Pharmaceuticals

Intro

Companies K and L manufacture and market pharmaceuticals. One firm is a diversified

company that sell both human pharmaceuticals as well as health products for animals. This
company’s strategy is to stay ahead of the competition by investing in the discovery and
development of new and innovative drugs.

The other company focuses on generic pharmaceuticals and medical devices. Most of this
company’s growth has been inorganic – the growth strategy has been to engage in highly leveraged
acquisitions, and it has participated in more than 100 during the past eight years. The goal of
acquiring new businesses is to enhance the value of the proven drugs in the company’s portfolio
rather than gamble on discoveries of new drugs for the future.

Analysis

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For pharmaceuticals, our group analyze company K and L based on:

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1. Assets

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Table 1 Common-Sized Financial Data and Ratio

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Assets (%) Pharmaceuticals
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Cash & ST Investments 1 13
Receivables 5 11
Inventory 3 10
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Current Assets-Other 2 2
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Current Assets-Total 11 35
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Net Property, Plant & Equipment 3 23

Long-term Marketable Securities 0 10
Goodwill & Intangibles 85 26
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Assets-Other 1 6
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Assets-Total 100 100

From Table 1, cash and short-term investment percentage of company L is higher

proportion than company K that illustrates the company L highly conservative approach to its
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financial management. Receivables percentage of company L is higher than company K. This

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result occurs because company K provides financing, which may cause delays in repayment
while company L may have more regular payment schedules. Inventory percentage of
company L is higher than company K which means the company L may struggles to turn over
inventory and make sales. From those three factors, it will lead to percentage of total
current asset of company L to be higher than company K.
The percentage of net property, plant, and equipment of company L is higher
proportion than company K which means the company L has more illiquid assets compare to
company K. Company L has a higher long-term marketable securities percentage than
company K that results the company L has more equity or debt instrument that can be
converted into cash with ease than company K. Company K has larger proportion of goodwill
and intangibles percentage than company L. The result occurs because the company K may

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 have more customer loyalty, brand reputation, non-quantifiable assets, proprietary
technology copyrights, patents, licensing agreements, and website domain names than
company L. Goodwill only shows up on a balance sheet when two companies complete a
merger or acquisition. The percentage number of this factor, goodwill and intangibles, is very
different for company K and L.

2. Liabilities and Equity (%)

Table 2 Common-Sized Financial Data and Ratio

Liabilities & Equity (%) Pharmaceuticals

K L
Accounts Payable 1 4
Debt in Current Liabilities 2 0
Current Liabilities-Other 8 19
Current Liabilities-Total 11 23
Long-term Debt 62 22

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Deferred Taxes 12 0

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Liabilities-Other 3 13

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Liabilities-Total 88 59
Stockholders' Equity 12 41

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Total Liabilities & Equity
rs e 100 100
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From Table 2, accounts payable percentage of company L is higher than company K
which may reflect a higher degree of supplier financing. Company K has higher debt in
current liabilities than company L. From those two factors, they are not too different in
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percentage for both companies. Total current liabilities percentage of company L is higher
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than company K which means company L has more debts or obligations that are due within
one year or within a normal operating cycle than company K.
The percentage of long-term debt of company K is higher than company L that
illustrates the company K may need funds to finance business operations because company
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takes on long-term debt in order to acquire immediate capital. Company K has higher
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percentage of deferred taxes than company L which means the company has more amount
of taxes that company has underpaid which will (eventually) be made up in the future
compare to company L
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For stockholders’ equity percentage, company L has higher proportion than company
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K. This shown that the remaining amount of assets available to shareholders after all
liabilities have been paid of company L is more than company K.

3. Income/Expenses (%)
Table 3 Common-Sized Financial Data and Ratio

Income/Expense % Pharmaceuticals
K L
Revenue 100 100
Cost of Goods Sold (23) (24)
Gross Profit 77 76
SG & A Expense (26) (33)

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 R & D Exp. (3) (24)
Other Operating Expense (23) 0
Earnings before Interest and Taxes 25 19
Net Interest Expense (15) 0
Other (12) (4)
Pretax Income (1) 14
Income Tax Expense (1) (2)
Net Income (3) 12

From Table 3, the percentage of SG & A expense of company K is higher than

company L which means company K. The R & D expense percentage of company K is higher
than company L that illustrates company K has spent the amount of money on develop new
products and services. The other operating expense percentage of company L is higher than
company K.
For the net interest expense percentage, company L has higher proportion compare
to company K and company K has negative net interest expense which means the company

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pays more interest on its loans than it received in interest on its investments while company

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L has zero net interest expense. The percentage of pretax income or income before taxes of

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company L is higher than company K which means company L has more enables the intrinsic

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profitability compare to company K. Company L has higher percentage of net income
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compare to company K that illustrates company L can generate more profit company to
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company K that its’ net income is negative.

4. Market Data
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Table 4 Common-Sized Financial Data and Ratio

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Market Data Pharmaceuticals

K L
Beta 1.15 0.75
Price/Earning 18.3 22.9
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Price to Book 5.5 6.1

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Dividend Payout (%) 0 88.7

From Table 4, Beta of company K is higher than company L. Company L has higher
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price to earnings ratio than company L . Price to book of company L is higher than company
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K. The percentage of dividend payout of L company is higher than company K which

company L has 88.7% which means while company K has 0% which means.

5. Liquidity
Table 5 Common-Sized Financial Data and Ratio

Liquidity Pharmaceuticals
K L
Current Ratio 1.04 1.53
Quick Ratio 0.62 1.03

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 From Table 5, The current ratio of company L is higher than company K which means.
For quick ratio, company L has higher ratio compare to company L which means.

6. Asset Management
Table 6 Common-Sized Financial Data and Ratio

Asset Management Pharmaceuticals

K L
Inventory Turnover 2.3 1.6
Receivables Turnover 4.3 5.9
Fixed Assets Turnover 7.6 2.5

From Table 6, company K has higher inventory turnover compare to company L.

Receivable turnover of company L is higher than company K. For fixed assets turnover,
company K has higher ratio than company K.

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7. Debt Management
Table 7 Common-Sized Financial Data and Ratio

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Debt Management Pharmaceuticals

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rs e K L
Total Debt/Total Assets (%) 87.7 59
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LT Debt/Shareholders' Equity (%) 501.9 54.6
Interest Coverage 1.7 23.2
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From Table 7, The percentage of total debt to total assets of K company is higher
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than company L. Long-term debt to shareholder’s equity percentage of company K is higher

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than company L. The interest coverage of company L is higher than company K.

8. DuPont Analysis
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Table 8 Common-Sized Financial Data and Ratio

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DuPont Analysis Pharmaceuticals

K L
Net Profit Margin (%) (2.8) 12.1
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Asset Turnover 0.3 0.6

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Return on Equity (%) (5) 16.1

From Table 8, All of the factors of company L are higher than company K. For net profit
margin percentage, company L has 12.1%

After analyze all of the factors, we consider that some of them are important to determine
the big difference between company K and L as following goodwill and intangibles, long-term debt, R
& D expense, net income percentage, long-term debt to equity, interest coverage ratio, and dividend
payout.

Summary of the determinants of the big difference between company K and L:

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 Financial Policy

 Debt versus Equity

 Dividend Policy

Growth Strategy

 Organic versus Inorganic

The nature of Eli Lilly and Company and Valeant Pharmaceuticals International, Inc.

Eli Lilly and Company

Valeant Pharmaceuticals International, Inc.

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Conclusion

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K=XX because

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L=YY because

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