Description
The doc explains on the joint venture of Genzyme GelTex Pharmaceuticals by studying NPV, value, investments
Genzyme/GelTex Pharmaceuticals Joint venture
Advanced Corporate Finance
Case Background: Genzyme Corporation, a large biotech company based in United States is entering into a joint venture with GelTex Pharmaceuticals in launching a new drug named RenaGel developed by GelTex. The EVP of Genzyme, Mr. Gregg Phelps is trying to consider all uncertainties surrounding this joint venture while coming up with the Net Present value (NPV) of the project. The initial assumptions while computing the NPV of the project are: 1. The profit share for Genzye Corporation in the JV is 50% and hence it has to pay $27.5 million. 2. The product is launched in the market without any delay 3. The market penetration is 43% 4. The initial compliance is 87% We vary the assumptions and compute the variability of NPV of the project by changing different values in exhibits 3 and 4. We consider an investment of $27.5 million by Genzyme to take a share of 50% from the JV. Proportionally if Genzyme wishes to have an interest of 80% in the JV, it must make an initial lump sum payment of $44 million. (All figures are in ‘000) Launch delay (years) JV Enterprise value Genzyme’s NPV (after deducting Investment) Genzyme Share of JV 0 1 2 $89793 $68735 $46649 $17396 $6868 -$4475 $27834 $10988 -$7161 $44896 $34368 $23025 $17959 $13474 $9210 50% 80% 50% 80% Geltex’s NPV
We see that even if the project is delayed by 1 year Genzyme’s NPV is positive in either case of a 50% or 80% share. If the project is delayed by 2 years, the NPV for Genzyme gets negative.
Considering the uncertainties in market penetration and compliance, we may evaluate the best and worst case scenarios based on the initial market analysis. It is given that the peak penetration rate in the market may vary within the range from 20% to 59%. Also, based on different marketing analysis and analyst’s reports, the compliance was estimated to be as low as 75% or as high as 94%. Considering Genzyme goes for a 50% share in the JV and there is no delay in launch of the product, we take the above figures into account and get the best and worst case scenarios as follows: (All figures are in ‘000) Peak penetration/Compliance JV Enterprise value 20% PP/75%Compliance 59% PP/ 94% compliance -$9189 $168594 Genzyme’s NPV (after deducting Investment) -$32094 $56797 -$4594 $84297 Geltex’s NPV
On evaluation of the most likely scenario, the JV enterprise value based on discounted cash flow was $89793; with Genzyme’s NPV is $17396 in a 50% share. However considering the various uncertainties in the market in terms of the peak penetration rate, compliance, delay in launch and price per patient we find that Genzyme’s NPV could vary from -$32 millions to $56 millions in a 50-50 share. Thus the EVP can use these figures to analyze the overall effects of these uncertainties in making his decision.
doc_893329219.docx
The doc explains on the joint venture of Genzyme GelTex Pharmaceuticals by studying NPV, value, investments
Genzyme/GelTex Pharmaceuticals Joint venture
Advanced Corporate Finance
Case Background: Genzyme Corporation, a large biotech company based in United States is entering into a joint venture with GelTex Pharmaceuticals in launching a new drug named RenaGel developed by GelTex. The EVP of Genzyme, Mr. Gregg Phelps is trying to consider all uncertainties surrounding this joint venture while coming up with the Net Present value (NPV) of the project. The initial assumptions while computing the NPV of the project are: 1. The profit share for Genzye Corporation in the JV is 50% and hence it has to pay $27.5 million. 2. The product is launched in the market without any delay 3. The market penetration is 43% 4. The initial compliance is 87% We vary the assumptions and compute the variability of NPV of the project by changing different values in exhibits 3 and 4. We consider an investment of $27.5 million by Genzyme to take a share of 50% from the JV. Proportionally if Genzyme wishes to have an interest of 80% in the JV, it must make an initial lump sum payment of $44 million. (All figures are in ‘000) Launch delay (years) JV Enterprise value Genzyme’s NPV (after deducting Investment) Genzyme Share of JV 0 1 2 $89793 $68735 $46649 $17396 $6868 -$4475 $27834 $10988 -$7161 $44896 $34368 $23025 $17959 $13474 $9210 50% 80% 50% 80% Geltex’s NPV
We see that even if the project is delayed by 1 year Genzyme’s NPV is positive in either case of a 50% or 80% share. If the project is delayed by 2 years, the NPV for Genzyme gets negative.
Considering the uncertainties in market penetration and compliance, we may evaluate the best and worst case scenarios based on the initial market analysis. It is given that the peak penetration rate in the market may vary within the range from 20% to 59%. Also, based on different marketing analysis and analyst’s reports, the compliance was estimated to be as low as 75% or as high as 94%. Considering Genzyme goes for a 50% share in the JV and there is no delay in launch of the product, we take the above figures into account and get the best and worst case scenarios as follows: (All figures are in ‘000) Peak penetration/Compliance JV Enterprise value 20% PP/75%Compliance 59% PP/ 94% compliance -$9189 $168594 Genzyme’s NPV (after deducting Investment) -$32094 $56797 -$4594 $84297 Geltex’s NPV
On evaluation of the most likely scenario, the JV enterprise value based on discounted cash flow was $89793; with Genzyme’s NPV is $17396 in a 50% share. However considering the various uncertainties in the market in terms of the peak penetration rate, compliance, delay in launch and price per patient we find that Genzyme’s NPV could vary from -$32 millions to $56 millions in a 50-50 share. Thus the EVP can use these figures to analyze the overall effects of these uncertainties in making his decision.
doc_893329219.docx