Financial Case Study: Merck & Co

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Merck & Co.

Merck & Co., founded in 1891 as the United States subsidiary of the German company Merck, is a pharmaceutical manufacturer headquartered out of Kenilworth, NJ, with approximately 68,000 employees. As a cornerstone of the pharmaceutical industry, Team Eight chose Merck & Co. for our case study to understand the financial decisions of a successful industry giant. We will be providing an analysis of the following subjects:

•Cash flow for 2016

•Differences between cash flow and net income

•Outlook based on current financial statements

•The key risks the company faces for future success

Merck’s FY2016 income statement, statement of cash flows, and balance sheet are attached in the appendix for reference.

Merck & Co’s
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If all the sales, expenses, and activities remain the same for FY2017, the company will lose approximately 2 billion in total cash. Since the company is starting FY2017 with 6.5 billion, the company will be able to maintain operations for the year leaving them with 4.5 billion at the end of next year.

No, there is a possibility of increased sales from the release of their cutting-edge cancer drug. The combination of this increasing their income with the company’s liabilities remaining consistent, an influx of cash to maintain their current operations is not needed. The outlook doesn 't show, but with the new cancer drug coming to market, Keytruda, they have the potential to significantly increase sales.

$10,376 - $1,614 - $5,124 = $3,638 Free cash
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Similarly, the quick ratio, calculated as 1.24, shows that Merck’s liquid assets surpass their liabilities, demonstrating their ability to pay off its short-term financial liabilities. The difference between the current ratio and quick ratio is that the quick ratio does not take into account the company 's inventory. They will have enough money to pay their current liabilities for the next year.

Key Risks to Company’s Bottom Line

Merck & Co. is in a competitive market with many risks that could affect its profit margin. With the ever-changing landscape of the pharmaceutical industry, the following issues may play a significant role in the company’s future:

•The company is dependent on its patent rights, and if its patent rights are invalidated or circumvented, its business would be adversely affected. This would greatly decrease sales as other companies would be able to produce and sell the drug.

•Key products generate a significant amount of the company’s profits and cash flows, and any events that adversely affect the markets for its leading products could have a material and negative impact on results of operations and cash

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