FINANCIAL ANALYSIS

OF
VALEANT PHARMACEUTICAL
WEST PHARMACEUTICAL
AND TEVA PHARMACEUTICAL

Prepared by:
Mohammed Behzad Khan (5042926)
Abderrahmane Khzami (5185981)

FIN 926
Advanced Corporate Finance

December 6th 2015

Table of Contents
Introduction/Study Objective.3
Executive summary........3
Companies.4
SWOT analysis5-7
Financial Comparison with Industry Average..9
Calculation of WACC, CAPM and Beta.30
Conclusions..33
Bibliography.34

EXECUTIVE SUMMARY
Being reduced to a group of two from the initial three we were tasked to conduct and report a
financial analysis for satisfying the essential requirements of the course, Advanced Cooperate
Finance, FIN 926. The report constitutes a cross sectional analysis of three companies over a
period of four years. The said task involves calculating and then comparing to the industry
averages, the financial ratios and weighted average cost of capital using CAPM and BETA,
with the later calculated by regression and slope analysis. Last but not the least, conclusions
drawn by logical reasoning using the aforementioned data provide an investors point of view
when analyzing an industry .The companies we chose for our analysis are Valeant
Pharmaceutical, West Pharmaceutical and Teva Pharmaceutical by using SWOT Analysis,
ratio analysis and all the other financial Analysis including Capital Asset Pricing Model and
Weighted Average Cost of capital from the Balance sheet, Income Statement and Cash flow
statement from the year 2011 to 2014. In some circumstances current market prices have
been used for example when calculating WACC. This study will determine each companys
current consolidated and divisional financial position.

Through DOW Jones index for

Pharmaceuticals, the Industry Average has been taken to compare financial to perform
industry wide comparison. We as a group have tried our best to perform complete analysis
with in the given constraints. The calculations have been performed on Excel where there is
full length analysis performed starting from Balance sheet income statement and cash flow
statements with all ratios and beta , capm calculation. If at any time while going throught the
analysis you feel some disconnect please go through the excel file for full background.

COMPANY PROFILE
Valeant Financial Statement and Analysis
Valeant Pharmaceutical known as (VRX) for the New York stock exchange
market is the multinational specialty pharmaceutical company. It has diverse product
portfolio that focus on branded Pharmaceutical, generic and over the counter products.
The product sales of the company generally focus on world regions like Europe,
Americas, Asia pacific and the Middle East. The specialty products that are produced by
Valeant cater to eye health, dermatology, consumer health care and neurology.
According to many investment reports company has great amount of development
capability but recently the company has been under the media eye because of some
discrepancies in its financial statements. The company produces its products in the
countries like Brazil, Poland, Mexico and Canada where the company is actually based
in. The company also has a strong hold in regulatory and medical expertise. We will start
our company analysis of Valeant by SWOT Analysis after which we will be proceeding
to the financial analysis of the company.

West Pharmaceutical
The Second Company I have chosen is West Pharmaceuticals Inc. It is like Valeant
traded on New York Stock Exchange. It is a global pharmaceuticals technology company
that applies formulation and development of consumer health care products including
vaccines and biologics. It is also the world leader In providing standard setting systems
and device components for parentally administered medicines. West is a company based
in Exton Pa. United States of America. It has formed a global partnership with over 50
locations in the world with operations taking place in all of the continents of the world.

Teva Pharmaceuticals:
The third company I have chosen for my analysis is Teva Pharmaceuticals. This company
is committed to provide access to high quality health care products. It is also a global
company traded in New York stock exchange. It became such a huge company by
developing and producing affordable drugs and specialty pharmaceuticals.

Tis

committed to increasing access to high-quality healthcare for people across the globe, at
every stage of life. We do this by developing, producing and marketing affordable
generic drugs as well as innovative and specialty pharmaceuticals. The company
produces a generic and specialty treatment product, which is backed by impressive global
development, and manufacturing capabilities making sure best quality and accessibility.

VALEANT SWOT ANALYSIS

WEST SWOT ANALYSIS

TEVA SWOT ANALYSIS

Financial Ratio Analysis of the three firms from the same industry

Note: Please refer to excel file and table number 1 for diagram when required for
proper understanding. Val refers to Valeant, WST refers to company West and TV
denotes Teva Pharmaceuticals.

Explanation:
This diagram indicates the level of liquidity that each company has on hand to meet its
short-term liabilities compared to industry average. Valeant Company has a stable current
ratio over the analyzed period of 1,50, which is slightly higher than industry average.
However, Teva Company has a fluctuant current ratio below the industry average.
Additionally, West Company has a high current ratio compared to industry average,
which means that it is able to meet its short-term liabilities.

Explaination:
The quick ratio is a tool to measure the ability of a company to meet its short-term
liabilities with its most liquid assets (cash and cash equivalents). According to the
results above, Valeant has a decreasing quick ratio from 3 in 2011 to less than 0,5 in
2014. West Company has a fluctuant ratio moving from more than 2,5 in 2011 to less
than 1,5 in 2013. This can be explained by the investments that the companies made in
the last years. Concerning Teva Company, it is going hand in hand with the industry
average that indicates that it is able to meet its short-term payables.

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ACCOUNT RECEIVABLES TO WORKING CAPITAL

EXPLAINATION:
The working capital ratio indicates the ability of the firm to pay its short-term liabilities.
In other words, it represents the proportion of current assets that it needs to pay its current
liabilities. Valeant has a ratio greater than 1, however, below the industry average. This
means that the company can face some problems meeting its short-term liabilities in the
future. Same thing can be said for West Company, which has a ratio below 1. On the
other hand, Teva Company has a working capital ratio greater than 2, which means that
current assets are 2x greater than current liabilities of the firm.

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EXPLANATION:
The inventory to working capital ratio indicates the portion of working capital the
company used to generate sales over the period. Valeant and West companies have a ratio
below industry average, which is above 2. Besides, Teva Company is performing better
than the industry average with a ratio above 6 in 2013 and equal to 2 in 2014. This means
that the company is able to generate sales using its working capital efficiently.

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Explanation:
A sale to working capital ratio is a measurement of how the firm is using its working
capital to generate sales. All companies have a ratio below the industry average except
Teva Company in 2013, which had a ratio of 24. The results can be explained by a
decision to keep more inventory on hand, or a management decision to give customers a
higher credit line, which can lead to the generation of more sales in future.

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Explanation:
From the results above, we can see that the three companies have an account receivable
turnover below industry average. This means that the companies are not efficient in the
collection of the receivables from customers. Following the time value of money theory,
for every additional day, the three companies are losing money.

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Explanation:
Days of sales receivables is a measure of the days that a company needs to receive
payments from customers. Depending on the industry, we can say if it is better to have a
greater ratio or lesser. For the pharmaceutical industry, the average is 280 days.
According to the analysis, companies ratios are below industry average. Which means
that they are able to collect money from their customers in a short period of time.

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Explanation:

This ratio indicates the proportion of sales the company generates relative to its assets.
From the chart above, we can see that the industry average ratio is equal to 1,45. Over the
period 2011-2014, Valeant Company has an increasing ratio going from 0,18 in 2011 to
0,3 in 2014, which indicates that the company is generating more revenues compared to
its assets. West Company has a mean ratio of 0,8 over the period. And Teva Company
has a stable ratio of 0,4 over the period, which means that the company generates sales of
approximately 2x its total assets. Compared to the industry average, this means that the
three companies are using well their assets to generate sales.

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Explanation:
This ratio indicates to the efficiency of the company generating sales compared to its
investment in fixed assets. Valeant has an increasing ratio going from 2 in 2011 to 20 in
2014. This can be explained by the effective acquisition made by the company last 3
years. However, Teva and West companies have a mean ratio of 2,5 over the period,
which is below the industry average of 16. This means that both companies are not using
effectively their fixed assets in the generation of revenues.

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Explanation:
Net Fixed assets to equity ratio show the proportion of shareholders contribution to the
fixed assets of the firm over a specific period. The industry average ratio, which is equal
to 1,40, indicates that companies are relying more on equity for fixed assets procurement.
Concerning Valeant and Teva Companies, they have a ratio lesser than 0,3 over the
period which means that they are relying more on debt than equity to acquire fixed assets.

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Explanation:

Gross profit is the profit made by the company after deducting the cost of goods sold
from the revenues generated. The three companies have a ratio below industry average;
however, Valeant, West, and Teva are still making respectively a gross profit of 70%,
30%, and 55% compared to revenues.

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Explaination

The percent profit margin to sales is the same as profit margin to sales but the only difference is this that it
tells you by what exact percentage revenue the company is generating profit. This analysis is good as it
helps decide the break-even percentage point. Valeant is the company because its low operations and sales
have negative value where all others are showing great promise for growth.

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Explanation:
The net margin analysis illustrates how much for each dollar generated by the company is
turned into profit. From the chart above, we can see that Teva and West companies are
doing better than the industry average with margin above 5% in 2011 going to 15% for
Teva in 2014 and 9% for West in 2014. Valeant Company experienced a loss during 2012
and 2013 with negative margins of -4% and -15% respectively.

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Explanation:
Gross margin analysis indicates the percentage a company is able to generate as profit
after paying all its costs related to the goods produced. Valeant has a gross margin equal
to 70% over the period, which is above the industry average of 59%. Teva Company is
going hand in hand with the industry average and it is generating 0,59$ as a profit after
meeting its direct costs. For West Company, its gross margin is equal to 30% over the
period, which is below industry average.

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Explanation:
Revenue per share ratio; also known as the sales per share ratio, is useful tool to measure
the companys effort to generate revenue compared to its share price. It is known that the
higher the ratio the better it is. From the graph, we can see that Valeants revenue per
share ratio has an increasing trend over the period. Which means that the company is
undertaking more and more determination to generate revenue and increase the share
price of the firm. In addition, West and Teva Companies have a stable ratio over the
period equal to 20.

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Explanation:
This represents the amount of money the company generated compared to the equity
holders investment over a period of time. Valeant Company experienced a decrease in its
equity in 2012 and 2013, which can explain the negative return on equity percentage in
this specific period. Concerning Teva and West companies, their return on equity ratio
has an increasing trend over the period going from 5% in 2011 for Teva to 15% in 2014.
This shows the return the company delivered to its shareholders over the period. In
addition, this increasing trend can attract more demand and thus, an increase in the share
price.

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Explanation:
It shows the efficiency of the company to generate profit after paying all the variable
costs such as salaries, raw materials used in the production process. According to the
graph above, the industry average is 30%. The three companies have an operating margin
less than industry average. This means that the proportion of sales revenues left after
paying all the charges is small. Teva Company has an increasing operating margin over
the period going from 7% in 2011 to 20% in 2014 as shown in the graph. For Valeant
Company, the operating margin was affected by the equity loss incurred in 2012 and
2013. Leaving the company with a negative operating margin of -8%.

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Explanation:
The earning per share ratio is an indicator of the companys profitability. It represents the
portion of profitability allocated to the outstanding shares. From the graph above, we can
see that Valeant Company has a negative EPS in 2012 and 2013 of -0,3 and -2,7
respectively which can be explained by the loss in their share price due to its pricing
practices and huge borrowing amounts. On the other hand, Teva Company has an
increasing earning per share ratio over the period, which shows us the increasing
profitability of the company compared to its outstanding shares.

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Explanation:
Debt to assets ratio is leverage ratio that indicates the companys relative amount of debt
is caring compared to its assets. Additionally, it highlights the amount of assets that are
covered by debt. From the graph, we can see that Valeant has a stable level of debt
compared to assets, which is relatively high compared to other companies even if it is
below industry average. More, we can say that 80% of Valeant assets have been financed
by debt. Besides, Teva Company has a debt to assets ratio of 0,5, meaning that 50% of
the firms assets have been financed by debt.

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Explanation:
Debt to equity ratio indicates basically the capital structure of the company. It reveals the amount
of money coming from debt compared to equity. Valeant Company has been financing its growth
mainly by debt. Over the period, Valeant invested using debt 2,5x the equity in 2011, and more
than 4x equity during the period going from 2012 until 2014. On the other hand, Teva and West
Companies have a ratio fluctuating near 1. Which means that they have as much debt as equity in
their capital structure.

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Explaination:
Times interest earned ratio is a measurement of how many times the company can meet its
interest payment before its income tax. The industry average is 20x while the three companies
are operating below this average. Clearly, the higher the ratio, the better it is for the company.

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Explanation:
The equity multiplier ratio indicates the leverage level of the firm. The higher the ratio
means that the company is using more debt than equity to finance its investments. From
the graph above, it is clear that Valeant has an aggressive debt strategy to finance its
investments. Its equity multiplier ratio has been above 3x in 2011, reaching 5x equity in
2014. Even though, the industry average is much higher than equity multiplier of the
three companies reaching 9,5x.

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WEIGHTED AVERAGE COST OF CAPITAL CALCUALTION FOR THREE COMPANIES

Financial Analysis
Equity
Debt
Interest Expense
Book value of Debt
Tax rate
Risf free rate
Beta
Cost of debt
Market risk
Premium
CAPM
WACC

E/(E+D)
D/(D+E)

Valeant
33232.84
16320.3
971
16320.3
25.41%
2.15%
0.76
5.95%

West
4560.27
355.1
16.5
355.1
28%
2.15%
0.54
4.65%

Teva
54655.8
11259
300
11259
6.41%
2.15%
0.81
2.66%

5.1%
6.0%
5.5%

3.5%
4.1%
4.0%

2.6%
4.2%
3.9%

0.6707
0.3293

0.9278
0.0722

0.8292
0.1708

EXPLAINATION:

A company's assets are financed by debt and equity. For this reason we need weights to
calculate the weight of equity and the weight of debt. Following are the steps we
performed WACC calculation. First of all we need to compute Market capitalization of
the company which in this case was valeant , West and Teva.
Valeant Pharmaceuticals International Inc's market capitalization ratio as for the current
scenario but according to the 2014 analysis it was 0.6707.
The market value of debt is typically difficult to calculate; therefore, we as a group used
book value of debt (D) to do the calculation.

Cost of Equity
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We used Capital Asset Pricing Model (CAPM) to calculate the required rate of return.
The formula is:
Cost of Equity = Risk-Free Rate of Return + Beta of Asset * (Expected Return of the
Market - Risk-Free Rate of Return). Cost of Debt is calculated by using D/D+E and
E/D+E respectively.

Beta Calculation Methodology:

We have used regression analysis where individual companies stock price data was taken
for the past ten years than regression analysis was applied using s and p 500 data to reach
to the required result. All three years data was chosen individually and same analysis was
applied as shown in the excel file. Following table shows the analysis of beta using both
slope and regression analysis. We can easily see from the the analysis that all the
companies are secure when it comes to risk with Teva the least risker and West the most
risker of all.

REGRESSION ANALYSIS
COMPANY
COMPANY
BETA
VALEANT
2005-2015
0.7641
TEVA
2005-2015
0.5449
WEST
2005-2015
0.8106

COMPANY
VALEANT
TEVA
WEST

SLOPE METHOD
COMPANY
BETA
2005-2015
0.7641
2005-2015
0.5449
2005-2015
0.8106

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CONCLUSION:

After performing the in-depth analysis of the three companies we have come to the
conclusion that all companies are to their own limitations like capital structure and other
constraints are performing well. All of them are growing at a consistent rate. Where some
of the key ratios show good potential for growth one but not that promising for the other
company.. If one company has upside trend in one year the other company has lost its
value for one reason or another. The reason I chose Valeant pharmaceutical was itself
being the new Enron and showing exponential growth over the past few years. Analysis
is important but cannot be the deciding factor in deciding whether to invest or not as there
are many forces playing at the same time that can influence and change the face of your
investment.

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References

Morning Star research report on West, Valiant , Teva 2014.

Bloomberg website www.bllomberg.com data for three companies including

balance sheet, income statement and cash flow statement.

Principles of Corporate Finance 13th edition. (2015)

NYSE data for companies and industry Average .

Yahoo.com to use 2005-2015 DOW Jones Industrial Average for Pharmaceutical

for beta calculations.

Youtube for different set of calculations on excel file.

Nasdaq for trading data among the 3 companies and also financial ratio analysis.

Zawya.com for library research.

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