American Home Products Corporation.

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American Home Products Corporation is one of the largest health care companies in US, after Laporte took over as chief executive of this company in 1966, for subsequent 13 years, the company is almost debt -free and has a growing cash reserves. The company has diversified organizations including several well-known brand names in four lines of business: prescription drugs, packaged drugs, food products, and housewares and household products.

There are several critical issues for this company. First, AHP has a tight financial control, even an expenditure that above $500 had to be approved by Laporte in person, this tight financial control can reduce short-term debt and risk orientation thereby lower the investment relative to R&D. Second, this company is to conservatism and risk-aversion in the volatile drug industry. It avoided the risk in new-product development and the products are always copies of new products introduced by competitors, in this way it could save the interests of short-term debt and costs of R&D, which are a large cost to a company. Third, the firm is centralizing controlled in the chief executive, and Laporte emphatic stating that he ran this company for the shareholders.

Many drug firms were slightly unleveraged, but none is like AHP’s conservative capital structure. Though AHP has diversified operations, the new products’ development may not that important to it, but if there is comparative competitors come out in the drug industry, it will be a great threat to AHP in this area, so one company should have its brand new concept on a product or has a unique prescription for a disease. In this case, AHP has to invest more on R&D to distinguish among others drug organizations. Besides, for the capitalization, as the Exhitib2 (Comparison Data for American Home Products and Warner-Lambert,1980) shows,

The total debt for American Home Products Corporation and Warner-Lambert Company is 13.9 and 710.1 respectively. The bond rating is...
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