Medfield

due 5/21

 excel spreadsheet requirement for the table

THE MEDFIELD PHARMA CASE: FIRM VALUATION AND ETHICAL CONSIDERATIONS OF REFORMULATION

Understand that the Medfield case has 2 major problems: 1) Firm Valuation – Impact of Patent Loss and Reformulation; 2) Ethical Considerations – How to Ensure Patients and third-party payees are not hurt

Organize your paper around the case questions, use them as an organizing device. This will benefit you in several ways: 1) provide a framework for constructing your paper; 2) ensure I (your reader) understand exactly what question you are answering; and 3) ensure you answer every question.

Use examples from Pfizer, AstraZeneca and other firms in EXHIBIT 3 to substantiate your thought.

1. What is the current value of Medfield as a company? Use the exhibit 4 spreadsheet to calculate the NPV of Medfield. Compare this result to the offer price and provide your reasoning for the difference.

2. If we consider the sale of Medfield as the sale of existing assets how does the elimination of R&D, investment in future assets, change the valuation of Medfield? (Using the exhibit 4 spreadsheet distinguish between the NPV value of existing products and R&D)

3. What is the value that would be created by a reformulation? Complete and explain the table below.

35

25

25

25

25

2%

2%

2%

2%

2%

2%

2%

-50%

-50%

0.00

57.99

0

0

0

0

0

0

0

0.00

8.59

0

0

0

0

0

0

0

0

0

0.00

2 0 11	2012	2013	2014	2015	2016	2017	2018	2019	2020	2021	2022	2023	2024
Incremental Research		35
Incremental Special Marketing					25
Growth								2%			-50%	2%	-50%
New Sales	214.77
Marginal Sales (New Sales – Original Sales				0.00
New Cost of Sales	49.40
Marginal Cost of Sales
New Direct Marketing		57.99
Old Direct Marketing	59.15	29.57	14.79	7.39														0				0
Marginal Direct Marketing
New G&A		8.59
Old G&A	8.76	4.38	2.19	1.10
Marginal G&A
Marginal Cash Flow pre Tax	(60.00)	29.52	14.76	7.38
Marginal NOPAT	(40.80)	20.07	10.04	5.02
NPV

4. What factors explain the value created from the reformulation for Fleximat?

5. Who reaps the financial benefits?

6. Who bears the financial costs?

ONLY ANSWER ONE OF THE QUESTION 7’S:

IF YOU SUPPORT REFORMULATION:

7. What facts would change your mind and cause you to recommend against reformulation?

IF YOU ARE AGAINST REFORMULATION

7. Under what conditions might you be in favor of reformulation?

8. How would you change your thinking if Medfield’s reformulation approach were more substantive (e.g. drug works faster, works longer) than cosmetic?

9. Could Medfield use the extra value created by the reformulation to generate new and helpful products?

10. When you consider Medfield’s stakeholders, what are the key issues. Choose three from the following list and discuss the key issues.

a. Shareholders of Medfield

b. Patients using the drug

c. Third-party payees (Medicare, private insurance companies, etc.)

d. Government

e. Employees of Medfield

f. Physicians

11. What ethical issues need to be considered in making a reformulation decision? Which are more pressing? Reference the ethics concepts discussed earlier in the semester, include at least one of the Right vs. Wrong explanations presented: Consequences, Duty, or Virtues. Use external references sources to support your discussion of the ethical issues.

12. What should Susan Johnson do? Explain your choice of a, b, c, or d. If you have another approach, discuss it here.

a. Don’t pursue the reformulation, but accept takeover offer

b. Initiate the reformulation and accept the offer

c. Refuse the offer but initiate reformulation

d. Refuse the offer and not reformulate

Your Turnitin Score needs to be 0-30% tops. Try to get it down there. If it is higher, I will read your paper, and see why the score is high but your grade will reflect the score.

REFERENCES MUST BE IN ALPHABETICAL ORDER. NAKED URLS ARE NOT ACCEPTABLE

APA conventions for citing and referencing:

https://owl.purdue.edu/owl/research_and_citation/apa_style/apa_formatting_and_style_guide/general_format.html//owl.purdue.

Title Page

by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. For customer service inquiries, send an e-mail tosales@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a retrieval system, posted to the Internet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation.

This spreadsheet supports STUDENT analysis of the case “Medfield Pharmaceuticals” (UVA-F-1636).

This spreadsheet was prepared by Marc L. Lipson, Associate Professor of Business Administration. Copyright ©

2011

Nov. 14, 2011

Exhibit 1

Income Statement

Exhibit 1

and Development

and

Interest

		MEDFIELD PHARMACEUTICALS
Income Statement (in thousands of U.S. dollars)
	2007		2008		2009			2010
Revenue	223,721	261,253	300,556	329,203
Cost of Goods Sold	55,788	65,724	75,241	76,472
Gross Profit	167,933	195,529	225,315	252,731
SG&A Expenses	71,586	82,446	97,542	105,166
		Research	42,175	54,078	57,535	62,457
113,761	136,524	155,077	167,623
Earnings Before	Interest		Taxes	54,172	59,005	70,238	85,108
984	1,385	1,403	1,457
53,188	57,620	68,835	83,651
Income Taxes	16,457	18,982	22,495	25,875
Net Income	36,731	38,638	46,340	57,776
Note: The company has negligible depreciation and amortization.

Exhibit 2

Balance Sheet

Exhibit 2

MEDFIELD PHARMACEUTICALS

2007 2008 2009 2010

LTD

223,898 259,976 285,585 301,626

Balance Sheet (in thousands of U.S. dollars)
Cash	21,465	28,227	29,542	32,251
Receivables	28,815	39,568	39,117	41,927
Inventory	24,704	24,316	27,859	30,559
74,984	92,111	96,518	104,737
Property and Equipment	102,977	118,553	127,498	129,171
Other Assets	45,937	49,312	61,569	67,718
	223,898		259,976		285,585		301,626
Accounts Payable	25,187	26,460	27,070	30,142
Accrued Expenses	39,236	52,634	55,256	59,850
Current	LTD	2,882	3,373	3,801	4,501
67,305	82,467	86,127	94,493
17,069	23,609	25,278	26,850
Equity	139,524	153,900	174,180	180,283

Exhibit 4

Financial Forecast

Exhibit 4

MEDFIELD PHARMACEUTICALS

Taxes

Research

2010 2011

2%

-50% -50%

Sales

2% 2% 2% 2% 2% -50% -50% -50%

Sales

Cost of Sales

2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% -50% -50% -50%

Sales

Cost of Sales

2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% -50% -50% -50%

Sales

Cost of Sales

189.99

109.82 112.02 114.26 116.54 58.27 29.14 14.57

Cost of Sales

43.70

25.26 25.76 26.28 26.81 13.40 6.70 3.35

Research

36.10

21.28 21.71 22.14

Direct Marketing

51.30

7.52

7.60

6.22 5.26

4.57

90.66 114.08 85.60 71.93 65.68 53.31 51.30 50.78 50.29 51.30 52.32 53.37 54.44 55.53 42.01 35.53 32.59 29.65 30.25 30.85 31.47 15.73 7.87 3.93

Taxes

9.49 9.68

10.07

2.52 1.26

34.88

Financial Forecast Based on Existing Products (in millions of U.S. dollars, unless otherwise noted)
Costs of				Sales	23.0%		Direct Marketing	27.0%	32.0%
19.0%	General and Admin	4.0%	Discount Rate	8.5%
2012	2013	2014	2015	2016	2017	2018	2019	2020	2021	2022	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Fleximat																																									2%												-50%
210.56	214.77	219.07	109.53	54.77	27.38
				Cost of Sales	47.46	49.40	50.39	25.19	12.60	6.30
Lodamadal
39.67	40.47	41.28	42.10	42.94	43.80	21.90	10.95	5.48
10.55	9.31		9.49		9.68	9.88		10.07	5.04		2.52		1.26
Orsamorph
78.97	80.55	82.16	83.80	85.48	87.19	88.93	90.71	92.52	94.37	96.26	98.19	100.15	102.15	104.20	52.10	26.05	13.02
18.46	18.53	18.90	19.27	19.66	20.05	20.45	20.86		21.28		21.71		22.14	22.58	23.03	23.50	23.97	11.98	5.99	3.00
Reximet
80.00	81.60	83.23	84.90	86.59	88.33	90.09	91.89	93.73	95.61	9	7.52	99.47	101.46	103.49	105.56	107.67		109.82		112.02		114.26		116.54		58.27		29.14		1	4.57
18.40	18.77	19.14	19.53	19.92	20.32	20.72	21.14	21.56	21.99	22.43	22.88	23.34	23.80	24.28	24.76		2	5.26		25.76		26.28		26.81		13.40		6.70		3.35
Total Sales	329.20	335.79	422.50	317.04	266.42	243.27	197.43		189.99	188.09	186.27	193.79	197.67	201.62	205.66	155.59	131.61	120.69
76.47	77.23	97.18	72.92	61.28	55.95	45.41		43.70	43.26	42.84	44.57	45.46	46.37	47.30	35.78	30.27	27.76
62.46	63.80	80.28	60.24	50.62	4	6.22	37.51		36.10	35.74	35.39	36.82	37.56	38.31	39.07	29.56	25.01	22.93	20.87	11.07	5.54	2.77
91.22		90.66		114.08		85.60		71.93		65.68		53.31				51.30		50.78		50.29		52.32		53.37		54.44		55.53		42.01		35.53		32.59		29.65		30.25		30.85		31.47		15.73		7.87		3.93
General and Administrative	13.94	13.43	16.90	12.68	10.66	9.73	7.90		7.60	7.45	7.75	7.91	8.06	8.23	4.83	4.39	4.48	4.66	2.33	1.17	0.58
85.11
27.15	29.01	36.50	27.39	23.02	21.02	17.06	16.41	16.25	16.09	16.42	16.74	17.08	17.42	17.77	13.44	11.37	10.43	9.87	5.03
NOPAT	57.96	61.65	77.57	58.21	48.91	44.66	36.25		34.88	34.53	34.20	35.58	36.29	37.02	37.76	28.57	24.16	22.16	20.16	20.57	20.98	21.40	10.70	5.35	2.67