Financial Statement Analysis

Case: Noven Pharmaceuticals, Inc

Noven Pharmaceuticals, Inc., headquartered in Miami, Florida, describes itself in a recent annual report as follows.

Noven Pharmaceuticals, Inc

Noven is a place of ideas – a company where scientific excellence and state-of-art, manufacturing combine to create new answers to human needs. Our transdermal delivery systems speed drugs painlessly and effortlessly into the bloodstream by means of a simple skin patch. This technology has proven applications in estrogen replacement, but at Noven we are developing a variety of systems incorporating bestselling drugs that fight everything from asthma, anxiety and dental pain to cancer, heart disease and neurological illness. Our research portfolio also includes new technologies, such as iontophoresis, in which drug are delivered through the skin by means of electrical currents, as well as products that could satisfy broad customers needs, such as our anti-microbial mothrinse.

Noven also reported in its annual report that its activities to date have consisted of product development efforts, some of which have been independent and some of which have been completed in conjunction with Rhone-Poulenc Rorer (RPR) and Ciba-Geigy. The revenue so far have consisted of money received from licensing fees, “milestone” payments (payments made under licensing agreements when certain stages of the development of a certain product have been completed), and interest on its investments. The company expects that it will have significant revenue in the upcoming fiscal year from the launch of its first product, a transdermal estrogen delivery system.

Cash and equivalents                      $12,070,272

Securities held to maturity                23,445,070

Inventory of supplies                          1,264,553

Prepaid and other current assets            825,159

Total current assets                         $37,605,054

An inventory supply is recorded at the lower-of-cost (first-in, first-out) –or-net realizable value and consists mainly of supplies for research and development.

Instructions:

a) What would you expect the physical flow of goods for a pharmaceutical manufacturer to be most like: FIFO, LIFO, or random (flow of goods does not follow a set pattern)? Explain.

b) What are some of the factors that Noven should consider as it selects an inventory measurement method?

c) Suppose that Noven has $49,000 in an inventory of transferral estrogens delivery patches. These patches are from an initial production run and will be sold during the coming year. Why do you think that this amount is not shown in a separate inventory account? In which of the accounts shown is the inventory likely to be? At what point will the inventory be transferred to a separated inventory account?