Roche Products Pty Limited

GSBS 6130 – Corporate Finance

This is an individual assignment. The assignment is marked out of 100, and counts towards 25% of the total course assessment

Word limit: 2,500 words

 

Submission Instructions:

 

  1. Please submit the assignment in a Word document with an assignment cover sheet included via Turnitin by the due The assignment should include all the required tables, which can be copied and pasted from Excel. Please format the tables/ calculations in a reader-friendly way.
  2. Besides the submission through Turnitin, please submit the Excel file by emailing it to me (in the email title, please state GSBS6130_Assignment_your name). You need to send me the Excel file by the due date as well. Failure to submit this file result in a deduction of 20 marks (out of 100).
  3. Submission by other means (email/hard copy) or forms (scanned copy) will attract no

 

Penalties:

 

  1. Penalties of 10 marks will apply for every day late.
  2. Penalties will also apply if academic misconduct (plagiarism, cheating, copying etc etc) is found.

 

 

Roche Products Pty Limited

Today is January 2nd 2017. You are the product development manager for the Roche Products Pty Limited (Australia). Roche is a fairly large pharmaceutical company that has a number of patented drugs under its belt. With a number of the firm’s patents expiring in the next three years, there has been some pressure to expand its production lines. You have been asked to make recommendations of new investment to the Board, specifically in reference to two new drugs recently developed within the company’s Research Department.

The first development is a new drug, called LDE225, which helps to slow down cancer growth. Upon your request, the project leader provides some standard cost estimates if the product is approved and launched in early this year.

Development costs                20 million

 

Testing costs:                         10 million

Initial Marketing costs:         12 million

Initial outlay                          42 million

The new drug is expected to generate $36 million in sales in the first year. The sales revenue generated from this product alone is expected to grow at a solid rate of 12% pa in the first three years and stay in line with inflation thereafter until its patent expires in 10 years.

The second recommendation is to introduce BKM120, which blocks a certain type of protein that is crucial for cancer cells to spread. This product has passed the testing phase and can also generate sales starting from next year. The initial marketing cost is around $10 million. Its sales revenue is expected to start off from $17.45 million in the first year and continue to grow steadily at 7% over the next 10 years.

The manufacturing of either product would be done in an unused plant of the firm which would otherwise be leased out for $100,000 per year after tax. Required equipment costing $5 million is expected to have a sale value of $300,000 after 10 years. The book value of the equipment by this time is zero. For both drugs, fixed production costs were estimated to be $1.5 million per year while variable production costs are expected to be attributable to 25% of sales revenues for each project. To get the project underway, additional inventory of $500,000 would be required. The company would also need to increase its account payable by $100,000 and its account receivable by $200,000. It is anticipated that the net working capital committed to each production line would be maintained at 20% of its sales each year thereafter. Investment in working capital can be recovered at the end of year 10.

The nominal weighted average cost of capital was calculated to be 14% p.a., which is applicable for both projects. The current inflation of 3.5% pa is expected to remain over the next 20 years, so does the company’s tax rate of 30%.

Requirements:

  1. You have been asked to advise the manager which one of these proposals should be adopted using the NPV analysis. Base on the base-case estimates, propose which project Roche should invest in.
  2. In addition, you need to provide some break-even analysis and sensitivity analysis using the numbers that could be questioned by the committee. This time, the main concern is that the expectation of the sale growth in the first recommendation would turns out to be overly optimistic. You believe there would be a 20% chance that sales growth of LDE225 in the first three years will be 25% higher and a 40% chance of being 25% lower. In addition, there is a 25% chance that the variable costs account for 35% of total sales, and a 25% chance that the variables costs account for 22% of total sales. The initial marketing cost may also be 25% lower (10% chance) or 25% higher (40% chance). Based on these analyses, comment on the viability of LDE225.
  3. Another factor of uncertainty stems from the requirement of obtaining approval from the Food and Drug Administration (FDA) prior to marketing the drug. If the FDA delays the launch of these products by two years, would your decision change?

 

 

Mark allocation

 

Section Maximum mark
Table of inputs/ assumptions 6
Treatment of depreciation 5
Treatment of taxes 5
Treatment of working capital 10
Free-cash-flow analysis 20
Base case NPV and IRR 4
Break-even analysis 5
Sensitivity analysis 15
Proper report format 5
Quality of report/ discussion[1] 20
Conclusions based on analysis 5
Total*

* If penalties apply, your total mark will be adjusted to reflect the penalties.

100

 

 

[1] This include explaining your assumptions/ calculations when necessary.