Medfield Pharma: The Future of Pharmaceuticals

Question 1 

The current value of the company is the net present value as of 2010. Since the net operating profit after tax (NOPAT) in 2010 was $ 57.96 million, we add the net present value of the next 34 years. The net present value represents the value of the difference between the current value of the company’s income less the expenses and tax. The NPV is the US $ 476.43 million. A positive net present value means that the present value of the income is more than the present value of expenses ( Benamraoui et al., 2017). On the other hand, a negative net present value suggests that the present value of expenses is more than that of income. Therefore, a higher net present value is preferable. The net present value of Medfield Pharma means that the company is highly profitable. 

Question 2 

Research and development expenses include all investments towards acquiring new knowledge to improve existing products or introduce new ones. Companies in pharmaceutical companies incur large sums in research and development, which increases the value of intangible assets and goodwill. Although the value of research and development expenses is uncertain, the expenditures are capitalized during mergers or acquisitions and paid for as part of the goodwill. The net present value of the research and development expenditures for Medfield Pharma is the US $ 402.50 million, meaning that the elimination of research and development lowers the valuation of Medfield by the US $ 402.50 million. 

Question 3 

Year	2011	2012	2013	2014	2015	2016	2017	2018
Cost of reformulation	35	35
Incremental special marketing	25	25	25	25	25
Fleximat Growth	2%	2%	-50%	2%	2%	2%	2%	2%
Old sales	214.77	219.07	109.53	54.77	27.38
New sales	214.77	219.07	109.53	111.72	113.96	116.24	118.56	120.93
Marginal sales (New sales-original sales)	0.00	0.00	0.00	56.96	86.58	116.24	118.56	120.93
Old cost of sales	49.40	50.39	25.19	12.60	6.30
New cost of Sales	49.40	50.39	25.19	25.70	26.21	26.73	27.27	27.81
Marginal cost of sales	0.00	0.00	0.00	13.10	19.91	26.73	27.27	27.81
Old direct marketing	57.99	59.15	29.57	14.79	7.39	0.00	0.00	0.00
New direct marketing	57.99	59.15	29.57	30.17	30.77	31.38	32.01	32.65
Marginal direct marketing	0.00	0.00	0.00	15.38	23.38	31.38	32.01	32.65
New G&A	8.59	8.76	4.38	4.47	4.56	4.65	4.74	4.84
Old G&A	8.59	8.76	4.38	2.19	1.10	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
Marginal cash flow pre-tax	(60.00)	(60.00)	(25.00)	1.20	14.82	53.47	54.54	55.63
Marginal NOPAT	(40.80)	(40.80)	(17.00)	0.82	10.08	36.36	37.09	37.83

Year	2019	2020	2021	2022	2023	2024
Cost of reformulation
Incremental special marketing
Fleximat Growth	2%	2%	2%	-50%	-50%	-50%
Old sales
New sales	123.35	125.82	128.34	64.17	32.08	16.04
Marginal sales (New sales-original sales)	123.35	125.82	128.34	64.17	32.08	16.04
Old cost of sales
New cost of Sales	28.37	28.94	29.52	14.76	7.38	3.69
Marginal cost of sales	28.37	28.94	29.52	14.76	7.38	3.69
Old direct marketing	0.00	0.00	0.00	0.00	0.00	0.00
New direct marketing	33.31	33.97	34.65	17.33	8.66	4.33
Marginal direct marketing	33.31	33.97	34.65	17.33	8.66	4.33
New G&A	4.93	5.03	5.13	2.57	1.28	0.64
Old G&A	0.00	0.00	0.00	0.00	0.00	0.00
Marginal G&A	4.93	5.03	5.13	2.57	1.28	0.64
Marginal cash flow pre-tax	56.74	57.88	59.03	29.52	14.76	7.38
Marginal NOPAT	38.58	39.36	40.14	20.07	10.04	5.02

NPV

49.56

Reformulation involves improving the drug at the cost of $35 million incurred in each of the first two years. The improvements would include the development of an easier-to-swallow coating and a change in the shape of the drug. The project would also involve additional advertisement costs of $25 million incurred each year for the first five years. The NOPAT remain negative in the first three years before breaking even in the fourth year. The net present value for the marginal net operating costs after tax generated by the reformulation process is $49.56 million indicating that the current value of the additional income generated is $49.56 million. The NPV represents the increase in the company’s value due to increased sales generated as a result of the reformulation process. Since the NPV is positive, the reformulation process is a profitable option. 

Question 4 

The reformulation process is informed by financial needs, customer satisfaction, and community services. The Fleximat drugs form a significant 64% of the company’s revenue. The pending patent expiration in 2 years means that a significant proportion of the company’s revenue would be wiped out by the expected 50 to 70% cheaper generics. The reformulation process offers a means of extending the period before the expiration of the patent and hence the projected company revenue. In seeking to extend the duration of the patent, the company plans to develop an easy-to-swallow coating for the benefit of the consumers. Above Johnson’s goals for creating a pharmaceutical company include alleviating the suffering of patients. Fleximat drug provides relief for patients suffering from Crohn’s condition. Failing to extend, Fleximat drug’s patent coupled with lack of breakthroughs may necessitate the sale of the company and potential change in the objectives and effectiveness of the drugs. 

Question 5 

The management of a company acts in place of the owners of a company, who are the shareholders. The ultimate beneficiaries of higher company value are the shareholders who receive higher dividends from the company’s revenue. Shareholders also earn when a company’s stock prices increase due to a higher value or projected higher performance. The reformulation process increases the company value reflecting higher NOPAT. 

Question 6 

The shareholders bear the financial costs of company investments. Although the shareholders do not have to pay any extra charges, they have to forego dividends to fund investments as the management pays the additional costs using the available net operating profits after tax. 

Question 7 

Although the reformulation process is profitable, there are significant litigation risks under the antitrust laws that prohibit companies from engaging in activities aimed at preventing competition. Based on the case of Walgreen Company against AstraZeneca, the reformulation process has higher chances of winning in a court case because of the changes in shape and coating of the drug. However, despite such a victory in court, there is a significant risk of publicity and possible drop in projected sales of Fleximat drug and other company products. AstraZeneca’s case elicited public scrutiny as the actions of extending the patent to prevent the production of cheaper generics were viewed as a way of conspiring to charge higher prices for insignificant innovations. 

Question 8 

More substantive changes in Medfield’s reformulation process reduces the possibility of bad publicity. For example, consumers would be willing to forego cheaper generics in return for benefits such as quicker pain reliever and longer drug action. Therefore, substantive changes lower the risk of litigation and subsequent loss in reputation and support the reformulation process. 

Question 9 

The extra value generated by the reformulation process is considerably low relative to the research and development costs required to develop a new product. For example, while the NPV of the marginal NOPAT is $ 49.56 million, the research and development costs in 2010 were $ 62.46 million. In addition, breakthroughs in the pharmaceutical industry are difficult to obtain despite heavy investment. 

Question 10 

Shareholders of Medfield are the most affected by the management decisions. Pursuing the reformulation process means that the shareholders have to forego dividends to fund the additional expenses of marketing and improvement of Fleximat drug. Thus, a successful reformulation process allows for additional company value and increases dividends in the long term. Contrary, patients who have Crohn’s condition would benefit from cheaper generic products upon the expiration of Fleximat drug patent in the next two years. The reformulation process means that the patients would have to pay higher prices in return for a different shape of the drug and easier-to-swallow coating. Like the patients, third-party payees would benefit from lower costs of Crohn’s condition treatment due to cheaper generic drugs upon the end of the patent in 2 years. However, pursuing the reformulation process means that the third-party payees would have to pay more for non-substantive changes in the drug. 

Question 11 

The ethical question is whether Medfield Pharmaceutical should pursue the reformulation process, which prevents patients from benefiting from cheaper generic in the next two years without achieving substantive changes in the Fleximat drug. Pharmaceutical companies have an ethical duty of care for patients, which includes upholding the safety of drugs, honestly reporting to the FDA about the possible side/adverse effects of a drug, and submitting a genuine application for new drug patents to facilitate quick approval of drugs for the benefit of patients (Salari et al., 2013). In addition, pharmaceutical companies must apply the principle of justice while allocating prices of drugs even in cases of drug shortages (Salari et al., 2013). The reformulation procedure prevents patients from accessing lower-priced generic drugs in two years without substantive changes in the drug composition. Finally, pharmaceutical companies must also portray virtues such as empathy and honesty towards stakeholders such as patients and employees (Salari et al., 2013). In progressing with the reformulation process, Medfield would breach honesty as the reformulation process is not guided by the patient’s interest but the company’s financial situation. 

Question 12 

Although the reformulation process is financially viable, the decision is unethical and jeopardizes the company’s reputation. The purchase offer of $ 750 million is above the present value of the expected NOPAT, US $ 476.43. Since the current value of research and development expenses after tax is the US $ 402.50 million , the company’s total value should be $ 878.93 million. Considering that the research and development costs are not expected to create a new product in the near future, the offered price is appropriate considering that the company is bound to lose a significant proportion of revenue from Fleximat in the next two years. 

References 

Benamraoui, A., Jory, S. R., Boojihawon, D. R., & Madichie, N. O. (2017). Net Present Value Analysis and the Wealth Creation Process: A Case Illustration.  The Accounting Educators’ Journal ,  26 . 

Salari, P., Namazi, H., Abdollahi, M., Khansari, F., Nikfar, S., Larijani, B., & Araminia, B. (2013). Code of ethics for the national pharmaceutical system: Codifying and compilation. Journal of research in medical sciences: the official journal of Isfahan University of Medical Sciences, 18(5), 442.