Financial performance analysis of big pharmaceutical companies during the COVID-19 pandemic

Abstract

In the era of COVID-19 crisis, the pharmaceutical sector has significantly contributed to patient’s life and societies on a global level. Being at the forefront in the war against this pandemic, pharmaceutical companies and biotech have rapidly responded and adopted to new technologies, finding new ways of working as they adjust to this new reality. As a multi-billiondollar global industry, this sector is not only responsible for saving millions of lives everyday but also is a key contributor of the global economy. In the framework of this diploma thesis, two pharmaceutical leaders (Roche and J&J) were carefully selected and evaluated, using ratio analysis during COVID-19 outbreak. Being the top two companies in respect of various financial indicators (e.g., revenue, market cap etc.), these firms were financially evaluated by assessing their performance in terms of liquidity, leverage, efficiency and profitability. One of the key findings of this research has shown that both companies do not maintain high values of liquidity. However, both J&J and Roche seem to follow a specific business strategy with a low liquidity risk, since they possess a strong cash generation ability, even in periods of severe health crisis. With respect to efficiency ratio analysis, both companies appear to have a strong bargaining power against their clients and suppliers, even though they do not seem to exploit their strength to the fullest, following a win-win strategy for both sides. In this context, J&J seems to utilize better its credits compared to Roche, presenting less time to convert its investments and other resources into cash (cash conversion cycle 68 vs 170 days on average). On the other hand, as part of the efficiency ratio analysis, using the asset turnover, Roche presents higher sales proportionally to its assets, even though J&J generates higher revenue during the years. Regarding leverage and debt, both companies maintain a low risk profile, using limited external funding and a conservative financial dependence, but at the same time, they maintain their borrowing capacity in case of future obligations. Only in 2021, this profile has changed for Roche, where it used external funding to repurchase its shares from Novartis in order to gain more flexibility and disentangle its operations from one of its most serious competitors. In respect of profitability, Roche seems to handle more effectively its expenses, presenting higher net profit- and operatingmargin in comparison with J&J. In the same context, Roche appears to have higher ROA and ROE values, indicating a more effective handling of its expenses to generate profit by owing less resources and by using its shareholders’ equity. Even though the profitability margins seem low compared to other sectors (i.e., ROE value of ~46% for Roche and ~25% for J&J on average), for the pharmaceutical industry are considered significant, indicating that both companies present a very healthy financial performance, which renders them a profitable investment for their stakeholder’s even during difficult times. Finally, RORC analysis have shown that both companies generate profit through their R&D activities, a key indicator of competitiveness and future growth, especially for the pharma industry.