Case 1 Merck and Johnson & Johnson Merck & Co., Inc. and Johnson & Johnson are two leading producers of health-care products. Each has considerable assets, and each expends considerable funds each year toward the development of new products. The development of a new health-care 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. Below are some basic data compiled from the financial statements of these two companies.

Instructions

(a)	What kinds of intangible assets might a health-care products company have? Does the composition of these intangibles matter to investorsthat 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 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 note 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 company's books?

(all dollars in millions) Total assets Total revenue Net income Research and development expense Intangible assets Johnson & Johnson $53,317 47,348 8,509 5,203 11,842 Merck $42,573 22,939 5,813 4,010 2,765