Exhibit 1.25 (page 68) presents common-size income statements and balance sheets

Question

Exhibit 1.25 (page 68) presents common-size income statements and balance sheets for seven
firms that operate at various stages in the value chain for the pharmaceutical industry. These common-
size statements express all amounts as a percentage of sales revenue. Exhibit 1.25 also shows
the cash flow from operations to capital expenditures ratios for each firm. A dash for a particular
financial statement item does not necessarily mean the amount is zero. It merely indicates that
the amount is not sufficiently large for the firm to disclose it. A list of the seven companies and a
brief description of their activities follow.
A. Wyeth: Engages in the development, manufacture, and sale of ethical drugs (that is,
drugs requiring a prescription). Wyeth’s drugs represent primarily mixtures of chemical
compounds. Ethical-drug companies must obtain approval of new drugs from the
U.S. Food and Drug Administration (FDA). Patents protect such drugs from competition
until other drug companies develop more effective substitutes or the patent
expires.
B. Amgen: Engages in the development, manufacture, and sale of drugs based on biotechnology
research. Biotechnology drugs must obtain approval from the FDA and enjoy patent
protection similar to that for chemical-based drugs. The biotechnology segment is
less mature than the ethical-drug industry, with relatively few products having received
FDA approval.
C. Mylan Laboratories: Engages in the development, manufacture, and sale of generic
drugs. Generic drugs have the same chemical compositions as drugs that had previously
benefited from patent protection but for which the patent has expired. Generic-drug
companies have benefited in recent years from the patent expiration of several major
ethical drugs. However, the major ethical-drug companies have increasingly offered
generic versions of their ethical drugs to compete against the generic-drug companies.
D. Johnson & Johnson: Engages in the development, manufacture, and sale of over-thecounter
health care products. Such products do not require a prescription and often benefit
from brand recognition.
E. Covance: Offers product development and laboratory testing services for biotechnology
and pharmaceutical drugs. It also offers commercialization services and market access
services. Cost of goods sold for this company represents the salaries of personnel conducting
the laboratory testing and drug approval services.

F. Cardinal Health: Distributes drugs as a wholesaler to drugstores, hospitals, and mass merchandisers.
Also offers pharmaceutical benefit management services in which it provides customized
databases designed to help customers order more efficiently, contain costs,
and monitor their purchases. Cost of goods sold for Cardinal Health includes the cost of drugs
sold plus the salaries of personnel providing pharmaceutical benefit management services.

G. Walgreens: Operates a chain of drugstores nationwide. The data in Exhibit 1.25 for
Walgreens include the recognition of operating lease commitments for retail space.

Use the ratios to match the companies in Exhibit 1.25 with the firms listed above and explain your reasoning.

Exhibit 1.25 Common-Size Financial Statement Data for Seven Firms in the Pharmaceutical Industry (Problem 1.13) 7 BALANCE SHEET Cash and marketable securities Receivables Inventories Property, plant, and equipment at cost 34.23.9 666 73.9 74.2 22.6 43.0 Accumulated depreciation Property, plant, and equipment net 12.5% 1.9% 5.7 7.2 63.7% 13.8 13.8 63.7% 16.018.7 13.1 12.1 % 4.1% 20.1% 3.9 152 7.9 3.7 10.7 (135) (2.0) (274) 24.9) 27.)(55) (204) 20.7% 109.3 1.9% 6.1 39.2% 95.5 49.0% 47.1% 17.1% 22.5% Intangibles Other assets 20.5 2.3 43.4 24.0 16.8 25 169 30.5 Total Assets Current liabilities Long-tem debt Other long-term liabilities Shareholders' equity 202.6% 25.2% 242.9% 192.8% 96.0% 39.7% 133.2% 30.1% 100.5 11.5% 32.6% 30.0% 25.2% 10.7% 32.7% 33 61.2 474 1.7 133 31.5 84.0 3.7 127 2.6 21.1 22.7 66.7 194 52.68.8135.9 202.6% 25.2% 242.9% 654 Total Liabilities and Shareholders' 192.8% 96.0% 39.7% 133.2% INCOME STATEMENT Operating re ve nues Cost of sales (exduding depreciation) 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% or operating expenses Depreciation and amortization Selling and administrative Research and development Interest (expense)/income Income taxes All other items, net (59.7) (944) (153) (27.4) (625) (72.2) (29.0) (8.3) (04) (72) (4.1) (3.9) (15 (4.4) (122) (3.1) (20.) (25.9) (13.7) (2 (29.3) (6.2) 0.0 202) (14.8) 0.0 0.0 (12.2) (6.9) (02) 02 (0.1) 04 (0.) (0.1) 0.1 0.0 (25) (0.) (53)0.0 4.1 % 1.3% 28.0% 19.3% 10.5% 3.2% 20.3% Net Income Cash flow from operations/capital expenditures 4.4

Explanation / Answer

The matching is provided below:

Wyeth is matched to Industry no 4

It is observed that the industry has high spending on research and development.Also High intnagibles as the company own many patents.

Amgen is matched to Industry no 3

High intangibles since the company have patents.As it is still a less mature firm most of the funding is through equity capital.Not much of long term debt capital has been raised.

Mylan Labortories is matched to Industry No 1

Since generic drug selling companies like Mylan Lab are facing competition from larger ethical drug companies.,this is reflecting in the falling profits.The drugs sold by this company are the ones whose patents have expired so the intangibles remain low for this company.

Johnson and Johnson is matched to industry No 7

Due to high brand recognition value and that too globally reflects in its high value of intangibles.

Covance is matched to industry no 5

It has a high cost of sales due to salaries of personnel for conducting lab testing.No research and developmemt is conducted by this firm as it offers services for labortary testing for biotechnology and pharmaceutical drugs.

Cardinal Health is matched to industry no 2

It has a high cost of sales due to salaries of personel for conducting lab testing.No research and development is conducted by this firm as it is only a drug wholesale distributor.

Walgreens is matched to Industry No 6

No research and development conducted by this firm as it is a drug store chain.Its cost of operating lease commitments for retail space is reflected in the expense line item of all other items net.

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