Capital Structures and Profitability of Pharmaceuticals Companies Listed under Australian Stock Exchange

1
Critical analysis of the capital structures and
profitability of Pharmaceuticals companies
listed under Australian stock exchange
Author- AARTI GOEL
This research project is presented for the partial fulfillment of
Degree in Master of Professional Accounting
In
Holmesglen Institute
Supervisor - Dr. Vasanthi Peter
This Master’s thesis is carried out as a part of the education at the
Holmesglen Institute and is approved as a part of this education.

2
AUTHORISATION FORM
I_________________, authorize Holmesglen Institute to publish or use this research project
“Relationship of effective working capital and profitability based on company’s performance”,
for scholarly research. I acknowledge that photocopy or electronic transfer, the abstract or in
part, at the request of research institutions or individuals for the purpose of scholarly research.
Dated on: June 2018

3
ACKNOWLEDGEMENTS
I would like to express my sincere gratitude to my class coordinator and research project leader
Dr. Vasanthi Peter for the continuous support of my MPA study and research project for her
patience, motivation, enthusiasm and immense knowledge. Her guidance helped me in all the
time of research and writing of thesis. I could not have imagined having a better advisor and
mentor for my research project.
Besides my course leader, I would like to thanks my friend _____________who always took me
out from the hurdles I faced and for encouragement he gave me and for hard questions.

4
Table of Contents
1.0 Introduction...........................................................................................................................................6
1.1 Review of Literature..............................................................................................................................7
1.2 Methodology.......................................................................................................................................39
1.3 Interpretation......................................................................................................................................41
1.4 Conclusion...........................................................................................................................................42
2.0 Introduction.........................................................................................................................................43
2.1 Objective.............................................................................................................................................43
2.2 Conceptual framework........................................................................................................................44
2.3 Review of literature.............................................................................................................................45
3.0 Introduction.........................................................................................................................................46
3.1 Research design...................................................................................................................................46
3.2 Data Collection....................................................................................................................................46
3.2.1 Data type......................................................................................................................................46
3.2.2 Variables included in the data set.................................................................................................47
3.2.2.1 Dependent variable:..............................................................................................................47
Debt equity ratio................................................................................................................................47
3.2.2.2 Research questions................................................................................................................47
3.2.2.3 Hypothesis.............................................................................................................................48
3.33 Data processing and Data analysis techniques..............................................................................48
3.34 Data pre- processing......................................................................................................................48
3.35 Data analysis techniques...............................................................................................................49
3.3 Descriptive analysis.............................................................................................................................49
3.3.1 Chi-square and cross tabulation...................................................................................................49
3.3.2 Inferential analysis........................................................................................................................49
3.3.3 Stationary test..............................................................................................................................49
3.3.4 Normality test and Heteroskedasticity.........................................................................................50
3.3.5 Correlation....................................................................................................................................50
3.3.6 Regression analysis.......................................................................................................................50
3.4 Limitation of the study........................................................................................................................51
4.0 Introduction.........................................................................................................................................52

5
4.1 Descriptive statistics............................................................................................................................52
4.2.1 Cross tab and chi square test........................................................................................................55
4.2.2 Profitability...................................................................................................................................56
4.2.3 Inferential analysis........................................................................................................................57
4.2.4 Correlation analysis......................................................................................................................58
4.2.5 Regression analysis.......................................................................................................................59
4.2.6 Pooled OLS....................................................................................................................................60
4.3 Summary.............................................................................................................................................63
5.0 Introduction.........................................................................................................................................64
5.1 Findings and conclusion.......................................................................................................................64
5.2 Recommendations...............................................................................................................................66
6.0 Reference............................................................................................................................................67
7.0 APPENDIX.........................................................................................................................................79

6
1.0 Introduction
Capital structure is generally classified into debt and equity to support assets. In the case of
healthcare systems, they are viewed as a strategic component for their financial planning.
However, for non- profit health care centers the capital structure is maintained nearly at a
constant level of debt over the past century, but investor-owned sectors have reduced their
relative use of debts (Akhtar, 2012).
According to Hackbarth and Mauer (2012), non-profit healthcare groups have not been able to
reduce their debts in the same way as investor-owned hospitals do. This is due to the use of debt
to support investments within the financial market. Since, pharmaceuticals, biotechnology, and
life science sectors don't have access to equity, high bond rating and solid investment earnings
which are the key asset for capital structure policies of preserving access to the debt market.
In this research study, we will analyze the firm's strategy to help brighten the choice managers
make between debt and equity financing the research will be based on the following companies
Auscann Group Holdings Ltd, Avita Medical Ltd, Benitec Biopharma Limited, Biotron Limited
and Bioxyne Limited. These companies are classified under Pharmaceuticals, Biotechnology &
Life Sciences in Australian Stock Exchange.
This research study will further discuss whether healthcare sectors recognize capital structure as
a strategic opportunity to enhance the value of the organization or to view capital structure as a
by-product of another decision making (Jin, 2005). For businesses, the form of competition each
entity chooses will determine the strategic value of the firm of maintaining financial slack. In this
research, we will use secondary data to analyze the strong support for the proposition that
financial slack should be a particularly critical strategic imperative for firms pursuing a
competitive strategy premised on innovation. In some cases, health care sectors employ a capital
structure in a strategic manner as they may have a specific capital structure to target independent
goals within the organization. The key criteria of capital structure policy are to reduce the overall

7
cost of financing, thus lowering the firm’s cost and enabling the firm to pursue more value-
adding investments.
1.1 Review of Literature
According to Decker (1997), healthcare sectors have different policies and various kind of
market competition which creates more challenges to the providers, hence the possibility that
capital structure can be used strategically becomes increasingly more important. One of the
concerns regarding healthcare sectors is that it depends on management for their financial
positions to support challenges from the other side. When management continues to manage their
financial affairs to make up for the financial shortcomings of the business, then the likelihood of
continuing financial viability is increased. If these healthcare sectors find it difficult to continue
achieving their financial management goals, and at the same time failing to meet their
operational goals, the future viability of these organizations will be significantly challenged.
According to Naseem, Zhang, Malik and Ramiz Ur Rehman (2017), "Optimal capital structure is
a unique mix of debt and equity that minimizes the overall cost of financing assets". There are
various theories that suggest the derivation of an optimal capital structure depends mainly on the
existence of financial market imperfections.
One of the key importance of capital structure depends on the asset part of the balance sheet.
Decisions made by management about programs and the source needed to carry out these
programs are significant to strategic and financial success (Pyo, Shin, and Thompson, 2015).
Even though, decisions made by management about the mix of debt and equity employed to
support the firm’s assets are not relevant to the overall cost of financing. Thus, companies tend to
reduce the overall cost of financing and hence increase the value of the firm by shifting the
capital structure towards more debt or more equity is not regarded as successful.

8
Under agency cost, a firm attempt to lower overall financing cost by shifting from relatively
costly equity to relatively lower cost debt which will result to be unsuccessful. This will impact,
the equity holders with increasing risk on their returns as it is associated with more debts, this, in
turn, will result in the business paying higher dividends (Stein, 2002). As a result, debt holders
may impose higher interest charges or more restrictive covenants on the borrowing firm which
have costs as well. The increase in required dividends, interest rates or cost of covenants will be
sufficient enough for the business to cancel out gains associated with using relatively cheap
debts, so the overall cost of financing stays constant. As a result, the firm can't do anything to
alter the capital structure that in turn will reduce the financing cost. Hence, the capital structure
will have no influence on the value of the firm.
Yang, Cheng, and Lee (2014) indicates that the altering the capital structure of the firm can
influence the overall cost of financing which depends on the nature of the financial market
implications faced by the firm. One of the key imperfections probably relates to access to
subsidized debt, restricted access to equity markets and the existence of significant transaction
cost associated with financial distress. Because high ratio shows that organization is not capable
of financing its project and a low ratio indicates that organization is not bold enough to take a
risk by borrowing from the market. Cost of capital is the expense related to the option chose for
raising funds (Naseem, Zhang, Malik and Ramiz Ur Rehman, 2017). Debt attracts interest but
provides tax deduction because it can be expensed. However, equity requires dividend which is
not an obligation but if paid there is no tax deduction on this amount. So, it can be said these two
factors determine the capital structure which further defines the amount of debt and equity.
According to Welch (2011), subsidized debts come in different forms. For instance, for a tax-
paying firm, the income tax deductibility of debt interest payments is a significant subsidy that
helps to support the use of debt, the magnitude of which depends on the marginal tax rate of the
firm. Since debt is taxed only once as income to individual and dividends are taxed twice as
income to the individual and as income to the firm. Non-profit health care sectors do not pay
income taxes; as a result, they don't face this income tax subsidy.