This case study allows students to perform a debt analysis/bond structuring strategy for MoGen, Inc.
Kenneth Eades and Alex Holsenbeck
Harvard Business Review (UV1054-PDF-ENG)
October 14, 2008
Case questions answered:
- Perform a debt analysis/bond structuring strategy for MoGen, Inc.?
- How and should Mogen structure the debt this way?
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MoGen, Inc. Case Answers
Executive Summary – MoGen, Inc.
MoGen, Inc. is one of the most successful biotechnology corporations in the global biopharmaceutical industry. The company, created in 1985, was one of the first to use emerging science in the industry of biotechnology, such as recombinant DNA and molecular biology.
After a few years, it was the first to develop biologically derived human therapeutic drugs, RENGEN and MENGEN, both drugs that can help to counteract the damaging effects of chemotherapy.
In 2006, MoGen, Inc. became one of the leaders in gene technology. The key to success for all biotech companies is to find new drugs through R&D and get them approved by the U.S. Food and Drug Administration (FDA).
In January 2006, the company’s substantial R&D expenditures resulted in a portfolio of five core products, primarily for supportive cancer treatments. As a result, it achieved a profit of $3.7 billion and sales of $12.4 billion in 2005.
Over the past five years, sales have grown at an annual rate of 29%, and EPS improved to $2.94 in 2005, compared to $1.81 in 2004 and $1.69 in 2003.
MoGen also faces challenges with the uncertainty and instability in new product creation and maintaining sales of future products. Leading up to January 10, 2006, the managing director of Merrill Lynch’s Equity-Linked Capital Market Group, Dar Maanavi, has been reviewing the final draft of MoGen convertible debt offering.
MoGen, Inc. is trying to continue its success by developing new drugs. The process of creating these new drugs takes an exponential amount of research and development that then goes through the rigorous process of being approved by the FDA.
The FDA goes to great lengths by conducting large-scale trials in order to make sure the drug is safe. Therefore, the research and development and waiting on the FDA’s approval of these new drugs take significant time and resources.
Since this is the only way a Biotech firm such as MoGen can survive, they need a consistent source of cash to fund these projects. Merrill Lynch, a primary funder of MoGen, Inc. in the past, was asked to again assist in funding.
MoGen estimated that they would need around $10 billion dollars. They currently had around $5 billion dollars, while the other $5 billion they would need from Merrill Lynch. The managing director of Merrill Lynch, Dan Maaanavi, proposed a convertible bond as a solution in order to agree to this $5 billion dollars.
Since this was the largest offering in history, it is important for the company to find the best coupon rate and conversion premium. Not only in order to be viewed as a favorable deal for both the investors as well as the company’s management, both of which have opposite views on the terms of coupon rate and conversion premium but as well as making sure not to cripple the company by giving too much away to Merrill Lynch.
An important aspect to consider in the following Analyses is Mogen’s dependency on the stock repurchase strategy/program. MoGen, Inc. is dependent on this strategy due to the need to promote external shareholder investment. Mogen has maintained a corporate structure of avoiding dividends in favor of stock repurchase programs. Therefore, we will be operating off of this assumption moving forward in the analyses.
The company desperately needs these cash flows from external financing for…
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