Valuation Techniques: Discounted Cash Flow, Earnings Quality, Measures of Value Added, and Real Options

TASKS TO BE COMPLETED

Armed with this information about Merck and the industry, Kurious proceeds to organize the report he will present to Randall. Because of the uncertainty surrounding the health care industry, he plans to look at three scenarios—most likely, most pessimistic, and most optimistic—and various growth assumptions. The plan for his analysis includes the following tasks:

1. Briefly describe the current issues involved in marketing pharmaceuticals.

2. Applying Porter’s framework for the analysis of competitive strategy, describe the competitive structure of the U.S. pharmaceutical industry. Porter’s approach is summarized in the schematic presented in Figure 6.1. (For a summary of the Porter framework, see Appendix 6C.)

FIGURE 6.1 Competitive Strategy Analysis Framework

3. Discuss the extent to which Merck depends on each of the three competitive strategies considered in Porter’s model for evaluating the competitive structure of an industry.

4. Evaluate Merck’s recent ROE performance using the DuPont ROE decomposition approach presented in Table 6.1. (For a review of the DuPont method, see Appendix 6D.) To supplement the ROE analysis, consider the comparative financial ratios provided in the data in Table 6.2.

TABLE 6.1 ROE Decomposition Analysis: Merck & Company, Year-End 1987–1991

Sources: Calculations are based on the financial statements provided by Merck’s ...