Pharmaceutical Joint Venture Genzyme and Geltex

1. Introduction

1.1 Background

In early 1997, a representative for Genzyme Corporation is meeting up with a joint-venture negotiation team in an effort to develop terms for a proposed joint-venture agreement. The joint-venture (JV) will, if agreed upon, combine the capabilities of Genzyme, a large pharmaceutical company and GelTex, an early-stage bio-tech research company with only two products in their pipeline. The rationale for the JV is to utilize Genzyme’s capital and knowledge in marketing to bring GelTex’s first product, RenaGel, to market. Genzyme has a history of growing through innovative uses of alliances and JVs. In addition to the potential increased sales that RenaGel can bring there are several strategic gains that Genzyme can acquire from the JV. The agreement would allow Genzyme to tap new markets in their specialty area of therapeutics and can potentially also lead to a similar agreement for GelTex’s next drug which will cater a substantially larger market segment and have large economic potential for Genzyme. For this reason, the representative of Genzyme is eager to look into the questions that need to be sorted out before an agreement can be signed.

1.2 Problem

The potential for the JV seems to be high, still there are several questions that needs to be addressed before an agreement can be signed. The main concern for both parties has to do with risks and the enterprise value of the joint venture. For the NPV to be robust, accurate assumptions for each input has to be made. As these inputs are uncertain before the project, proper analysis for the variation of each variable is needed and its effect on the final outcome.

1.3 Purpose

The purpose of this study is to determine if the JV should take place, and if so, at what price.

2. Methodology

For the valuation of the joint venture, the discounted cash flow method is utilized using estimated future cash flows acquired over the life of the drug. The cash flows are estimated by calculating future revenues and deducting costs. Since it is easier to predict future costs associated with bringing the drug to the market, the main focus will be on assumptions underlying future revenue streams. A sensitivity analysis is undertaken in the form of a tornado diagram, where all varying input variables are listed according to their relative importance. In addition to this, a Monte Carlo analysis has been performed to test for the possibility of worse and better outcomes allowing certain variation to the input variables.

In a Monte Carlo simulation one can simulate the different uncertainties simultaneously. The variables are drawn from assigned distributions in order to capture the differences in Enterprise value between different scenarios. By conducting a large amount of simulations a better picture of the possible outcomes of the joint venture can be taken into the consideration. The uncertainties and its distribution simulated are lifecycle of the drug (triangular), peak penetration rate (triangular), compliance rate (triangular), price per patient (triangular), gross profit (triangular), marketing multiplier (triangular), launch delay (discrete), FDA approval (binomial with triangular distribution condition).

The triangular distributions are assigned according to the analysts’ predictions of minimum, most likely and maximum points. The discrete distribution is the delay for 0, 1 or 2 years with the probabilities 70%, 20% and 10%. For the binomial distribution with the triangular condition is if the efficacy rate is over/under 0,3 in a triangular distribution (min=0, most likely=0,4 and maximum=0,8) the FDA will or will not approve the drug in phase 3.

3. Literature review

3.1 Equity financing

A company can fund operations with either debt or equity. Equity financing is the process of raising capital through the sale of shares in a company. In this section, different alternatives for equity financing will be discussed.

3.1.1 Venture capital

Start-up companies, especially in high-tech sectors, rely heavily on large capital injections. These firms face a number of different sources of capital, thus the decisions of early-stage fund-raising are critical for both growth and survival. (Ozmel et al, 2009) Venture Capitalists provide capital to new and young companies where they expect large return with a view to a later exit opportunity. Most venture capital comes from investment banks, financial institutions or a group of wealthy individuals. Their investment horizon is approximately