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Hospital

Student Name

Institutional Affiliation

Course Name

Instructor Name

Date
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Question: 01:

First, we will be starting from calculating the future forecast free cash flows. The following case is

generated in order to facilitate the analysis and will eradiate all the difficulties and complications

appeared from depreciation and capital expenditures along with net working capital. We can deduce

the free cash flow comes from the NOPAT (Net operating profits after tax). When,

Discount rate = 8.5 %, PV will be equal to $418 million

The tables drawn below shows the prices that are offered are far higher than the original value.

That’s because the firm doesn’t incorporate the cash flows that were generated as the result of new

products, plus the cash flows doesn’t involve any terminal values as well.

MEDFIELD PHARMACEUTICALS
Value of firm

Naïve First Pass

2011 2012 2013 2014 2015 2016 2017 2018 2019

Total Sales 335.79 422.50 317.04 266.42 243.27 197.43 189.99 188.09 186.27

Cost of Sales 77.23 97.18 72.92 61.28 55.95 45.41 43.70 43.26 42.84

Research 63.80 80.28 60.24 50.62 46.22 37.51 36.10 35.74 35.39

Direct Marketing 90.66 114.08 85.60 71.93 65.68 53.31 51.30 50.78 50.29
General and Administrative 13.43 16.90 12.68 10.66 9.73 7.90 7.60 7.52 7.45

90.66 114.08 85.60 71.93 65.68 53.31 51.30 50.78 50.29

Taxes 29.01 36.50 27.39 23.02 21.02 17.06 16.41 16.25 16.09

NOPAT 61.65 77.57 58.21 48.91 44.66 36.25 34.88 34.53 34.20
NPV 418.47

Question 2:
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The below table represents calculation for NPV after eliminating Research cost.

Value Decomposition

335.7 422.5 317.0 266.4 243.2 197.4 189.9 188.0 186.2 18

Total Sales 9 0 4 2 7 3 9 9 7 9

Cost of Sales 77.23 97.18 72.92 61.28 55.95 45.41 43.70 43.26 42.84 43
114.0
Direct Marketing 90.66 8 85.60 71.93 65.68 53.31 51.30 50.78 50.29 51
G&A 13.43 16.90 12.68 10.66 9.73 7.90 7.60 7.52 7.45 7.6
154.4 194.3 145.8 122.5 111.9
6 5 4 5 0 90.82 87.39 86.52 85.68 87
Taxes 49.43 62.19 46.67 39.22 35.81 29.06 27.97 27.69 27.42 27
105.0 132.1
3 6 99.17 83.34 76.09 61.76 59.43 58.84 58.26 59
NPV without Research 712.95

The below table represents calculation for NPV of the Research cost.

Research 63.80 80.28 60.24 50.62 46.22 37.51 36.10 35.74 35.39 36.10 3
After Tax 43.38 54.59 40.96 34.42 31.43 25.51 24.55 24.30 24.07 24.55 2
PV of Research 294.48

Question 3:

The use of valuation drivers is there as these factors increased the value of the business

mostly by sales. There are numbers of factors which explains the value created those are use of

technology, reaching economies of scale and selling virtually identical drug therapy at high price,

NPV, cash flows and discount rate.

Question 4:
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Medfield enjoyed the financial benefits as they participate in marketing and in return capture

benefits from it in return.

Question 5:

The main influencers were the patients and the insurance companies. The patients who have to get

themselves treated at any cost and the companies who need to pay for those services.

Question 7:

7b) if you are against reformulation:

Having a positive NPV means the cash inflows which are the revenues exceeds the cash outflows

which are the costs meaning investor can make profit and the business can run easily and more

confidently.

Question 8:

Customers opt to go for reformulation cosmetics approach as it is cost ineffective for both the

patients who will use it and the businesses who will make and market it. Furthermore, it can cause a

sense of self appearance clashes as it is of the great addiction, termed as BDD (Body Dysmorphic

disorder)

Question 9:

Following are the few mentioned below key elements:

 develop the reformulation for two years at $35 million per year
 reformulation for five years at $25 million per year
 Incremental sales as a result of the reformulation
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 Incremental cost of sales

 Incremental regular direct marketing
 Incremental general and administrative
No more Research and development costs are needed to be included.
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MEDFIELD PHARMACEUTICALS
Analysis of Fleximat Reformulation (in millions of U.S. dollars, unless otherwise noted

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Incremental Research 35 35
Incremental Special
Marketing 25 25 25 25 25

Growth 2% -50% 2% 2% 2% 2% 2% 2% 2%
214.7 219.0 109.5 111.7 113.9 116.2 118.5 120.9 123.3 125.8
New Sales 7 7 3 2 6 4 6 3 5 2
116.2 118.5 120.9 123.3 125.8
Marginal Sales 0.00 0.00 0.00 56.96 86.58 4 6 3 5 2

New Cost of Sales 49.40 50.39 25.19 25.70 26.21 26.73 27.27 27.81 28.37 28.94

Marginal Cost of Sales 0.00 0.00 0.00 13.10 19.91 26.73 27.27 27.81 28.37 28.94

New Direct Marketing 57.99 59.15 29.57 30.17 30.77 31.38 32.01 32.65 33.31 33.97
Old Direct Marketing 57.99 59.15 29.57 14.79 7.39 0.00 0.00 0.00 0.00 0.00

Marginal Direct Marketing 0.00 0.00 0.00 15.38 23.38 31.38 32.01 32.65 33.31 33.97

New G&A 8.59 8.76 4.38 4.47 4.56 4.65 4.74 4.84 4.93 5.03
Old G&A 8.59 8.76 4.38 2.19 1.10 0.00 0.00 0.00 0.00 0.00
Marginal G&A 0.00 0.00 0.00 2.28 3.46 4.65 4.74 4.84 4.93 5.03

Marginal Cash Flow pre (60.00 (60.00 (25.00

Tax ) ) ) 1.20 14.82 53.47 54.54 55.63 56.74 57.88
(40.80 (40.80 (17.00
Marginal NOPAT ) ) ) 0.82 10.08 36.36 37.09 37.83 38.58 39.36

49.5
NPV 6

The case provided the proper insight of what values does a new product incur while in camparison to

the already existing ones.

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The value of the future cash flows is calculated below, while into consideration, the value of a new

drug is approximately $92 million.

MEDFIELD PHARMACEUTICALS
Analysis of Typical Project (Reximet) and Research Advantage (in millions o

Reximet Alone (Typical) 2012 2013 2014 2015 2016 2017 2018 2019

Sales 80.00 81.60 83.23 84.90 86.59 88.33 90.09 91.89

Cost of Sales 18.40 18.77 19.14 19.53 19.92 20.32 20.72 21.14
Marketing 21.60 22.03 22.47 22.92 23.38 23.85 24.33 24.81
G&A 3.20 3.26 3.33 3.40 3.46 3.53 3.60 3.68
Pretax 36.80 37.54 38.29 39.05 39.83 40.63 41.44 42.27
NOPAT 25.02 25.52 26.03 26.56 27.09 27.63 28.18 28.74
NPV as of Approval 278.58

Research by Medfield 35.00 35.00 35.00 35.00 35.00

After-Tax Research 23.80 23.80 23.80 23.80 23.80
NPV of Research 93.79

Value of Drug—Adjust for Timing

(Five years of additional
PV of Approval Value 185.27 discounting)
NPV 91.48

Value of Research Efficiency

Research by Typical Firm 50.00 50.00 50.00 50.00 50.00

After-Tax Research 34.00 34.00 34.00 34.00 34.00
NPV of Research 133.98

Advantage Medfield Per Drug 40.19

Research Budget 62.46

After Tax 42.47
Proportional Savings Medfield 0.30
Perpetual Savings 12.74
Value of Perpetual Savings 149.90
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The price that was offered initially was $775 million as the original was $700 million. Medfield

offered to provide $40 million per drug, which contributed almost 30% less cost effective than

the original ones. As the offer Medfield was relatively lower than the original ones. Whereas,

Johnson was opting to provide a value closer to $900 million.

Question 10:

Following are the mentioned below key issues

Shareholders Patients using drugs Government

Value increases by Higher tax revenue/higher
Pay more
$50million Medicare

The table drawn above depicted the involvement of stakeholders with respect to the

shareholders. The details of the stakeholders and their issues attached are as follows.

1. Shareholders of Medfield:

The shareholders hold the share of around 50%, which contributes a lot

towards the annual sales and increase in decrease in the business strategies.

2. Patients using the drugs:

In case of reformulation, patient needs to suffer a lot more than any other in

the business.

3. Government:

It results in the higher values of taxes paying to governments and the national

health insurance program Medicare will be higher thus an external burden on them.

Question 11:
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According to the ethical and stakeholders, the case depicted enough information that was

required in order to compare the values being generated before and after the values carried out

between the actual and the new products. Profit maximization is also one of the ethical issues

this will help make the employers work harder and motivating them leading to bonuses and

increments. The main ethical issue residing is being the effect on customers/patients and/or third-

party providers who pay.

Question 12:

Reformulation seems irrelevant as none of the factors were strong enough to support one

another. The numerical analysis depicted the cash flows of the original value and products

compared to the new ones. As it has a positive NPV. Susan Johnson should be opting for “C”

option. As the incentive gain by accepting the offer is to less but the initiation of reformulation

adds additional value to the firm.