Charles Hulten University of Maryland, NBER & The Conference Board Janet Hao The Conference Board Kirsten Jaeger The Conference Board Intangible Capital.

Charles HultenUniversity of Maryland, NBER &

The Conference Board

Janet HaoThe Conference Board

Kirsten JaegerThe Conference Board

Intangible Capital and the Valuation of Companies: A Comparison of German and

U.S. Corporations

Project funded by the European Commission under the Seventh Framework ProgrammeGrant No 217512

Website : www.coinvest.org.uk

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• Absence of most intangible assets from financial statements• Expenditure on intangibles produced within a firm often treated as a

current expense, not as an investment in firm’s future. No output or value created.

• No market transactions to measure the value of R&D and brand created within the company

• Difference between stock-market value of a firm and the book value of its equity treated as “goodwill” and (more or less) loosely associated with intangibles.

Market to Book Value Puzzle

The PuzzleAccounting Principle: Equity=Assets-LiabilitiesTheoretically: Equity=Market ValueActually: Equity<<Market value

Book Equity Does Not explain Market Values of U.S. Companies

Decomposition of Stock Market ValueSelected S&P Compustat Companies

Source: Hulten-Hao (2008)

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97 98 99 00 01 02 03 04 05 06

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Residual Rents

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Market value >> Equity

Adding Intangible Assets Can Fill the Gap

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Decomposition of Stock Market ValueSelected S&P Compustat Companies

Source: Hulten-Hao (2008)

Residual Rents

Organizational Capital

R&D Assets

Equity

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Market-to-book gap is too large to be attributed solely to the mismeasurement of conventional equity / vicissitudes of the stock market.

• Construct estimates of the cost-in-house investment in R&D and organizational capital

• Include “own” intangibles on corporate financial statements• Compare traditional financial statements with “new view” balance sheets

and income statements narrows the gap between book value and market value

• Matched-company comparisons Compare performance of German companies with US companies

US Companies: 617 R&D intensive firms + 6 large pharmaceutical companiesGerman companies: 12 German companies + Novartis

Goal of the Analysis

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• Traditional balance sheet and income statement

• New view balance sheet and income statement: capitalize own R&D and organizational capital – Estimate the cost of in-house investment in R&D

Current cost of R&D plus markup for profit (total operating surplus is allocated to R&D according to R&D’s share in current expenses)

– Estimate the cost of own production of organizational capital: CHS procedure - translate approximate proportions of brand equity and organizational development investment into a corresponding fraction of SG&A spending (~30%)

– Amortization of R&D and organizational capitalR&D: 10 year useful life – Organizational capital 5 year useful life

• Comparison of traditional and “new view” financial statements

Approach of the analysis

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All 2008 (€ millions)

Pharma 2008 (€ millions)

Trad. +R&D +Org C. Trad. +R&D +Org C.

1. Conventional Revenue 41,127 41,127 41,127 17,812 17,812 17,8122. Own Prod. R&D 0 2,422 2,422 0 2,977 2,9773. Own Prod. org cap 0 0 1,608 0 0 2,0574. Total Adj.Revenue 41,127 43,549 45,157 17,812 20,789 22,846

8. Total Current Cost 35,527 35,527 35,527 13,604 13,604 13,604

9. Operating Surplus 5,600 8,022 9,630 4,208 7,185 9,24210. Depreciation 2,410 2,410 2,410 1,461 1,461 1,46111. Amort. own R&D 0 2,233 2,233 0 1,956 1,95612. Amort. own org Cap 0 0 1,774 0 0 1,73413. Adj. Operating Surplus 3,190 3,379 3,213 2,747 3,768 4,09115. Before-Tax Income 2,815 3,004 2,838 2,384 3,405 3,72817. After-Tax Income 2,016 2,205 2,038 1,943 2,964 3,28718. Earnings per Share 6.53 8.18 9.03 1.94 3.73 4.71

“New View“ Income Statement Average of 12 German companies + Novartis and Pharma

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All 2008 (€ millions)

Pharma 2008 (€ millions)

Conventional Balance Sheet 2008 Trad. +R&D +Org C. Trad. +R&D +Org C.2. Plant and Equipment 8,264 8,264 8,264 5,300 5,300 5,3003. Purchased Intangibles 5,704 5,704 5,704 7,419 7,419 7,4194. Goodwill 3,140 3,140 3,140 4,584 4,584 4,5846. Total Assets 56,098 56,098 56,098 31,045 31,045 31,0457. Total Liabilities 38,957 38,957 38,957 15,735 15,735 15,7358. Equity 16,988 16,988 16,988 15,310 15,310 15,310

Adjustments for own Intangibles9. R&D Capital 0 16,256 16,256 0 16,185 16,18510. Organizational Capital 0 0 5,922 0 0 7,69111. Assets adj. for own Intangibles 55,946 72,202 78,124 31,045 47,230 54,92212. Equity adj. for own Intangibles 16,988 33,244 39,166 15,310 31,496 39,187

Company Valuation13. Market Value of Equities 35,733 35,733 35,733 34,794 34,794 34,79417. Total Intangible Assets 8,844 25,100 31,022 12,003 28,189 35,88018. Tobin's Equity Qe 2.10 1.07 0.91 2.27 1.10 0.8919. % MV value explained (1/Qe) 0.48 0.93 1.10 0.44 0.91 1.13

“New view“ Balance Sheet Average of 12 German companies + Novartis

Key Results – all sample companies, 2008

2008 US Ger

%MV explained w/o Intan 0.30 0.48

%MV explained w Intan 0.77 1.10

ROE w/o Intan 0.33 0.11

ROE w/ Intan 0.17 0.05

Debt/EQ w/o Intan 2.15 2.62

Debt/EQ w/ Intan 0.83 1.15

R&D spending/conventional revenues 0.08 0.09

(R&D & org. assets)/total conventional assets 0.60 0.35Note: The US sample includes 633 R&D intensive firms. The Germany sample includes Adidas, Audi, BASF, Bayer, BMW, Daimler, Merck, SAP, Siemens, Stada and Volkswagen.

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Matched-Company Comparisons 2008

1. ElectronicsUS: GE, United Technologies Corporation; DE: Siemens

2. Pharmaceuticals – largeUS: Johnson & Johnson, Pfizer; DE: Bayer; CH: Novartis

3. SoftwareUS: Oracle; DE: SAP

4. ChemicalsUS: Dow, DuPont; DE: BASF

GE UTX Siemens J&J Bayer Pfizer Novartis

%MV explained w/o Intan 0.41 0.26 0.42 0.23 0.41 0.44 0.43

% MV explained w Intan 0.76 0.58 1.11 0.53 1.22 1.45 1.08

ROE w/o Intan 0.15 0.29 0.21 0.31 0.11 0.14 0.16

ROE w/ Intan 0.11 0.17 0.06 0.13 0.05 0.08 0.10

Debt/EQ w/o Intan 0.86 0.71 0.71 0.5 0.69 0.93 0.55

Debt/EQ w/ Intan 0.77 0.53 0.48 0.47 0.43 0.28 0.22

Oracle Sap Dow DuPont BASF

%MV explained w/o Intan 0.22 0.18 0.45 0.19 0.51

%MV explained w Intan 0.52 0.58 0.83 0.64 0.96

ROE w/o Intan 0.24 0.26 0.04 0.28 0.16

ROE w/ Intan 0.19 0.15 0.04 0.06 0.1

Debt/EQ w/o Intan 0.51 0.48 0.7 0.8 0.63

Debt/EQ w/ Intan 0.31 0.23 0.56 0.55 0.48

Key dimensions – matched pairs

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Findings:• Addition of internally intangibles increases the percentage of

market value that can be explained by equity - All companies 2008: Germany 48% 110%; US 30% 77 % - Pharmaceuticals 2008: Germany 44% 113 %; US 29% 100 %

• German companies– Have larger fraction of market capitalization explained by conventional

equity, both before and after own-intangibles are counted

– Have lower return of equity, before and after own-intangibles

– Have higher debt-equity ratios

– And are comparably R&D intensive as measured by ratio of direct R&D outlays to conventional revenue, but less own-intangibles-intensive as measured by R&D and organizational stocks as fractions of total conventional assets

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Caveats

• “New view” estimates on intangibles are inaccurate. They are based on imputations rather than on market transactions, and are inferred from the cost of investment

• The German sample is much smaller, thus more prone to idiosyncratic variation (it is more heavily weighted to the auto industry)

• Different accounting system in the US and Germany: US GAAP vs. IFRS

• Differences is corporate structure & governance may matter, so accounting differences may not reflect underlying structural differences

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US. GAAP• All costs related to research and development are expensed as incurred, with few

exceptions (certain website development costs and costs associated with developing internal use software)

IFRS: IAS 38• Differentiation between “research” and “development” costs• Research expenses are expensed as incurred• Development costs are capitalized if specified criteria are met

– Development cost can be measured reliably – The product is technically and commercially feasible – Future economic benefits are probable

• Conditions for capitalization are often not satisfied in full development costs mostly expensed

Treatment of R&D under US GAAP and IFRS

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Development costs in matched company groups

ElectronicsGE, UTC: US GAAP – expensed as incurredSiemens*: Before 2007: expensed allSince 2007: research findings applied to a plan or design for the production of new or substantially improved products and processes

Pharmaceuticals – largeJ&J, Pfizer: US GAAP – expensed as incurredBayer*: Expensed as incurred, conditions are not satisfiedNovartis*: Regulatory and other uncertainties inherent in the development of new products preclude the capitalization

Pharmaceuticals – smallForest: US GAAP – expensed as incurredStada*: In 2008, development costs in the amount of € 14.6 millionwere capitalized as internally-created intangible assets

SoftwareOracle: US GAAP – expensed as incurredSAP*: Technical feasibility of software is reached shortly before products are available for sale. Costs incurred after technical feasibility have not been material. All R&D costs are expensed as incurred.

ChemicalsDow, DuPont: US GAAP – expensed as incurredBASF*: Capitalized development costs are mostly in-house software (Ignored in our analysis)

We adjusted R&D expenditures in our analysis

accordingly

*Capitalization of development costs only in accordance with narrowly defined conditions

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• Capitalized internal R&D and organizational capital large impact on income statements and balance sheets both countries

• Own-intangibles appear to be more important in U.S. business, though this is not a general rule

• Current practice of largely omitting intangibles from financial statements biased perspective about the drivers of company value

• Addition of internally intangibles increases the percentage of market value that can be explained by equity - All companies: Germany 48% 110%; US 31% 75 % - Pharmaceuticals: Germany 44% 113 %; US 29% 100 %

Conclusions I

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• Over-explanation may be caused by our assumptions on own R&D and organizational capital

• Intangibles can explain most (or all) of the market-to-book gap does not necessarily mean that they actually do explain the gap.

• But: intangibles = important factor to determine the value of companies on both sides of the Atlantic.

• Direct company comparisons generally support previous findings, but there are exceptions.

• Note that Siemens, BASF, SAP, Bayer, and Novartis are global companies, as are the U.S. counterparts, and may therefore not be representative of the average

Conclusions II

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Back-up charts

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Accounting Issues: General areas with significant differences between US GAAP & IFRS (I)

• Equity and financial liabilities (IAS 1, IAS 27, IAS 32, IAS 39)*e.g. IFRS: Components of compound financial instruments with liability and equity characteristics, are accounted for separately.; US GAAP: Instruments with characteristics of both debt and equity are not always split up

• (Post ) Employee benefits (IAS 19, IFRIC 14)*e.g. IFRS: No further differentiation between post-employment benefits; US GAAP: Division of post-employment benefits into post-retirement benefits and other post-employment benefits. Accounting for post-employment benefits depends on the type of benefit provided

• Income taxes (IAS12, SIC-12, SIC-25)*e.g. IFRS: Deferred tax liability is recognised for the difference in tax bases between jurisdictions as a result of an intra-group transfer of assets, US GAAP: is not recognised...

*See back-up slides for more details

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US GAAP & IFRS: General areas with significant differences (II)

• Inventories (IAS 2)*e.g. IFRS inventories measured at the lower of cost and net realisable value; US GAAP measured at the lower of cost and market.

• Property, Plant, and Equipment (IAS 16, IAS 23, IFRIC 1)*e.g. IFRS revaluation possible under certain circumstances; US GAAP not permitted

• Impairment of Assets (IAS 36, IFRIC 10)*e.g. IFRS goodwill allocated to cash-generating units, US GAAP goodwill allocated to reporting units

• Intangible Assets (IFRS 3, IAS 36, IAS 38, SIC–32) next slides

In general, IFRS is substantially similar to US GAAP

*See back-up slides for more details

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• Intangible assets… - are assets, not including a financial asset - lacks physical substance - are identifiable if they are separable or arise from contractual or legal rights - generally are recognised initially at cost = fair value of the consideration given - with finite useful lives are amortised over their expected useful lives

• Direct-response advertising, software developed for internal use, and software developed for sale to third parties are recognised initially at cost.

• Goodwill: recognised only in a business combination and is measured as a residual. Goodwill and other intangible assets with indefinite lives: no amortisation but impairment testing at least annually.

• Subsequent expenditure on an intangible asset : No capitalisation unless it can be demonstrated that the expenditure increases the utility of the asset, (broadly like IFRS)

• No capitalization possible: internally generated goodwill, costs to develop customer lists, start-up costs and training costs.

Comparison of US GAAP and IFRS Treatment of Intangibles (Similarities)

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IFRS US GAAP•Expenditure on relocation or reorganisation is expensed as incurred.

• Certain relocation costs following a business combination are capitalised. Other relocation or reorganisation expenditures are expensed as incurred, like IFRS.

•Intangible assets may be revalued to fair value only if there is an active market.

• Intangible assets cannot be revalued.

•Internal research expenditure is expensed as incurred. Internal development expenditure is capitalised if specific criteria are met. These capitalisation criteria are applied to all internally developed intangible assets.

• Both internal R&D expenditure is expensed as incurred. Special capitalisation criteria apply to direct-response advertising, software developed for internal use, and software developed for sale to third parties, which differ from the general criteria under IFRS.

•Advertising and promotional expenditure is expensed as incurred.

•Direct-response advertising expenditure is capitalised if specific criteria are met. Other advertising and promotional expenditure is expensed as incurred, like IFRS.

Source: KPMG (2008): IFRS compared to U.S. GAAP: An overview

Comparison of US GAAP and IFRS Treatmentof Intangible Assets - Significant Differences

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Possible impact of US GAAP and IFRS differences on Income Statements and Balances Sheets

• Compound financial instruments & Pensions and post-employment benefits- Different treatment under IFRS and US GAAP results in differences between carrying amounts of assets and liabilities

• Capitalization of development costs - IFRS: Treatment of intangibles as assets in general: equity - Our analysis: adjusted R&D = R&D – amortization of capitalized development costs current costs , operating surplus - Automobile companies: highest share of capitalized development cost in R&D costs- Pharmaceuticals: requirements for capitalisation seldomly fulfilled due the high level of risk up to the time products are marketed

• Deferred taxes - Deferred taxes on intragroup profit: Net loss or depending on

tax rate of acquiring company (IFRS) < or > tax rate in the seller’s or manufacturer’s jurisdiction (US GAAP)

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Key Results – all sample companies, 2006

2006 US Ger

%MV explained w/o Intan 0.30 0.66

%MV explained w Intan 0.68 1.41

ROE w/o Intan 0.22 0.1

ROE w/ Intan 0.15 0.06

Debt/EQ w/o Intan 1.81 2.17

Debt/EQ w/ Intan 0.80 1.01

R&D spending/conventional revenues 0.08 0.09

(R&D & org. assets)/total conventional assets 0.53 0.36

Note: The US sample includes 633 R&D intensive firms. The Germany sample includes Adidas, Audi, BASF, Bayer, BMW, Daimler, Merck, SAP, Siemens, Stada and Volkswagen.

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“New View“ Income Statement – Large Pharmaceutical companies

*Pharma = Bayer, Merck, Stada, and Novartis

Bayer 2008 (€ millions)

Novartis 2008 (€ millions)

Pfizer 2008 (€ millions)

J&J 2008 (€ millions)

Trad. +R&D +Org C. Trad. +R&D +Org C. Trad. +R&D +Org C. Trad. +R&D +Org C.

1. Conventional Revenue 32,918 32,918 32,918 29,126 29,126 29,126 33,064 33,064 33,064 43,601 43,601 43,601

2. Own Prod. R&D 0 3,277 3,277 0 6,792 6,792 0 10,738 10,738 0 7,559 7,5593. Own Prod. org cap 0 0 3,566 0 0 3,471 0 0 5,555 0 0 610

4. Total Adj.Revenue 32,918 36,195 39,761 29,126 35,918 39,389 33,064 43,802 49,357 43,601 51,161 51,771

8. Total Current Cost 26,652 26,652 26,652 21,169 21,169 21,169 18,068 18,068 18,068 30,605 30,605 30,605

9. Operating Surplus 6,266 9,543 13,109 7,957 14,749 18,220 14,996 25,735 31,289 12,996 20,556 21,16610. Depreciation 2,722 2,722 2,722 1,826 1,826 1,826 3,481 3,481 3,481 1,937 1,937 1,93711. Amort. own R&D 0 3,025 3,025 0 4,094 4,094 0 6,403 6,403 0 3,696 3,69612. Amort. own org Cap 0 0 2,905 0 0 3,283 0 0 5,525 0 0 4,69913. Adj. Operating Surplus 3,544 3,796 4,457 6,131 8,829 9,016 11,515 15,850 15,880 11,059 14,922 10,83315. Before-Tax Income 2,356 2,608 3,269 6,497 9,195 9,382 6,630 10,966 10,996 11,579 15,442 11,35317. After-Tax Income 1,719 1,971 2,632 5,605 8,303 8,490 5,505 9,841 9,870 8,857 12,720 8,63118. Earnings per Share 2.21 2.54 3.39 2.46 3.66 3.75 0.82 1.46 1.47 3.16 4.54 3.08

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“New View“ Balance Sheet – Large Pharmaceutical companies

*Pharma = Bayer, Merck, Stada, and Novartis

Bayer 2008 (€ millions)

Novartis 2008 (€ millions)

Pfizer 2008 (€ millions)

J&J 2008 (€ millions)

Conventional Balance Sheet Trad. +R&D +Org C. Trad. +R&D +Org C. Trad. +R&D +Org C. Trad. +R&D +Org C.

2. Plant and Equipment 9,492 9,492 9,492 8,960 8,960 8,960 9,088 9,088 9,088 9,825 9,825 9,8253. Purchased Intangibles 13,951 13,951 13,951 6,521 6,521 6,521 12,121 12,121 12,121 9,559 9,559 9,5594. Goodwill 8,647 8,647 8,647 7,719 7,719 7,719 14,681 14,681 14,681 9,383 9,383 9,3836. Total Assets 52,511 52,511 52,511 53,555 53,555 53,555 76,022 76,022 76,022 58,078 58,078 58,0787. Total Liabilities 36,171 36,171 36,171 19,057 19,057 19,057 36,656 36,656 36,656 29,001 29,001 29,0018. Equity 16,340 16,340 16,340 34,498 34,498 34,498 39,367 39,367 39,367 29,076 29,076 29,076Adjustments for own Intangibles 9. R&D Capital 0 19,633 19,633 0 37,588 37,588 0 68,469 68,469 0 44,068 44,06810. Org. Capital 0 0 12,877 0 0 13,913 0 0 22,112 0 0 21,76011. Assets adj. for own Intang 52,511 72,144 85,021 53,555 91,142 105,055 76,022 144,491 166,603 58,078 102,146 123,90512. Equity adj. for own Intang 16,340 35,973 48,850 34,498 72,085 85,998 39,367 107,835 129,947 29,076 73,144 94,904Company Valuation13. Market Value Equities 39,911 39,911 39,911 79,892 79,892 79,892 89,343 89,343 89,343 124,390 124,390 124,39017. Total Intang.Assets 32,090 51,723 64,600 14,240 51,827 65,740 26,802 95,270 117,382 18,943 63,011 84,77018. Tobin's Equity Qe 2.44 1.11 0.82 2.32 1.11 0.93 2.27 0.83 0.69 4.28 1.70 1.3119. % MV value explained 0.41 0.90 1.22 0.43 0.90 1.08 0.44 1.21 1.45 0.23 0.59 0.76

$ Billion General Electric 2008United

Technologies 2008

Siemens

2008

Conventional Income Statement 10K R&D ORG K 10K R&D ORG K 10K R&D ORG K1. conventional revenue 181 181 181 59 59 59 97 97 972. own production of R&D 0 4 4 0 2 2 0 5 53. own production of org. capital 0 0 20 0 0 2 0 0 54. total adjusted revenue 181 185 205 59 61 63 97 102 107 8. total current cost 123 123 123 49 49 49 90 90 90 9. operating surplus 58 62 82 9 11 13 7 12 1710. depreciation already accounted for 11 11 11 1 1 1 4 4 411. amortization of own R&D 0 2 2 0 1 1 0 8 8

12. amortization of own org. capital 0 0 16 0 0 2 0 0 413. adj. operating surplus 46 49 53 8 8 9 3 1 1 15. before-tax income 20 22 26 7 8 8 4 1 219. adjusted net income 17 20 24 5 5 6 7 5 5 20. earings per share 1.73 1.99 2.37 5.00 5.71 6.45 8.05 5.11 5.90

Electronics

$ BillionGeneral Electric

2008United Technologies

2008Siemens

2008

Conv. Balance Sheet 10K R&D ORG K 10K R&D ORG K 10K R&D ORG K1. current assets 503 503 503 24 24 24 54 54 542. plant and equipment 79 79 79 6 6 6 14 14 143. purchased intangibles 15 15 15 3 3 3 7 7 74. goodwill 82 82 82 15 15 15 20 20 205. other long term assets 119 119 119 7 7 7 23 23 236. total assets 798 798 798 56 56 56 119 119 119 7. total liabilities 684 684 684 41 41 41 84 84 848. equity 114 114 114 16 16 16 34 34 34 Adj. for own intangibles 9. R&D capital 0 25 25 0 12 12 0 41 4110. organizational capital 0 0 72 0 0 8 0 0 1611. assets adj. for own intang. 798 822 894 56 68 76 119 160 17512. equity adj. for own intang. 114 138 210 16 28 36 34 76 91 13. Tobin's equity Qe 2.42 1.99 1.31 3.88 2.23 1.73 2.38 1.08 0.9014. % MV value explained 0.41 0.50 0.76 0.26 0.45 0.58 0.42 0.92 1.12

Electronics

$ Billion J&J 2008 Bayer 2008Conventional Income Statement 10K +R&D +ORG K 10K +R&D +ORG K1. conventional revenue 64 64 64 41 41 412. own production of R&D 0 11 11 0 4 43. own production of org. capital 0 0 1 0 0 44. total adjusted revenue 64 75 76 41 45 50 8. total current cost 45 45 45 33 33 33 9. operating surplus 19 30 31 8 12 16

10. depreciation already accounted for 3 3 3 3 3 311. amortization of own R&D 0 5 5 0 4 4

12. amortization of own org. capital 0 0 7 0 0 413. adj. operating surplus 16 22 16 4 5 6 15. before-tax income 17 23 17 3 3 419. adjusted net income 13 19 13 2 2 3 20. earings per share 4.62 6.63 4.50 2.78 3.19 4.25

Pharmaceuticals (1)

$ Billion J&J 2008 Bayer 2008CONVENTIONAL BALANCE SHEET 10K +R&D +ORG K 10K +R&D +ORG K1. current assets 34 34 34 22 22 222. plant and equipment 14 14 14 12 12 123. purchased intangibles 14 14 14 18 18 184. goodwill 14 14 14 11 11 115. other long term assets 8 8 8 4 4 46. total assets 85 85 85 66 66 66 0 0 0 0 0 07. total liabilities 42 0 0 45 45 458. equity 43 0 0 21 21 21 ADJUSTMENTS FOR OWN INTANGIBLES9. R&D capital 0 64 64 0 25 2510. organizational capital 0 0 32 0 0 1611. assets adj. for own intang. 85 149 181 66 91 10712. equity adj. for own intang. 43 64 96 21 45 61 18. Tobin's equity Qe 4.28 2.82 1.89 2.44 1.11 0.8219. Percent MV value explained 0.23 0.35 0.53 0.41 0.90 1.22

Pharmaceuticals (1)

Pharmaceuticals (2)

$ Billion Pfizer 2008

Novartis 2008

Conventional Income Statement 10K R&D ORG K 10K R&D ORG K1. conventional revenue 48 48 48 27 27 272. own production of R&D 0 16 16 0 6 63. own production of org. capital 0 0 8 0 0 34. total adjusted revenue 48 64 72 27 33 36 8. total current cost 26 26 26 20 20 20 9. operating surplus 22 38 46 7 14 1710. depreciation already accounted for 5 5 5 2 2 211. amortization of own R&D 0 9 9 0 4 412. amortization of own org. capital 0 0 8 0 0 313. adj. operating surplus 17 23 23 6 8 8 15. before-tax income 10 16 16 6 9 919. adjusted net income 8 14 14 5 8 8 20. earings per share 1.20 2.14 2.15 2.29 3.40 3.47

Pharmaceuticals (2)

$billion Pfizer 2008 Norvatis 2008CONVENTIONAL BALANCE SHEET 10K R&D ORG K 10K R&D ORG K1. current assets 43 43 43 13 13 132. plant and equipment 13 13 13 8 8 83. purchased intangibles 18 18 18 6 6 64. goodwill 21 21 21 7 7 75. other long term assets 16 16 16 15 15 156. total assets 111 111 111 50 50 50 7. total liabilities 54 54 54 18 18 188. equity 58 58 58 32 32 32 ADJUSTMENTS FOR OWN INTANGIBLES 9. R&D capital 0 100 100 0 35 3510. organizational capital 0 0 32 0 0 1311. assets adj. for own intang. 111 211 244 50 84 9712. equity adj. for own intang. 58 158 190 32 67 80 18. Tobin's equity Qe 2.27 0.83 0.69 2.32 1.11 0.9319. Percent MV value explained 0.44 1.21 1.45 0.43 0.90 1.08

$ Billion Forest 2008 Stada 2008Income Statements 10K R&D ORG K 10K R&D ORG K1. conventional revenue 3.7 3.7 3.7 2.1 2.1 2.12. own production of R&D 0.0 1.0 1.0 0.0 0.1 0.13. own production of org. capital 0.0 0.0 0.7 0.0 0.0 0.24. total adjusted revenue 3.7 4.7 5.4 2.1 2.1 2.4 8. total current cost 2.5 2.5 2.5 1.7 1.7 1.7 9. operating surplus 1.2 2.2 2.8 0.3 0.4 0.6

10. depreciation already accounted for 0.1 0.1 0.1 0.1 0.1 0.111. amortization of own R&D 0.0 0.1 0.1 0.0 0.0 0.0

12. amortization of own org. capital 0.0 0.0 0.6 0.0 0.0 0.113. adj. operating surplus 1.1 1.9 2.0 0.2 0.3 0.4 15. before-tax income 1.2 2.0 2.1 0.1 0.2 0.319. adjusted net income 1.0 1.8 1.9 0.1 0.1 0.2 20. earings per share 3.08 5.73 5.96 1.74 2.44 4.07

Pharmaceuticals (3)

$ Billion Forest 2008 Stada 2008CONVENTIONAL BALANCE SHEET 10K R&D ORG K 10K R&D ORG K1. current assets 2.9 2.9 2.9 1.3 1.3 1.32. plant and equipment 0.4 0.4 0.4 0.4 0.4 0.43. purchased intangibles 0.5 0.5 0.5 1.3 1.3 1.34. goodwill 0.0 0.0 0.0 0.0 0.0 0.05. other long term assets 0.7 0.7 0.7 0.1 0.1 0.16. total assets 4.5 4.5 4.5 3.1 3.1 3.1 0.0 0.0 0.0 0.0 0.0 0.07. total liabilities 0.8 0.8 0.8 2.0 2.0 2.08. equity 3.7 3.7 3.7 1.1 1.1 1.1 0.0 0.0 0.0 0.0 0.0 0.0ADJUSTMENTS FOR OWN INTANGIBLES9. R&D capital 0.0 4.4 4.4 0.0 0.3 0.310. organizational capital 0.0 0.0 2.2 0.0 0.0 0.811. assets adj. for own intang. 4.5 8.9 11.1 3.1 3.4 4.212. equity adj. for own intang. 3.7 8.1 10.3 1.1 1.4 2.1 18. Tobin's equity Qe 2.74 1.25 0.99 2.56 2.00 1.2819. Percent MV value explained 0.36 0.80 1.01 0.39 0.50 0.78

Pharmaceuticals (3)

Oracle 2008 SAP 2008Conventional Income Statement 10K R&D ORG K 10K R&D ORG K1. conventional revenue 22 22 22 15 15 152. own production of R&D 0 5 5 0 3 33. own production of org. capital 0 0 3 0 0 14. total adjusted revenue 22 27 30 15 17 19 8. total current cost 13 13 13 10 10 10 9. operating surplus 9 14 17 4 7 8

10. depreciation already accounted for 1 1 1 1 1 111. amortization of own R&D 0 2 2 0 1 1

12. amortization of own org. capital 0 0 1 0 0 113. adj. operating surplus 8 11 13 3 5 5 15. before-tax income 8 11 12 3 5 519. adjusted net income 6 9 10 2 4 4 20. earings per share 1.08 1.69 1.96 1.95 3.11 3.47

Software

$ Billion Oracle 2008 SAP 2008 CONVENTIONAL BALANCE SHEET 10K +R&D +ORG K 10K +R&D +ORG K1. current assets 18 18 18 7 7 72. plant and equipment 2 2 2 2 2 23. purchased intangibles 8 8 8 1 1 14. goodwill 18 18 18 6 6 65. other long term assets 1 1 1 1 1 16. total assets 47 47 47 17 17 17 7. total liabilities 24 24 24 8 8 88. equity 23 23 23 9 9 9 ADJUSTMENTS FOR OWN INTANGIBLES9. R&D capital 0 20 20 0 15 1510. organizational capital 0 0 10 0 0 511. assets adj. for own intang. 47 68 78 17 32 3712. equity adj. for own intang. 23 44 54 9 24 28 13. Tobin's equity Qe 4.46 2.36 1.91 5.45 2.09 1.7314. Percent MV value explained 0.22 0.42 0.52 0.18 0.48 0.58

Software

Chemicals

Dow 2008 Du Pont 2008 BASF 2008Conventinal Income Statement 10K R&D ORG K 10K R&D ORG K 10K R&D ORG K1. conventional revenue 57.5 57.5 57.5 31.7 31.7 31.7 78.3 78.3 78.32. own production of R&D 0.0 1.5 1.5 0.0 1.6 1.6 0.0 2.0 2.03. own production of org. capital 0.0 0.0 0.6 0.0 0.0 1.3 0.0 0.0 2.24. total adjusted revenue 57.5 59.0 59.6 31.7 33.3 34.6 78.3 80.3 82.4 8. total current cost 53.0 53.0 53.0 26.9 26.9 26.9 66.2 66.2 66.2 9. operating surplus 4.5 6.0 6.6 4.8 6.4 7.7 12.1 14.1 16.310. depreciation already accounted for 2.1 2.1 2.1 1.4 1.4 1.4 4.0 4.0 4.011. amortization of own R&D 0.0 1.1 1.1 0.0 2.4 2.4 0.0 1.9 1.912. amortization of own org. capital 0.0 0.0 0.5 0.0 0.0 1.1 0.0 0.0 1.613. adj. operating surplus 2.4 2.7 2.8 3.4 2.6 2.7 8.1 8.2 8.8 15. before-tax income 1.3 1.7 1.7 2.4 1.6 1.7 7.5 7.6 8.219. adjusted net income 0.6 0.9 1.0 2.0 1.2 1.4 3.7 3.8 4.3 20. earings per share 0.62 0.98 1.08 2.22 1.37 1.50 3.93 4.03 4.62

Chemicals

Dow 2008 Du Pont 2008 BASF 2008Conv. Balance Sheet 10K R&D ORG K 10K R&D ORG K 10K R&D ORG K1. current assets 16.1 16.1 16.1 15.3 15.3 15.3 26.7 26.7 26.72. plant and equipment 14.3 14.3 14.3 11.2 11.2 11.2 18.9 18.9 18.93. purchased intangibles 0.5 0.5 0.5 2.7 2.7 2.7 12.4 12.4 12.44. goodwill 3.4 3.4 3.4 2.1 2.1 2.1 0.0 0.0 0.05. other long term assets 11.2 11.2 11.2 4.9 4.9 4.9 5.9 5.9 5.96. total assets 45.5 45.5 45.5 36.2 36.2 36.2 63.9 63.9 63.9 7. total liabilities 32.0 32.0 32.0 29.1 29.1 29.1 40.4 40.4 40.48. equity 13.5 13.5 13.5 7.1 7.1 7.1 23.5 23.5 23.5

Adjustments for own intan. 9. R&D capital 0.0 9.2 9.2 0.0 11.4 11.4 0.0 13.0 13.010. organizational capital 0.0 0.0 2.4 0.0 0.0 4.8 0.0 0.0 7.611. assets adj. for own intang. 45.5 54.6 57.0 36.2 47.6 52.5 63.9 76.9 84.512. equity adj. for own intang. 13.5 22.7 25.0 7.1 18.5 23.4 23.5 36.5 44.2 18. Tobin's equity Qe 2.23 1.33 1.20 5.15 1.98 1.57 1.95 1.25 1.0419. Percent MV value explained 0.45 0.75 0.83 0.19 0.50 0.64 0.51 0.80 0.96