Exhibit 1.16 presents common-size income statements and balance sheets for six firms that operate at various stages in the value chain for the pharmaceutical industry. These common-size statements express all amounts as a percentage of sales revenue. Exhibit 1.16 also shows the cash flow from operations to capital expenditures ratios for each firm. A dash for a particular financial statement item does not necessarily mean that the amount is zero. It merely indicates that the amount is not sufficiently large for the firm to disclose it. The six companies and a brief description of their activities appear below. Wyeth: Engages in the development, manufacture, and sale of ethical drugs (that is, drugs requiring a prescription). The drugs of Wyeth primarily represent mixtures of chemical compounds. Ethical drug companies must obtain approval of new drugs from the Food and Drug Administration (FDA). Patents protect such drugs from competition until either other drug compa- nies develop more effective substitutes or the patent expires. Amgen: Engages in the development, manufacture, and sale of drugs based on biotechnology rescarch. Biotechnology drugs must obtain approval from the FDA and enjoy patent protection similar to those for chemical-based drugs. The biotechnology segment is less mature than the ethical drug industry, with relatively few products having received FDA approval. Johnson & Johnson: Engages in the development, manufacture, and sale of over-the-counter health care products. Such products do not require a pre- scription and often benefit from brand recognition. Quintiles: Offers laboratory testing services and expedition of the drug approval process through the FDA for ethical drug companies that have discovered new drugs. Cost of goods sold for this company represents the salaries of personnel conducting the laboratory testing and drug approval services. Cardinal Health: Distributes drugs as a wholesaler to drugstores, hospitals, and mass merchandisers. Also offers pharmaceutical benefit management services in which it provides customized databases designed to help customers order more efficiently, contain costs, and monitor their purchases. Cost of goods sold for Cardinal Health includes the cost of drugs sold plus the salaries of personnel providing pharmaceutical benefit management services. Walgreen: Operates a chain of drug stores nationwide. The data in Exhibit 1.16 for Walgreen include the recognition of operating lease commitments for retail space. Required Use whatever clues that you can to match the six companies above with the six companies in Exhibit 1.16. Company 1 2 3 4 Income Statement Sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of Goods Sold (11.0) (24.0) (58.4) (28.9) (73.3) (92.5) Selling and Administrative (24.2) (36.7) (31.0) (36.3) (21.0) (4.2) Research and Development (21.5) (13.2) (10.9) Interest (0.3) (1.0) (2.6) (1.6) (0.3) Income Taxes (14.1) (7.0) (3.2) (6.8) (2.2) (1.0) Other 5.2 (1.5) 1.0 1.4 0.1 (0.2) Net Income 34.1% 16.6% 5.8% 16.9% 3.6% 1.8% Balance Sheet Cash 66.3% 21.4% 34.9% 24.2% 0.1% 1.9% Receivables 12.3 19.4 26.4 14.0 3.2 5.0 Inventories 8.9 12.4 9.1 14.1 13.1 Other Current 8.6 15.9 5.4 8.7 0.4 2.3 Property, Plant, and Equipment (net) 48.5 44.6 22.4 23.4 17.7 3.8 Other Noncurrent Assets 15.9 48.9 31.2 37.2 0.4 (4.4) Total Assets 160.5% 162.6% 120.3% 116.6% 35.9% 30.5% Current Liabilities 25.0% 51.4% 28.5% 24.4% 12.2% 13.7% Long-term Debt 5.6 11.4 2.0 6.5 3.9 Other Noncurrent Liabilities 23.8 12.3 2.6 1.6 Shareholders' Equity 129.9 76.0 89.8 73.4 21.1 11.3 Total Equities 160.5% 162.6% 120.3% 116.6% 35.9% 30.5% Cash Flow from Operations / Capital Expenditures 3.4 2.3 1.3 2.8 0.6 1.3