INTRODUCTION

This is a report about Farmican plc. for the years 2011, 2012 and 2013.
The purpose of this report is to interpret the financial performance,
financial position, cash flows and investor ratios of the company. The
interpretation will present the performance, profitability, efficiency and
the risk as well as the future prospect and growth of Farmican plc. For the
analysis of financial performance ROCE and Net profit ratios were used.
Gearing and interest cover ratios were used for the financial position
while for the investors section, dividend yield, dividend cover and price
earning ratio were analyzed. An overall analysis of cash flow position
was made and an other information section was included as well. Finally,
Shire plc. was used for the comparison of Farmican plc.

FINANCIAL PERFORMANCE
ROCE-Return on capital employed

2011 ROCE
Farmican plc. had a ROCE of 19.13 %, in 2011, which is a quite remarkable and
attractive percentage of return.

2012 ROCE
In 2012, ROCE increased to 27.24%. This indicates that the companys managers
make better use of the available capital, as a result, returning higher profits. This can
be seen by the improvement in operating profit, which occurred due to the significant
increase of unpatented products revenue after the unexpected fire to a competitors
factory. Moreover, the operating improvements resulted in an overall reduction of
operating expense and as further result, an increase of operating profit.

2013 ROCE
The ROCE percentage though, had decreased to 22.66%, in 2013. The main reason
for this effect was the reduction of operating profit. Even though, the sales of patented
products were excellent after the launch of Farmaface in the market, the unpatented
and licensing royalties sales decreased dramatically for Farmican plc. Some of the
unpatented products had to be sacrificed for the production of the new product and an
agreement with an important customer ceased to exist reducing significantly licensing
royalties. In addition, the cancellation of research and development project on the foot
care helped the improvement of operating profit as well.

An amount affecting negatively the operating profit is operating expenses, which

increased significantly due to the legal settlement on Farmaface product.
 ROCE would remain constant at 27.71% if this settlement would not occur
during the year, which means that the company is managing its capital
excellent so far. A future stability or increase would be expected after the
investments undertaken so far. Furthermore, the high ROCE percentage is a
sign of a successfully growing company.

ROCE is a powerful tool for making comparisons. Comparing Farmican with

Shire, Farmican has a much higher ROCE percentage. Considering that net
profit margins are on the same level for both companies it means that
Farmican plc. makes better use of its capital. Therefore returned profits are
much higher and investing in this company is a more attractive option.

NET PROFIT MARGIN

The companys net profit margin in 2012 increased 7.15% compared to 2012 but
it dropped by 1.86% in2013. The reasons for these changes its the fluctuations
of revenues and expenses in the last two years.

Revenues

Revenue of Farmican improved by 15.39% from 2011 to 2012. The

increase in revenue was mostly due to the production of more unpatented
products after a fire damaged a competitors factory and therefore
Farmican had to fulfill the markets demand.

In 2013, there was a small reduction of 3.21% in revenues, even though

there was an incredible boost in the sales of patented products(.) after the
introduction of the Farmaface in the market, which made initial sales of
330 million. However, the unpatented products revenue has fallen
because of certain unpatented products could not be produced as
factories were operating in full capacity. In addition, Farmican did not
renew a licensing agreement with a major customer, which expired
during the year resulting in a major decrease of licensing royalties
revenue but in total revenue as well.

Expenses

Most pharmaceutical companies face the threat of losing exclusivity when

their patents expire, since their competitors sell the same drug in a
cheaper version. Their response to this threat is the reduction of their
annual operating costs(ref). This can be seen in Farmican in both years
2012 and 2013. While the companys revenue increases, the operating
costs are reducing even though in 2013 operating expenses had increased
by 146 million. That was resulted, after the payment of 150 million for a
legal settlement of Farmaface product, which was treated as operating
expense by the company.
 Research and development costs are rising in the sector as the worlds
population is getting older. Companies will have to support demand for
healthcare and medicines over the coming decades (ref). Farmicans
research and development costs had risen in the year 2012 indicating a
further research for future medicines. In 2013 though, research and
development costs has been reduced significantly. This was a result of
cancellation on the foot care project. However, Farmican may have
abandoned more projects as well, but more information is not available.

Market position. Comparing Farmican with Shire for the year 2013, it seems
that Farmicans financial performance is slightly better than Shires, according to
Net profit margins, which are 19.98% and 19.47% respectively.

FINANCIAL POSITION-SOLVENCY

GEARING RATIO

2012

Farmican plc. has managed to reduce its risk by a significant percentage. In

2011, gearing was up to 60.86% but the following year was reduced down to
44.89%. This is due to a slight repayment of 20 million in borrowings, but
mostly due to the 24.58% increase of equity.

2013

In 2013, gearing ratio increased by 2.82% reaching to 47.71%. The percentage

was increased despite the fact that equity increased as well.

Farmican plc. had to borrow a further 120 million to invest in new facilities,
for the company to cover its production needs, since the company was in
shortage of capacity for unpatented products and for the payment of 150
million of the claim of patented product Farmaface.

On 15th October 2013, Farmican plc. borrowed another 100 million to acquire
its new manufacturing facilities in China to extend even more its production
capacity.
INTEREST COVER

2012

Interest cover has increased significantly by 5.8 times from 2011 to 2012. This
is a result of an increase in revenue of the unpatented products, resulting in an
increase in operating profit. In addition, the increase in interest cover was also
affected by the repayment of 20 million in year 2012. The repayment had a
further result of reducing the finance costs down to 56 million from the 65
million, which were in 2011.

2013

Interest cover in 2013 dropped by 6.76 times from 12.6 to 5.84. Even though
the profits from operations had a small reduction, the main factor for this
decrease is the major increase of finance cost which almost doubled as
compared to the previous year. After the borrowing of 120 million, which was
used in investment in facilities, the total borrowings reached 1000million at
the end of the year. The finance cost though, increased disproportionally to the
new borrowing.

Future

Farmican plc. borrowed a further 100 million on 15th October 2013 to fund
its new facilities in China. Moreover, the companys directors are negotiating
new agreements to replace the borrowings expiring in 2014. If the interest rate
though remains at the same percentage as now, which is 11.15%, then it is
expected that interest cover will be reduced even more. This will also affect the
cash, as a significant amount will be absorbed by finance cost.

Comparison with Shire plc. Farmicans interest cover for the year 2012 is rather low
compared to Shires which covers its interest 24, 86 times. Shire plc. ,has a debt of
676 million and an interest expense of 21.6 million, which is much lower compared
to those of Farmican plc.

CASH FLOW RATIO

Operating cash flows

Net cash from operating activities for the year 2011 were 620 million whereas in
2012, increased to 878 million. In the last year, operating cash has fallen to 737
million. The main reason, for this, is the fluctuation of operating activities between
each year.
Cash flow from investing activities

Disposal of product rights

In 2012, the company made a sale of products rights, amounting to 62 million. This
action might have been the need of Farmican to inject some immediate cash into the
business to cover some of the current liabilities.

Purchase of tangible assets

In the last two years, a lot of Farmicans cash were invested for the purchase of
tangible assets, and mostly for the purchase of new facilities, after reaching full
manufacturing capacity. More specific, Farmicans investments in tangible assets
were 270 million in 2012 and 352 million in 2013.

Cash flow from financing activities

Borrowings and finance costs

In 2011 and 2012, Farmican repaid 20 million each year, reducing on the same time
the finance cost payable. In 2013 though, due to the investment, that had to be
undertaken for the new manufacturing facilities, a further borrowing of 120 million
had to be obtained. The additional amount of money acquired, resulted in a significant
amount of cash inflow into the company. However, the increased borrowing, together
with the higher interest rate, has resulted in an increase of finance costs of nearly two
times.

Dividends paid to shareholders

Farmican spends a significant amount of cash each year to pay dividends, keeping its
shareholders satisfied. So far, the company paid dividends of 240 million, 255
million and 260 million for the years 2011, 2012 and 2013 respectively and
proposed further dividends of 260 million for 2014. The dividend payments is one of
the highest cash outflows of the company but it seems that Farmican will be able to
keep paying high dividends in the future.

Future cash flow position

According to the latest financial statements and investments undertaken by Farmican,

it seems that future cash inflows will increase. More cash will be generated from
operations since more sales will be made after the operations of the new factories.
Moreover, the cash spent on tangible assets will be reduced since no further
investment is planned. However, finance cost will have a negative impact on cash in
the following years if the company keeps paying the high interest rate that pays today.
The further 100 million acquired from borrowings in 15 October 2013, will result in
further increase of finance cost.
INVESTOR RATIOS
DIVIDEND YIELD

Farmicans dividend yield had a huge reduction within the last two years from 5.31%
on 2011 down to 2.83% today. A combination of the share market price and dividend
paid out, has affected the drop of the dividend yield. The main reason for this
reduction though is the sharp increase of shares market price.
The other reason which affected the dividend yield drop, but in a lesser extent, is the
constantly increasing dividend paid to shareholders in the last three years.

Comparison with Shire plc. Comparing Farmican plc. with Shire plc., it is clear that
Farmicans return on investment is much higher than that of Shire, which is only
0.16%.
In addition, Farmican plc. pays much higher dividends, which reaching 260 pence
per share, compared to just 11.13 pence for Shire plc.

Other investing options. A comparison of Farmicans dividend yield can be made

with other investing options such as bank deposits. Farmican plc. is still returning a
higher percentage as compared to bank deposit which is maximum 1.50%. (reference)

DIVIDEND COVER

Farmican plc. is covering its dividends from earning 1.82 times in the current year,
while was covering them, 1.17 times and 2.32 times in the years 2011 and 2012,
respectively. Considering that dividends per share are almost the same during the last
years, it is quite obvious that the main reason for the change in the ratio is the
Earnings per Share.

Dividend cover for the years 2011, 2012, 2013

In 2011, Famican plc. had a dividend cover ratio of 1.17 times which is quite
low. It must be taken into consideration though that Farmican plc. paid 85.57%
of its earnings as dividends which is a really high proportion.

In the following year, dividend cover reached 2.32 times due to the fact that
earnings doubled, compared to 2011. In 2013 and according to payout ratio,
Farmican will pay 54.97% of its earnings as dividend. This brings the dividend
cover to 1.82 times.

Comparison with Shire plc. Compared to Shiress dividend cover which is

12.16 times in 2013, Farmicans dividend cover is low. However, Farmican
 plc. pays out very generous dividends of 260 pence, compared to a low
dividend policy of Shire. On the other hand Shire plc. , prefers to pay low
dividends and keep its earnings for internal investment. This can be seen by
their latest report and their price earnings ratio, which is rather high.(reference)

PRICE EARNING RATIO

The price-earning ratio reflects the markets appraisal of the shares future prospects.
The ratio had a constant improvement during the last 3 years and now it is 19.45.

Reasons for high price earnings ratio

High demand. The high demand for Farmicans plc. shares during the last few
years, has led to the rapid increase of the price earnings ratio as well. This high
demand though was foreseeable since Farmican plc. is operating in the
pharmaceutical industry, which has been one of the best performing and
growing sectors in the year, so far. (ref)
Additionally, the decision of Farmican to invest heavily to acquire new
facilities for its production, led to a further increase of market share price, as
investors are expecting large amounts of profits in the following years.

Comparison with Shire plc. Shire has a price-earnings ratio of 21.14 times, which is
slightly higher than Farmicans 19.45 times. Shire is growing steadily in the industry
and this can be seen by their latest report and the increase of their current market
price, which reached 28.22. However, the high price-earning ratio can also be
explained with the low earnings per share of 1.34. On the other hand, Farmican plc.
has a price earning ratio of 19.45 times which increased significantly during the last
three years and 4.73 as earnings per share.
Other information

Tax investigation

Farmican plc. is under investigation by HMRC for low rate of taxation, after
receiving negative publicity from the Public Accounts Committee. However,
further investigation is needed to find out if HMRC will charge the company with
penalty fees. Farmican plc. might need further borrowings to cover this
payment.

Diluted earnings per share

Farmican issued share options to the managers of the company, which can be
exercisable in 2018 if they achieve a certain performance. This will have a
negative impact on Earnings per share since the profit for the year will be
allocated to more shares, therefore less available dividend for each share. This
will be the case if profits remain on the same level as today. However, if profits of
the year increase, then the Earnings per share will increase as well.

Quality improvements

Farmican entered into new agreements with key suppliers to reduce

raw material costs but improving the quality of its products on the
same time. This will result in a further increase of revenue, as the
buyers will be attracted to buy the new product. Therefore, more
profits will be made and probably more dividends for the investors at
the end of the year.
Conclusion

Farmican is a pharmaceutical company, operating in a rapidly growing industry.

According to its financial statements, Farmican has grown fast during the last
few years and keeps growing even more.
The return on capital employed of the company is on a really high percentage of
27.71% nearly double the percentage of shire, which also has a satisfying return
of 16.07%. This difference however indicates that Farmican manages its
available capital in a more efficient way. Moreover, net profit margin is
increasing as well, even though some factors such as, shortage in capacity have
resulted in a small reduction in the last year. Farmican however, is still having a
higher percentage of net profit from its main competitor.
Farmican is in a very good financial position. Its gearing is at 47.71%, which is on
the same level as Shires. These borrowings have been wisely invested into the
business and effectively will generate more profits and lead to further growth. At
the same time, it should be noted that Farmican is paying extremely high interest
rate on its borrowings. This is reflected by the reduction of 7.7 times on interest
cover ratio during the last year. Nevertheless, the company is covering its
interest payments 5.84 times, a quite satisfying figure.
Furthermore, Farmicans shares, seems to have a high demand in the market.
Investors have a dividend return of 2.83% on their investment, which is above
the average industry return of 2.33% (reference). Farmican is also covering its
dividends from earnings 1.82 times after paying out 54.97% of the years
earnings as dividends. These figures indicate a healthy company with many
future prospects, resulting in a high share market price and demand.
The cash flow of Farmican is also in a good position. The company has high cash
amounts from operations, which are expected to increase in the future. A lot of
money was invested has been used for purchasing tangible assets to cover the
needs of the companys growth. This will result in a further increase of cash in
the future. However, Farmican will have to take into consideration, the
repayment of its borrowings. The managers of the company should think about
negotiating new interest rate, as the current one will absorb a significant amount
of their available cash. This action will improve the cash flow position of the
company as well, as less cash will be paid for interest.
To sum up, it seems that Farmican is a very good investing option, with future
prospects of high return and growth.
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