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The Case of the Unidentified Healthcare Companies — 2010 Case Solution & Answer

Question 1: Match the 14 companies with the data in Exhibits 1 and 2 of the case.

# Company Type Matching Letter Profile
1 Biotechnology Company B
2 Community Nursing A
3 Distributor (Medical) D
4 Durable Medical Equipment (DME) Licensee and Seller G
5 Durable Medical Equipment (DME) Developer and Seller I
6 Home Care Provider E
7 Hospital (Diversified) H
8 Insurer C
9 Lab/Diagnostics Firm F
10 Medical Device Manufacturer L
11 Nursing Home Operator N
12 Pharmaceuticals (Branded) K
13 Pharmaceuticals (Generic) J
14 Private Practice M

 

Question 2: Why does each of the healthcare sectors you identified have the pattern of expenses revealed in the exhibits? 

# Company Type   Why this expense pattern?
1 Biotechnology Company   Revenues by fees, R&D >>Revenue
2 Community Nursing
3 Distributor (Medical) High COGs
4 Durable Medical Equipment (DME) Licensee and Seller No R&D; have inventories, High AR, lower gross margins,
5 Durable Medical Equipment (DME) Developer and Seller High depreciation and amortizing.
6 Home Care Provider Growing fast  via rollups
7 Hospital (Diversified) Owns or leases 50 hospitals
8 Insurer One of largest in US, full service
9 Lab/Diagnostics Firm Purchased patents
10 Medical Device Manufacturer Leader researcher, profitable
11 Nursing Home Operator 200 input factors, growth from M&A
12 Pharmaceuticals (Branded) Intensive  R&D ; high SG&A in 130 countries
13 Pharmaceuticals (Generic) Copy cat
14 Private Practice 40 doctors, no Equity

 

# Company Type Reason for expense pattern?
1 Biotechnology Company There is a higher R&D cost because, Biotech company incurs extremely high R&D cost couple with very small revenue in the developmental years
2 Community Nursing
3 Distributor (Medical) The reason for high COGS incurred by distribute is that COGS is the price to the consumer, which includes any warehousing, and transportation cost incurred as a part of the transaction.
4 Durable Medical Equipment (DME) Licensee and Seller i The reason for high AR is due to the sale of major medical equipment after credit sale, and low gross margin is incurred due to increase in COGS, which includes discount given to the customer, and decrease in revenue due to less amount retrieve for credit sales. No R&D cost is incurred by the seller as the seller does not manufacture the product and carries the inventories in stock for selling purpose.
5 Durable Medical Equipment (DME) Developer and Seller DME developers incur higher depreciation and amortization cost due to the machinery being used in the manufacturing process. As the manufacturer of DME produces wide variety of product, it required various machinery to produce these products. This leads the manufacturer of DME in occurring high cost of depreciation of machineries
6 Home Care Provider As Home Care Provide is growing through merger and acquisition, therefore, the costs are incurred by M&A due to the following reasons. Such as, stock issuance, divisive transactions or payment of dividends.
7 Hospital (Diversified) The expense that is associated with the lease of hospital are the cost that will be incurred in the form of lease rental being paid to lessor, its maintenance cost. On the other hand, expense associated with owning the hospital is incurred in a form of hospital maintenance, tax return etc.
8 Insurer The cost may increase due to the wrong policy being made or wrong actuarial assumption is made over which a policy is derived, which results in litigation claim made after the insurance company
9 Lab/Diagnostics Firm As the patent is being purchased rather than being built in-house. The amortized cost of the patent over the useful life asset will be incurred.  In addition to this, the initial cost will be incurred when the patent is acquired externally which includes the cost of legal fees related to the application, the cost of registration and documentation.
10 Medical Device Manufacturer It develops the bio-medical devices which are highly specialized in nature. The major cost will be incur in its research and development of the devices, and high quality material acquired for the production purpose, since it is manufactured by specialized bio-medical devices, which are costly, and being used by hospitals. In this way, the production of such devices leads to profitability.
11 Nursing Home Operator The nursing home operator expands its operation through merger and acquisition activity, the cost incurred by the nursing home operator in a four M&A would be costs associated with research over targeted company, and other cost such as, stock issuance, divisive transactions or payment of dividends.
12 Pharmaceuticals (Branded) High R&D cost incur in the form of improving the medicines to treat the variety of illnesses. High sales and marketing costs are incurred for advertising the product. Branded Pharmaceuticals have a high sale budget.
13 Pharmaceuticals (Generic) The cost incurred by generic pharmaceutical is less than those of branded pharmaceutical products, as they do not need any advertisement; and only the cost associated with the product is manufacturing, packing, and distribution cost.
14 Private Practice Private practices are those which are owner based institutions such as clinics that consist few doctors. It is financed wholly by one person who is the owner of the clinic. No external source of finance is used to finance the clinic.

 Question 3:  How would you assess the financial strength……………

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