ALAPIS SA, a Greek public pharmaceutical firm, employing 741 employees, is engaged in the manufacture and distribution of detergents and cosmetics, veterinary pharmaceuticals, nutritional supplements, animal accessories and organic products, as well as human pharmaceuticals, medical devices and health materials. The Company operates several subsidiaries that supply a variety of pharmaceuticals, medical equipment, and hygienic products to drug stores and hospitals. Animal feeds, pet food and accessories are some of the Company’s veterinary product offerings. ALAPIS S.A.’s cosmetics and detergents product portfolio includes fabric softeners, bleachers and personal hygiene products, whereas the organic products segment contains agrochemicals, seeds, chemicals and aquaculture products.
On June 10, 2010 Alapis implemented its strategy to focus on its core business Pharmaceutical segment and proceeded in the disposal of its non-Human Health activities, namely in Cosmetics and Liquid Detergents, Animal Health and Medical Devices sector. The CompanyA¢â‚¬Å¸s equity capital, as of the end of FY2010, amounted to A¢”šA¬588.360.132, divided into two 245.150.055 shares (a decrease from 1.961.200.440 in a reverse split; pro rata one new share for every 8 existing ones), each with nominal value A¢”šA¬ 2.40 (up from A¢”šA¬0.30 of nominal value per share). The major shareholder of the firm, since December 2010, is Mr. Mario Al-Jebouri who controls 15.206% of the CompanyA¢â‚¬Å¸s total outstanding voting rights, and who, since February 2011, has been appointed the new Vice-Chairman (Non-executive member) of its Board of Directors.
In Table 2-1 we can see first the change in the current ratio and quick ratio over the fiscal years 2008 and 2010. The significant drop of the current ratio in 2010 is attributed to the 47.13% fall in current assets over the previous year against a 119 % increase in current liabilities in the same year. Of the total decline in current assets the drop in inventory contributed 2.78 percentage points  , while the fall in accounts receivable 29.67percentage points. The reduction in inventory and accounts receivable led to a decline in both the number of days of accounts receivable and the number of days in inventory increases.
Then, we turn our attention to the basic three activity ratios; these ratios that measure the firm’s ability to convert different accounts within its balance sheets into cash. We can use these ratios in order to expresses the length of time (in days) that the takes to sell inventory, collect receivables and pay its accounts payable. Table 2-1 shows that the company, as its inventory turnover ratio fell, increased the number of days (from 18 days on 2008 to 70 days in 2010) it takes to convert its inventory to sales, either as cash or accounts receivable. This increase is attributed o the 264% increase of average inventory over the period 2008-2010.
We start our analysis of the firm’s profitability by looking at the most the most widely used measure of profitability, i.e. that of the return on equity (); this is defined as net income (i.e. profit after tax) divided by (average) common stockholders’ equity (Ross et al., 1999: 35). Table 2-2 shows the firm’s rapid deterioration of ROE from 2.82% in FY 2010 to the troublesome -84.59% in 2010. These results do not include and any figures for discontinued operations. Of course the main driver in the falling course of the return on equity was the falling profit margin (in Table 2-4 we see that financial leverage could not enhance the company’s ROE; notice the significant increase in the firm’s debt-to-equity ratio). As we can see the profit margin plunged from 9.79% in FY 2008 to -310% in FY2010.
This immensely negative figure for the profit margin was down of course to the impact of the 792.494.000A¢”šA¬ worth of the impairment charge in FY 2010; that figure concerned only the continuing operations. Indeed, In application of the IFRS and specifically IAS 36, Alapis proceeded to the audit of impairment of the GroupA¢â‚¬Å¸s goodwill stemming from the acquisition of controlling interest at subsidiaries, the Group proceeded with an impairment of the goodwill related to intangible and tangible assets from continuing operations amounting to a total amount of A¢”šA¬ 840,5 mil. which impacted the results for 2010. The magnitude of the impairment was affected to a great extent by the adverse changes of financial parameters and components such as the discount rate, the market risk factor, the systematic risk factor, all of which were affected by the global financial crisis and the impact on the Greek economy. It should be noted however that the majority of the impairment is attributed to the significant impairment of goodwill that was created in 2007 when Alapis was formed through the 4-way merger as well as the subsequent company acquisitions.
Table 2-3 shows that all cash flow multiplies decreased through time. This of course has to do with the fact that operating cash flow plummeted from A¢”šA¬195,310,000 in 2008 to just A¢”šA¬58,293,000 in 2010. If we leave aside the thorny year of 2010, the problem with the falling operating cash flow in 2009 is not to be found in the operating profitability (roughly the same in 2008 and 2009), but to the working capital charges. Specifically, the huge increase in trade receivables in 2009 (compared with a decrease in 2008) brought the operating cash flow down from A¢”šA¬195,310,000 in 2008 to A¢”šA¬97,065,000 in 2009.
Table 2-4 shows the firm’s hugely erratic interest coverage ratio, which is used to determine how easily the company can pay out of its operating income its interest expenses on outstanding debt. Notice how the firm’s ability to meet its interest expenses became questionable after FY2009. Clearly, the company cannot go one like that as a going concern; it must either reduce leverage or increase operating profitability. If we exclude from our analysis FY2010, the interest coverage ratio fell as the quite robust increase in operating profit (from 74,856,000A¢”šA¬ in 2008 to 129,178,000A¢”šA¬ in 2009) could not cover the immense increase in the firm’s (net) finance cost (from 294,000A¢”šA¬ in 2008 to 51,436.000A¢”šA¬ in 2009).
One of the reasons accounting for the increase in finance cost is the increase in interest expense on non-current borrowings; this expense rose from A¢”šA¬ 12,648,000 to A¢”šA¬ 23,263,000 in 2009.
Table 2-5 also shows very erratic investment ratios. At this point we need to clarify that in order to calculate the price earnings ratio we have divided the market price per share at the end of the fiscal year by the earnings over the last 12 months, while in order to estimate the dividend yield we have used the share price at the beginning of the fiscal year.
As we can see from Table 2-4, the only “decent” fiscal year when it comes to the dividend yield was FY2009 when an investor who had bought shares of the company at the beginning of the year would have landed an 8.13% dividend yield. In 2008 the dividend yield was a non-existent 0.60%. This is attributed to the fact that in 2008 the company’s net profits (after tax) were significantly reduced (by almost 46%), and as a result the company’s management decided to distribute a dividend per share of 0.011A¢”šA¬ against 0.025A¢”šA¬ for 2007; this represent a 56% reduction in the dividend payout for the FY2008. For 2010 we see that the dividend yield was zero as the company distributed no dividend because of the losses incurred in the same fiscal year.
The firm’s P/E is illustrative as to the growth prospects the market had attached to the firm. Specifically, by the end of FY2008 much investors were willing to pay A¢”šA¬13.23 for A¢”šA¬1 ofA current earnings, while by the end of the next fiscal year that figure went down to A¢”šA¬1.38 pay euro of earnings per share. This tenfold reduction in the P/E ratio, which occurred despite the fact that the company’s earnings per share rose from 0.04 in 2008 to 0.33 in 2009, is indicative of how gloomy are the market’s expectations with the regard to the growth prospects of Alapis.
The adverse conditions that prevailed throughout 2010 in combination with the stringent austerity measures Greece has taken as was expected took a toll on healthcare expenditure; this in turn significantly affected the domestic pharmaceutical sector. Right now the main problem the sector faces is overall delay of payments by the Greek State to the pharmaceutical companies, a problem that may further dent turnover and profit margins 2010
The decrease in the company’s turnover can be attributed to three factors. First, there was the reduction in the pharma prices imposed by the State during the 4th quarter of 2010. More specifically, in May 2010 the Greek state applied a horizontal price reduction on approximately 12,000 drugs. Second, as the pharmacies decided to destock in view of the new pricing environment that led to a lot of product returns to the Company. Third, the company decided to proceed with the sale of some activities.
We may argue that the basic risk ahead for the company is the price risk, as the Greek State (according to L.3840/31.03.2010) is the price setter for a medicine produced, packaged or imported in the country; this price must not exceed the average of the three lowest prices of that particular medicine as sold within the European Union (EU) member states. This pricing system is expected to be to the detriment of the company’ s future as the GDP and labour costs in some EU member states, such as Bulgaria, Romania, and Poland, are 40% of the respective Greek figures, and as a result the price of the same piece of medicine is expected to be quite low in these countries.
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