Why Genzyme looks forward to setting up a joint venture with GelText rather than buying an equity share
The joint share between Genzyme and GelText was a co-operation between the two companies thus; both aimed at working together for the sake of their partnership. If Genzyme would have bought equity shares, that would have been just that, an exchange of shares for the facilitation of GelText to launch its first product, Renagel. Buying GelText’s equity shares enables Genzyme to possess a mere number of shares in GelText. Genzyme would therefore not have the privilege of having an equal share from GelText. It would only benefit from profits based on its equity share value (Fenn, Liang and Prowse 133-140).
A joint venture with GelText on the other hand was associated with more benefits for Genzyme. A joint venture is a form of partnership where parties involved have an equal share in the partnership business. It would help Genzyme increase revenue. Genzyme would have a 50% interest in GelText thus, would be entitled to en equal share of profits. The sale of Renagel would be part of Genzyme investment hence, increasing earnings of Genzyme from its sales.
This venture would also enable Genzyme to tap fresh markets for its specialty therapeutics. Genzyme would be involved in the marketing organization for Renagel. By so doing, it will be killing two birds with the same stone as it would also be tapping new markets for its therapeutic products. This way, Genzyme would continuously benefit from increased sales.
The venture would be a pathway for Genzyme to strike another similar deal for the second product belonging to GelText, CholestaGel. This second product would have a much larger market segment with regard to anti-cholesterol drugs. The joint venture would be a factor to consider during GelText’s launch of its second product. The joint venture would make it possible for GelText to include Genzyme in this launch incase capital investment was necessary. As a result, Genzyme would continue to benefit from the joint venture unlike if; it had bought equity shares from GelText (Jacquet 1-3).
Timing of GelText’s fundraising
It was a good idea for GelText to go about the fundraising process before the approval of the Food and Drug Administration (FDA). This is because; GelText will already have established a starting point for the launch of its business by the time FDA approves the drug. Renagel had already gone through all the six distinct stages required for a drug before it reached the market place. What had remained was the approval of the FDA.
The step taken by GelText to approach Genzyme was healthy as it showed that the company was set to go. Therefore, when the FDA got to approve the drug, there would be no wastage of time. As shown in Exhibit 2 in the Genzyme case study (12), Renagel was already in phase III trial and there was a high probability that it would go through FDA filing and obtain FDA approval. Consequently, the next move would be to launch the drug since all the necessary plans and strategies would be in place already.
This action by GelText showed proper planning and strategizing, aimed at avoiding the incurring of unnecessary losses. It would not be in order for GelText to start looking for investors after the drug gained FDA approval, too much time would be wasted limiting the lifecycle of the drug. GelText had already taken all the necessary steps that were required for it to get approved by the FDA; therefore there were no doubts about Renagel’s approval. The action by GelText showed that GelText was result driven and goal oriented as was demonstrated by the ability of GelText to plan ahead so as to achieve a certain goal and result.
Genzyme’s investment of $27.5M for 50% interest in Renagel
Based on an average scenario analysis (Jordan 371-372) for worst and best cases, the investment by Genzyme to invest $27.5 for 50% interest in Renagel was a good idea. There were different factors that changed with respect to the volume of sales. However, the main focus was Renagel’s turnover. It was expected that the drug would reach the European market in the following year once it had its way into the U. S. market.
The eligible market in the U. S. was estimated to be 90%. It was believed that the drug would penetrate by 50% during its fifth year. The best case of the penetration would be realized by a 59%penetration while 20% would account for the worst case. An average of 43% penetration was arrived at. 92% compliance to Renagel was considered to be the most likely outcome. Viewing this from best case scenario, the percentage was extended to 94% and reduced to 75% for the worst case scenario. An average compliance rate was derived, which was 87%. An average of $1,000 annual price for every patient consuming Renagel was derived. This was obtained on the basis that $1,100 was estimated to be the most likely price in a range of between $600 and $1,300 (Jacquet 8-9).
It was arduous to establish the variable costs of Renagel but, they were not critical factors to consider while evaluating Renagel’s success. An industrial average of 70% gross profit margin was used for the analysis despite the fact that it was also difficult to come up with a gross profit margin for Renagel. As a result, a 5% standard deviation was used. The target market was estimated to be around 200,000. The strategy for marketing was directed towards the doctors who had the largest patient populations. 45 people would be used as the sales force to market the drug. The marketing costs were scheduled to be $200,000 for every sales force and this would continually appreciate with 5% on a yearly basis.
The team however realized that the marketing costs could actually fall within a range instead of the scheduled marketing costs. Based on assumption, a lower marketing cost of 87% was developed while a 20% higher marketing cost was scheduled on the higher side. A most probable marketing cost of 93% was arrived at, hence, reaching at an average of 100%. 40% of the sales force costs were considered to account for general and administrative costs.
A capital expenditure of $14 million for a three year period of the venture was forecasted for the net working capital. The net working capital would consist of a 45-day period for collecting receivables, 90-day duration for the Renagel inventory and 45-day duration for payables. Since discounting cash flows was part and parcel of the joint venture, it was necessary to choose a cost of capital for that purpose (Jordan 467-475). It was typical of biotech industries to have a 20-25% discount rate with regard to products whose clinical trials were advanced. Therefore, Genzyme and GelTex obtained weighted-average costs of capital at 14.75% and 23% respectively.
Conclusively, a hypothetical 50% interest of Genzyme in the joint venture would yield $44.896. Upon subtraction, the net present value (NPV) for Genzyme became $17.396. This would not be so bad after all, based on the assumptions as indicated above. The NPV derived for Genzyme proved that investing in the joint venture would be a good idea (Jacquet 9).
Works Cited
Fenn, George, Nellie Liang, and Steven Prowse. The Economics of the Private Equity Market. Washington: Division of Research and Statistics 2000.
Jacquet, Pierre. Genzyme. Charlottesville: University of Virginia Darden School Foundation, 1999.
Jordan, Ross. Fundamentals of Corporate Finance. Vol 1. New York: McGraw-Hill, 2010.
Jordan, Ross. Fundamentals of Corporate Finance. Vol 2. New York: McGraw-Hill, 2010.
Kaplan, Steven, and Antoinette Schoar. Private Equity Performance: Returns, Persistence, and Capital Flows. Journal of Finance 60.4 (2005): 1791-1823.
Mansour, Nick. Grand Junction. Revised. Stanford: Stanford University, 2007.