Wyeth (formerly American Home Products) is a global leader in prescription pharmaceuticals, nonprescription medicines, and animal health

Question:

Wyeth (formerly American Home Products) is a global leader in prescription pharmaceuticals, nonprescription medicines, and animal health care products. Wyeth's products are sold in more than 140 countries, with a product that includes treatments across a wide range of therapeutic areas. Exhibit 6.15 presents a recent income statement for Wyeth. A set of transactions and activities during Year 1 through Year 3 led to a number of nonrecurring items on the income statement.
1. Diet drug litigation charges. Wyeth was named as a defendant in numerous legal actions related to the diet drugs Redux and Pondimin. The drugs were used in the United States by approximately 5.8 million people until their voluntary market withdrawal several years ago. The legal actions alleged that the use of the diet drugs caused certain serious conditions, including valvular heart disease. Extensive class-actions lawsuit and court-administered settlements took place after removal of the drugs from the market. Wyeth recorded the following litigation charges related to these drugs: Year 3, $2,000 million ($1,300 million after taxes); Year 2, $1,400 million ($910 million after taxes); and Year 1, $950 million ($615 million after taxes).
2. Gains related to Immunex/Amgen stock. In Year 2, Wyeth recorded, gains totaling $4,082.2 ($2,628.1 million after taxes) related to the acquisition of Immunex by Amgen and then the subsequent sale of Amgen by Wyeth. Wyeth sold its remaining shares of Amgen stock in Year 3, generating a gain of $860.6 million ($558.7 million after taxes).
3. Special charges. In Year 2, Wyeth recorded a special charge for restructuring and related asset impairments of $340.8 million ($233.5 million after taxes). The charges were recorded to recognize the costs of closing manufacturing facilities and two research facilities. In Year 3, Wyeth recorded a special charge of manufacturing restructuring, asset impairments, and the extinguishment of $639.9 million ($466.4 million after taxes). The charges are broken out in its financial reports by personnel costs, asset impairments, contract settlement costs, and other closure/exit costs.
Required
a. Discuss whether you would adjust for each of the three items when using earnings to forecast the future profitability of Wyeth. Discuss each item separately.
b. Indicate the adjustments to the income statement of Wyeth to eliminate each item in part a.
c. Determine the percentage change in income for Year 1 through Year 3 based on (1) reported income as revealed in Exhibit 6.15 and (2) pro forma income calculated in part b, and comment on the different trends. Pro forma income for Year 0 was $2,513 million, with a reported loss for the year of $902 million.
d. The statement of cash flows shows an add back to net income for items 1 and 3, and a subtraction for item 2. Why is this case?
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