Understand that the Medfield case has 2 major problems: 1) Firm Valuation Impact of Patent Loss and Reformulation; 2) Ethical Considerations How to Ensure Patients and third-party payees are not hurt
Organize your paper around the case questions, use them as an organizing device. This will benefit you in several ways: 1) provide a framework for constructing your paper; 2) ensure I (your reader) understand exactly what question you are answering; and 3) ensure you answer every question.
Use examples from Pfizer, AstraZeneca and other firms in EXHIBIT 3 to substantiate your thought.
- What is the current value of Medfield as a company? Use the exhibit 4 spreadsheet to calculate the NPV of Medfield. Compare this result to the offer price and provide your reasoning for the difference.
- If we consider the sale of Medfield as the sale of existing assets how does the elimination of R&D, investment in future assets, change the valuation of Medfield? (Using the exhibit 4 spreadsheet distinguish between the NPV value of existing products and R&D)
Case 44 Medfield Pharmaceuticals 565 Furthermore, in a front-page article that first revealed AZ's initiative to reformulate its expiring medication, the Wall Street Journal concluded that the Prilosec pattern, repeated across the pharmaceutical industry, goes a long way to explain why the na- tion's prescription drug bill is rising an estimated 17% a year even as general inflation is quiescent." The Value of Medfield As Johnson sat down to contemplate the acquisition offer, she began to look at the com- pany's portfolio of drugs in a new light. Rather than therapies for ailments, they were sources of cash flow. Fortunately, whereas the R&D process was notoriously unpredict- able, once a product was approved, the future was relatively clear. This future could be summarized as follows: For 20 years, the product would be patent-protected, and from the initial sales level, sales would grow at about 2% a year. When the patent expired, sales would decline 50% in each of the following three years and then would have effectively negligible sales in the fourth year. The direct cost of sales would be 23%. Direct marketing costs were 27% of revenue and Medfield typically spent 19% of revenue on future R&D. The company estimated other general and administrative expenses would be about 4% of sales. A large portion of this expense category was tied directly or indi- rectly to sales and little of the cost was reasonably classified as fixed. Capital expenditures were typically close to depreciation levels so that net changes in plant and equipment associated with a given product could be ignored. Similarly, net working capital tended to be very small and could be ignored. The marginal tax rate for the firm was 32% and Johnson estimated that 8.5% was a reasonable discount rate (cost of capital) for this industry. Johnson had recently requested a forecast of the firm's financials based on approved products. This forecast (Exhibit 44.4) included a forecast for Reximet starting with initial pros sales of $80 million. This forecast was generated largely as a tool for examining the pects associated with products already in existence and to allow her to gauge the possible impact of Fleximat going off patent. Clearly, the forecast did not include the operating effects of adding new products to the lineup. While generated for an alternate purpose, the orecast was built from the assumptions listed above, and Johnson wondered if this fore- Che could also form a reasonable basis for valuing the company. As Johnson contemplated her analysis, she immediately recognized that she needed reach some decision regarding extending the patent life of Fleximat. The simplest and was to reformulate the drug. Her research team was reasonably most obvious approach iner Harris, "Prilosec's Maker Switches Users To Nexium, Thwaing Generics, Salonal 2002.1. with wypow.com www. stored . HVAD Oy - un ediyocondicions for Decor word ved wo ES y the OTCC 20 35 2019 2015 27.39 610 54.27 DCT 44.4 Financial Forecast Based on ting Products in ons of dollars, unless otherwise noted Direct Marketing Costs of Sales 23.04 General and 27.04 Do Research 19.05 4.05 2010 2012 2012 2014 2015 2016 2017 2011 126 109.52 2519 12 60 21909 5039 10.95 252 21.90 504 4380 214.77 49.40 943 21.21 4214 9252 TO 210 56 47.46 90 71 20 86 968 412 9.49 20.45 37.19 20.05 40.42 9.31 39 67 10.55 1966 9009 20 72 18809 85.59 91.59 21.14 185.22 42.54 35 39 1927 20:32 16999 BOSS 18.90 19.92 78.97 18.46 B000 18.40 745 Flexi Sales Cost of sales Lodama Sales Cost oftas Orsamorpha Sales Cost of sales Rexet Sales Cost of sales Totes Cost of sales Research Direct marketing General and administrive 84.90 19.53 24327 55.95 4522 65.6 973 6568 21.99 44.66 19743 4541 37.51 53.31 799 83.23 1914 266.42 6128 5062 71.90 10 66 71 93 2302 4891 97.18 81.60 1877 31704 72.92 60 24 8560 12.09 85 60 27-29 3.10 51.30 7.60 51 30 164 34.00 7.52 50.78 16.25 1453 335.79 77.23 630 16 09 34.20 329 20 76.47 62.46 91.22 13.94 17.06 3625 11400 16.00 114.00 3650 5821 90.66 29.01 61.65 27.15 Taves NOPAT Case 44 Medfield Pharmaceuticals 565 Furthermore, in a front-page article that first revealed AZ's initiative to reformulate its expiring medication, the Wall Street Journal concluded that the Prilosec pattern, repeated across the pharmaceutical industry, goes a long way to explain why the na- tion's prescription drug bill is rising an estimated 17% a year even as general inflation is quiescent." The Value of Medfield As Johnson sat down to contemplate the acquisition offer, she began to look at the com- pany's portfolio of drugs in a new light. Rather than therapies for ailments, they were sources of cash flow. Fortunately, whereas the R&D process was notoriously unpredict- able, once a product was approved, the future was relatively clear. This future could be summarized as follows: For 20 years, the product would be patent-protected, and from the initial sales level, sales would grow at about 2% a year. When the patent expired, sales would decline 50% in each of the following three years and then would have effectively negligible sales in the fourth year. The direct cost of sales would be 23%. Direct marketing costs were 27% of revenue and Medfield typically spent 19% of revenue on future R&D. The company estimated other general and administrative expenses would be about 4% of sales. A large portion of this expense category was tied directly or indi- rectly to sales and little of the cost was reasonably classified as fixed. Capital expenditures were typically close to depreciation levels so that net changes in plant and equipment associated with a given product could be ignored. Similarly, net working capital tended to be very small and could be ignored. The marginal tax rate for the firm was 32% and Johnson estimated that 8.5% was a reasonable discount rate (cost of capital) for this industry. Johnson had recently requested a forecast of the firm's financials based on approved products. This forecast (Exhibit 44.4) included a forecast for Reximet starting with initial pros sales of $80 million. This forecast was generated largely as a tool for examining the pects associated with products already in existence and to allow her to gauge the possible impact of Fleximat going off patent. Clearly, the forecast did not include the operating effects of adding new products to the lineup. While generated for an alternate purpose, the orecast was built from the assumptions listed above, and Johnson wondered if this fore- Che could also form a reasonable basis for valuing the company. As Johnson contemplated her analysis, she immediately recognized that she needed reach some decision regarding extending the patent life of Fleximat. The simplest and was to reformulate the drug. Her research team was reasonably most obvious approach iner Harris, "Prilosec's Maker Switches Users To Nexium, Thwaing Generics, Salonal 2002.1. with wypow.com www. stored . HVAD Oy - un ediyocondicions for Decor word ved wo ES y the OTCC 20 35 2019 2015 27.39 610 54.27 DCT 44.4 Financial Forecast Based on ting Products in ons of dollars, unless otherwise noted Direct Marketing Costs of Sales 23.04 General and 27.04 Do Research 19.05 4.05 2010 2012 2012 2014 2015 2016 2017 2011 126 109.52 2519 12 60 21909 5039 10.95 252 21.90 504 4380 214.77 49.40 943 21.21 4214 9252 TO 210 56 47.46 90 71 20 86 968 412 9.49 20.45 37.19 20.05 40.42 9.31 39 67 10.55 1966 9009 20 72 18809 85.59 91.59 21.14 185.22 42.54 35 39 1927 20:32 16999 BOSS 18.90 19.92 78.97 18.46 B000 18.40 745 Flexi Sales Cost of sales Lodama Sales Cost oftas Orsamorpha Sales Cost of sales Rexet Sales Cost of sales Totes Cost of sales Research Direct marketing General and administrive 84.90 19.53 24327 55.95 4522 65.6 973 6568 21.99 44.66 19743 4541 37.51 53.31 799 83.23 1914 266.42 6128 5062 71.90 10 66 71 93 2302 4891 97.18 81.60 1877 31704 72.92 60 24 8560 12.09 85 60 27-29 3.10 51.30 7.60 51 30 164 34.00 7.52 50.78 16.25 1453 335.79 77.23 630 16 09 34.20 329 20 76.47 62.46 91.22 13.94 17.06 3625 11400 16.00 114.00 3650 5821 90.66 29.01 61.65 27.15 Taves NOPAT
