Discuss about the Pharmaceutical Biotechnology for Biotron Limited.
Biotron Limited (Biotron) is a pharmaceutical biotechnology company based in Australia. It is developing new therapeutic drugs targeting Hepatitis C and HIV AIDS through cutting edge research. It’s most popular drug is the BIT 225 which is being developed clinically for treatment of both Hepatitis C and HIV AIDS. It is also in the process of developing oral direct-acting antiviral drugs for use against the Hepatitis C virus. (Biotron, 2016)
The Chief Financial Officer, Peter James Nightingale, who is also the secretary, is responsible for the budget planning and book-keeping of the company, while also being accountable for his chief deliverable of managing the financial risk of the company. The timely and accurate release of the corporation’s financial reports also fall under his purview. He is involved in top-level decision making, both strategic and tactical, working closely with the Chief Operating Officer and the Chairman, Dr. Michael J. Hoy. Dr. Hoy is a decorated executive with more than 30 years of corporate experience in Australia, US, UK and Asia.
Forecasting and Planning: A CFO should be able to share his views and critically analyze the department-wise performance of his company. Being an important part of the strategy team of the company, his job is to identify, appreciate and consolidate the high performing assets for strengthening capitalization, while keeping a close watch on the low-performing assets for necessary actions. Forecasting through financial modelling is a major part of his job description. Long-term sustainability of the company’s profits is his ultimate goal. Contingency planning through scenario analysis, considering all the possibilities the company can face, also constitutes a major part of time. The Hepatitis C drug market has been forecasted to grow in value to $19 billion by 2017 with more than 3% of the world population predicted to be infected. Biotron should take the right steps to capture a greater share of this increased market potential.
Auditor and Controller: Assessment of company performance and translation into financially measurable metrics is the responsibility of the Chief Financial Officer. The timely release of quarter-end results and other financial reports and information which is useful to all stakeholders – shareholders, employees and management – is solely the responsibility of his finance team. The accuracy and precision of these reports is critical as it drives many strategic decisions. Converting the operational metrics to financial ones is a task made easy by use of tools like ratio analysis and balanced scorecard.
Treasurer: The company’s financial risk is managed solely by the CFO. Investment of pension funds and other funds needs the final approval of the CFO. The risk, return and liquidity of the investment options drive his investment decisions.
According to the efficient market hypothesis, the only possible way to get higher returns than the market is by increasing the risk of the portfolio. This is based in the conjecture that the share prices always represent the true value of the stock, representing the sentiment, trading at very close to its fair value. Therefore, betting long on undervalued stocks or shorting the overvalued ones is impossible because it is very difficult to locate such stocks. However, this theory is always under scrutiny and much debated in financial circles. Accumulation of well-above average returns by investor like Warren Buffet by investing in portfolios clearly questions this theory. It is further contradicted by sustained bull and bear runs of the market. That being said, according to academic research, it is theoretically impossible to beat the market for long periods of time. Although very rare, one still might earn higher returns through careful stock selection. Therefore, it is always better to invest in portfolios directly indexed to the market as they are low cost and guarantee average market returns. This kind of an investment is also known as passive investment.
A CFO, being responsible for the management of pension funds, has to ensure that the pension funds operates sustainably and effectively for a long duration. The risk window that the manager can manipulate is very narrow, since the fund contains life-long savings of a large number of people and has to provide guaranteed benefits after retirements. Since the governments is gradually shifting the responsibility of social security from itself to the individuals and corporations, pension fund management has become very popular. The pension fund may directly be managed by an in-house team employed by the CFO. There are also consultancies and fund-management service companies which provide these services and manage the pension fund on behalf of the corporation. Alternatively, there are also government pension schemes available which can be availed and numerous insurance schemes which provide retirement benefits to customers.
Besides investments, the capital structure of the corporation is also in the hands of the CFO. Both debt and equity fund raising has to be arranged by the CFO and the debt/equity ratio needs to be appropriately maintained. Any scrutiny by the stakeholders about the debt and equity and the reasons for his decision making has to be dealt with by the CFO. Bitron recently completed an A$8 million fundraising drive, underlining the positive market sentiment that Biotron has significant upside and that its drugs are undervalued as compared to other HCV drugs. (Proactive Investors, 2016)
The objectives of the corporation and its drive towards its achievement are impacted by the CFO in a major way. Measurable and time-bound performance objectives are established by him along with the other C-level executives. These objectives also depend on the position of the company in its life-cycle. For example, while an established FMCG major might be interested in improving its gross margins by 20% in a quarter, an apparel start-up might prioritize increasing its Gross Merchandise Volume by 100%. Realistic and achievable targets are set b CFO by critically analyzing the past financial performance reports and other resources.
Monitoring and achievement of desired objectives after they have been accurately defined is the responsibility of the CFO. Proper KPI have to be outlined to quantify the various performance objectives. Continuous tracking of these KPI’s and feedback to the management have to be provided by the CFO. Financial insights are translated into operating procedures by his team which are then followed by the workforce in the organization. Collaboration with the various operating groups in the company is necessary.
The company’s performance is impacted in a significant way if the CFO is unable to fulfill his responsibilities. Any funding needs of the company should be readily fulfilled by the CFO. Lack of availability of funds can significantly set the company back in the achievement of its goals. Pharmaceutical companies require heavy investment in R&D and may take 4-5 or even 10-15 years in some cases in recuperating back the investment. The clinical development of the BIT225, the flagship drug of Biotron targeting both HCV and HIV requires strong financial backing.
To provide the company enough cash for its operational day-to-day expenses, the CFO has to keep the company appropriately leveraged, along with managing the risks in the process of building strong fundamentals. Smooth functioning of the business is ensured by guaranteeing the availability of liquidity so that the business can remain afloat.
The CFO’s job profile has risen meteorically from a book-keeping accountant to a strategy consultant. A lot of trust is bestowed on him by the senior leadership. He has become more of a business partner rather than a transactional employee. He has risen in the ranks to reach the position of a thought leader from a micromanager, from a doer to a strategizer, from a reserved personality to an outspoken one. He is now skilled at communicating the company perspective to the shareholders and the board of directors. The CFO ensures that the financial foundation of the corporation remains intact in this turbulent global economic environment. Many CEOs in today’s big corporations are the first in-line to be the next CEO’s.
Biotron has consistently been featured in the America’s AIDS magazine and other media because of the cutting edge research it is currently pursuing. Its share price saw a spike after its drugs were found to be effective against the Zika virus. Biotron had recently sent a several drugs from its library to an independent facility for testing against the Zika virus, one of which showed significantly positive results. The US Senate has pledged a whopping $662.1 million investment in order to curb the spread of the Zika virus. This would be large valuation impact for Biotron if the drug shows positive results in clinical trials. (Proative Investors, n.d.)In addition to the BIT 225, it has other program for developing targets targeting Dengue. Such projects are still in their early stage. It has also identified a new class of viral proteins as targets for potential intervention. If these efforts are to fructify and show strong returns, Biotron will need better support both strategically and financially from its CFO. Considering the excellent track record of Biotron in the past, the shareholders should not be worried at all about its future performance.
Efficient market Hypothesis (EMH) states that stock prices truly reflect the sentiment for that stock in the market and it is impossible to make more than average returns from the markets. According to EMH, prices truly reflect all information. However, the efficiency may be weak or strong depending on whether the prices reflect both public and private information or not. Privileged information includes market knowledge and insider information available only to the management. It also includes the proprietary information compiled by various investment managers of fund-management firms.
Efficient Market Hypothesis has been hotly debated ever since its inception. Empirical studies have been conducted on various stock markets to prove its relevance. Market- makers and corporate managers have made abnormal profits based on the insider information available to them (although it is illegal to do so). Therefore, it is clear that abnormal profits can be easily made in weakly efficient markets with some privileged information.
Besides that, there have been countless practical examples where investors such as Warren Buffet have made very strong profits by selectively investing in the market. Such investors exploit the violations inherent in the Efficient Market Hypothesis. One of the popular significant violation is that markets respond very slowly to surprising events like extremely good/bad earning announcements. Such stocks have been observed to be earning significant excess returns over and above the market portfolio. (ET Beaureu, 2011)
There have been other historically popular violations that have been exploited by investment firms. One such was pairs trading which was exploited by Morgan Stanley in the 80s. It basically is a market-neutral trading strategy which takes both long and short position in highly correlated entities like two stocks, currencies, commodities etc. Then there were also strategies like fixed income arbitrage which was exploited by Salomon Brothers. However, it is very difficult to make excess returns from such techniques today as they are now so widely known that books have been written on them. The boom in hedge funds also does not substantiate the violations in efficient market hypothesis.
EMH has led to the establishment of passively-managed portfolios and indexed portfolios which have no hassle, no fees and very low transaction costs. Today many index funds daily outperform the actively-managed funds. Investors are today generally advised to accept the EMH today as the violations that generate significant excess returns are either rare, illegal or not advertised to the retail investor or the general public. (Kumar, 2012)
Pension funds typically have large sums of money invested as they contain the life-long savings of the employees of a corporation or multiple corporations. A pension fund manager has very little leeway when it comes to playing with risk to generate higher than average returns. Given EMH, the pension fund management process should thus not focus on getting above-average returns, as they are impossible. Rather, it should focus on minimizing the risk while maintaining the average market returns. The pension fund manager should focus on reducing the investment cost- transaction cost, interest cost, capital cost etc.
References
Anderson, C., 2016. What Are the Top Ten CFO Responsibilities. Retrieved September 15, 2016 from https://www.bizmanualz.com/be-a-better-boss/what-are-the-top-ten-cfo-responsibilities.html
Biery, M. E., 2015. 4 Key Functions of a Chief Financial Officer. Retrieved September 15, 2016 from https://www.entrepreneur.com/article/242001
Biotron, 2016. Biotron. Retrieved September 15, 2016 from https://www.biotron.com.au/
ET Bureau, 2011. Efficient market hypothesis maintains financial markets are information efficient. Economic Times. Retrieved September 15, 2016 from. https://articles.economictimes.indiatimes.com/2011-09-15/news/30160087_1_index-funds-fund-managers-efficient-market-hypothesis
Investopedia Staff, 2015. What does a Chief Financial Officer (CFO) do. Investopedia. Retrieved September 15, 2016 from https://www.investopedia.com/ask/answers/04/042204.asp
Kumar, S., 2012. If Markets Were Efficient, Why are there Winners and Losers?.. Retrieved September 15, 2016 from https://valuestockguide.com/all/wall-streets-achilles-heel-efficient-market-hypothesis-doesnt-always-work/
Proactive Investors, 2016. Biotron Limited cashes up as research refines Hepatitis C therapy. Proactive Investors Australia. Retrieved September 15, 2016 from https://www.proactiveinvestors.com.au/companies/news/64934/biotron-limited-cashes-up-as-research-refines-hepatitis-c-therapy–64934.html
Proative Investors, n.d. Biotron Ltd shares rise after drug compounds show promise against Zika virus. Proactive Investors, Australia. Retrieved September 15, 2016 from https://www.proactiveinvestors.com.au/companies/news/68773/biotron-ltd-shares-rise-after-drug-compounds-show-promise-against-zika-virus-68773.html.
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