Advice You - Business

Continuing our discussion on cash flow 101, I feel that cash flow discussion is not complete without digging further into operating cash flow. To refresh yo

According to USFDA, a combination product is one composed of any combination of a drug and device; biological product and device; drug and biological product

ur memory, operating cash flow is the cash flow generated by a firm's business activities. Business exists to produce cash flow. Therefore, we prefer busine

; or drug, device, and biological product and fixed dose combination would include two or more combinations of drug.

Examples of combination products may in

ss that spots a positive cash flow.

We do invest in companies that produce negative cash flow in certain ocassions. For example, this is the company that i

lude drug-coated devices, drugs packaged with delivery devices in medical kits, and drugs and devices packaged separately but intended to be used together.

s growing rapidly and in order to create barrier of entry, the company is investing heavily while business hasn't picked up. An example of this scenario is:

here is enormous increase in the number of combination products entering the market in the recent years. Combination products have proven advantages but fixe

biotech companies that spend money on Research & Development or retailers giving away free shipping to gain customer loyalty.

There is also a little thin

d dose combinations are still in the process of convincing regulatory authority on their advantages over the single ingredient formulations.

Combination pro

line of classifying expense of between operating cash flow and say investing cash flow. A retailer that is giving away free shipping might experience a posi

ucts have become life saving products for the pharmaceutical companies who doesn’t have many innovative molecules in their product pipeline and have been inc

tive operating cash flow but negative investing cash flow if it feels that the free shipping is a long term investment to create barriers of entry. However,

easingly used in the product life cycle management. Even the companies having product patents are trying to extend their product life cycle through the combi

for the most part, that kind of expense will fall into operating cash flow since it relates to the daily part of the company's business.

Now, what constit

nation products and maximize the revenues. But the companies involved in this practice are overlooking that they are burdening the patients both economically

utes a positive cash flow from operations? Generally, we work our way back from the income statement. From the net income, we have to add depreciation and a

and physically. They need to rightly judge the benefits of the combination products and they have to even look at the risks involved when combining the produ

mortization, interest expense and taxes. This is because, theoretically, a firm is not required to pay taxes if it reported a net loss. Furthermore, interes

ts. Some of the combination products were well accepted by physicians while others suffered. Companies involved in development of combination products are fi

expense is deemed to vary depending on a firm's capital structure. A firm may pay more or less interest expense due to the amount of debt it holds, not due

ding difficulty in defining their combination products and facing various challenges from selecting a combination to marketing it.

Following aspects would a

to its operating efficiencies. Finally, depreciation and amortization is the subtraction of long term asset purchased outside of the accounting period. The

dd to the challenges in developing combination products:

Which markets to tap where the combination products can do fairly well?
Which combination prod

refore, no cash actually flows out of the coffer during the period.

Let's take a look at a typical cash flow statement for Merck & Co Inc. (MRK). For the f

cts are meaningful and rational?
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin

iscal year ending on December 2006, Merck reported net income of $ 4.34 Billion. Operating cash flow meanwhile, was reported at $ 6.77 Billion, mainly due t

tions increase the patient compliance?
What would be the developing cost?
How to tackle the risks encountered during combination product developmen

o $ 2.27 Billion addition of depreciation. There is also adjustments due to change in liabilities and/or inventories as well as account receivables. That is

t?

As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel

a given. When you do X amount of sales but you did not get cash back (a.k.a bulging account receivables), your operating cash flow would be affected. There

ping new procedures for reviewing their safety, efficacy and quality.

Professional from academic institutions, pharmaceutical industries, health care indust

is also a line called 'Adjustments to Net Income', which is not clear from the example above. For the most cases, however, cash flow generated from operati

y and representatives from various regulatory agencies are working out to design the regulatory requirements for manufacture and sale of combination products

on is a higher figure than the net income figure.

Now, how would cash flow from operations help us in investing in stocks? In the absent of dependable cash

.

As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de

flow from operations, we prefer to invest in companies that have positive net cash on their balance sheet. This means more cash on hand than it has debt. I

elopment. They need to be wiser in analyzing the market trends and the regulatory requirements.

Companies that provide selfless information through particip

f a firm has dependable huge cash flow from operations, it can compensate for the lack of strength in its balance sheet (i.e: less cash than long term debt)

tion in industry events and feedback to regulatory authorities would be able to face the challenges and will be successful in developing combination products

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