The Economics of Running a Genomics Company

Genset sign religious offering Prof. Nahata FIN 9774 1. What atomic number 18 the economics of running a genomics come with? What is the billet of large pharmaceuticals in genomics? How competitive is the genomics assiduity? Running a genomics comp whatsoever is extremely hood intensive. Research and development, palp adequateing, and developing foodstuffable products cost a lot of funds. The associated dangers of working with unvarnisheds are in addition at issue here. Genset mustiness(prenominal) be able to defend its clear in court against tangible trolls, which can layer additional costs upon the dandy intensive essential line of reasoning activities of the firm.At this point in time, the patent situation ring mapped divisors is alike tentative. The US courts sacrifice yet to rule on the patent status of genes, making the market for patented genes suspect. The different difficulty of the genomics industry is winding research into impose revenue. It sc oops a very long time to turn a patented gene into a medical product, which has to pass through several rounds of scrutiny before arriveing the market. Even if Genset is able to take chances a major gene, they might not play returns for several years. massive pharmaceutical companies are integral to the genomics industry.Genset researches genes that are connect to a extensive variety of diseases. However, galore( maculationnominal) mapped genes provide not be linked to some(prenominal) underlying genetic disorder. The genes that are linked to treatable disorders must be researched to get hold chemical compounds that interact with genes to treat the underlying disorder. turn Genset has the intellectual energy to research the genes, they are not capable of developing drugs to interact with the genes they have mapped. Through licensing agreements, genomics companies could decrease the run a risk and issue forth of time before they could stem positive earnings.The licens ing agreements generated revenue immediately by selling some or all of the rights to future applications of proper(postnominal) genes. consequently the genomics companies did not have to hold in for the future applications to mature before they could realize positive earnings. The industry is to a fault extremely competitive. There are 114 biotechnology companies in France, with an additional 1,050 in the United States. Several genomic companies have already passed through their IPOs with mixed victor. rivalry is fierce to discover every gay gene. It is a quicken to see who light upons and catalogues all the human genes by the end of the millennium.By early 1996, thither was an intense race to map all genes and genomics companies were getting closer to finale the task every day. There is alike heavy challenger betwixt the genomic companies and pharmaceutical companies. 2. What is happening at other genomics companies? What is Gensets competitive sit in the genomics ind ustry? Many genomics companies have passed through IPOs and toffee-nosed patronage rounds. At 250 employees, Genset is larger than all the other comparable companies provided in the case. Many other companies are operating in the sequencing business, developing libraries of sequenced genes.Beyond private companies, many research universities, organization-sponsored facilities, and research institutions are also sequencing genes. While progress has not been lightening fast, it is deserving noting that at that place is a finite supply of genes in the human genome. The amount of genes that are functional from Gensets perspective is unkat oncen. While competition to discover every gene was fierce, Genset was engaged in the imperious and comprehensive analysis of the genetic map of the humans to identify and patent genes and regulatory regions related to selected common diseases.Genset was a unique firm beca function it was both creating a library of genes and researching the gen etic causes of diseases. They intended to discover drugs to treat these diseases and enter into strategic partnerships with pharmaceutical companies to develop and market these drugs. Genset not exactly researches genes, hardly it also is the worlds largest creator of synthetic deoxyribonucleic acid. Bradys hopes that this line of business is extremely important to Gensets future. Part of the in demand(p) $70 meg will be devoted to tripling the out send of synthetic DNA by updating its sequencing machines and increasing its workforce.Part of the m iy was needed to finance more equipment secures and further research for its DNA mapping and sequencing appendages to strike its competition. The industry is expanding quickly, with many small, nascent firms popping up, searching for private funding. The adorn is expanding quickly, with each firm trying to take in itinerarys to monetize their findings as quickly as accomplishable. 3. What are the key success factors in genomi cs? What are the risk factors? What is the nature of cash flows in genomics? To be successful in genomics, a firm must have s puff up to acquire the inevitable equipment and personnel to quickly map and patent genes.Given the finite amount of genes available to map, the genomics industry is truly deadlocked in a race to sequence the human genome. While upbringing the necessary capital is difficult, the more difficult aspect of the genomics industry is finding ways to monetize their research. Genset is blushful to be the world leader in synthetic DNA. While their research may take years to pay off, their synthetic DNA operation gives them a reliable revenue stream. Genset is unique within the genomics industry in that respect and another(prenominal) they are not just sequencing genes they are also researching the genetic causes of diseases.This additional research makes their genetic patents and research more precious to pharmaceutical companies that will be assured that they are pursuing worthy genes. To succeed profitability, Genset needed to successfully discover genes related to particular diseases, find partners to develop the products, conduct clinical trials, get regulatory approvals, and successfully assembly and market such products. But the risk with this plan was that, Genset was establish in France and patented its discoveries in France and the Euro zone countries.They were also unsure if the discovered gene fragments or genes (without known functions) could be patented. This was a BIG risk, in that any other firm could discover the genes function and patent it. comparablely since they did not have any patents in the States, where they were considering raising money put a big question on the viability of the plan. There was also the possibility that the patents, mainly on which the firms value was based on, were broad enough to give the firm a competitive improvement besides any patent could be challenged, invalidated or circumvented by ot hers. . Are Gensets cash flow projections reasonable? How often cash does the caller-up need and when? To achieve profitability, Genset needed to successfully discover the genes associated with particular diseases and find appropriate strategic partners to develop products, conduct clinical trials and obtain regulatory approvals. Genset entered into a triplet-year strategic alliance with Syntehlabo SA which focused on discovering genes associated with prostate cancer.They were also under discussions with an affiliate of Johnson & Johnson to target schizophrenia. Their financial projections showed that in the future the smart set expected its revenues to come primarily from these types of contract revenues. The company has also filed three patent applications in France relating to its gene sequencing techniques. They are projecting their revenues based on successfully discovering these genes. Genset is looking to acquire approximately $70 cardinal to finance more equipment purch ases and further research.The company needed $30 million for capital expenditures including expansion of its TGS high throughput sequencing adroitness, the construction of a new mapping facility and polymorphism scanning lab. Another $40 million would fund on pass research and development expenses. The funds were needed almost immediately. Without this technology and research, Genset would come upon behind with no chance to recover. Raising this capital would be Gensets largest financing project and would augment the $54. 2 million of funding embossed through private equity (70. 4%), bank loans (13. 5%), political science bonds (7. %) and other loans (8. 9%). We accept that Gensets cash flow projections could be overstated since a major part of their cash flow extension is contract revenues which would have to be made with Pharmaceutical firms. The case mentions that all of a suddenly all the patents that Genset has are registered and protected in Europe. Most pharmaceutical f irms on the other hand are based in North America with it being the largest market and unless all the patents that Genset are are registered and protected in North America, we believe they would not be in a position to achieve those cash flows.Hence we have discounted these cash flows by 40% initially. Also we believe that post an IPO and strategic investors from North America, Genset will develop the capability and expertise to pursue these patents listed in N. A and achieve the egression that they expect now. Thus we have a terminal fetchth rate of 5% factored in our model. However we have factored in the capital expenditure schedule that the firm has planned on the onset and that has been factored in the model since these expenses are essential in the pursuit of the firms future projections. 5.What is the current state of the financial markets? Are they conducive for an initial public offering by Genset? Would a private placement be a better alternative? The current state of th e financial markets is healthy. upstart IPOs by other genomics firms have fared very well, despite the inherent risk in the business. Gene research is seen as the future of science, just as physics was the driving science of the early twentieth century. Given the success of recent offerings (with Human Genome Sciences and Myriad Genetics being the most successful), Genset is check o investigate the possibility of a public offering. US capital is flowing into genomics at a steady clip, making it an appealing extraction of funding. The conditions associated with private funding make it less appealing to Genset. Genset is also tall(a) to be able to raise their capital requirements through private funding alone. They have already received $54. 2 million in private funding, with 59. 3% of their shares owned by private investors. Private investment in biotechnology is at an all-time high, but funds are curb from putting more than 10% of their total capital into any one business.This m ay require that Genset form deals with multiple funds, further dividing their remaining equity. Also there is a possibility that post these deals, while Genset would further edit out their equity there could be a situation where they could again be short of funds and raising funds in the future via this course could/could not be difficult. However once you access the public markets there is always the option of accessing the markets continuously for multiple capital raising activities. Thus going public sounds much more attractive.Also in the future, stipulation the right strategic partner and if making continued contract revenue agreements becomes difficult they could also enter into a partnership or voice menace. Given that the firm would then have carnation that is listed on the bourses makes this much more easier and hence going public is an extremely attractive choice. 6. Should Brandys take such extreme measures to issue stock in both France and the US? Why is he doing i t? What additional costs and requirements are raised in doing so? Bradys is understandably weary about issuing stock in both France and the US.The offering would cost Genset twice as much, losing roughly 20% of their raised capital to fees and operate. Before the offering, Genset would need to review their financials and make up their one-time(prenominal) statements to comply with both US and French law. They would also need to undecomposed accountants, lawyers, and underwriters in both France and the US, which will cost the firm a muscular price. Bradys is pursuing this option to expose the firm to as many possible sources of funding as possible. The US capital market is deeper than that of France.However, since the firm is French, it is able to draw some of the most talented French scientists to its firm. The US genomics market is deeper, making the pursuit of human capital more difficult. Bradys understands that if he were to provided make an offering in France, he would be incapable of raising their required funds. Bradys needs the US market not just for capital. He also needs the US pharmaceutical industry and patent protection. By having American capital, Genset can more effectively lobby the US government for the patent protection they need to make their mapped genes intellectual properties.It is also worth noting that Genset has plenty of cash reserves and is not as badly in need for capital as Bradys believes. While the US has yet to consult in on patent protection for genes, the increased amount of physician on the side of genomics indicates that the courts will most likely uphold the rights of companies to patent their library of genes alongside their patented processed. 7. Why is Genset going public now? Does it make sense? Genset is going public now because they need $70 million in capital to advance their research and to not go on behind other genomics companies.There are some positive points to going public now. Tapping into the US mark et makes sense because of the higher amount of venture capital expenditures over their native France. If Genset does not find a way to raise this capital, they will most likely fall out of competition among their direct competition. The drawbacks to going public are many. No other similar genomics business has raised $70 million in their IPO. The highest previous offering was by Human Genome Sciences, which raised $66. 7 million. However, Human Genome Sciences did not construction the challenges of Genset.Most offerings lose 10% of their raised capital to offering related services. Genset could conceivably lose 20% of their offering value, as they must prepare for offerings in both France and the US. A dual offering would require accountants, lawyers, and services for two different markets in two different languages. If Genset were to achieve their desired level of $70 million, they would need to raise roughly $87. 5 million in capital, before related costs are tabulated. It makes sense that Genset go forward with an IPO at this time, although it is not without its dangers.If their IPO fails, the firm would be tainted and they would be hard pressed to raise capital elsewhere. They could kinda seek more private capital, which would not preclude an IPO in the future. Even if another round of private capital falls short of the $70 million mark, they could receive bridge funds that would carry them to another round of funding through venture capital or an IPO. However, presumption the amount of firms entering the market, Genset could easily hurt their value by waiting. The markets could grow weary of genomics companies and fail to pony up capital to even the outmatch companies.Genset should strike while the iron is hot, not wait until the market has cooled down. Genset must firmly trust their advantage of having the most talented French scientists in the US market. The flood of US-based genomics firm has diluted the talent pool of American scientists. Genset h as a strong advantage in this respect. Coupled with their superiority in synthetic DNA and competitive edge in DNA sequencing, Genset is certain to be a much sought after stock. 8. What valuation would you put on Gensets stock? Be sure to support your valuation with specific analysis. You could try to be creative hereWe estimate Gensets stock to be priced at $10. 57 per share. We are using a genus Beta of 1. 6 which is based on the weighted market capital of all comparable companies. The reasoning behind this is that the majority of the listed firms are in the US and hence it is difficult to find closely comparable firms. We also use the P/E based valuations since the value of the firm will also depend on how the comparable firms have performed in the market post IPO. The terminal growth rate is 5% which is reasonable since we havent accepted the revenue streams given to us by the firm.We have cut back them to 60% of the firms estimates since the numbers look highly plausive and could be difficult to achieve given the fact that the firms patents are registered only in Europe and could not be easily marketable in the US where most development and pharmaceutical firms are based. The revenues depend on agreements with pharmaceutical firms and if these agreements are subjective then the associated revenues will also be subjective. The core valuation itself comes from a variety of inputs that we considered.While we also did comparable company valuations, we agreed upon considering using the adjusted present values mode which realizes a share price closest to that using a place of share prices obtained using the multiples method. We used a range of discount rate and P/E values associated with them, from the range of comparable firms given to us. We believe this gives us a range of valuations and taking out the High-Low values, we use the average value Net display Value of the firm and the associated stock price derived from it then ending with a share price of $10. 57 and a NPV of $44. 796mn. We believe this is fair onservative valuation and reflective of the risk as well as the potential associated with the firm. This reflects a good middle ground for the investors to get in on a company with great potential as well as for the firm to capitalize on its unique position in the biomedical space. Adjusted Present Value Approach Inputs revenue send Unlevered Cost of big(p) Cost of Debt Growth Rate (Product Sales 2001 2003) perch Growth rate Other Income/Loss Depriciation (Straight Line) CAPEX (every year) All Value in Thousands 40% Asset Beta (comps) Risk Free Rate food market Risk Premium concluding growth rate 1. 7 6. 05 7. 09 13. 62% 16. 2% 15. 00% 5. 00% 0 20% 3% $10,000. 0 DEBT 20,000 Adjusted Present Value (APV) (A) NPV of Unlevered Investment Date tax revenues Expense Other Income/Loss wear and tear and Amortization EBIT EBIT(1-T) Add derogation Gross Cash Flow little Capex Less Change in WC Free Cash Flow goal Value P V Factor PV of Future Cash Flows (at time 0) NPV of Unlevered Investment (B) PV of vex value Shields Date Debt (D) Interest Expense Tax Shield Terminal Value of Tax Shield PV Factor PV of Tax Shields (at time 0) NPV of Tax shield Infinite Horizon 1996 1 $12,700. $23,300. 0 $0. 0 $15,662. 6 $26,262. 6 $15,757. 6 $15,662. 6 $95. 0 $20,000. 0 $0. 0 $20,095. 0 1997 2 $21,300. 0 $26,800. 0 $0. 0 $17,662. 6 $23,162. 6 $13,897. 6 $17,662. 6 $3,765. 0 $10,000. 0 $0. 0 $6,235. 0 1998 3 $44,600. 0 $31,500. 0 $0. 0 $19,662. 6 $6,562. 6 $3,937. 6 $19,662. 6 $15,725. 0 $10,000. 0 $0. 0 $5,725. 0 1999 4 $68,600. 0 $36,700. 0 $0. 0 $21,662. 6 $10,237. 4 $6,142. 4 $21,662. 6 $27,805. 0 $10,000. 0 $0. 0 $17,805. 0 2000 5 $129,200. 0 $46,500. 0 $0. 0 $10,000. 0 $72,700. 0 $43,620. 0 $10,000. 0 $53,620. 0 $10,000. 0 $0. 0 $43,620. 0 2001 2002 2003 6 $148,580. $53,475. 0 $0. 0 $12,000. 0 $83,105. 0 $49,863. 0 $12,000. 0 $61,863. 0 $10,000. 0 $0. 0 $51,863. 0 7 $170,867. 0 $61,496. 3 $0. 0 $10,000. 0 $99,370. 8 $59,622. 5 $10,000. 0 $69,622. 5 $10,000. 0 $0. 0 $59,622. 5 8 $196,497. 1 $70,720. 7 $0. 0 $10,000. 0 $115,776. 4 $69,465. 8 $10,000. 0 $79,465. 8 $10,000. 0 $0. 0 $69,465. 8 $673,852. 8 0. 3601 $267,668. 6 $71,549. 8 0. 8801 $17,686. 4 $331,280. 9 0. 7747 $4,829. 9 0. 6818 $3,903. 3 0. 6001 $10,684. 5 0. 5282 $23,038. 3 0. 4649 $24,108. 7 0. 4091 $24,393. 8 1 $12,163. 2 $1,965. 0 $786. 0 2 $33,437. 2 $5,401. 9 $2,160. 7 3 $42,913. $6,932. 8 $2,773. 1 4 $41,347. 9 $6,679. 9 $2,671. 9 5 $27,550. 7 $4,450. 9 $1,780. 4 6 $20,000. 0 $3,231. 1 $1,292. 4 7 $20,000. 0 $3,231. 1 $1,292. 4 8 $20,000. 0 $3,231. 1 $1,292. 4 $8,000. 0 0. 860916465 0. 74117716 0. 63809162 0. 54934358 0. 47293893 0. 407160916 0. 350531536 $676. 68 $1,601. 50 $1,769. 49 $1,467. 82 $842. 00 $526. 22 $453. 04 0. 301778371 $2,804. 25 $10,141. 00 NPV of endure $341,421. 92 total debt market cap genome therapeutics 1. 4 131. 4 human genome sciences 6 697. 4 incyte pharmaceuticals 0. 1 244. 8 millenium phar maceuticals. 2 7 non-finite genetics 0. 307 sequana therapeutics 4. 1 189. 9 cash 0. 01065449 0. 008603384 0. 000408497 0. 002931596 0. 021590311 9 107. 5 41 17. 8 72. 5 41. 3 EV (calc) 123. 8 595. 9 203. 9 -10. 6 235. 4 152. 7 revenue 11. 2 9. 6 11. 1 22. 9 3. 6 12. 4 revenue multiple (calc) EBITDA 11. 05357143 0. 6 62. 07291667 -31. 1 18. 36936937 -10. 1 -0. 462882096 65. 38888889 -5. 2 12. 31451613 -6. 1 28. 12273006 0. 053571 -3. 23958 -0. 90991 0 -1. 44444 -0. 49194 EBITDA multiple (calc) 206. 3333333 -19. 1607717 -20. 18811881 -45. 26923077 -25. 03278689 19. 33648503 MEAN median HIGH LOW 28. 12 15. 34 65. 39 -0. 46 19. 4 -20. 19 206. 33 -45. 27 Base Case tally Revenue Total Expense depreciation Taxable Income Taxes After Tax Depreciation Capital Expenditures FCF Terminal Value FCF Post Terminal Value PV 1996 5. 84 2173. 6575 0. 6771654 1996 12700 23300 15662. 6 -26262. 6 0 -26262. 6 15662. 6 20000 -30600 -30600 $313,353. 57 1997 21300 26800 17662. 6 -23162. 6 0 -23162. 6 1 7662. 6 myriad -15500 -15500 1998 44600 31500 19662. 6 -6562. 6 0 -6562. 6 1999 68600 36700 21662. 6 10237. 4 3378. 342 6859. 058 2000 129200 46500 myriad 72700 23991 48709 0. 596237 0. 30626 depreciation capex Depreciation 1992 1991 0. 19413 0. 016384 0. 017899 0. 107211 0. 053256 0. 080234 includes patent purchase+investing activities 1 2 3 4 5 6 20 32 19. 2 11. 52 11. 52 5. 76 19662. 6 21662. 6 ten thousand 10000 3100 18521. 658 10000 10000 48709 593323. 1 3100 18521. 658 642032. 1 51144. 45 Conservative 1996 Total Revenue Total Expense Depreciation Taxable Income Taxes After Tax Depreciation Capital Expenditures FCF Terminal Value FCF Post Terminal Value (B) PV of Interest Tax Shields Date Debt (D) Interest Expense Tax Shield NPV of Tax Shields FCF including tax shield Total Net income NPV of Plan $44,796. 5 7620 23300 15662. 6 -31342. 6 0 -31342. 6 15662. 6 20000 -35680 -35680 1997 12780 26800 17662. 6 -31682. 6 0 -31682. 6 17662. 6 10000 -24020 -24020 1998 26760 31500 19662. 6 -24402. 6 0 -24402. 6 19662. 6 10000 -14740 -14740 1999 41160 36700 21662. 6 -17202. 6 0 -17202. 6 21662. 6 10000 -5540 2000 77520 46500 10000 21020 6936. 6 14083. 4 depreciation capex Depreciation 1992 1991 0. 019413 0. 016384 0. 017899 0. 107211 0. 053256 0. 080234 includes patent purchase+investing activities 1 2 3 4 5 6 20 32 19. 2 11. 52 11. 52 5. 76 10000 10000 14083. 171549. 5 -5540 185632. 9 14787. 57 1 $12,163. 2 $1,970. 4 $788. 2 $10,143. 89 ($34,892) 2 3 $33,437. 2 $42,913. 2 $5,416. 8 $6,951. 9 $2,166. 7 $2,780. 8 4 5 $41,347. 9 $27,550. 7 $6,698. 4 $4,463. 2 $2,679. 3 $9,785. 3 20000 $3,240. 0 $1,296. 0 $8,000. 000 $16,084 ($21,853) ($11,959) ($2,861) $23,869 PV 1996 Shares majuscule Share Price $34,652. 16 4,574 $7. 58 Present Value $28,139. 37 $118,630. 13 $7,862. 21 $68,507. 03 Rate 0. 2 0. 2 0. 3 0. 3 PE 11 25 11 25 Share Price $6. 15 $25. 94 high $1. 72 low $14. 98 10. 57 median