Week 55 Pharmaceuticals, Johnson & Johnson, Allergan Plc, and UCB SA

Welcome to the fifty-fifth edition of my weekly blog. In volume II, I look at what some of the most sustainable companies in the world are doing to be better corporate citizens.
 
Introduction
Each week I will analyse three companies from an industry sector to see what policies and procedures they have implemented to make their companies more sustainable. I will also compare these companies' financial ratios (valuation, growth, yield, leverage etc.) against their industry averages to see if a company can be sustainable and still outperform their industry sub-sector expectations.

1. Johnson & Johnson
Johnson & Johnson (J&J) publishes an annual ‘Health & Humanity Report’, the progress and reporting section of their latest annual report notes the following achievements:
 

• 20% of board positions at J&J are held by women compared with global research from multiple sources that show a range between 12% and 15%.
• J&J has reduced its CO2 emissions by 10.4% between 2010 -  2016 and has a 2020 reduction target of 20%.
• All 120 manufacturing and R&D facilities have undergone water risk assessment.
• They have enrolled 44% of their suppliers onto their ‘Sustainable Procurement Program’ and source approximately 20% of their goods and services from small & medium sized companies.
• Over 13,000 employees completed an internal “Energy for performance” training
• Concluded 100 MW wind power purchase agreement to help reach renewable energy targets.

 
2. Allergan Plc
Highlights from Allergan’s 2017 Sustainability Report include:
 

• 25% of board positions at Allergan are held by women and 30% of Allergan’s executives are women.
• Reduced GhG emissions by 22% since 2015.
• Recycled more than 75% of all waste.
• Decreased water consumption intensity by 7% since 2015.
• Workplace injuries and illnesses have reduced by over 30% since 2015.
• Allergan has commenced a sustainable supply chain audit with key suppliers where water use and emissions data will be provided by the suppliers.

3. UCB SA
UCB SA’s sustainability report 2017 highlights include:
 

• 31% of board positions at UCB SA are held by women, they also have a 4-year mandate and over 50% of the board of directors are independent directors.
• Three carbon compensation projects:
  • Providing energy efficient cooking stoves in DR Congo to prevent illegal harvesting of wood.
  • Over 10,000 hectares of reforestation will take place in Virunga Park DR Congo over the next 10-years.
  • 12,000 of degraded forest in Tigray Ethiopia will be restored by 2030.
• 92% of electricity consumption is from renewable sources.
• 19.5 hours of training per employee was provided to staff. 88% of employees consider UCB to be a socially responsible company.
• UCB has supply chain security council comprising of purchasing departments who operate in 20 countries and are responsible for over 21,000 suppliers. The council meets to review the quality standard of their key suppliers.
• €7m raised for charitable organizations.

 
Key Performance Statistics – Company Vs Industry Average
Using Morningstar data, we can compare the performance of the three companies against industry averages:

J&J’s lower than industry net margin and returns on assets and equity can be linked to the enactment of the Tax Cuts and Jobs Act (TCJA) in the US. This led to a sharp rise in provisions for taxes on income for J&J, the 2017 provision was $16.4b compared with a 2016 figure of $3.3b and is an initial estimate of what the impact of TCJA will have on the company’s net earnings. In addition to fiscal policy change in the US, J&J are faced with potential tax reform measures in Switzerland and the implementation of the OECD’s Base Erosion Profit Shifting (BEPS) project. The tax provision along with a net loss on disposal of assets ($2.5b) in 2015 help explain the negative 3-year net income growth figure. J&J’s operational performance was strong and outperformed their industry peers as did revenue growth. Gross profit (67% - 69%) and earnings before tax provisions (20 – 27%) relative sales have reasonably consistent since 2012.
 
Allergan’s performance compared with its industry peers is extremely positive. Allergan has increased their gross margin from 78% in 2015 to 87% in 2017. Amortization of intangible assets, along with research & development costs and asset disposals/ impairments ($646m for Aczone) means that they have been running operating losses for the past three years. However, relative to their industry peers their operating margin (loss) is better. Revenue has grown at an impressive rate of 50% over the last three years. From a financial leverage point of view, their current debt/equity of 0.4 is at prudent levels. Allergan appears to be in restructure mode (sold generic business to Teva) as they generated large incomes from discontinued operations in 2016 ($15b) and 2015 ($3.9b).
 
UCB had a strong financial performance in 2017. The company recorded €4.5b revenue and €1.4b of recurring EBITDA. €1.1b was invested in R&D or almost 80% of EBITDA. They outperformed their industry peers against all the key statistical measures in the diagram above and achieved their net/EBITDA target of 1.1 and recurring EBITDA/revenue goal of 30% in the past two years. From a segmental reporting point of view, their top product (Cimzia) accounted for 34% of total revenue with the vast majority of their remaining revenue spread across a further eight products. Geographically the US market accounted for almost half of their revenue with nine key European and Asian markets supplying most of the remaining income. In spite of more than half of their revenue being generated in non-euro currencies, UCB recording a small net fx loss (€44m) in 2017. Net debt/EBITDA have dropped significantly in the last five years as evidenced by a debt/equity ratio of 0.3.
 
Summary
When you compare the operational performance of these three pharmaceutical companies with their industry peers all three outperform their industries. This is a positive development as improvements to sustainable performance can be directly linked to operational performance such as the selections of suppliers, sourcing of energy, water usage, employee training, recycling etc.
 
Overseeing the financial performance of a large pharmaceutical’s company involves the proactive management of a multitude of risks. Show leadership in the area of sustainability can help mitigate against but not limited to risks to: staff (health & safety), the environment (fines), reputation (bad publicity), operations (inefficiencies). It will not solve for other market risks such as changes in fiscal policy and foreign exchange fluctuations however it is a step in the right direction and will help strengthen the operational performance and stability of the business.
 
Next week’s blog will feature three software companies, Dassault Systemes SE, Autodesk Inc, and Adobe Systems, and the measures they have taken to be more sustainable. 
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Disclaimer
The content of this article is intended to be used and must be used for informational purposes only. It is very important to do your own analysis before making any investment based on your own personal circumstances. You should take independent financial advice from a professional in connection with, or independently research and verify, any information that you find in this article and wish to rely upon, whether for the purpose of making an investment decision or otherwise.