Massachusetts General Hospital and the Enbrel Royalty Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Massachusetts General Hospital and the Enbrel Royalty The Case Solution

WACC risk

One of the main financial risks associated with the Free Cash Flow method, which is used for the valuation of future revenues at present, is WACC risk. Higher the WACC lower would be the revenue stream and lower the WACC higher would be the revenue stream. Since calculation WACC is associated with the cost of equity which is calculated by using CAPM method and to calculate that market risk and risk free rates are needed, which could differ based on various factors like market related factors can change the market risk and government conditions could bring change in the risk free rate so all these factor would directly cause the WACC to change, if the WACC is changed from estimated rate of 13.69% to 18.69% (5% increase for example) , the NPV of the revenue stream would decrease to $792 million from estimated $1030 million. So this change of WACC is the risk associated with the estimated valuation of overall revenue stream.

Note: Refer to Appendix 2 for quantification purposes.

Deal Terms and Conditions

MGH must consider some negotiating points and terms and conditions before selling its Enbrel royalties to potential investors. Some of the terms are proposed below:

Since the foretasted amount for the royalty is at least to be $1030.8 million, the sell price should be set by MGH according to that, by considering this amount of revenue stream the sell price must be higher than that, because Enbrel is one of the highest selling drugs for MGH due to its demand for the treatment of RA market, hence the price must be higher than its revenue stream to compensate the company from future losses of all the cash inflows received by the MGH from Enbrel.
The deal terms must include the payment conditions on the basis which MGH will sell Enbrel royalty. Since MGH has two ways to sell it, it could sell the royalty revenue stream either by receiving upfront principal amount higher than the foretasted revenue stream of $1030.8 million or hold an interest on the revenue stream. It is suggested that MGH should consider the second payment condition and hold interest on revenue steam because it is estimated to be more profitable than to avail the first payment option as its estimated value is to be of amount $3353 million.
MGH should also specify terms that clearly indicates any side effects that leads the patients’ health to be worsen, caused by any future modification to the Enbrel could not be the responsibility of the hospital as the hospital will sell all the royalty rights to the potential investor, so the investor could not blame the hospital for any side-effects caused by the usage of drug.
According to case there is a wide scope for the TNF industry based on the increasing demand of drugs for treatment of various auto-immune diseases and RA, so as a result there could be decline in the revenue stream, so such type of market risks and various liabilities associated to the selling of royalty must be clearly mentioned and specified in the deal terms so that the investor might not blame the hospital for lower than estimated cash flows of the royalty’s revenue streams.

Contradicting Negotiation Points

The investor have to propose to buy the royalty stream at lower price than proposed price for the value stream. If hospital is going to demand on a purchase of royalty $1030.8 million with adding premium of 6% then the investor have to propose that stream should be purchased in $1030.8 million plus add up 4% premium. In this scenario, the GHM will have to negotiate at a selling price of more than estimated price as it is the minimum value which the hospital receive from the royal stream and it would not be beneficial for the hospital so it cannot sell in this price. The selling executive should negotiate the amount from the purchaser to buy this stream in a cost of $1030.8 million or more than 5% expense.

Additionally, if the buyer has argued that the royalty is overpriced, so in this case the executive of the hospital can legitimize the selling value set by disclosing to the investor, that one of the advantage of buying this royalty is the monetary life of this drug, the drug will accomplish its economic life plus disclosing the financial benefits of the drug. Also mention the foretasted cash flows, assumption which have used for the justification, market demand of the business with ought to be disclosed to the financial investor for persuading him to buy the royalty stream at the requested cost.

Furthermore, the executive of the hospital can propose and try to make it sure that the deal is under the budget and if after any legal issue will rise it will be their responsibility to overlook and show the purchaser legal issues with patent rights.