The pharmaceutical industry spends billions of dollars each year on research and development

Due Day 3, Thursday

The pharmaceutical industry spends billions of dollars each year on research and development. Rather than capitalize these R&D expenditures as intangible assets, companies are required to charge them to expense in the year incurred. Perform a key word search of pharmaceutical companies using the search engine of your choice. Select 2 of these companies and obtain their 10K report by using the SEC’s EDGAR system or going directly to the websites of the company you choose. For each company selected, determine:

  1. Total R&D expense for the most current year
  2. Total R&D expense as a percentage of total operating costs and expenses
  3. Total R&D expense as a percentage of net sales
  4. The percentage by which operating income would have increased had the entire R&D expenditure been recorded as an intangible asset instead of being charged to expense.
  5. Using information from the 10-K reports, summarize briefly the kinds of drugs being researched and developed by each of these companies. To a potential investor, which company appears to be the most innovative and promising? Please explain.

Financial ratio analysis, 1

Financial ratio analysis, 2

Please present the dollar amount for each company’s sales, total R&D costs, total operating expenses including R&D costs, and operating income, and provide the supporting calculations for your %s. 

R&D would typically be presented as a separate line item under operating expenses or alongside it. To calculate R&D as a % of net sales is not difficult, since both items would be clearly presented on the income statement. With operating expense data, care should be exercised on whether total operating expenses already contains R&D costs or are operating expenses presented separately from R&D costs. Technically the R&D costs as a % of total operating expenses should be R&D divided by total operating expenses which include R&D, so we can see how much of the company’s on-going, recurrent expenses are made up of R&D. Operating income should be presented as a separate line item on the income statement. If not, subtract cost of sales and operating expenses (including R&D) from sales and you get operating income.

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