Question

Case 1: Merck and Johnson & Johnson Merck & Co., Inc. (USA) and Johnson & Johnson (USA) are two leading producers of healthcare products. Each has considerable assets and each expends considerable funds each year toward the development of new products. The development of a new healthcare product is often very expensive and risky. New products frequently must undergo considerable testing before approval for distribution to the public. For example, it took Johnson & Johnson 4 years and $200 million to develop its 1-DAY ACUVUE contact lenses. The following are some basic data compiled from the financial statements of these two companies (all dollars in millions) Johnson & Johnson Merck Total assets $53,317 $42,573 Total revenue 47,348 22.939 Net income 8,509 5,813 Research and development expense 5,203 4.010 Intangible assets 11,842 2,765 Instructions a. What kinds of intangible assets might a healthcare products company have? Does the composition of these intangibles matter to investors-that is, would it be perceived differently if all of Merck's intangibles were goodwill, than if all of its intangibles were patents? b. Suppose the president of Merck has come to you for advice. He has noted that by eliminating all research and development expenditures the company could have reported $4 billion more in net income. He is frustrated because much of the research never results in a product, or the products take years to develop He says shareholders are eager for higher returns, so he is considering eliminating research and development expenditures for at least a couple of years. What would you advise? c. The notes to Merck's financial statements state that Merck has goodwill of $1.1 billion. Where does recorded goodwill come from? Is it necessarily a good thing to have a lot of goodwill on a company's books?

Answer 1

Above question is about the case of Merck and Johnson & Johnson. Refer a below image for the above mentioned questions, in a detailed way of explanation.

Answer: Given case is Merck And Johnson & Johnson & Requirement (a) : The products company would The nature of each of Investor would normally intangible assets is if primary intangible assets of a health care probably be patents, goodwill and trade these is quite different; thos, an want to know what the composition a it is materiale Requirement (b) : 2 Many that investors : Many complain executives corporate cosporate exec are too about concerned don't reward the short-term and good long-term planning. As a consequence, they feel that the requirement that research and development experditures insed immediately penalizes those executives who do invest in the future. As a consequence when ner income does not look good, it is always tempting to cut research and development rent expenditures expenditures since since this will th a direct cause increase in corrent year reported profits of will also diminish the company's long term prospects most hoot allowed to ed Requirement ©: If a company reports good will on its balance sheet it can only have resulted from one thing the company must have purchased another company. companies This is because are not allowed to record internally created goodwill. They can only report purchased goodwill Ironically, if you want to report a large amount of good with all you have to do is overpay then you purchase another company - the more you overpay, the more goodwill you will report obviously reporting a lot of good will is not such a good thing. good will