GenzymeGeltex Pharmaceuticals Joint Venture Harvard Case Solution & Analysis

Proposed Solutions/Alternatives

The evaluation of the attractiveness of proposed project is usually analyzed through discounted cash flow approach. However, in this analysis there are many probabilities involved. Thus, only NPV method of evaluation will not serve the purpose of Genzyme team. Thus, a tornado analysis and a Monte Carlo Simulation are used. The base case estimate NPV of the project is $17.4 million; which seems like an attractive investment if the probabilities are not considered that hinder the valuation.

The base case uses fairly optimistic assumptions for calculating the NPV of the venture. The uncertainties pertaining to the project may create uneasiness for the Genzyme team. For this purpose, alternative valuation tools are used.

From the tornado analysis, it can be observed that probabilities can turn down the possibility of positive NPV as well as lead the project towards a failure and the companies may have to face severe losses. This tornado analysis sums up the results of the Monte Carlo analysis as well. The minimum and maximum values of the Monte Carlo analysis are identified in the tornado analysis so that the results can be extracted.

Any project has various characteristics, but none of them come without risk. Some projects have low risk profile while others have high risk. However, the higher expected returns compensate for the project of higher risk. It is upon company’s personal discretion to choose a risk level and then find the project that can provide highest return by absorbing that much level of risk.

Currently there is a 65% probability that FDA would approve the project. This particular key driver is taken into consideration because this results in highest negative NPV in the worst case scenario. In this situation, if the company is ready to accept this much level of risk then it will accept the project; otherwise the company will back out from the venture.

The third alternative pertaining to this situation is that the company should move on with the project based on the option of staged investment. This will reduce the risk for the company and increase the attractiveness of the project.

Evaluation on the Proposed “Talk Points”

The tornado analysis shows that worst and best case scenario for each of the key driver, by assuming all other factors to be constant at the base case. This shows that every alternative has some potential risk involved. The combined effect of these scenarios can enlarge the effect.

Alternative 1:

Genzyme is a large company and has grown on the basis of joint ventures and alliances. It has been taking risks in the past which has led the firm to success. Thus, the company should accept the proposal of venture. The potential risks of choosing alternative one that is leaving the opportunity on the table will allow other companies to enter in this venture and tap the potential target market plus enjoy the success of other upcoming products by GelTex as well.

However, the pro of accepting this alternative is just that the risk of a negative NPV will be avoided. If the company’s objective is to grow, then it must reject this alternative and carry on with the venture.

Alternative 2:

The strength of the project is visible from the acceptance of other partners. However, the potential risks are also large. The average NPV becomes negative because of the uncertainty of the FDA approval, with lump sum payment of interest. There is a risk of high and the negative NPV because of the worst assumptions, which may lead to rejection of an otherwise profitable project. The acceptance of this alternative will be considered to be an initiative for growth but the stakeholders may worry about the profit potential of the company, by visualizing this negative NPV, which resulted in reduced confidence of those stakeholders.

Alternative 3:

The combination of first and second alternative, to generate a third alternative of staged investment reduces the risks and increases the profit potential. This creates a feasible scenario in which the company won’t lose this opportunity and the stakeholders will also not lose the confidence in the profit potential of the company...................................

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