“Measuring Several Aspects of Corporate Finance on Pharmaceuticals Industry of

DSE.”

A Study on Ambee Pharmaceuticals Ltd and Beacon Pharmaceuticals Ltd

Presented by
Mahmudur Rahman Rabby
ID-26051
 AMBEE PHARMACEUTICALS LTD. was founded in 1976 in Bangladesh.
This company was registered under the companies Act, 1913 and started
operation in Bangladesh on 4th February 1976. Ambee is a joint venture
with Medimpex of Hungary, a multinational company. Ambee has
collaboration with a 17 joint ventured products and is now running with
76 products. They have tablets, capsules, liquids, gel and injectables.
Ambee was listed in Dhaka Stock Exchange in 1986 named as
AMBEEPHA.
 Ambee aims to achieve business excellence through quality by satisfying
customer expectations. They follow Quality Management System to
ensure consistent quality of products. Follow Good Manufacturing
Practices (GMP) which is recommended by World Health Organization
(WHO) for its pharmaceutical operations.
 Ambee Pharmaceuticals Ltd. became an ISO 9001 certified company in in
2001. ISO 9001 certificate is an international recognition of the quality
management system of this organization that complies with the standard
of ISO 9001 system. This is a certificate which was awarded by United
Registrar of Systems Ltd. (URS) of UK. Among 250 pharmaceutical
companies only few have become ISO 9001 certified and Ambee is one of
them.
 Beacon pharmaceuticals ltd. A leading pharmaceutical
company in Bangladesh in respect of producing high-tech
products like anticancer and cardiovascular portfolio.
Beacon is a public limited company listed with Dhaka and
Chittagong Stock Exchange, which was incorporated on 12
September, 2001 as a private limited company with the
Registrar of Joint Stock Companies and Firms, Dhaka,
Bangladesh under the company’s act on 1994 and
subsequently converted into a Public Limited Company.
 Beacon is the first anticancer drug manufacturing company
in Bangladesh and has also been producing Bio-tech
products and various types of other life saving drugs to
serve the ailing humanity of Bangladesh. Beacon was listed
in Dhaka Stock Exchange in 2010 as BEACONPHAR.
 Goals
 Serve their customers with quality products at a reasonable price.
 Develop their employees with high potentials and an opportunity of career
development.
 Establish strong regional presence.
 Provide their shareholders a steady asset growth and return on investment.
 Recognize the suppliers as their business partners and competitors as the contributor to
the market value.
 Grow revenue and profit.
 Core Values
 Quality in everything we do.
 Live up to their commitment.
 Trust and respect for each other.
 Transparent and fair in all their dealings.
 Take initiative to exceed standard.
 Work as a team.
 Share social responsibilities.
 Capital structure refers to a company’s outstanding debt and equity. It
allows a firm to understand what kind of funding the company uses to
finance its overall activities and growth. In other words, it shows the
proportions of senior debt, subordinated debt and equity (common or
preferred) in the funding. The purpose of capital structure is to provide
an overview of the level of the company’s risk. As a rule of thumb, the
higher the proportion of debt financing a company has, the higher its
exposure to risk will be.
 Capital structure is commonly known as the debt-to-equity ratio. But
some firms use short debt more than long term debt so total debt to asset
must be considered.
 A company’s capital structure points out how its assets are financed.
When a company finances its operations by opening up or increasing
capital to an investor (preferred shares, common shares, or retained
earnings), it avoids debt risk, thus reducing the potential that it will go
bankrupt. Moreover, the owner may choose debt funding and maintain
control over the company, increasing returns on the operations.
 The pecking-order theory starts with asymmetric information, indicating
that managers know more about their companies’ prospects, risks, and
values than do outside investors. Managers obviously know more than
investors. We can prove that by observing stock price changes caused by
announcements by managers. For example, when a company announces
an increased regular dividend, stock price typically rises, because
investors interpret the increase as a sign of management’s confidence in
future earnings. In other words, the dividend increase transfers
information from managers to investors. This can happen only if
managers know more in the first place.
 Asymmetric information affects the choice between internal and external
financing and between new issues of debt and equity securities. This
leads to a pecking order, in which investment is financed first with
internal funds, reinvested earnings primarily; then by new issues of debt;
and finally with new issues of equity. New equity issues are a last resort
when the company runs out of debt capacity, that is, when the threat of
costs of financial distress brings regular insomnia to existing creditors
and to the financial manager.
 This trade-off theory of capital structure recognizes that
target debt ratios may vary from firm to firm. Companies
with safe, tangible assets and plenty of taxable income to
shield ought to have high target ratios. Unprofitable
companies with risky, intangible assets ought to rely
primarily on equity financing. If there were no costs of
adjusting capital structure, then each firm should always be
at its target debt ratio. However, there are costs, and
therefore delays, in adjusting to the optimum.
 Firms cannot immediately offset the random events that
bump them away from their capital structure targets, so we
should see random differences in actual debt ratios among
firms having the same target debt ratio.
 Here are three types of agency costs which can help explain the
relevance of capital structure.
 Asset substitution effect: As D/E increases, management has an
increased incentive to undertake risky (even negative NPV)
projects. This is because if the project is successful, shareholders
get all the upside, whereas if it is unsuccessful, debt holders get all
the downside.
 Underinvestment problem: If debt is risky (in a growth company),
the gain from the project will accrue to debt holders rather than
shareholders. Thus, management have an incentive to reject
positive NPV projects, even though they have the potential to
increase firm value.
 Free cash flow: unless free cash flow is given back to investors,
management has an incentive to destroy firm value through
empire building and perks etc. Increasing leverage imposes
financial discipline on management.
Return on Asset 2012 2013 2014 2015 2016
Ambee
Pharmaceuticals Ltd 0.03 0.02 0.02 0.02 0.01
Beacon
Pharmaceuticals Ltd 0.02 0.00 0.01 0.01 0.01

Industry Average 408.69 123.93 155.63 111.22 305.38

Return on Equity 2012 2013 2014 2015 2016

Ambee
Pharmaceuticals Ltd 0.15 0.15 0.13 0.11 0.09
Beacon
Pharmaceuticals Ltd 0.03 0.00 0.01 0.01 0.02

Industry Average 131.68 470.57 444.87 178.46 476.68

RNOA 2012 2013 2014 2015 2016

Ambee
Pharmaceuticals Ltd 0.00 0.08 0.07 0.06 0.06
Beacon
Pharmaceuticals Ltd 0.06 0.04 0.04 0.05 0.04

Industry Average 0.47 0.57 0.04 0.91 0.10

FCF 2012 2013 2014 2015 2016
17,624,936 1,354,212 32,078,841 24,144,011 (24,214,807)

Ambee
Pharmaceuticals Ltd
(62,373,664) 272,238,055 (265,339,650) (92,080,803) (162,292,902)

Beacon
Pharmaceuticals Ltd
788,935,828 2,708,167,177 1,467,639,335 496,043,501 (156,707,709)

Industry Average
 Ambee Beacon
Risk Free Rate 4.01% 4.01%

Market Return 5.03% 5.03%

Market Risk Premium 1.02% 1.02%

Beta 0.12 0.74

Adjusted Beta 0.41 0.83

Tax Rate 25% 25%

Cost of Debt 7.17% 10.02%

After Tax Cost of Debt 5.38% 7.52%

Debt to Equity Ratio 6.09 0.67

Weight of Debt 85.89% 40.13%

Weight of Equity 14.11% 59.87%

Cost of Equity 7.84% 8.15%

WACC 5.72% 7.90%

 2016 2015 2014 2013 2012

DPS (Cash) 2.60 2.60 2.80 1.25 3.30

DPS (Stock) 0.00 0.00 0.00 1.67 0.00

EPS 2.27 2.71 3.13 3.29 3.94

Dividend Payout Ratio 1.14 0.96 0.89 0.38 0.84

OCF per Share 12.05 11.59 15.50 0.89 9.08

FCF per Share -10.09 10.06 13.37 0.56 8.81

Market Price 387.70 273.00 251.30 209.35 226.70

P/E Ratio 170.59 100.63 80.17 63.60 57.61

P/E Multiple of the
Industry 384.81 248.17 284.66 482.40 175.77

BV per Share 24.82 24.12 24.21 22.32 26.14

Reserve & RE per Share 14.82 14.12 14.21 13.99 16.14

Sustainable Growth
Rate -0.01 0.00 0.01 0.09 0.02

Inflation Rate 6% 6% 8% 7% 12%

GDP Growth Rate 7% 7% 6% 6% 7%

 2016 2015 2014 2013 2012

DPS (Cash) 0.50 0.00 0.00 0.00 0.00

DPS (Stock) 0.00 0.00 0.00 0.00 0.00

EPS 0.27 0.17 0.10 0.04 0.33

Dividend Payout Ratio 1.88 0.00 0.00 0.00 0.00

OCF per Share 2.41 0.28 0.30 0.90 0.66

FCF per Share -0.70 -0.40 -1.15 1.18 -0.27

Market Price 17.30 14.70 14.80 14.10 19.10

P/E Ratio 65.08 88.07 141.11 356.71 58.62

P/E Multiple of the
Industry 384.81 248.17 284.66 482.40 175.77

BV per Share 13.00 12.58 12.41 12.01 11.97

Reserve & RE per
Share 3.00 2.58 2.41 2.01 1.97
Sustainable Growth
Rate -0.02 0.01 0.01 0.00 0.03

Inflation Rate 6% 6% 8% 7% 12%

GDP Growth Rate 7% 7% 6% 6% 7%

 the revenues and cost of sales had been rising but the
operating expenses had been rising even more than the
gross profits. As a result, the overall profits have not
been increasing and at times decreasing over the years.
Both the companies had been investing in itself to get
rid of their free cash flow since keeping them would
result in wasting them which is one of the prime
concerns of agency costs. Both firms have lower cost of
debt than cost of equity so taking more loans to expand
their operation would lead them to lower cost of
capital overall but Ambee already have a large amount
of debt whereas Beacon has a low amount of debt. So
taking more debt would help Beacon more than Ambee
to decrease costs.
Questions and Answers