Main Issue In 2000, Rich Kender, Vice President of Financial Evaluation and Analysis at Merck & Company was discussing the opportunity of investing in licensing, manufacturing and marketing of Davanrik, a drug originally developed to treat depression by LAB Pharmaceuticals. LAB proposed to sell the right of all the future profit made from the successful launch of Davanrik at the cost of an initial fee, royalty payments and additional payments as the drug completed each stage of the approval process. Merck & Company's organizational goal is to constantly refresh it's company's drug development portfolio and reach as many customers as possible during the patented time. So there was not only the potential of financial gain or quantitative aspect of the offer, but also the qualitative value which will be added by getting better positioning in the risky pharmaceuticals industry. Presenting team analysis The presenting team started out by giving a background about the industry and the companies. The main issue and financial terms were explained. However we feel that some of the assumptions such as Merck's flexibility to back out from building the plant in case of failure were not clearly mentioned. They failed to explain why Davanrik's market risk was lower than its stand alone risk. Discounted cash flow method which is the traditional financial tool for evaluating capital allocation was rejected without explanation. We can rationalize not using DCF for its inability to capture risk uncertainty. Passive investments such as stocks and bonds are good candidates to use DCF on. Once these investments are made investors cannot influence the cash flow generation. We agree that decision tree can be used to make preliminary judgment and real option analysis can be used to get more definitive answer. We think that sensitivity analysis and scenario analysis could have been useful since all inputs may change over time. Merck's investment valuation Decision tree approach: This approach is suitable for projects that do not have to be funded all at one time. The alternatives, probability of payoffs are identified using diagrams which are simple to understand and interpret with brief explanation giving important insights. It identifies managerial flexibility to reevaluate decisions using new information and then either invest additional funds or terminate the project. Results of decision tree: This analysis shows that the projects NPV as 13.37 million dollar. Our result is slightly different than the presenting team because of rounding. But both of our teams had positive NPV which suggest that the project should be accepted.
The painkiller Vioxx was introduced in 1999 by Merck & Co. It has been used by over 20 million Americans since it was put on the market. Vioxx remained on the market for approximately five years without adequate warnings about its risks. In September of 2004, Merck took Vioxx off the market after a study revealed that it doubled the risk of heart attack or stroke for patients that used it for more than 18 months. Although Merck claimed that they had no idea of these possibly lethal side effects, some internal documents imply that they had been aware of the problem for years and had not made moves to change it. Over 300 lawsuits have been filed against Merck, and it is expected that thousands more will arise.
Bristol-Myers Squibb is a worldwide health and personal care company with major businesses in medicines, beauty care, nutritionals, and medical devices. BMS is a leader in innovative therapies for cardiovascular, metabolic and infectious diseases, central nervous system and dermatalogical disorders, and cncer. They are also leaders in consumer medicine, orthopaedic devices, ostomy care, wound management, nutritional supplements, infant formulas, and hair and skin care products.Some of the very well known products manufactured by Bristol-Myers Sqibb are Bufferin, Excederin, Enfamil, Clairol, and Sea Breeze. Another large part of BMS is their research and development of new pharmecutical products. Their annual budget for research and development is in excess of one billion dollars.
Star Appliance is looking to expand their product line and is considering three different projects: dishwashers, garbage disposals, and trash compactors. We want to determine which project would be worth doing by determining if they will add value to Star. Thus, the project(s) that will add the most value to Star Appliance will be worth pursuing. The current hurdle rate of 10% should be re-evaluated by finding the weighted average cost of capital (WACC). Then by forecasting the cash flows of each project and discounting them by the WACC to find the net present value, or by solving for the internal rate of return, we should be able to see which projects Star should undertake.
Earlier 2002, the stock price of Agnico-Eagle Mines sharply decreased by $1 finally closed at $13.89. This price has reached one of the lowest level, from the company's historical perspective. As a professional equity portfolio manager, who has a large number of AEM stocks on hand. Acker and his team are necessary to find a proper way to estimated the fair value of AEM as well as its equity. Discounted Cash Flow (DCF) has been chosen to do this job. The theory behind DCF valuation approach is that the firm's value can be estimated by using the expected future free cash flow discounted by an appropriate discounted rate (Koller etc 2005). However several assumptions need to be clearly examined within this approach. The following sections are showing the process of DCF step by step.
...eting tool that show the differences between the present value of revenues and the present value of expenses. The project can be profitable when the net present value is positive. In other words, the present value of revenues is greater than the present value of expenses. Profitability index is another tool for evaluating investment projects, which is the ratio of the PV of benefits on the PV of costs. A project can be beneficial if the profitability index is greater than 1. Also, it has the same idea as NPV that In other words, the present value of benefits is greater than the present value of costs. However, these two methods (NPV and Profitability Index) have been used to evaluate the proposal of implementing EHR.
The two main issues in this case are the project analysis and financial forecasting. The project should be analyzed before doing the forecasting, because any recommendations on the project will affect financial forecasting for the next two years.
Eli Lilly and Company is an American global pharmaceutical company. Colonel Eli Lilly, a pharmaceutical chemist and veteran of the U.S. Civil War, founded Eli Lilly and Company on May 10th, 1876 in the state of Indiana, Indianapolis which is where the company's headquarters are currently located.
Analysis Introduction This project belongs in the engineering-efficiency category; therefore, it has to fit at least 3 of 4 performance hurdles, which are 1. Impact on EPS; 2.Payback; 3.Discounted cash flow and 4. Internal rate of return. In this article, some of those involved explained and described their opinions; however, professional knowledge may have been lacking.
Threat of new entrants is relatively high. Companies forming alliances are potential rivals. Even if earlier such company was not considered to be a threat, after merging with some research and development company or forming alliance with another pharmaceutical company it would become a rival to Eli Lilly. The threat is however weakened by significant research and development costs necessary to successfully enter the business. Eli Lilly’s focus on a relatively narrow market of sedatives and antidepressants weakens the threat of new entrants, but other products that form lesser part of company’s sales such as insulin and others are exposed to high threat of new entrants. The need of obtaining certificates and licenses also weakens the threat of new entrants. Discussed above leads to the conclusion that threat of new entrants is medium.
Projects are widely used by many organizations and government institutions in the course of conducting their business. One of the reasons for this is because they have been proven to be effective in initiating change and translating strategic programs into daily activities. However, it has been established that most projects fail to deliver on time, budget, and customer specifications. In most cases, this failure is caused by over-optimism by the project management team. This over-optimism commonly referred to as optimism bias can simply be defined as overestimating the projects benefits and conversely underestimating its cost and duration time. Research have portrayed that this is often caused by failure to properly identify, understand, and manage effectively the risk associated with the project therefore putting its success at jeopardy(Mott McDonald, 2002). Fortunately, this biasness can be detected and minimized during the project gateway process.
As noted in section 1 and 5, the MD has acquired a wealth of knowledge and market since he worked in the same industry for the past five years. Financing has not been covered yet, therefore, the discussion on financial risk will take place in section 7. Other the other hand, Gartner and Liao (2011) indicates that strategic risks should also be considered which looks at the overall success of the new venture and its rate of growth in the next few years. While high risks yields high returns, Spinelli and Adams (2016, p.126) argues that ‘entrepreneurs take calculated risks and avoid risks they do not need to
The case under analysis, Eli Lilly & Company, will be covering the positives and negatives with regards to the business situation and strategy of Eli Lilly. One of the major pharmaceutical and health care companies in its industry, Lilly focused its efforts on the areas of "drug research, development, and marketed to the following areas: neuroscience, endocrinology, oncology, cardiovascular disease, and women's health." Having made a strong comeback in the 1990's due to its remarkably successful antidepressant Prozac, was now facing a potential loss in profits with its patent soon to expire. The problem was not only the soon to expire patent on Prozac, but the fact that Prozac accounted for as much as 30% of total revenue was the reality Eli Lilly now faced. (Pearce & Robinson, 34-1)
To test the financial feasibility and plan acceptability, there must be information on the magnitude, and share of estimated project cost that are reimbursable. This information can be derived from cost allocation. Also where cost sharing is required in the multipurpose planning process cost allocation can be applied. Cost allocation also provides information necessary for allocating the real expenditures ensuring that the cost account are maintained in line with plan formulation and allocation principles during the subsequent c...
One of the key areas of long-term decision-making that firms must tackle is that of investment - the need to commit funds by purchasing land, buildings, machinery, etc., in anticipation of being able to earn an income greater than the funds committed. In order to handle these decisions, firms have to make an assessment of the size of the outflows and inflows of funds, the lifespan of the investment, the degree of risk attached and the cost of obtaining funds.
For decision making purposes, the projects can be further divided into two groups which is independent project and mutually...