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Financial Analysis of Merck

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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

 

Fiscal Year

Fiscal Year Ends:

Dec 31

Most Recent Quarter (mrq):

Sep 30, 2011

Profitability

Profit Margin (ttm):

8.84%

Operating Margin (ttm):

25.87%

Management Effectiveness

Return on Assets (ttm):

7.22%

Return on Equity (ttm):

7.52%

Income Statement

Revenue (ttm):

47.85B

Revenue Per Share (ttm):

15.54

Qtrly Revenue Growth (yoy):

8.10%

Gross Profit (ttm):

27.59B

EBITDA (ttm)6:

18.96B

Net Income Avl to Common (ttm):

4.22B

Diluted EPS (ttm):

1.37

Qtrly Earnings Growth (yoy):

394.70%

Balance Sheet

Total Cash (mrq):

15.58B

Total Cash Per Share (mrq):

5.11

Total Debt (mrq):

18.15B

Total Debt/Equity (mrq):

31.51

Current Ratio (mrq):

2.06

Book Value Per Share (mrq):

18.07

Cash Flow Statement

Operating Cash Flow (ttm):

12.69B

Levered Free Cash Flow (ttm):

11.83B

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)

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.

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