MINI CASE: PHARMA BIOTECH CORPORATION

The Pharma Biotech Corporation spent several years working on developing a DHA product that can be used to provide a fatty acid supplement to a whole variety of food products. DHA stands for docsahexaenoic acid, an omega-3 fatty acid found naturally in cold water fish. The benefits of fatty fish oil have been cited in studies of the brain, eyes, and the immune system. Unfortunately, it is both difficult to consume enough fish to get the benefits of DHA and most individuals might be concerned about the taste consequences associated with adding fatty fish oil to eggs, ice cream, or chocolate candy. To counter these constraints, Pharma Biotech and several competitors have been able to grow algae and other plants that are rich in DHA. The resulting chemical compounds then are used to enhance a variety of food products.

Pharma Biotechs initial DHA product was designed as additives to dairy products and yogurt. For example, the ventures DHA product was added to cottage cheese and fruit-flavored yogurts to enhance the health benefits of those products. After the long product development period, Pharma Biotech began operations in 2019. Income statement and balance sheet results for 2019, the first full year of operations, have been prepared.

Pharma Biotech, however, is concerned with forecasting its financial statements for next year because it is uncertain as to the amount of additional financing of assets that will be needed as the venture ramps up sales next year. Pharma Biotech expects to introduce a DHA product that can be added to chocolate candies. Not only will consumers get the satisfaction of the taste chocolate candies they will benefit from the DHA enhancement. Since this is expected to be a block buster new product, sales are expected to increase 50 percent next year (2020) even though the new product will come on line in mid-year. Sales are projected to increase by 80% in 2021 (from 2020).

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Pharma Biotech Corporation

Income Statement for December 31, 2019

(Thousands of Dollars)

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Sales $15,000

Operating expenses -13,000

EBIT 2,000

Interest 400

EBT 1,600

Taxes (40%) 640

Net income 960

Cash dividends (40%) 384

Added retained earnings $576

Pharma Biotech Corporation

Balance Sheet as of December 31, 2019

(Thousands of Dollars) ________________________________________________________________________

Cash & marketable securities $ 1,000 Accounts payable $ 1,600

Accounts receivable 2,000 Bank Loan 1,800

Inventories 2,200 Accrued liabilities 1,200

Total current assets 5,200 Total current liabilities 4,600

Long-term debt 2,200

Fixed assets, net 6,800 Common stock 2,400

Total assets $12,000 Retained earnings 2,800

Total liabilities & equity $12,000 ________________________________________________________________________

Part A - Pharma Biotech is interested in developing an initial big picture of the size of financing that might be needed to support its rapid growth objectives for 2020 and 2021.

Estimate Pharmas additional funds needed (AFN) for 2020?