Gilead Sciences (B): Implementing the Gilead Access Program for HIV Drugs Net Present Value (NPV) / MBA Resources

Introduction to Net Present Value (NPV) - What is Net Present Value (NPV) ? How it impacts financial decisions regarding project management?

NPV solution for Gilead Sciences (B): Implementing the Gilead Access Program for HIV Drugs case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Gilead Sciences (B): Implementing the Gilead Access Program for HIV Drugs case study is a Harvard Business School (HBR) case study written by David P. Baron, Keith Krehbiel, Brian Tayan. The Gilead Sciences (B): Implementing the Gilead Access Program for HIV Drugs (referred as “Gilead Viread” from here on) case study provides evaluation & decision scenario in field of Strategy & Execution. It also touches upon business topics such as - Value proposition, Health, Performance measurement, Policy, Public relations, Strategy execution.

The net present value (NPV) of an investment proposal is the present value of the proposal’s net cash flows less the proposal’s initial cash outflow. If a project’s NPV is greater than or equal to zero, the project should be accepted.

NPV = Present Value of Future Cash Flows LESS Project’s Initial Investment

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Case Description of Gilead Sciences (B): Implementing the Gilead Access Program for HIV Drugs Case Study

Describes Gilead Sciences' initial experience implementing an access program for delivering its AIDS drug Viread to developing nations in Africa. In April 2003, Gilead announced the Gilead Access Program to make the company's new drug Viread available, at no profit to Gilead, to developing countries. Viread represented a significant advancement in antiretroviral medicines for the treatment of HIV/AIDS with once-a-day dosage, greater effectiveness, and a much improved side-effect profile. Gilead executives expected the Access Program to have an immediate, positive impact on the treatment of HIV/AIDS patients in the world's poorest countries. A year after implementation, however, the Access Program had not led to widespread use of Viread in Africa. Having learned from early missteps, Gilead had to make significant changes to improve the program. It also wanted to expand the Access Program to create greater access to therapies in middle-income regions.

Case Authors : David P. Baron, Keith Krehbiel, Brian Tayan

Topic : Strategy & Execution

Related Areas : Health, Performance measurement, Policy, Public relations, Strategy execution

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Calculating Net Present Value (NPV) at 6% for Gilead Sciences (B): Implementing the Gilead Access Program for HIV Drugs Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10018461)	-10018461	-	-
Year 1	3465771	-6552690	3465771	0.9434	3269595
Year 2	3972080	-2580610	7437851	0.89	3535137
Year 3	3969964	1389354	11407815	0.8396	3333258
Year 4	3224813	4614167	14632628	0.7921	2554354
TOTAL			14632628		12692345

The Net Present Value at 6% discount rate is 2673884

In isolation the NPV number doesn't mean much but put in right context then it is one of the best method to evaluate project returns. In this article we will cover -

Different methods of capital budgeting

What is NPV & Formula of NPV,
How it is calculated,
How to use NPV number for project evaluation, and
Scenario Planning given risks and management priorities.

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Capital Budgeting Approaches

Methods of Capital Budgeting

There are four types of capital budgeting techniques that are widely used in the corporate world –

1. Payback Period
2. Profitability Index
3. Net Present Value
4. Internal Rate of Return

Apart from the Payback period method which is an additive method, rest of the methods are based on Discounted Cash Flow technique. Even though cash flow can be calculated based on the nature of the project, for the simplicity of the article we are assuming that all the expected cash flows are realized at the end of the year.

Discounted Cash Flow approaches provide a more objective basis for evaluating and selecting investment projects. They take into consideration both –

1. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Gilead Viread shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.
2. Timing of the expected cash flows – stockholders of Gilead Viread have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.

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Formula and Steps to Calculate Net Present Value (NPV) of Gilead Sciences (B): Implementing the Gilead Access Program for HIV Drugs

NPV = Net Cash In Flowt1 / (1+r)t1 + Net Cash In Flowt2 / (1+r)t2 + … Net Cash In Flowtn / (1+r)tn
Less Net Cash Out Flowt0 / (1+r)t0

Where t = time period, in this case year 1, year 2 and so on.
r = discount rate or return that could be earned using other safe proposition such as fixed deposit or treasury bond rate. Net Cash In Flow – What the firm will get each year.
Net Cash Out Flow – What the firm needs to invest initially in the project.

Step 1 – Understand the nature of the project and calculate cash flow for each year.
Step 2 – Discount those cash flow based on the discount rate.
Step 3 – Add all the discounted cash flow.
Step 4 – Selection of the project

Why Strategy & Execution Managers need to know Financial Tools such as Net Present Value (NPV)?

In our daily workplace we often come across people and colleagues who are just focused on their core competency and targets they have to deliver. For example marketing managers at Gilead Viread often design programs whose objective is to drive brand awareness and customer reach. But how that 30 point increase in brand awareness or 10 point increase in customer touch points will result into shareholders’ value is not specified.

To overcome such scenarios managers at Gilead Viread needs to not only know the financial aspect of project management but also needs to have tools to integrate them into part of the project development and monitoring plan.

Calculating Net Present Value (NPV) at 15%

After working through various assumptions we reached a conclusion that risk is far higher than 6%. In a reasonably stable industry with weak competition - 15% discount rate can be a good benchmark.

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 15 %	Discounted Cash Flows
Year 0	(10018461)	-10018461	-	-
Year 1	3465771	-6552690	3465771	0.8696	3013714
Year 2	3972080	-2580610	7437851	0.7561	3003463
Year 3	3969964	1389354	11407815	0.6575	2610316
Year 4	3224813	4614167	14632628	0.5718	1843797
TOTAL					10471290

The Net NPV after 4 years is 452829

(10471290 - 10018461 )

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Calculating Net Present Value (NPV) at 20%

If the risk component is high in the industry then we should go for a higher hurdle rate / discount rate of 20%.

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 20 %	Discounted Cash Flows
Year 0	(10018461)	-10018461	-	-
Year 1	3465771	-6552690	3465771	0.8333	2888143
Year 2	3972080	-2580610	7437851	0.6944	2758389
Year 3	3969964	1389354	11407815	0.5787	2297433
Year 4	3224813	4614167	14632628	0.4823	1555176
TOTAL					9499140

The Net NPV after 4 years is -519321

At 20% discount rate the NPV is negative (9499140 - 10018461 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Gilead Viread to discount cash flow at lower discount rates such as 15%.

Acceptance Criteria of a Project based on NPV

Simplest Approach – If the investment project of Gilead Viread has a NPV value higher than Zero then finance managers at Gilead Viread can ACCEPT the project, otherwise they can reject the project. This means that project will deliver higher returns over the period of time than any alternate investment strategy.

In theory if the required rate of return or discount rate is chosen correctly by finance managers at Gilead Viread, then the stock price of the Gilead Viread should change by same amount of the NPV. In real world we know that share price also reflects various other factors that can be related to both macro and micro environment.

In the same vein – accepting the project with zero NPV should result in stagnant share price. Finance managers use discount rates as a measure of risk components in the project execution process.

Sensitivity Analysis

Project selection is often a far more complex decision than just choosing it based on the NPV number. Finance managers at Gilead Viread should conduct a sensitivity analysis to better understand not only the inherent risk of the projects but also how those risks can be either factored in or mitigated during the project execution. Sensitivity analysis helps in –

What are the key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

What are the uncertainties surrounding the project Initial Cash Outlay (ICO’s). ICO’s often have several different components such as land, machinery, building, and other equipment.

Understanding of risks involved in the project.

What can impact the cash flow of the project.

What will be a multi year spillover effect of various taxation regulations.

Some of the assumptions while using the Discounted Cash Flow Methods –

Projects are assumed to be Mutually Exclusive – This is seldom the came in modern day giant organizations where projects are often inter-related and rejecting a project solely based on NPV can result in sunk cost from a related project.

Independent projects have independent cash flows – As explained in the marketing project – though the project may look independent but in reality it is not as the brand awareness project can be closely associated with the spending on sales promotions and product specific advertising.

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Negotiation Strategy of Gilead Sciences (B): Implementing the Gilead Access Program for HIV Drugs

References & Further Readings

David P. Baron, Keith Krehbiel, Brian Tayan (2018), "Gilead Sciences (B): Implementing the Gilead Access Program for HIV Drugs Harvard Business Review Case Study. Published by HBR Publications.