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In mid-2009, Chem-Med commenced the manufacture and distribution of its first product, VISCAM, which is used to hold tissues in place during and after surgery of the retina. In late 2010, Chem-Med received regulatory approval to market another HA product known as VISCHY, which is used for the treatment of degenerative joint diseases in horses. The two products, VISCHAM and VISCHY, are the only ones Chem-Med currently produces; however, the company has an active R&D program that is currently investigating other applications.

There are only two other manufacturers of FDA-approved HA products in the world: AB Fortia, a Swedish corporation, which manufactures a product called Healon in Sweden and distributes it in the United States through a subsidiary, Pharmacia, Inc.; and Cilco, Inc., of Huntington, West Virginia. Chem-Med has about a 25 percent share of the market (for HA products in eye surgery) against Cilcos 16 percent and Pharmacias 59 percent. Pharmacia, with the power of giant AB Fortia behind it, waged a continuing marketing war with Chem-Med, undercutting Chem-Meds prices and wooing its costumers away at every opportunity. The matter came to a head in September, when Chem-Med filed a $13 million suit against Pharmacia, charging unfair trade practices. Dr. Swan was reasonably confident that Chem-Med would prevail in the suit, and, in fact, Pharmacia had recently offered to settle out of court for $500,000.

Dr. Swans primary problem, he said, was that, although he was convinced the company was sound and would grow, he wasnt sure how to communicate that to potential investors in the financial community in a way that would convince them. Just handing out past income statements and balance sheets that he received from the accountants didnt seem to be enough. Further, he wasnt even sure the company needed outside financing, let alone how much. He just felt that they would need it, since they had always had to ask for money in the past.

Dr. Swan had lunch with his banker just recently, and the banker mentioned several restrictive covenants that the company would have to meet if it came to the bank for financing. Dr. Swan pulled a sheet of paper from his desk drawer and glanced at it. There were three covenants listed:

• The current ratio must be maintained above 2.25 to 1.
• The debt-to-assets ratio must be less than .3 to 1.
• Dividends cannot be paid unless earnings are positive.

Dr. Swan didnt think he would have any trouble with those, but he wasnt sure. Then he suddenly remembered he was supposed to meet a representative from one of the local supermarket chains (who supplied Chem-Med with rooster combs) in five minutes. He hurriedly put his papers away and wished he had more time to analyze the numbers before the next board of directors meeting. (The financial information is presented in Figures 1, 2, and 3.)

1.) What was Chem-Meds rate of sales growth in 2015? What is it forecasted to be in 2016, 2017, and 2018?

2.) What was Chem-Meds net income growth in 2015? What is it forecasted to be in 2016, 2017, and 2018? Is projected net income growing faster or slower than projected sales? After computing these values, take a hard look at the 2016 income statement data to see if you want to make any adjustments.

3.) How does Chem-Meds current ratio for 2015 compare to Pharmacias? How does it compare to the industry average? Compute Chem-Meds current ratio for 2018. Is there any problem with it?

CHEM-MED COMPANY Income Statements 20132015 (in 000) Pro Forma Income Statements 1 2016 2017 2018 2013 2014 2015 $3,051 $3,814 995 1.040 2,056 2,774 705 964 $7,475 2.154 5,321 2,120 $10,466 3.054 7,412 2,645 Net sales (all credit) Cost of goods sold. Gross profit Selling, etc., expenses. Other inc (exps) Operating profit.. Interest expense Income before tax Income taxes (40% in 1986; 33% thereafter) Net income $ 777 257 520 610 0 (90) 11 (101) 0 ($ 101 $5,340 1,716 3,624 1,520 500 2,604 202 2,402 793 $1.609 1,351 75 1,276 510 $766 1,276 1,312 1,810 94 1,716 566 $1,150 3,201 302 2,899 957 $1.943 4,767 434 4,333 1.430 $ 2,903 Dividends paid. 0 0 0 0 0 0 Increase in retained earnings ($ 101) $ 766 $1,150 $1,609 $1.943 $ 2,903 Average number of shares** 2,326 2,326 2,347 2,347 2,347 2,347 Earnings per share. ($ 0.04) $ 0.33 $ 0.49 $ 0.69 $ 0.83 $ 1.24 * Other Inc Exps) refers to extraordinary gains and losses. In 2016, $500,000 is expected from Pharmacia, Inc., in settlement of their suit. ** Shares are not publicly traded. CHEM-MED COMPANY Balance Sheets As of Dec. 31, years ended: Pro Forma Balance Sheets As of Dec. 31, years ended: 2013 2014 2015 2016 2017 2018 $ 124 100 151 28 403 1,901 81 1,820 0 $2,223 $ 103 409 302 59 873 2,298 82 2,216 101 $3,190 $ 167 564 960 29 1,720 2,917 346 2,571 200 $4,491 $ 205 907 1,102 41 2,255 4,301 413 3,888 200 $6,343 $ 422 1,495 1,443 57 3,417 5,531 522 5,009 215 $8,641 $ 101 2,351 798 11 3,261 8,923 588 8,335 399 $11.995 Assets: Cash and equivalents Accounts receivable.. Inventories ...... Other current Total current assets Property, plant, and equipment...... Less: accumulated depreciation.. Property, plant, and equipment, net. Other fixed assets. Total assets Liabilities: Accounts payable. Short-term debt. Total current liabilities.. Long-term debt Total liabilities Equity: Common stock Retained earnings Total equity. Total liabilities and equity 210 35 245 17 262 $ 405 39 444 19 $ 551 42 593 21 614 $ 771 59 830 27 $1,080 82 1,162 50 1,212 $ 1,512 135 1,647 17 1,664 463 857 2,062 2,062 (101) 1,961 $2.223 665 2,727 2,062 1,815 3,877 $4,491 2,062 3,424 5,486 $ 6,343 2,062 5,366 7,428 $8.641 2,062 8,269 10,331 $11.995 $3,190 Figure 3 2015 Current ratio. Quick ratio. Inventory turnover Total asset turnover. Return on sales. Return on assets Return on equity. Total debt to assets. Biotechnology Industry Statistics Median Company in SIC 2831 Biological Products* 2013 2014 2.5 2.3 1.2 1.1 5.5 5.6 1.15 1.16 4.00% 4.00% 4.60% 4.645 7.64% 8.44% 0.40 0.45 2.4 1.3 5.7 1.18 5.00% 5.90% 12.299 0.52 Current ratio Quick ratio Inventory turnover Total asset turnover. Return on sales. Return on assets Return on equity. Total debt to assets. Price-carnings ratio Average stock price.. 2013 2.8 1.5 5.6 1.9 6.00% 11.40% 19.04% Selected Statistics Pharmacia Company 2014 2.7 1.3 5.7 2 6.50% 13.00% 27.66% 0.53 14 $24.92 2015 2.8 1.6 5.8 1.9 7.00% 13.30% 29.56% 0.55 15 $31.50 0.40 13.7 $21.78 * Source: Dun's Industry Ratios. The data have been adjusted for this case