Massachusetts General Hospital Case Study Analysis
Risks:
The estimated value of the royalty stream from Enbrel drug is based on various assumptions related to growth rates and WACC. Therefore, there is a risk that unfair or unrealistic selling price might be set for the royalty stream leading to financial problems or wrong decision made by the company. Nearly two thirds of the hospital’s licensing income comes from the Enbrel royalty, there is a chance that financial problems might be faced as a result of deciding to sell the royalty stream based on using unrealistic WACC and growth rates in estimating the value of the royalty stream. As a result of changing WACC to 9%, the value of the royalty stream is estimated at $1344 million, there is a chance that the director of the hospital might decide to sell the revenue stream at an undervalued price of $1013 million estimated using WAC of 14%. (Annexure, Quantifying Risks)
Furthermore, there is a chance that the growth rates and assumptions determined by the industry analysts might be unrealistic leading to variation in the selling price of the royalty stream from Enbrel drug. Considering, the backlash received from people as a result of side effects caused by the drug, there is a possibility that the government might discontinue the drug or it may fail to achieve the projected sales. As a result of reducing the growth rates by 1.5% each year as compared to 0.5% each year, the value of the royalty stream is estimated at $798 million as compared to $1013 million forecasted value of the royalty stream. (Annexure, Quantifying Risks)
Proposed Deal terms and Negotiating Points:
The director should set a selling price of more than the estimated value of the royalty stream amounting $1013 million as it is the minimum benefit the hospital receives form the Enbrel drug. The payment terms should be specified in negotiating the deal with investors as MGH has two options to receive the payment as a result of selling the revenue stream, receiving upfront cash payment from the principal of the price more than $1013 million or retain a royalty interest in the drug. It will be recommended to retain a royalty interest in the drug as it has a forecasted value of $3353 million and seems profitable. The deal should include terms and conditions related to the prohibition related to unnecessary modification of drug resulting in more side effects or jeopardizing the health of the patients. The risk and liabilities associated with the sale of revenue stream should also be specified.
Negotiation between Investor and MGH:
The investor might propose to purchase the royalty stream at a price less than the proposed price for the value stream. If the hospital has demanded a purchase price of $1013 million plus a premium of 6%, the investor might propose to purchase the royalty stream at $1013 million plus 4% premium. In this case, the general hospital will need to negotiate for a selling price of more than estimated value as it is the minimum benefit the hospital receives from the royal stream and it cannot sell the stream below this value. The executive directors of the hospital will negotiate with the purchaser by persuading the investor topurchase the royalty stream at a price of $1013 million plus 5% premium.
Moreover, in case the investor argues that the royalty stream is overpriced, the executive directors of the hospital can justify the selling price set by explaining to the investor, the forecasted sales the drug will achieve in its economic life and other financial benefits of the drug. In addition, the cash flow forecast, justifications of the assumptions used, market demand of the TNF industry should be explained to the investor for persuadinghim to purchase the royalty stream at the demanded price............................
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