Chapter 1
1.7 Effect of Industry Economics on Balance Sheets
Firm A Firm B Firm C
Property, plant and equipment/assets 27.9% 34.6% 62.5%
Long-term debt/assets 18.2% 3.7% 35.7%
Firm A
Firm B
Firm C
1.13
A. Wyeth
4Choose 1 - 7 based on the common-size financial statement data in Exhibit 1.18.
B. Amgen
This firm is American Airlines. Its revenues change with changes in the economy, subjecting it to
cyclical risk, reducing the use of long-term debt. It has operated at a net loss for several years and
has negative shareholders' equity, resulting in a higher ratio of long-term debt to assets.
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.
Exhibit 1.18 represents 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 1.18 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.
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.
Access the investor relations or corporate information section of the websites of American Airlines
(www.aa.com), Intel (www.intel.com), and Disney (http://disney.com). Study the business strategies of each
firm. Examine the financial ratios below and indicate which firm is likely to be American Airlines, Intel, and
Disney. Explain your reasoning.
This firm is Walt Disney. Its revenues change with changes in economic conditions, subjecting them
to cyclical risk and, thereby, reducing their use of long-term debt. Besides producing movies and
family entertainment, Disney operates theme parks, which the firm does not include in property,
This firm is Intel. Among the three firms, Intel faces the greatest risk of technological change for its
products. Although the manufacture of semiconductors is capital-intensive, Intel does not add
financial risk to its already high business risk.
3Choose 1 - 7 based on the common-size financial statement data in Exhibit 1.18.
C. Mylan Laboratories
1Choose 1 - 7 based on the common-size financial statement data in Exhibit 1.18.
D. Johnson & Johnson
7Choose 1 - 7 based on the common-size financial statement data in Exhibit 1.18.
E. Covance
5Choose 1 - 7 based on the common-size financial statement data in Exhibit 1.18.
F. Cardinal Health
2Choose 1 - 7 based on the common-size financial statement data in Exhibit 1.18.
G. Walgreens
6Choose 1 - 7 based on the common-size financial statement data in Exhibit 1.18.
Wyeth- 4: This is the most mature company and they spend a larger amount on research and development.
Their maturity allows for competitive competition and lower intangible assets. Amgen- 3: This company has
higher research and development and intangible assets due to lack of maturity and patent protection. Mylan
Laboratories- 1: This company has higher research and development costs and the highest intangible assets of
all seven companies. Johnson & Johnson- 7: One of the most recognizable companies, they have research and
development costs and some intangible assets. Covance- 5: This company does not have research costs but
their property, plant, and equipment costs are above most due to product development and laboratory testing
services for biotechnology and pharmaceutical drugs. Cardinal Health- 2: This company does not have research
and development costs, has higher goods sold, and cost of goods sold because they are a distributor and not a
retailer. Walgreens- 6: This company is a chain drugstore that is required to pay an operating lease on all of its
buildings. This company has the lowest intangible assets and one of the lowest net incomes.
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.
Engages in the development, manufacture, and sale of over-the-counter healthcare products. Such products
do not require a prescription and often benefit from brand recognition.
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.
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 benefits.
Operates a chain of drugstores nationwide. The data in Exhibit 1.18 for Walgreens include the recognition of
operating lease commitments for retail space.
Wyeth- 4: This is the most mature company and they spend a larger amount on research and development.
Their maturity allows for competitive competition and lower intangible assets. Amgen- 3: This company has
higher research and development and intangible assets due to lack of maturity and patent protection. Mylan
Laboratories- 1: This company has higher research and development costs and the highest intangible assets of
all seven companies. Johnson & Johnson- 7: One of the most recognizable companies, they have research and
development costs and some intangible assets. Covance- 5: This company does not have research costs but
their property, plant, and equipment costs are above most due to product development and laboratory testing
services for biotechnology and pharmaceutical drugs. Cardinal Health- 2: This company does not have research
and development costs, has higher goods sold, and cost of goods sold because they are a distributor and not a
retailer. Walgreens- 6: This company is a chain drugstore that is required to pay an operating lease on all of its
buildings. This company has the lowest intangible assets and one of the lowest net incomes.
T firm is Intel. Among the three firms, Intel faces the greatest risk of technological change for its products. Although the manufacture of semiconductors is capital-intensive, Intel does not add financial risk to its already high business risk.
T firm is Walt Disney. Its revenues change with changes in economic conditions, subjecting them to cyclical risk and, thereby, reducing their use of long-term debt. Besides producing movies and family entertainment, Disney operates theme parks, which the firm does not include in property, plant, and equipment.
T firm is American Airlines. Its revenues change with changes in the economy, subjecting it to cyclical risk, reducing the use of long-term debt. It has operated at a net loss for several years and has negative shareholders' equity, resulting in a higher ratio of long-term debt to assets.
1
2
3
4
5
6
Choose 1 - 7 based on the common-size financial statement data in Exhibit 1.18. 7
This firm is American Airlines. Its revenues change with changes in the economy, subjecting it to
cyclical risk, reducing the use of long-term debt. It has operated at a net loss for several years and
has negative shareholders' equity, resulting in a higher ratio of long-term debt to assets.
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.
Exhibit 1.18 represents 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 1.18 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.
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.
Access the investor relations or corporate information section of the websites of American Airlines
(www.aa.com), Intel (www.intel.com), and Disney (http://disney.com). Study the business strategies of each
firm. Examine the financial ratios below and indicate which firm is likely to be American Airlines, Intel, and
Disney. Explain your reasoning.
This firm is Walt Disney. Its revenues change with changes in economic conditions, subjecting them
to cyclical risk and, thereby, reducing their use of long-term debt. Besides producing movies and
family entertainment, Disney operates theme parks, which the firm does not include in property,
This firm is Intel. Among the three firms, Intel faces the greatest risk of technological change for its
products. Although the manufacture of semiconductors is capital-intensive, Intel does not add
financial risk to its already high business risk.
Choose 1 - 7 based on the common-size financial statement data in Exhibit 1.18.
Choose 1 - 7 based on the common-size financial statement data in Exhibit 1.18.
Choose 1 - 7 based on the common-size financial statement data in Exhibit 1.18.
Choose 1 - 7 based on the common-size financial statement data in Exhibit 1.18.
Choose 1 - 7 based on the common-size financial statement data in Exhibit 1.18.
Choose 1 - 7 based on the common-size financial statement data in Exhibit 1.18.
Wyeth- 4: This is the most mature company and they spend a larger amount on research and development.
Their maturity allows for competitive competition and lower intangible assets. Amgen- 3: This company has
higher research and development and intangible assets due to lack of maturity and patent protection. Mylan
Laboratories- 1: This company has higher research and development costs and the highest intangible assets of
all seven companies. Johnson & Johnson- 7: One of the most recognizable companies, they have research and
development costs and some intangible assets. Covance- 5: This company does not have research costs but
their property, plant, and equipment costs are above most due to product development and laboratory testing
services for biotechnology and pharmaceutical drugs. Cardinal Health- 2: This company does not have research
and development costs, has higher goods sold, and cost of goods sold because they are a distributor and not a
retailer. Walgreens- 6: This company is a chain drugstore that is required to pay an operating lease on all of its
buildings. This company has the lowest intangible assets and one of the lowest net incomes.
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.
Engages in the development, manufacture, and sale of over-the-counter healthcare products. Such products
do not require a prescription and often benefit from brand recognition.
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.
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 benefits.
Operates a chain of drugstores nationwide. The data in Exhibit 1.18 for Walgreens include the recognition of
operating lease commitments for retail space.
Wyeth- 4: This is the most mature company and they spend a larger amount on research and development.
Their maturity allows for competitive competition and lower intangible assets. Amgen- 3: This company has
higher research and development and intangible assets due to lack of maturity and patent protection. Mylan
Laboratories- 1: This company has higher research and development costs and the highest intangible assets of
all seven companies. Johnson & Johnson- 7: One of the most recognizable companies, they have research and
development costs and some intangible assets. Covance- 5: This company does not have research costs but
their property, plant, and equipment costs are above most due to product development and laboratory testing
services for biotechnology and pharmaceutical drugs. Cardinal Health- 2: This company does not have research
and development costs, has higher goods sold, and cost of goods sold because they are a distributor and not a
retailer. Walgreens- 6: This company is a chain drugstore that is required to pay an operating lease on all of its
buildings. This company has the lowest intangible assets and one of the lowest net incomes.
This firm is Intel. Among the three firms, Intel faces the greatest risk of techn change for its products. Although the manufacture of semiconductors is capital-intensive, Intel does not add financial risk to its already high business risk.
This firm is Walt Disney. Its revenues change with changes in economic condit , subjecting them to cy risk and, thereby, reducing their use of long-term debt. Besides producing s and family entertainment, Disney operates theme parks, which the firm does not include in property, plant, and equipment.
This firm is American Airlines. Its revenues change with changes in the econo , subjecting it to cyclical risk, reducing the use of long-term debt. It has operated at a net loss for sev years and has negative shareholders' equity, resulting in a higher ratio of long-term debt to assets.
This firm is Walt Disney. Its revenues change with changes in economic conditions, subjecting them to cyclical risk and, thereby, reducing their use of long-term debt. Besides producing movi and family entertainment, D operates theme parks, which the firm does include in property, plant, and equipment.
This firm is Walt Disney. Its revenues change with changes in economic conditions, subjecting them to cyclical risk and, thereby, reducing their use of long-term debt. Besides producing movies and family entertainment, Disney operates theme parks, which the firm does not include in property, plant, a equipment.
