Financial Analysis of Merck
Table of Contents
The health care industry is currently one of the most competitive industries in the world today. This is the main reason why this industrial sector has some of the most preferred stocks among investors. Analysts have found out that consumers always maintain their health care spending even during recession but the same is not translated to during economic expansion. This is why the health care industry is one of the most dynamic and unpredictable industry. Due to this nature, the stocks in the industry become overvalued hence economists suggest that it is best to buy heath care stocks in the stock market due to their nature of being less risky in a declining stock market.
Merck (MRK) is one of the leading manufacturers of both human and animal health products. The company has a long list of popular brands such as Fosamax and Fosamax Plus while at the same time being involved in many other health care delivery services. “During the month of December 2007, the company’s share price reached a five-year high of $60.77” (Bodenhamer, 1994). However, the share prices of the company were once more on a downward trend up until March 2009 when the company recorder d the lowest share price of $20.05. In 2010, the company announced its statement of financial position after a previous merger with Schering-Plough. However, the financial position of Merck was greatly affected by the merger and the changes occurring due to health care reforms. The company’s stocks showed a significant downward trend
Financial Highlights |
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According to the company’s policy, acquired intangibles include products and product rights such as trade names and patents which are basically recorded at a fair value and assigned an estimated useful life. In this context, a review of the company’s financial position or situation, recoverability from future operations of acquired intangibles using pretax undiscounted cash flows derived from the lowest appropriate asset groupings keeping in mind that the value of intangible assets exceeds the fair value. The fair value is hence determined by the present value of estimated future cash flows.
In the company, deferred taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting based on enacted tax laws and rates (biz.yahoo.com/prnews). This implies that the company evaluates taxes based on tax merits and whether the evaluation of the same affects the tax positions of the company. In this context, it is a fundamental fact that tax positions are not sustainable in the occurring of a sustained audit. It is the company policy therefore not to recognize any portion of the benefit in the financial statements.
The company is involved in a number of claims and legal proceedings including product liabilities and anti-trust action as it is the case for most major companies. “The Company records accruals for contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated” (news.yahoo.com) The Company carries out what is known as overall accruals on liability claims where individual contingent loses are reasonable estimate din consideration of factors such as previous liability trend and future projections.
The income statement is a detailed presentation for the financial result of an organization over a specified period of time. This statement gives the communication regarding the revenue generated by the company over a stated period of time and the amount of revenue generated.
2 months ended Dec 31, 2010 Dec 31, 2009 Dec 31, 2008 Dec 31, 2007 Dec 31, 2006
Sales 45,987 27,428 23,850 24,198 22,636
Materials and production (18,396) (9,019) (5,583) (6,141) (6,001)
Marketing and administrative (13,245) (8,543) (7,377) (7,557) (8,165)
Research and development (10,991) (5,845) (4,805) (4,883) (4,783)
Restructuring costs (985) (1,634) (1,033) (327) (142)
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U.S. Vioxx Settlement Agreement charge – – (4,850) –
Operating income 2,370 2,387 5,052 440 3,545
Equity income from affiliates 587 2,235 2,561 2,977 2,294
Interest income 83 210 631 741 764
Interest expense (715) (460) (251) (384) (375)
Exchange gains (losses) (214) 12 (147) 54 25
Other, net (458) 10,906 2,085 (336) 89
Other income (expense), net (1,304) 10,668 2,318 75 503
Income before taxes 1,653 15,290 9,931 3,492 6,342
Taxes on income (671) (2,268) (1,999) (95) (1,788)
Net income 982 13,022 7,932 3,397 4,554
Net income attributable to non-controlling interests (121) (123) (124) (121) (121)
Net income attributable to Merck & Co., Inc. 861 12,899 7,808 3,276 4,433
The sales of the company recorded aggregate revenue that was as a result of goods sold, services rendered, and insurance premiums among other services that constitutes the earning process of an organization. The operating cost was derived as a result of deducting the operating expenses and operating revenues. The sum of the operating and non-operating expenses before income as shown in the income statement is exclusive of cumulative effects in the accounting principles and non-controlling interest.
The current ration which is calculated as the liquidity ratio derived by dividing the current assets by the current liabilities showed s significant progress form 2008 tom 2009 as well as the years 2009 and 2010. The company’s quick ration on the other hand which is derived by dividing the sum of short term marketable investments and the receivable by the current liabilities also showed a steady improvement form 2008 to 2010.
Cash and cash equivalents 10,900 9,311 4,368 5,336 5,915
Short-term investments 1,301 293 1,118 2,895 2,798
Accounts receivable, 7,344 6,603 3,779 3,636 3,315
Inventories 5,868 8,055 2,283 1,881 1,769
Deferred income taxes 3,651 4,166 7,756 1,297 1,433
Current assets 29,064 28,428 19,304 15,045 15,230
Investments 2,175 432 6,491 7,159 7,788
Property, plant and equipment, 17,082 18,274 12,000 12,346 13,194
Goodwill 12,378 11,923 1,439 1,455 1,432
Other intangibles, net 39,456 47,656 525 713 944
Joint ventures and other equity method affiliates 494 881 1,400 3,900 3,500
Other assets 5,132 4,495 6,036 7,732 2,482
Noncurrent assets 76,717 83,661 27,891 33,305 29,340
Total assets 105,781 112,089 47,195 48,350 44,570
In this statement of financial position, cash and cash equivalents comprises of the cash in hand as well as the demand for cash deposits in financial institutions.
Eli Lilly and Company (NYSE: LLY) is a leading pharmaceutical company boasting of one of the youngest product portfolios in the healthcare industry. The business organization of the company is such that it is split into two major divisions namely, pharmaceutical and animal health. The pharmaceutical department is mainly the main revenue generating department generating an estimated net income of $5 billion. The company manufactures and distributes its products in more than 17 countries and the company’s products are sold in more than one hundred and twenty five countries.
The bar chart below shows the revenue generation of the company as seen through a time frame of ten months in the yaer2010. As observed form the bar chart, revenue increased up to $6.18 billion in quarter ended as on December 31, 2010. It can be seen that the company recorded its largest revenue in the last few months of the financial year. However, the company exhibits consistency in terms of market performance and financial position. The company started on a relatively slow note on the first quarter of the year but improved significantly on the last quarter of the year rising from
Eli Lilly & Co., Consolidated Income Statement
USD $ in thousands
|
12 months ended |
Dec 31, 2010 |
Dec 31, 2009 |
Dec 31, 2008 |
Dec 31, 2007 |
Dec 31, 2006 |
Revenue |
23,076,000 |
21,836,000 |
20,378,000 |
18,633,500 |
15,691,000 |
|
Cost of sales |
(4,366,200) |
(4,247,000) |
(4,382,800) |
(4,248,800) |
(3,546,500) |
|
Gross profit |
18,709,800 |
17,589,000 |
15,995,200 |
14,384,700 |
12,144,500 |
|
Research and development |
(4,884,200) |
(4,326,500) |
(3,840,900) |
(3,486,700) |
(3,129,300) |
|
Marketing, selling, and administrative |
(7,053,400) |
(6,892,500) |
(6,626,400) |
(6,095,100) |
(4,889,800) |
|
Acquired in-process research and development |
(50,000) |
(90,000) |
(4,835,400) |
(745,600) |
– |
|
Asset impairments, restructuring, and other special charges |
(192,000) |
(692,700) |
(1,974,000) |
(302,500) |
(945,200) |
|
Operating income (loss) |
6,530,200 |
5,587,300 |
(1,281,500) |
3,754,800 |
3,180,200 |
|
Interest expense |
(185,500) |
(261,300) |
(228,300) |
(228,300) |
(238,100) |
|
Interest income |
51,900 |
75,200 |
210,700 |
215,300 |
261,900 |
|
Other income (expense) |
128,600 |
(43,400) |
(8,500) |
135,000 |
214,000 |
|
Other expense, net |
(5,000) |
(229,500) |
(26,100) |
122,000 |
237,800 |
|
Income (loss) before income taxes |
6,525,200 |
5,357,800 |
(1,307,600) |
3,876,800 |
3,418,000 |
|
Income taxes |
(1,455,700) |
(1,029,000) |
(764,300) |
(923,800) |
(755,300) |
|
Net income (loss) |
5,069,500 |
4,328,800 |
(2,071,900) |
2,953,000 |
2,662,700 |
As opposed to Merck, Eli Lilly has its investments in debt and marketable equity securities. According to the US Securities Exchange Commission, Investment securities with maturity dates of less than one year from the date of the balance sheet are classified as short-term (United States Securities and Exchange Commission). The company reviews accounting indicators and sets a fair value with the unrealized gains and losses, net of tax, reported in other comprehensive income (loss). This implies that the other miscellaneous debt securities are recorded in the comprehensive income (loss). “Eli Lilly & Co. does not evaluate cost-method investments for impairment unless there are an indicator of impairment but rather reviews these investments for indicators of impairment on a regular basis” (United States Securities and Exchange Commission).
Assets |
|
|
|
|
|
Cash and Equivalents |
3,220.5 |
5,496.7 |
4,462.9 |
5,993.2 |
|
Short-Term Investments |
1,610.7 |
429.4 |
34.7 |
733.8 |
|
TOTAL CASH AND SHORT TERM INVESTMENTS |
4,831.2 |
5,926.1 |
4,497.6 |
6,727.0 |
|
Accounts Receivable |
2,673.9 |
2,778.8 |
3,343.3 |
3,493.8 |
|
Other Receivables |
1,030.9 |
498.5 |
488.5 |
664.3 |
|
TOTAL RECEIVABLES |
3,704.8 |
3,277.3 |
3,831.8 |
4,158.1 |
|
Inventory |
2,523.7 |
2,493.2 |
2,849.9 |
2,517.7 |
|
Prepaid Expenses |
613.6 |
374.6 |
1,307.2 |
1,437.2 |
|
Deferred Tax Assets, Current |
642.8 |
382.1 |
— |
— |
|
TOTAL CURRENT ASSETS |
12,316.1 |
12,453.3 |
12,486.5 |
14,840.0 |
|
Gross Property Plant and Equipment |
14,841.3 |
15,315.9 |
15,100.0 |
14,486.6 |
|
Accumulated Depreciation |
-6,266.2 |
-6,689.6 |
-6,902.6 |
-6,545.9 |
|
NET PROPERTY PLANT AND EQUIPMENT |
8,575.1 |
8,626.3 |
8,197.4 |
7,940.7 |
|
Goodwill |
745.7 |
1,167.5 |
1,175.0 |
1,423.9 |
|
Long-Term Investments |
577.1 |
1,544.6 |
1,155.8 |
1,779.5 |
|
Deferred Charges, Long Term |
— |
— |
— |
598.0 |
|
Other Intangibles |
1,709.7 |
2,761.6 |
2,524.8 |
2,796.9 |
|
Other Long-Term Assets |
2,951.1 |
2,659.3 |
1,921.4 |
1,622.4 |
|
TOTAL ASSETS |
26,874.8 |
29,212.6 |
27,460.9 |
31,001.4 |
|
|
|
|
|
||
LIABILITIES & EQUITY |
|
|
|
|
|
Accounts Payable |
924.4 |
885.8 |
968.1 |
1,072.2 |
|
Accrued Expenses |
1,587.1 |
1,705.1 |
2,066.8 |
2,288.3 |
|
Short-Term Borrowings |
18.6 |
5,425.9 |
7.1 |
137.8 |
|
Current Portion of Long-Term Debt/Capital Lease |
395.1 |
420.4 |
20.3 |
18.2 |
|
Current Portion of Capital Lease Obligations |
— |
— |
— |
13.9 |
|
Current Income Taxes Payable |
238.4 |
229.2 |
346.7 |
457.5 |
|
Other Current Liabilities, Total |
2,273.2 |
4,443.3 |
3,159.1 |
3,127.4 |
|
TOTAL CURRENT LIABILITIES |
5,436.8 |
13,109.7 |
6,568.1 |
7,101.4 |
|
Long-Term Debt |
4,593.5 |
4,615.7 |
6,640.9 |
6,745.5 |
|
Capital Leases |
— |
— |
— |
25.0 |
|
Minority Interest |
— |
2.4 |
1.6 |
-7.5 |
|
Pension & Other Post-Retirement Benefits |
1,145.1 |
2,387.6 |
2,334.7 |
1,887.4 |
|
Deferred Tax Liability Non-Current |
287.5 |
74.7 |
— |
— |
|
Other Non-Current Liabilities |
1,908.0 |
2,287.2 |
2,391.9 |
2,829.3 |
|
TOTAL LIABILITIES |
13,370.9 |
22,474.9 |
17,935.6 |
18,588.6 |
|
Common Stock |
709.5 |
711.1 |
718.7 |
721.3 |
|
Additional Paid in Capital |
3,805.2 |
3,976.6 |
4,635.6 |
4,798.5 |
|
Retained Earnings |
11,806.7 |
7,654.9 |
9,830.4 |
12,732.6 |
|
Treasury Stock |
-100.5 |
-99.2 |
-98.5 |
-96.4 |
|
Comprehensive Income and Other |
-2,717.0 |
-5,508.1 |
-5,562.5 |
-5,735.7 |
|
TOTAL COMMON EQUITY |
13,503.9 |
6,735.3 |
9,523.7 |
12,420.3 |
|
TOTAL EQUITY |
13,503.9 |
6,737.7 |
9,525.3 |
12,412.8 |
|
TOTAL LIABILITIES AND EQUITY |
26,874.8 |
29,212.6 |
27,460.9 |
31,001.4 |
The main difference between the two companies is that although the debt of the total capital of Eli Lilly & Co has surpassed the regulated percentage by the Pharmaceutical industry, the percentage achieved is still in line with the stipulated percentage in the health care industry. In addition to this, the company has enough assets to satisfy the stipulated regulations in the industry. The company has been named as one of the best companies in inventory management with only 224.36 days of its Cost of Goods Sold tied up in inventory.
