover ratio) or measuring the
cash returns from a share (dividend yield) are not relevant in the case of
BTG. However the market performance of the total sum of shares and
earnings available to ordinary shareholder provide two ratios of
importance. Figure 9 shows the performance over the last 5 years of the
Earnings Per Share (EPS) ratio and Price Earnings (P/E) ratio.
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Figure 9: 5 year P/E ratio of the benchmark and EPS of BTG (London Stock Exchange,
2017; Nasdaq, 2017; Roche, 2017)
The drop in the P/E ratio in 2016 was caused by a lower market
performance represented by the green line in figure 9, due to
reorganisation as well as the uncertainty of the political situation around
Brexit (BTG plc, 2016). Combined with higher earnings in 2016 as
represented in the income statement in appendix 1, which also cause the
increase in EPS to 15.8 pence per share.
When compared against the benchmark BTG has consistently a significant
higher P/E ratio, which suggests BTG, has consistently great market
confidence. Yet one should note that this could also be caused by different
accounting policies at other companies within the benchmark. Also
comparing the market performance with the companies in the benchmark,
represented in figure 12 in appendix 4, BTG outperforms all other 4
companies with a 127% growth in market value per share over a 5 year
period, followed by Baxter with 82% and Genus with 71%.
Gearing ratios
As BTG has is not financed through borrowings, no financial gearing ratios
can be calculated. Yet current net profits would allow for sufficient
coverage to obtain a level of debt, which in return could at current interest
rates represented in figure 13 in appendix 5 provide greater return to the
equity owners obtained through tax benefits (Atrill and Mclaney, 2015).
Corporate governance
All companies listed on the London Stock Exchange need to comply with
the UK Corporate Governance code, or they should provide the
shareholders with good reason if they deviate from that (Atrill and
Mclaney, 2015). The code is a guide to effective board practice and how it
sets value for the company, and is therefore different from the day-to-day
management of the company (Financial Reporting Council, 2016).
The corporate governance review 2017 of Grant Thornton (2017) reveals
that 66% of all FTSE350 companies comply with the code, however just
14% provides high-quality informative insights. Various investor insights
identified should support companies to improve their reporting, such as:
investors value to see the gender pay in the sustainability reporting,
whereas just reporting on company values does not meet the investor
expectations when it comes to measuring culture, and more focus over
the coming years can be expected. The reporting on investor relations is
the biggest improvement identified, whereas also gender diversity and
employee engagement can be expected to remain high on the agenda,
whilst environmental, social and governance KPI reporting would be a
welcomed addition (Grant Thornton, 2017).
BTG’s 2017 annual report counts a total of 164 pages, in line with the
average FTSE350 Company, fully complying with the code as outlined in
The UK Corporate Governance Code (Financial Reporting Council, 2016).
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Whilst less pages then average, is entails qualitative reporting on the
leadership and their responsibilities existing of 1 chairman, 2 executive
board members and 6 non-executive board members though after the
year end the CFO has resigned on good notice whom will stay on board to
ensure a smooth transition. It reports properly on the effectiveness and
accountability with an extensive risk assessment. Through and investor
relations department and various road shows BTG has extensively shared
information with their investors and been approachable. Last the
extensive remuneration report reflects on the remunerations of all board
members and reports on the decision making of these through
shareholder votes (BTG plc, 2017).
Advise
Whilst the market value has recovered in 2017 and revenues continued to
grow BTG is in a position where it can leverage more of the successful
acquisitions and product development of its IM which are expected to
continue gaining greater portfolio share. This should allow the ROCE to
improve over the years, as employed capital ratio for these products will
reduce versus generated revenues whilst other costs will be maintained at
current level.
The automatic entrance position into the FTSE100 is currently held by
GKN at the 90th position with a total market capital of GBP 5,346.5M
(FTSE, 2017). To gain a market share that will allow entrance into the
FTSE100 BTGs’ market share will have to grow over 100%. Further R&D is
required to increase both the geographical scope of IM through further
approvals and reimbursement code listings as well as the development of
IM for other organs. Yet considering the current R&D to sales ratio it
would benefit the net profit margin to shift towards an extrovert
orientated intellectual capital position. The IM is a nice market within the
pharmaceutical and biotechnological industry, which still has huge market
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capitalisation potential. As such cooperation with selected other IM
competitors would benefit both the internal results as well as the speed of
product development and market acceptance, eventually benefitting the
patients. The combined speed of market adaptation with improved ROCE
will increase the market value of BTG. It is however suggested that such
strategy is shared with the shareholders and their approval is obtained
before initiating any action.
Conclusion
BTG has specialized itself successfully in the IM, growing the overall
portfolio as well as IM share within the portfolio. Whilst the switch to focus
on IM required intensive R&D spending as well making acquisitions BTG
was able to maintain its profitability levels and started to improve over FY
2017, as well as maintaining healthy liquidity levels. Further diversification
of the IM portfolio and continuing efforts to obtain licenses and
reimbursement codes allow for sufficient depth in the market to grow
further. Though significant time is required at the past growth level to
become a FTSE100 listed company, BTG could accelerate its’ IM portfolio
expansion whilst continuing to use its’ cash generated from specialist
pharmaceuticals and licensing operations. Whereas the industry shows
potential best practice examples to improve profitability and market value
by adopting more extrovert R&D practices.
This report has reflects the capabilities of the new candidate as financial
director of BTG. Through his demonstrated knowledge by means of a
reflection of BTGs financial position and adherence to the corporate
governance rules, resulting in a strategic advice based on financial drivers
proven within the industry. this report should convince the board of the
capabilities of this candidate whom should work with the board members
to guide BTG to a become a FTSE100 listed company.
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