What is the value of Medfields existing drugs and drug pipeline (total of 4 drugs)? Show your valuation model. What do you think about R&D being deducted from revenue? (hint: think about accounting, how do accountants try to match expenses with revenue? Does deduction of R&D adhere to the general rule of matching of expenses and revenue)?

What is the (financial) value created if Medfield decides to pursue the Fleximat reformulation as described in the case? Show your valuation model. What is the value of Fleximat if the reformulation is not done (show valuation model)? What is the difference between these two values? Explain why the distinction is essential.

Please specify the information you need? This is mostly the information I am given. Discount rate, taxes, etc are located on the forecast. It is mainly trying to answer these two questions above for my understanding.

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 indirectly 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. MEDFIELD PHARMACEUTICALS Income Statement (in thousands of U.S. dollars) 2007 2008 2009 2010 Revenue Cost of Goods Sold Gross Profit 223,721 55,788 167,933 261,253 300,556 65,724 75,241 195,529 225,315 329,203 76,472 252,731 SG&A Expenses Research and Development 71,586 42,175 113,761 82,446 54,078 136,524 97,542 57,535 155,077 105,166 62,457 167.623 Earnings Before Interest and Taxes Interest 54,172 984 53,188 59,005 1,385 57,620 70,238 1,403 68,835 85,108 1,457 83,651 Income Taxes Net Income 16,457 36,731 18,982 38,638 22,495 46,340 25,875 57.776 MEDFIELD PHARMACEUTICALS Balance Sheet (in thousands of U.S. dollars) 2007 2008 2009 2010 Cash Receivables Inventory 21,465 28,815 24,704 74,984 28,227 39,568 24,316 92,111 29,542 39,117 27,859 96,518 32,251 41,927 30,559 104,737 Property and Equipment Other Assets 102,977 45,937 223,898 118,553 49,312 259,976 127,498 61,569 285,585 129,171 67,718 301,626 Accounts Payable Accrued Expenses Current LTD 25,187 39,236 2.882 67,305 26,460 52,634 3,373 82,467 27,070 55,256 3,801 86,127 30,142 59,850 4,501 94,493 LTD Equity 17,069 139,524 223,898 23,609 153,900 259,976 25,278 174,180 285,585 26,850 180,283 301,626 MEDFIELD PHARMACEUTICALS orecast Based on Existing Products (in millions of U.S. dollars, unless other Costs of Sales Research 23.0% 19.0% Direct Marketing General and Admin 27.0% 4.0% Taxes Discount Ratc 32.0% 8.5% 2010 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Fleximat Sales Cost of Sales 2011 2% 214.77 49.40 2012 2% 219.07 50.39 2013 -50% 109.53 25.19 2014 -50% 54.77 12.60 2015 -50% 27.38 6.30 210.56 47.46 Lodamadal Sales Cost of Sales 2% 40.47 9.31 39.67 10.55 2% 41.28 9.49 2% 42.10 42.94 9.88 2% 43.80 10.07 -50% 21.90 5.04 -50% 10.95 2.52 -50% 5.48 1.26 Orsamorph Sales Cost of Sales 78.97 18.46 2% 80.55 18.53 2% 82.16 18.90 2% 83.80 19.27 2% 85.48 19.66 2% 87.19 20.05 2% 88.93 20.45 2% 90.71 20.86 2% 92.52 21.28 2% 94.37 21.71 96.26 22.14 2% 98.19 22.58 2% 100.15 23.03 102.15 23.50 2% 104.20 23.97 -50% 52.10 11.98 -50% 26.05 5.99 -50% 13.02 3.00 Reximet Sales Cost of Sales 2% 80.00 18.40 2% 81.60 18.77 2% 83.23 19.14 2% 84.90 19.53 2% 86.59 19.92 2% 88.33 20.32 2% 90.09 20.72 2% 91.89 21.14 2% 95.61 21.99 93.73 21.56 97.52 99.47 22.88 2% 101.46 23.34 2% 103.49 23.80 2% 105.56 24.28 107.67 24.76 2% 109.82 25.26 2% 112.02 114.26 25.76 26.28 2% 116.54 26.81 -50% -50% -50% 58.27 29.14 14.57 13.40 6.70 3.35 22.43 Total Sales Cost of Sales Research Direct Marketing General and Administrative 329.20 335.79 76.47 77.23 62.46 63.80 91.22 90.66 13.94 13.43 85.11 90.66 27.15 29.01 57.96 61.65 422.50 97.18 80.28 114.08 16.90 114.08 36.50 77.57 317.04 72.92 60.24 85.60 12.68 85.60 27.39 58.21 266.42 61.28 50.62 71.93 10.66 71.93 23.02 48.91 243.27 55.95 46.22 65.68 9.73 65.68 21.02 44.66 197.43 45.41 37.51 53.31 7.90 53.31 17.06 36.25 189.99 188.09 43.70 43.26 36.10 35.74 51.30 50.78 7.60 7.52 51.30 50.78 16.41 16.25 34.88 34.53 186.27 42.84 35.39 50.29 7.45 50.29 16.09 34.20 189.99 43.70 36.10 51.30 7.60 51.30 16.42 34.88 193.79 44.57 36.82 52.32 7.75 52.32 16.74 35.58 197.67 45.46 37.56 53.37 7.91 53.37 17.08 36.29 201.62 46.37 38.31 54.44 8.06 54.44 17.42 37.02 205.66 47.30 39.07 55.53 8.23 55.53 17.77 37.76 155.59 35.78 29.56 42.01 6.22 42.01 13.44 28.57 131.61 30.27 25.01 35.53 5.26 35.53 11.37 24.16 120.69 27.76 22.93 32.59 4.83 32.59 10.43 22.16 109.82 25.26 20.87 29.65 4.39 29.65 9.49 20.16 112.02 114.26 25.76 26.28 21.28 21.71 30.25 30.85 4.48 4.57 30.25 30.85 9.68 9.87 20.57 20.98 116.54 58.27 29.14 26.81 13.40 6.70 22.14 11.07 5.54 31.47 15.73 7.87 4.66 2.33 1.17 31.47 15.73 7.87 10.07 5.03 2.52 21.40 10.70 5.35 14.57 3.35 2.77 3.93 0.58 3.93 1.26 2.67 Taxes NOPAT 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 indirectly 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. MEDFIELD PHARMACEUTICALS Income Statement (in thousands of U.S. dollars) 2007 2008 2009 2010 Revenue Cost of Goods Sold Gross Profit 223,721 55,788 167,933 261,253 300,556 65,724 75,241 195,529 225,315 329,203 76,472 252,731 SG&A Expenses Research and Development 71,586 42,175 113,761 82,446 54,078 136,524 97,542 57,535 155,077 105,166 62,457 167.623 Earnings Before Interest and Taxes Interest 54,172 984 53,188 59,005 1,385 57,620 70,238 1,403 68,835 85,108 1,457 83,651 Income Taxes Net Income 16,457 36,731 18,982 38,638 22,495 46,340 25,875 57.776 MEDFIELD PHARMACEUTICALS Balance Sheet (in thousands of U.S. dollars) 2007 2008 2009 2010 Cash Receivables Inventory 21,465 28,815 24,704 74,984 28,227 39,568 24,316 92,111 29,542 39,117 27,859 96,518 32,251 41,927 30,559 104,737 Property and Equipment Other Assets 102,977 45,937 223,898 118,553 49,312 259,976 127,498 61,569 285,585 129,171 67,718 301,626 Accounts Payable Accrued Expenses Current LTD 25,187 39,236 2.882 67,305 26,460 52,634 3,373 82,467 27,070 55,256 3,801 86,127 30,142 59,850 4,501 94,493 LTD Equity 17,069 139,524 223,898 23,609 153,900 259,976 25,278 174,180 285,585 26,850 180,283 301,626 MEDFIELD PHARMACEUTICALS orecast Based on Existing Products (in millions of U.S. dollars, unless other Costs of Sales Research 23.0% 19.0% Direct Marketing General and Admin 27.0% 4.0% Taxes Discount Ratc 32.0% 8.5% 2010 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Fleximat Sales Cost of Sales 2011 2% 214.77 49.40 2012 2% 219.07 50.39 2013 -50% 109.53 25.19 2014 -50% 54.77 12.60 2015 -50% 27.38 6.30 210.56 47.46 Lodamadal Sales Cost of Sales 2% 40.47 9.31 39.67 10.55 2% 41.28 9.49 2% 42.10 42.94 9.88 2% 43.80 10.07 -50% 21.90 5.04 -50% 10.95 2.52 -50% 5.48 1.26 Orsamorph Sales Cost of Sales 78.97 18.46 2% 80.55 18.53 2% 82.16 18.90 2% 83.80 19.27 2% 85.48 19.66 2% 87.19 20.05 2% 88.93 20.45 2% 90.71 20.86 2% 92.52 21.28 2% 94.37 21.71 96.26 22.14 2% 98.19 22.58 2% 100.15 23.03 102.15 23.50 2% 104.20 23.97 -50% 52.10 11.98 -50% 26.05 5.99 -50% 13.02 3.00 Reximet Sales Cost of Sales 2% 80.00 18.40 2% 81.60 18.77 2% 83.23 19.14 2% 84.90 19.53 2% 86.59 19.92 2% 88.33 20.32 2% 90.09 20.72 2% 91.89 21.14 2% 95.61 21.99 93.73 21.56 97.52 99.47 22.88 2% 101.46 23.34 2% 103.49 23.80 2% 105.56 24.28 107.67 24.76 2% 109.82 25.26 2% 112.02 114.26 25.76 26.28 2% 116.54 26.81 -50% -50% -50% 58.27 29.14 14.57 13.40 6.70 3.35 22.43 Total Sales Cost of Sales Research Direct Marketing General and Administrative 329.20 335.79 76.47 77.23 62.46 63.80 91.22 90.66 13.94 13.43 85.11 90.66 27.15 29.01 57.96 61.65 422.50 97.18 80.28 114.08 16.90 114.08 36.50 77.57 317.04 72.92 60.24 85.60 12.68 85.60 27.39 58.21 266.42 61.28 50.62 71.93 10.66 71.93 23.02 48.91 243.27 55.95 46.22 65.68 9.73 65.68 21.02 44.66 197.43 45.41 37.51 53.31 7.90 53.31 17.06 36.25 189.99 188.09 43.70 43.26 36.10 35.74 51.30 50.78 7.60 7.52 51.30 50.78 16.41 16.25 34.88 34.53 186.27 42.84 35.39 50.29 7.45 50.29 16.09 34.20 189.99 43.70 36.10 51.30 7.60 51.30 16.42 34.88 193.79 44.57 36.82 52.32 7.75 52.32 16.74 35.58 197.67 45.46 37.56 53.37 7.91 53.37 17.08 36.29 201.62 46.37 38.31 54.44 8.06 54.44 17.42 37.02 205.66 47.30 39.07 55.53 8.23 55.53 17.77 37.76 155.59 35.78 29.56 42.01 6.22 42.01 13.44 28.57 131.61 30.27 25.01 35.53 5.26 35.53 11.37 24.16 120.69 27.76 22.93 32.59 4.83 32.59 10.43 22.16 109.82 25.26 20.87 29.65 4.39 29.65 9.49 20.16 112.02 114.26 25.76 26.28 21.28 21.71 30.25 30.85 4.48 4.57 30.25 30.85 9.68 9.87 20.57 20.98 116.54 58.27 29.14 26.81 13.40 6.70 22.14 11.07 5.54 31.47 15.73 7.87 4.66 2.33 1.17 31.47 15.73 7.87 10.07 5.03 2.52 21.40 10.70 5.35 14.57 3.35 2.77 3.93 0.58 3.93 1.26 2.67 Taxes NOPAT