Meds4U Ltd and Hope Ltd are two leading producers of pharmaceutical drugs. Each has considerable assets and expends considerable funds each year in developing new products. The development of a new pharmaceutical drug is often very expensive and risky. New products must often undergo considerable testing before they are approved for distribution to the public. For example, it took Hope Ltd 5 years and $800 million to develop a new blood pressure drug.

Here are some basic data compiled from the 2016 financial statements of these entities: 

Required

(a) What kinds of intangible assets might a pharmaceutical company have? Does the composition of these intangible assets matter to investors? That is, would Hope Ltd be perceived differently if all of its intangibles were goodwill instead of patents? 

(b) Using the asset turnover, determine which entity is using its assets more effectively.

(c) Suppose that, by eliminating research and development expenditures, Hope Ltd could have reported $3.6 billion more in profit in 2016. Much of the research never results in a product or the products take years to develop, but shareholders are eager for higher returns. Therefore the entity is considering eliminating research and development expenditures for at least a couple of years. What would you advise?

(d) The notes to Hope Ltd’s financial statements indicate that Hope Ltd has goodwill of $8.6 billion. Where does recorded goodwill come from? Is it necessarily a good thing to have a lot of goodwill in the financial statements?