Financial Statement Analysis Project

Industry:

Pharmaceutical Preparations

(SIC: 2834)

Companies:

Abbott Laboratories (ABT)

Johnson and Johnson (JNJ)

Merck and Co., Inc. (MRK)

Pfizer Inc. (PFE)

GL11 Team 5:

Marvina Campbell

Tony Eggers

Mauricio Hermosillo

Brad Olivier
Introduction

Despite the economic downturn, America’s biopharmaceutical sector maintained

the scale of its commitment to discovering new medicines in 2008 and delivering value

to its stakeholders. As a whole, the sector invested a record $65.2 billion in research

and development. (Pharmaceutical Research and Manufacturers of America iii) As

shown in Appendix A, Table 1, the research and development spending of this group of

companies totaled $23 billion for 2008, about 35% of the biopharmaceutical sector total

for 2008 and down less than 1% from 2007, indicating their continuing commitment to

discovering new medicines.

Company Profiles

Abbott is a broad-based global health care company whose principle businesses

are global pharmaceuticals, nutritional and medical products, including diagnostics and

cardiovascular devices. (Abbott 1) Johnson and Johnson (J&J) is the world’s leading

consumer health company engaged in the research, development, manufacturing and

sale of consumer health care products, pharmaceuticals and medical devices and

diagnostics. (Datamonitor 4) Merck’s major business segments, pharmaceuticals and

vaccines, focus on products for human and animal health. Merck’s business is to

discover, develop, manufacture, and market vaccines and medicines to serve unmet

medical needs. (Merck & Co., Inc. 1) Pfizer has two major business segments that

develop, produce, and market a wide range of products: Pharmaceutical, which sells

prescription medicines for people and Animal Health, which focus on “products for the

prevention and treatment of diseases in livestock and companion animals.” (Pfizer

2,4,5)

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Quality of Accounting Disclosure

This industry operates with less flexibility when choosing many of their

accounting policies, resulting in less discretionary reporting opportunities. (Palepu and

Healy) This lack of flexibility creates consistency in the financial reports. When

comparing the notes to financial statements, key success factors such as revenue

recognition, product rebates, research and development and goodwill are defined and

applied the same. Additionally, each company effectively communicates their relevant

critical accounting policies and annual performance with little noise. J&J and Abbott

both deliver financial reports that focus on their positive performance without an

indication of setbacks experienced during the year. Conversely, Pfizer and Merck offer a

more objective and detailed explanation of their successes and challenges as well as

outline specific strategies to address them. While all four companies offer notes to

understand year-end performance across all business and geographic segments, Merck

and Pfizer include additional disclosures. In addition to assessing strategies to respond

to economic, competitive, and governmental challenges, their notes are more forward

looking. One possible explanation for their full disclosure might be that Merck’s

revenues decreased between 2007 and 2008 while Pfizer remained flat and

management for both companies felt obliged to explain performance in further detail.

Profitability

Sales revenue for Abbott has increased by 13% for 2008 versus prior year for a

total of $29.5 billion. Abbott’s ROE is slightly below its peer’s average at 27.7%, but

increased 5% from 2007. Profit margin for Abbott has increased for the past 3 years

reaching 16.5% for 2008. The EPS ratio for Abbott of $3.16 is equal to its peer average.

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Cash and cash equivalents have risen substantially as a percentage of sales from 6.2%

in 2007 to 9.7% in 2008. For 2008, J&J sales have increased by 4.3% to $63.7 billion.

ROE has increased during 2008 to 30.2% versus 1.69% industry average. Profit margin

has increased 3% in 2008 to 20.3%. Gross margin for 2008 is above industry average

at a 71%, but declined 4.6% from 2007 due to higher spending in product mix. J&J’s

EPS ratio is one of the highest in the industry at $4.62, resulting in a solid cash position

and an efficient use of assets. Merck sales revenue has decreased by 2% for a total of

$23.8 billion in 2008. Merck’s ROE has spiked to 42.3% from 18.3% in 2007, which was

depressed as a result of settlement payouts. Both profit margin and gross margin for

Merck are above the peer average at 32.7% and 76.6%, respectively. EPS for Merck

has jumped to a 3 year high in 2008 to $3.66 from $1.51 in the previous year. Pfizer

sales revenue has remained flat for 2008 with sales of $48.3 billion. Pfizer’s ROE is

below peer average at 12.7% and up 7.9% from previous year. Gross margin is strong

at 83.2%, mainly due to lower cost of goods sold. Profit margin for Pfizer is above

average and on an upward trend for the last 3 years at 32.7%. Pfizer’s EPS of $1.16 is

below peer and industry average.

Profitability based on ROE, Gross Margin, Profit Margin, Asset Turnover and

EPS is above industry average in all four companies. J&J and Merck had the most

profitability as measured by these ratios. Measured by net income, J&J was the most

profitable company of the group, earning almost $13 billion on $63 billion in sales.

Risk Ratio Analysis

In 2006, Abbott’s Current Ratio was at 0.94. In 2007 it jumped up to 1.54 and

1.47 in 2008, giving them a 3-year average of 1.32. Abbott’s cash and cash equivalents
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were considerably lower in 2006 while their loans payable was at its highest over the 4-

year comparison. Further, their Quick Ratio in 2006 was .47 and then grew to 0.85 and

0.91 in 2008. Again, in 2006 their cash and cash equivalents were substantially low but

then they increased this category 371% in 2007 and again by 67%. Debt to Equity (D/E)

ratio dropped in 2007 to 1.23 but rose again to 1.43 as their current liabilities climbed

27% partially due to conclusion of the TAP Pharmaceutical joint venture. In 2008,

Abbott’s Times Interest Earned ratio was 12.1, compared to the peer average of 26.4.

J&J’s Current Ratio is 1.65 for 2008 and has averaged 1.45 over the last 3 years

with no significant increase in inventories or accounts receivable. The company’s Quick

Ratio is 1.08 putting it above the average of 0.96. It has increased its cash and short

term investment, coupled with a slight decrease in inventories and stable cash flow. D/E

ratio has increased from .87 to 1 as the company has repurchased stock in order to

finance its acquisitions, instead of issuing new stock. Times Interest Earned ratio is 39.9

for 2008 compared to an average of 26.4 for J&J’s peers, demonstrating the ability of

the company to meet its financial obligations to its creditors.

Merck’s Current Ratio is 1.35 for 2008 up from its average of 1.26 over previous

three years. This reduction in risk is mostly due to a significant increase in the asset

Prepaid Expenses and Taxes. The Quick Ratio is 0.65, down significantly from 2007

and well below the average, driven by an increase in current liabilities and a decrease in

cash and short term investments. D/E ratio has improved slightly since 2007, dropping

from 1.66 to 1.52. Merck’s Times Interest Earned ratio more than quadrupled between

2007 and 2008 due to nonrecurring settlement charges for Vioxx and income from

transactions with AstraZeneca, with whom Merck has a partnership agreement.

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 Pfizer's Current Ratio is 1.59 for 2008 averaging 1.99 over the last 3 years with a

reduction in inventories by $1 billion each year. The Quick Ratio is 1.21 which puts it

above the average of 0.96. Pfizer’s cash and short term investments have remained

steady over the last three years and their long-term solvency is within the industries’

median with an average D/E ratio of 0.77. However, in 2008, it increased to 0.93 due to

its pending purchase of Wyeth. Pfizer's Times Interest Earned ratio was 30.8, 9.4, and

13.5 from 2006 to 2008, respectively, averaging 17.9 increasing the potential risk of

defaulting on scheduled interest and debt payments.

Based on a comparison of the group’s four risk ratios over the last three years,

an investment in J&J would be the least risky, closely followed by Pfizer. J&J has better

overall long term solvency, mostly due to Times Interest Earned Ratio, although Pfizer’s

D/E ratio is slightly better. Merck’s Times Interest Earned ratio is similar to J&J’s, but is

due to several nonrecurring transactions that have temporarily benefited their financial

position. Pfizer has the best average Current and Quick Ratios of the four companies,

but both have been declining over the last 3 years – increasing the risk they face

meeting short term obligations. Conversely, J&J’s Current and Quick Ratios are better

than Merck’s & Abbott’s and have been increasing over the last 3 years improving their

short term risk.

Business Opportunities and Threats

All four companies consider sales outside of the US to be a big opportunity. J&J

international sales in Europe, Asia-Pacific, and other, non-US, Western Hemisphere

regions grew 7.3%, 13.9%, and 10.5%, respectively, in 2008 accounting for nearly 50%

of total revenues. (J&J 35) Pfizer’s revenues exceeded $500 million in each of 14
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countries outside of the US. The US was the only country that exceeded 10% of total

revenue. Pfizer has opportunity to strengthen its leadership in emerging markets in Asia

and Latin America, become a leader in biologics, enter the global vaccine business and

expand in fast growing therapeutic areas. (Pfizer 4-12) International markets are also

approximately 50% of Abbott’s consolidated sales. (Abbott 26) Sales for Merck outside

of the US were 44% in 2008 vs. 39% in 2007. (Merck & Co., Inc. 26) Emerging markets

will continue to provide significant growth opportunities where they are on track to

increase sales to more than $2B by 2010. (Richard T. Clark) Overall the industry

organization, PhRMA’s outlook is positive citing the following opportunities for the

Pharmaceutical Industry: an R&D pipeline exceeding 2900 medicines in development

and researchers having the necessary ammunition to continue to find cures for disease

utilizing genetic and molecular data elements. (Pharmaceutical Research and

Manufacturers of America)

Opposite the opportunities facing this group of companies are significant threats

to their businesses in areas of litigation and patent expirations. Abbott increased their

reserves to approximately $325M to cover a range of potential losses $255M to $495M

related to legal proceedings and environmental exposures. (Abbott 30) J&J has claims

and lawsuits with an aggregate cap of $100M surrounding Propulsid that have been

resolved or are currently in settlement programs. J&J has other civil and patent

litigations ongoing which could have significant financial impact. (J&J 43) Merck is

defending approximately 800 pending litigation cases filed relating to Fosamax. Merck

spent $34M in legal defense costs in 2008 and added $40M to their reserve for future

expenses. (Merck & Co., Inc. 36) Patent expirations are another threat to this industry

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as a whole. Table 2 lists selected products that are a significant portion of this group’s

annual revenues. This industry typically experiences a collapse of revenues once a

product’s patent expires due to competition from generics.

Prediction

With increasing competition and the prospect of patent expirations in the near

future Johnson & Johnson is the most likely company to succeed in its industry with a

strong balance sheet, income statement and continued revenue growth in the US and

Emerging Markets. In addition to this it has a strong cash position and a low risk profile

that provides them with AAA credit rating. This allows the company to capitalize on

current and future opportunities. J&J will continue to grow revenue in emerging markets

such as Asia and Latin America, invest strongly in R&D and develop its already robust

pipeline of new products to meet competition from generic drugs and rising costs.

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Appendix A – Summary Data

TABLE 1 RESEARCH AND DEVELOPMENT COSTS

Company 2008 2007 2006 Total

Abbott $2,689 $2,506 $2,255 $7,450
Johnson & Johnson $7,577 $7,680 $7,125 $22,382
Merck $4,805 $4,883 $4,783 $14,471
Pfizer $7,945 $8,089 $7,599 $23,633
Total $23,016 $23,157 $21,762 $67,936

TABLE 2 SELECTED PRODUCT REVENUES & PATENT EXPIRATIONS

Company Drug brand name 2008 rev($) Patent expires

Abbott Kaletra 1.5B 2016
Abbott TriCor 1.3B 2011,2018,2020, 2023
Abbott Niaspan 782M 2013,2014,2017,2018
Merck Singulair 4.3B 2012
Merck Cozaar 3.6B 2010
Pfizer Aricept 482M 2010
Pfizer Lipitor 12.4B 2010 (28% of Ph rev)
Pfizer Xalatan 1.7B 2011
Pfizer Geodon 1.0B 2012
Pfizer Viagra 1.9B 2012
Pfizer Detrol 1.2B 2012
J&J Topamax 2.7B 2009
J&J Risperdal 2.1B 2008
J&J Levaquin 1.6B 2011

(Abbott) (J&J) (Merck & Co., Inc.) (Pfizer)

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Appendix B – Common Sized Financial Statements

TABLE 3: ABBOTT LABORATORIES STATEMENT OF INCOME

Abbott Laboratories For Years Ended (in millions)

Statement of Income 12/28/2008 12/30/2007 12/31/2006

Net Sales $29,527.6 100% $25,914.2 100% $22,476.3 100%

Cost of Products Sold 12,612.0 42.7% 11,422.0 44.1% 9,815.1 43.7%
Gross Margin 16,915.5 57.3% 14,492.2 55.9% 12,661.2 56.3%
Costs, Expenses, and Other
Research and Development 2,688.8 9.1% 2,505.6 9.7% 2,255.3 10.0%
Selling, general and administrative 8,435.6 28.6% 7,408.0 28.6% 6,349.7 28.3%
Acquired in-process R&D 97.3 0.3% 0.0 0.0% 2,014.0 9.0%
11,221.7 38.0% 9,913.6 38.3% 10,619.0 47.2%
Operating Income 5,693.8 19.3% 4,578.5 17.7% 2,042.2 9.1%
Non Operating Income
Interest (Income) 201.2 0.7% 136.8 0.5% 123.8 0.6%
TAP Pharmaceutical Products Inc. joint venture 119.0 0.4% 498.0 1.9% 475.8 2.1%
Other Income (expense) 454.9 1.5% (135.5) -0.5% 79.1 0.4%
Less Interest Expense (528.5) -1.8% (593.1) -2.3% (416.2) -1.9%
Net foreign exchange loss (84.2) -0.3% (15.0) -0.1% (28.4) -0.1%
162.4 0.6% (108.9) -0.4% 234.2 1.0%
Income before Tax 5,856.3 19.8% 4,469.6 17.2% 2,276.4 10.1%
Less Income Tax 1,122.1 3.8% 863.3 3.3% 559.6 2.5%
Income before Extraordinary Item 4,734.2 16.0% 3,606.3 13.9% 1,716.8 7.6%
Gain on Sale of Discontinued Operations, net taxes 146.5 0.5% 0.0 0.0% 0.0 0.0%
Net Income 4,880.7 16.5% 3,606.3 13.9% 1,716.8 7.6%

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 TABLE 4: JOHNSON AND JOHNSON STATEMENT OF INCOME

Johnson & Johnson For Years Ended (in millions)

Statement of Income 12/28/2008 12/30/2007 12/31/2006

Net Sales $63,747.0 100% $61,095.0 100% $53,324.0 100%

Cost of Sales (Materials & Production) 18,511.0 29.0% 17,751.0 29.1% 15,057.0 28.2%
Gross Margin 45,236.0 71.0% 43,344.0 70.9% 38,267.0 71.8%
Costs, Expenses, and Other
Selling, Marketing, and Administrative Expenses 21,490.0 33.7% 20,451.0 33.5% 17,433.0 32.7%
Research and Development 7,577.0 11.9% 7,680.0 12.6% 7,125.0 13.4%
Purchase of in-process Research and Development 181.0 0.3% 807.0 1.3% 559.0 1.0%
Restructuring Charges 0.0 0.0% 745.0 1.2% 0.0 0.0%
Interest Expense (Income) (361.0) -0.6% (452.0) -0.7% (829.0) -1.6%
Interest Expense, net portion capitalized 435.0 0.7% 296.0 0.5% 63.0 0.1%
Other (income) expense, net (1,015.0) -1.6% 534.0 0.9% (671.0) -1.3%
28,307.0 44.4% 30,061.0 49.2% 23,680.0 44.4%
Income before Tax 16,929.0 26.6% 13,283.0 21.7% 14,587.0 27.4%
Less Income Tax 3,980.0 6.2% 2,707.0 4.4% 3,534.0 6.6%
Net Income $12,949.0 20.3% $10,576.0 17.3% $11,053.0 20.7%

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 TABLE 5: MERCK & CO., INC. STATEMENT OF INCOME

Merck & Co., Inc. and Subsidiaries For Years Ended (in millions)

Statement of Income 12/31/2008 12/31/2007 12/31/2006

Net Sales $23,850.3 100% $24,197.7 100% $22,636.0 100%

Cost of Sales (Materials & Production) 5,582.5 23.4% 6,140.7 25.4% 6,001.1 26.5%
Gross Margin 18,267.8 76.6% 18,057.0 74.6% 16,634.9 73.5%
Costs, Expenses, and Other
Marketing and Administrative 7,377.0 30.9% 7,556.7 31.2% 8,165.4 36.1%
Research and Development 4,805.3 20.1% 4,882.8 20.2% 4,782.9 21.1%
Restructuring Costs 1,032.5 4.3% 327.1 1.4% 142.3 0.6%
- - -
Equity Income from affiliates (2,560.6) 10.7% (2,976.5) 12.3% (2,294.4) 10.1%
U.S. Vioxx Settlement Agreement Charge 0.0 0.0% 4,850.0 20.0% 0.0 0.0%
Other (Income) expense, net (2,194.2) -9.2% 46.2 0.2% (382.7) -1.7%
8,460.0 35.5% 14,686.3 60.7% 10,413.5 46.0%
Income before Tax 9,807.8 41.1% 3,370.7 13.9% 6,221.4 27.5%
Less Income Tax 1,999.4 8.4% 95.3 0.4% 1,787.6 7.9%
Net Income $7,808.4 32.7% $3,275.4 13.5% $4,433.8 19.6%

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 TABLE 6: PFIZER INC. STATEMENT OF INCOME

Pfizer Inc. and Subsidiaries For Years Ended (in millions)

Statement of Income 12/31/2008 12/31/2007 12/31/2006

Sales $48,296.0 100% $48,418.0 100% $48,371.0 100%

Cost of Sales 8,112.0 16.8% 11,239.0 23.2% 7,640.0 15.8%
Gross Margin 40,184.0 83.2% 37,179.0 76.8% 40,731.0 84.2%
Costs, Expenses, and Other
Selling, Informational, & Administrative 14,537.0 30.1% 15,626.0 32.3% 15,589.0 32.2%
Research and Development 7,945.0 16.5% 8,089.0 16.7% 7,599.0 15.7%
Amortization of intangible assets 2,668.0 5.5% 3,128.0 6.5% 3,261.0 6.7%
Acquisition related in process R&D 633.0 1.3% 283.0 0.6% 835.0 1.7%
Restructuring charges & Acquisition costs 2,675.0 5.5% 2,534.0 5.2% 1,323.0 2.7%
Other (Income) deductions, net 2,032.0 4.2% (1,759.0) -3.6% (904.0) -1.9%
30,490.0 63.1% 27,901.0 57.6% 27,703.0 57.3%
Income before Tax & Minority Interests 9,694.0 20.1% 9,278.0 19.2% 13,028.0 26.9%
Less Income Tax 1,645.0 3.4% 1,023.0 2.1% 1,992.0 4.1%
Less Minority Interest 23.0 0.0% 42.0 0.1% 12.0 0.0%
Income from continuing operations $8,026.0 16.6% $8,213.0 17.0% $11,024.0 22.8%
Discontinued Operations:
Income/(loss) from discontinued operations net of tax (2.0) 0.0% (3.0) 0.0% 433.0 0.9%
Gains/(losses) on sales of discontinued operations net of
tax 80.0 0.2% (66.0) -0.1% 7,880.0 16.3%
Discontinued operations net of tax 78.0 0.2% (69.0) -0.1% 8,313.0 17.2%
Net income $8,104.0 16.8% $8,144.0 16.8% $19,337.0 40.0%

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 TABLE 7: ABBOTT LABORATORIES BALANCE SHEET
Abbott Laboratories For Years Ended (in millions)
Balance Sheet
Assets 12/31/2008 12/31/2007 12/31/2006 12/31/2005
Current Assets
Cash & Cash Equivalents $4,112.0 9.7% $2,456.4 6.2% $521.2 1.4% $2,893.7 9.9%
Short-term Investments 967.6 2.3% 364.4 0.9% 852.2 2.4% 62.4 0.2%
Accounts Receivable 5,465.7 12.9% 4,946.9 12.5% 4,231.1 11.7% 3,576.8 12.3%
Inventories
Finished Products 1,546.0 3.6% 1,677.1 4.2% 1,338.3 3.7% 1,203.6 4.1%
Work in process 698.1 1.6% 681.6 1.7% 686.4 1.9% 630.3 2.2%
Materials 531.8 1.3% 592.7 1.5% 781.6 2.2% 708.2 2.4%
2,775.8 6.5% 2,951.4 7.4% 2,806.4 7.8% 2,542.0 8.7%

Deferred Income Taxes $2,463 5.8% $2,110 5.3% $1,717 4.7% $1,249 4.3%
Other prepaid expenses and receivables $1,259 3.0% $1,214 3.1% $1,154 3.2% $1,063 3.6%
Total current assets 17,042.6 40.2% 14,042.7 35.4% 11,281.9 31.2% 11,386.0 39.1%

Investments 1,073.7 2.5% 1,125.3 2.8% 1,229.9 3.4% 134.0 0.5%

Property, Plant, & Equipment (at cost)
Land 509.6 1.2% 494.0 1.2% 488.3 1.3% 370.9 1.3%
Buildings 3,698.9 8.7% 3,589.1 9.0% 3,228.5 8.9% 2,655.4 9.1%
Equipment 10,366.3 24.4% 10,393.4 26.2% 9,947.5 27.5% 8,813.5 30.2%
Construction in progress 613.9 1.4% 1,121.3 2.8% 737.6 2.0% 920.6 3.2%
15,188.7 35.8% 15,597.8 39.3% 14,401.9 39.8% 12,760.4 43.8%
Less accumulated depreciation and amortization 7,969.5 18.8% 8,079.7 20.3% 7,455.5 20.6% 6,757.3 23.2%
Total PP&E 7,219.2 17.0% 7,518.1 18.9% 6,946.4 19.2% 6,003.1 20.6%
Goodwill 9,987.4 23.5% 10,128.8 25.5% 9,449.3 26.1% 5,219.2 17.9%
Other Intangibles, net 5,151.1 12.1% 5,720.5 14.4% 6,403.6 17.7% 4,741.6 16.3%
Deferred Income Taxes and Other Assets 1,945.3 4.6% 1,178.5 3.0% 867.1 2.4% 1,657.1 5.7%
Total Assets $42,419.2 100% $39,713.9 100% $36,178.2 100% $29,141.2 100%

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 ABBOTT LABORATORIES BALANCE SHEET cont’d
Liabilities and Stockholders' Equity
Current Liabilities
Loans payable $1,691.1 4.0% $1,827.4 4.6% $5,306.0 14.7% $212.4 0.7%
Trade accounts payable 1,351.4 3.2% 1,219.5 3.1% 1,175.6 3.2% 1,032.5 3.5%
Salaries, wages and commissions 1,011.3 2.4% 859.8 2.2% 807.3 2.2% 625.3 2.1%
Accrued and other current liabilities 4,216.7 9.9% 3,713.1 9.3% 3,850.7 10.6% 2,783.5 9.6%
Dividends payable 559.1 1.3% 504.5 1.3% 454.0 1.3% 423.3 1.5%
Income tax payable 805.4 1.9% 80.4 0.2% 262.3 0.7% 488.9 1.7%
TAP Pharmaceutical Products Inc. joint venture
obligation 916.0 2.2% 0.0 0.0% 0.0 0.0% 0.0 0.0%
Current Portion of Long-term debt 1,040.9 2.5% 898.6 2.3% 95.3 0.3% 1,849.6 6.3%
Total current liabilities 11,591.9 27.3% 9,103.3 22.9% 11,951.2 33.0% 7,415.5 25.4%

Long-term debt 8,713.3 20.5% 9,487.8 23.9% 7,009.7 19.4% 4,571.5 15.7%
Post-employment obligations and other LT Liabilities 4,634.4 10.9% 3,344.3 8.4% 3,163.1 8.7% 2,155.8 7.4%
Deferred Income Taxes 0.0 0.0% 0.0 0.0% 0.0 0.0% 583.1 2.0%

Stockholders' Equity
Paid-In Capital 7,444.4 17.5% 6,104.1 15.4% 4,290.9 11.9% 3,477.5 11.9%
Retained earnings 13,825.4 32.6% 10,805.8 27.2% 9,568.7 26.4% 10,404.6 35.7%
Accumulated other comprehensive income (loss) (1,163.8) -2.7% 2,081.8 5.2% 389.8 1.1% 745.5 2.6%
20,106.0 47.4% 18,991.7 47.8% 14,249.4 39.4% 14,627.5 50.2%
Less treasury stock, at cost 2,626.4 6.2% 1,213.1 3.1% 195.2 0.5% 212.3 0.7%
Total stockholders' equity 17,479.6 41.2% 17,778.5 44.8% 14,054.2 38.8% 14,415.3 49.5%
Total Liabilities and Stockholders' Equity $42,419.2 100% $39,713.9 100% $36,178.2 100% $29,141.2 100%

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 TABLE 8: JOHNSON AND JOHNSON BALANCE SHEET

Johnson and Johnson For Years Ended (in millions)

Balance Sheet
Assets 12/28/2008 12/30/2007 12/31/2006 12/25/2005
Current Assets
Cash & Cash Equivalents $10,768.0 12.7% $7,770.0 9.6% $4,083.0 5.8% $16,055.0 27.3%
Short-term Investments (Marketable Securities) 2,041.0 2.4% 1,545.0 1.9% 1.0 0.0% 83.0 0.1%
Accounts Receivable 9,719.0 11.4% 9,444.0 11.7% 8,712.0 12.3% 7,010.0 11.9%
Inventories 5,052.0 5.9% 5,110.0 6.3% 4,889.0 6.9% 3,959.0 6.7%
Prepaid Expenses and Taxes 6,797.0 8.0% 6,076.0 7.5% 5,290.0 7.5% 4,373.0 7.4%
Total current assets 34,377.0 40.5% 29,945.0 37.0% 22,975.0 32.6% 31,480.0 53.5%

Investments 4.0 0.0% 2.0 0.0% 16.0 0.0% 20.0 0.0%

Property, Plant, & Equipment (at cost) 14,365.0 16.9% 14,185.0 17.5% 13,044.0 18.5% 10,830.0 18.4%

Goodwill 13,719.0 16.2% 14,123.0 17.4% 13,340.0 18.9% 5,990.0 10.2%

Other Intangibles, net 13,976.0 16.5% 14,640.0 18.1% 15,348.0 21.8% 6,185.0 10.5%
Deferred Taxes on Income 5,841.0 6.9% 4,889.0 6.0% 3,210.0 4.5% 1,138.0 1.9%
Other assets 2,630.0 3.1% 3,170.0 3.9% 2,623.0 3.7% 3,221.0 5.5%
Total Assets $84,912.0 100% $80,954.0 100% $70,556.0 100% $58,864.0 100%

15
 JOHNSON AND JOHNSON BALANCE SHEET cont’d

Liabilities and Stockholders' Equity

Current Liabilities
Loans and notes payable $3,732.0 4.4% $2,463.0 3.0% $4,579.0 6.5% $668.0 1.1%
Trade accounts payable 7,503.0 8.8% 6,909.0 8.5% 5,691.0 8.1% 4,315.0 7.3%
Accrued liabilities 5,531.0 6.5% 6,412.0 7.9% 4,587.0 6.5% 3,529.0 6.0%
Accrued rebates, returns & promotions 2,237.0 2.6% 2,318.0 2.9% 2,189.0 3.1% 2,017.0 3.4%
Accrued salaries, wages & commissions 1,432.0 1.7% 1,512.0 1.9% 1,391.0 2.0% 1,166.0 2.0%
Accrued taxes on income 417.0 0.5% 223.0 0.3% 724.0 1.0% 940.0 1.6%
Total current liabilities 20,852.0 24.6% 19,837.0 24.5% 19,161.0 27.2% 12,635.0 21.5%

Long-term debt 8,120.0 9.6% 7,074.0 8.7% 2,014.0 2.9% 2,017.0 3.4%
Deffered taxes on income 1,432.0 1.7% 1,493.0 1.8% 1,319.0 1.9% 211.0 0.4%
Employee related obligations 7,791.0 9.2% 5,402.0 6.7% 5,584.0 7.9% 3,065.0 5.2%
Other liabilities 4,206.0 5.0% 3,829.0 4.7% 3,160.0 4.5% 2,226.0 3.8%

Stockholders' Equity
Par Value 3,120.0 3.7% 3,120.0 3.9% 3,120.0 4.4% 3,120.0 5.3%
Retained earnings 63,379.0 74.6% 55,280.0 68.3% 49,290.0 69.9% 42,310.0 71.9%
Accumulated other comprehensive income (loss) (4,955.0) -5.8% (693.0) -0.9% (2,118.0) -3.0% (755.0) -1.3%
61,544.0 72.5% 57,707.0 71.3% 50,292.0 71.3% 44,675.0 75.9%

Less treasury stock, at cost 19,033.0 22.4% 14,388.0 17.8% 10,974.0 15.6% 5,965.0 10.1%
Total stockholders' equity 42,511.0 50.1% 43,319.0 53.5% 39,318.0 55.7% 38,710.0 65.8%
Total Liabilities and Stockholders' Equity $84,912.0 100% $80,954.0 100% $70,556.0 100% $58,864.0 100%

16
 TABLE 9: MERCK & CO., INC. BALANCE SHEET

Merck & Co., Inc. and Subsidiaries For Years Ended (in millions)
Balance Sheet
Assets 12/31/2008 12/31/2007 12/31/2006 12/31/2005
Current Assets
Cash & Cash Equivalents $4,368.3 9.3% $5,336.1 11.0% $5,914.7 13.3% $9,585.3 21.4%
Short-term Investments 1,118.1 2.4% 2,894.7 6.0% 2,798.3 6.3% 6,052.3 13.5%
Accounts Receivable 3,778.9 8.0% 3,636.2 7.5% 3,314.8 7.4% 2,927.3 6.5%
Inventories 2,283.3 4.8% 1,881.0 3.9% 1,769.4 4.0% 1,658.1 3.7%
Prepaid Expenses and Taxes 7,756.3 16.4% 1,297.4 2.7% 1,433.0 3.2% 826.3 1.8%
Total current assets 19,304.9 40.9% 15,045.4 31.1% 15,230.2 34.2% 21,049.3 46.9%

Investments 6,491.3 13.8% 7,159.2 14.8% 7,788.2 17.5% 1,107.9 2.5%

Property, Plant, & Equipment (at cost)

Land 386.1 0.8% 405.8 0.8% 408.9 0.9% 433.0 1.0%
Buildings 9,767.4 20.7% 10,048.0 20.8% 9,745.9 21.9% 9,479.6 21.1%
Machinery, equipment, and office furnishings 13,103.7 27.8% 13,553.7 28.0% 13,172.4 29.6% 12,785.2 28.5%
Construction in progress 871.0 1.8% 795.6 1.6% 882.3 2.0% 1,015.5 2.3%
24,128.2 51.1% 24,803.1 51.3% 24,209.5 54.3% 23,713.3 52.9%
Less allowance for depreciation 12,128.6 25.7% 12,457.1 25.8% 11,015.4 24.7% 9,315.1 20.8%
Total PP&E 11,999.6 25.4% 12,346.0 25.5% 13,194.1 29.6% 14,398.2 32.1%

Goodwill 1,438.7 3.0% 1,454.8 3.0% 1,431.6 3.2% 1,085.7 2.4%

Other Intangibles, net 525.4 1.1% 713.2 1.5% 943.9 2.1% 518.7 1.2%
Other assets 7,435.8 15.8% 11,632.1 24.1% 5,981.8 13.4% 6,686.0 14.9%
Total Assets $47,195.7 100% $48,350.7 100% $44,569.8 100% $44,845.8 100%

17
 MERCK & CO., INC. BALANCE SHEET cont’d

Liabilities and Stockholders' Equity

Current Liabilities
Loans payable and current portion of long term debt $2,297.1 4.9% $1,823.6 3.8% $1,285.1 2.9% $2,972.0 6.6%
Trade accounts payable 617.6 1.3% 624.5 1.3% 496.6 1.1% 471.1 1.1%
Accrued and other current liabilities 9,174.1 19.4% 8,534.9 17.7% 6,653.3 14.9% 5,277.8 11.8%
Income tax payable 1,426.4 3.0% 444.1 0.9% 3,460.8 7.8% 3,691.5 8.2%
Dividends payable 803.5 1.7% 831.1 1.7% 826.9 1.9% 830.0 1.9%
Total current liabilities 14,318.7 30.3% 12,258.2 25.4% 12,722.7 28.5% 13,242.4 29.5%

Long-Term Debt 3,943.3 8.4% 3,915.8 8.1% 5,551.0 12.5% 5,125.6 11.4%
Deferred Income Taxes and noncurrent liabilities 7,766.6 16.5% 11,585.3 24.0% 6,330.3 14.2% 6,092.9 13.6%
Minority Interests 2,408.8 5.1% 2,406.7 5.0% 2,406.1 5.4% 2,407.2 5.4%

Stockholders' Equity
Par Value 29.8 0.1% 29.8 0.1% 29.8 0.1% 29.8 0.1%
Other paid - in capital 8,319.1 17.6% 8,014.9 16.6% 7,166.5 16.1% 6,900.0 15.4%
Retained earnings 43,698.8 92.6% 39,140.8 81.0% 39,095.1 87.7% 37,980.0 84.7%
Accumulated other comprehensive income (loss) (2,553.9) -5.4% (826.1) -1.7% (1,164.3) -2.6% 52.3 0.1%
49,493.8 104.9% 46,359.4 95.9% 45,127.1 101.3% 44,962.1 100.3%

Less treasury stock, at cost 30,735.5 65.1% 28,174.7 58.3% 27,567.4 61.9% 26,984.4 60.2%
Total stockholders' equity 18,758.3 39.7% 18,184.7 37.6% 17,559.7 39.4% 17,977.7 40.1%
Total Liabilities and Stockholders' Equity $47,195.7 100% $48,350.7 100% $44,569.8 100% $44,845.8 100%

18
 TABLE 10: PFIZER INC. BALANCE SHEET
Pfizer Inc. and Subsidiaries For Years Ended (in millions)
Balance Sheet
Assets 12/31/2008 12/31/2007 12/31/2006 12/31/2005
Current Assets
Cash & Cash Equivalents $2,122.0 1.9% $3,406.0 3.0% $1,827.0 1.6% $2,247.0 1.9%
Short-term Investments 21,609.0 19.4% 22,069.0 19.1% 25,886.0 22.4% 19,979.0 17.1%
Accounts Receivable, less doubtful account allowance 8,958.0 8.1% 9,843.0 8.5% 9,392.0 8.1% 9,103.0 7.8%
Short-term Loans 824.0 0.7% 617.0 0.5% 514.0 0.4% 510.0 0.4%
Inventories 4,381.0 3.9% 5,302.0 4.6% 6,111.0 5.3% 5,478.0 4.7%
Prepaid Expenses and Taxes 5,034.0 4.5% 5,498.0 4.8% 3,866.0 3.3% 2,859.0 2.4%
Assets held for sale 148.0 0.0 114.0 0.0 62.0 0.0 6,659.0 0.1
Total current assets 43,076.0 38.8% 46,849.0 40.6% 47,658.0 41.2% 46,835.0 40.0%

Long term Investments and loans receivable 11,478.0 10.3% 4,856.0 4.2% 3,892.0 3.4% 2,497.0 2.1%

Property, Plant, & Equipment, less accumulated

depreciation 13,287.0 12.0% 15,734.0 13.6% 16,632.0 14.4% 16,233.0 13.9%

Goodwill 21,464.0 19.3% 21,382.0 18.5% 20,876.0 18.1% 20,985.0 17.9%

Identifiable intangible assets, less accumulated
amortization 17,721.0 15.9% 20,498.0 17.8% 24,350.0 21.1% 26,244.0 22.4%
Other assets, deferred taxes and deferred charges 4,122.0 3.7% 5,949.0 5.2% 2,138.0 1.9% 4,176.0 3.6%
Total Assets $111,148.0 100% $115,268.0 100% $115,546.0 100% $116,970.0 100%

19
 PFIZER INC. BALANCE SHEET cont’d
Liabilities and Stockholders' Equity
Current Liabilities
Loans payable and current portion of long term debt $9,320.0 8.4% $5,825.0 5.1% $2,434.0 2.1% $11,589.0 9.9%
Trade accounts payable 1,751.0 1.6% 2,270.0 2.0% 2,019.0 1.8% 2,073.0 1.8%
Dividends payable 2,159.0 1.9% 2,163.0 1.9% 2,055.0 1.8% 1,772.0 1.5%
Income tax payable 656.0 0.6% 1,380.0 1.2% 6,466.0 5.6% 3,618.0 3.1%
Accrued compensation and related items 1,667.0 1.5% 1,974.0 1.7% 1,903.0 1.7% 1,602.0 1.4%
Other current liabilities 11,456.0 10.3% 8,223.0 7.1% 6,510.0 5.7% 6,521.0 5.6%
Discontinued operations and others held for sale 0.0 0.0% 0.0 0.0% 2.0 0.0% 1,227.0 1.0%
Total current liabilities 27,009.0 24.3% 21,835.0 18.9% 21,389.0 18.6% 28,402.0 24.3%
Long-term debt 7,963.0 7.2% 7,314.0 6.3% 5,546.0 4.8% 6,347.0 5.4%
Pension benefit obligations 4,235.0 3.8% 2,599.0 2.3% 3,632.0 3.2% 2,681.0 2.3%
Post-retirement benefit obligations 1,604.0 1.4% 1,708.0 1.5% 1,970.0 1.7% 1,424.0 1.2%
Deferred taxes 2,959.0 2.7% 7,696.0 6.7% 8,015.0 7.0% 9,707.0 8.3%
Other taxes payable 6,568.0 5.9% 6,246.0 5.4% 0.0% 0.0%
Other non-current liabilities 3,070.0 2.8% 2,746.0 2.4% 2,927.0 2.5% 2,645.0 2.3%
Total liabilities 53,408.0 48.1% 50,144.0 43.5% 43,479.0 37.8% 51,206.0 43.8%
Minority Interests 184.0 0.2% 114.0 0.1% 74.0 0.1% 0.0 0.0%
Stockholders' Equity
Preferred Stock w/o par value 73.0 0.1% 93.0 0.1% 141.0 0.1% 169.0 0.1%
Common Stock, $0.05 par value 443.2 0.4% 442.5 0.4% 441.0 0.4% 439.2 0.4%
Additional paid - in capital 70,283.0 63.2% 69,913.0 60.7% 69,104.0 60.1% 67,759.0 57.9%
Employee Benefit Trust (425.0) -0.4% (550.0) -0.5% (788.0) -0.7% (923.0) -0.8%
Retained earnings 49,142.0 44.2% 49,660.0 43.1% 49,669.0 43.2% 37,608.0 32.2%
Accumulated other comprehensive income (expense) (4,569.0) -4.1% 2,299.0 2.0% (469.0) -0.4% 479.0 0.4%
114,947.2 103.4% 121,857.5 105.7% 118,098.0 102.8% 105,531.2 90.2%

Less treasury stock, at cost 57,391.0 51.6% 56,847.0 49.3% 46,740.0 40.7% 39,767.0 34.0%
Total stockholders' equity 57,556.2 51.8% 65,010.5 56.4% 71,358.0 62.1% 65,764.2 56.2%
Total Liabilities and Stockholders' Equity $111,148.2 100% $115,268.5 100% $114,911.0 100% $116,970.2 100%

20
Appendix C – Financial Ratios

Abbott Laboratories Johnson and Johnson

Profitability 2008 2007 2006 2008 2007 2006
Return on Equity (%) 27.7% 22.7% 12.1% 30.2% 25.6% 28.3%
Gross Margin (%) 57.3% 55.9% 56.3% 71.0% 70.9% 71.8%
Profit Margin (%) (Retn on Sales) 16.5% 13.9% 7.6% 20.3% 17.3% 20.7%
Asset Turnover (%) 71.9% 68.3% 68.8% 76.9% 80.6% 82.4%
Earnings Per Share $3.16 $2.34 $1.12 $4.62 $3.67 $3.76

Short-Term Liquidity
Current Ratio 1.47 1.54 0.94 1.65 1.51 1.20
Quick Ratio 0.91 0.85 0.47 1.08 0.95 0.67
Accounts Receivable Turnover 5.67 5.65 5.76 6.65 6.73 6.78
Average A/R Collection Period 64.4 64.6 63.4 54.9 54.2 53.8
Inventory Turnover 4.40 3.97 3.67 3.64 3.55 3.40

Long-Term Solvency
Debt to Assets 0.59 0.55 0.61 0.50 0.46 0.44
Debt to Equity 1.43 1.23 1.57 1.00 0.87 0.79
Times Interest Earned 12.1 8.5 6.5 39.9 45.9 232.5

Merck & Co., Inc. Pfizer Inc.

Profitability 2008 2007 2006 2008 2007 2006
Return on Equity (%) 42.3% 18.3% 25.0% 12.7% 4.8% 6.5%
Gross Margin (%) 76.6% 74.6% 73.5% 76.6% 74.6% 73.5%
Profit Margin (%) (Retn on Sales) 32.7% 13.5% 19.6% 32.7% 13.5% 19.6%
Asset Turnover (%) 49.9% 52.1% 50.6% 21.1% 21.0% 19.5%
Earnings Per Share $3.66 $1.51 $2.04 $1.16 $0.47 $0.61

Short-Term Liquidity
Current Ratio 1.35 1.23 1.20 1.59 2.15 2.23
Quick Ratio 0.65 0.97 0.95 1.21 1.62 1.73
Accounts Receivable Turnover 6.43 6.96 7.25 2.54 2.52 2.45
Average A/R Collection Period 56.7 52.4 50.3 143.9 145.1 149.1
Inventory Turnover 2.68 3.36 3.50 1.15 1.08 1.04

Long-Term Solvency
Debt to Assets 0.60 0.62 0.61 0.48 0.44 0.38
Debt to Equity 1.52 1.66 1.54 0.93 0.77 0.62
Times Interest Earned 40.0 9.8 17.6 13.5 9.4 30.8

21
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<http://www.abbott.com/global/url/pressRelease/en_US/60.5:5/Press_Release_0599.htm>.

—. "2nd Quarter Press Release." 16 July 2008. Abbott Laboratories. 7 June 2009
<http://www.abbott.com/global/url/pressRelease/en_US/60.5:5/Press_Release_0636.htm>.

—. "3rd Quarter Press Release." 15 October 2008. Abbott Laboratories. 7 June 2009
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—. "4th Quarter Press Release." 21 January 2009. Abbott Laboratories. 7 June 2009
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<http://www.merck.com/newsroom/fact_sheet/index.html>.

—. "Form 10K." 27 February 2009. Merck and Co., Inc. 27 April 2009 <http://media.corporate-
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23