Mogen, Inc. Harvard Case Solution & Analysis

Mogen, Inc. Case Solution


Mogen, Inc was founded in 1985, and rapidly became a leading biotech company in the industry. The key to success for the company was its strong
emphasis on R&D through which it found new drugs that (FDA) approved.  This approval process of drug approval takes too much time and it costs hundreds of millions of dollars to the company. Therefore. Mogen continuously supply the cash to R&D so that company can maintain their financial flexibility for future challenges and opportunities. In 2006, company needed funds to the tone of $10 billion in order to expand their business, the management decided to invest $5 billion through generating funds internally and the other half through convertible bonds. Since convertible bonds are considered hybrid security because they feature both debt and equity.

From the investor point of view, the convert will provide safety of bond and upside possible of equity, a convertible bond provides safety to the investor as he would receive bond coupon payments plus principle amount and upside potential of equity come from converting the bond into common share. The bond holder will become a share holder. The investor only converts their bonds when stock price is above than conversion price, so that investor can receive more than the principle amount. The coupon rate of conversion bond always be lower than plain vanilla bond thus when investor brought a coverable bond, they received less income than plan vanilla bond.

Investments of funds

The company decided to invest $10 billion as following

Manufacturing and Formulation:

The company estimates that $1 billion would be required in expanding manufacturing and formulation so that company can increase the demand of a certain product by putting more emphasis on internal manufacturing capacity.

Research and development and last stage trail:

The company decided to expand $3.5 billion in R&D and last stage trail, as the last stage trial is a big hurdle before the drug is approved by FDA. In 2006, the management knew that this investment would give a successful outcome where Mogen can maintain momentum behind its new drug development pipeline.

 Acquisition and licensing:

The company estimates that $2 billion in Acquisition and licensing so that Mogen will be able to achieve strong growth in revenues and earnings per share.

Stock repurchased program:

The management estimate $3.5 billion in stock repurchased program. Due to the highly uncertain nature of its operation, Mogen never issued dividend to their shareholders. Therefore, they decided to follow repurchased program. The management believed that through this program company dilution decreased, which will lead the market share of the company. Due to strong operational and financial performance over the last several years, the management carries out several billion dollars worth of stock repurchased.

Problem statement:

The management of the company, decided to raise $5 billion through coverable bonds. Since this offering was the largest offering, therefore management of the company was facing difficulties to set the price at a level where company could generate sufficient demand and find the right conversion premium and coupon rate, which would be suitable to investor as well as acceptable for Mogen management.

Sensitivity analysis:

Sensitivity analysis is a technique that is used to determine how different coupon rates and conversion premium will impact on the investors and the company. As plain vanilla coupon rate is 2.95%, the company is offering convertible bond. This means that coupon rate will be lower than straight bond...................

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