×




Alnylam Pharmaceuticals: Building Value from the IP Estate 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 Alnylam Pharmaceuticals: Building Value from the IP Estate case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Alnylam Pharmaceuticals: Building Value from the IP Estate case study is a Harvard Business School (HBR) case study written by Willy Shih, Sen Chai. The Alnylam Pharmaceuticals: Building Value from the IP Estate (referred as “Ip License” from here on) case study provides evaluation & decision scenario in field of Technology & Operations. It also touches upon business topics such as - Value proposition, Intellectual property.

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






Case Description of Alnylam Pharmaceuticals: Building Value from the IP Estate Case Study


To maximize their effectiveness, color cases should be printed in color.The learning objective of this case is to help students to recognize the interplay between intellectual property (IP) rights and corporate strategy. We do this by examining what is a fairly atypical circumstance today in which a single firm is able to secure what it perceives to be a frontier IP "estate" that blocks competitors from "practicing" in a significant part of the field. Those who elect to sign a license agreement must pay a high license fee and therefore help to fund the company's R&D. The company, meanwhile, must balance the immediate benefit of non-dilutive financing obtainable from the license fees vs. enabling a potential future competitor. The case setting is a lawsuit over a seemingly arcane issue: whether one of the co-owners of a key patent application is properly prosecuting the application. Understanding the issue requires students to progressively build up an understanding of some key aspects of U.S. patent law. Then by piecing together the strategy of the company and how it is driven by its IP position, students can understand why the litigation represents such a high stakes gamble.


Case Authors : Willy Shih, Sen Chai

Topic : Technology & Operations

Related Areas : Intellectual property




Calculating Net Present Value (NPV) at 6% for Alnylam Pharmaceuticals: Building Value from the IP Estate Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10028825) -10028825 - -
Year 1 3468626 -6560199 3468626 0.9434 3272289
Year 2 3974361 -2585838 7442987 0.89 3537167
Year 3 3947952 1362114 11390939 0.8396 3314777
Year 4 3230609 4592723 14621548 0.7921 2558945
TOTAL 14621548 12683177




The Net Present Value at 6% discount rate is 2654352

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.




Capital Budgeting Approaches

Methods of Capital Budgeting


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

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






Formula and Steps to Calculate Net Present Value (NPV) of Alnylam Pharmaceuticals: Building Value from the IP Estate

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 Technology & Operations 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 Ip License 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 Ip License 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 (10028825) -10028825 - -
Year 1 3468626 -6560199 3468626 0.8696 3016197
Year 2 3974361 -2585838 7442987 0.7561 3005188
Year 3 3947952 1362114 11390939 0.6575 2595843
Year 4 3230609 4592723 14621548 0.5718 1847111
TOTAL 10464338


The Net NPV after 4 years is 435513

(10464338 - 10028825 )








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 (10028825) -10028825 - -
Year 1 3468626 -6560199 3468626 0.8333 2890522
Year 2 3974361 -2585838 7442987 0.6944 2759973
Year 3 3947952 1362114 11390939 0.5787 2284694
Year 4 3230609 4592723 14621548 0.4823 1557971
TOTAL 9493160


The Net NPV after 4 years is -535665

At 20% discount rate the NPV is negative (9493160 - 10028825 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Ip License 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 Ip License has a NPV value higher than Zero then finance managers at Ip License 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 Ip License, then the stock price of the Ip License 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 Ip License 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 will be a multi year spillover effect of various taxation regulations.

What can impact the cash flow of the project.

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.






Negotiation Strategy of Alnylam Pharmaceuticals: Building Value from the IP Estate

References & Further Readings

Willy Shih, Sen Chai (2018), "Alnylam Pharmaceuticals: Building Value from the IP Estate Harvard Business Review Case Study. Published by HBR Publications.


Kyokuto Securities SWOT Analysis / TOWS Matrix

Financial , Investment Services


Skill Gaming SWOT Analysis / TOWS Matrix

Financial , Misc. Financial Services


Biotech Capital Ltd SWOT Analysis / TOWS Matrix

Healthcare , Biotechnology & Drugs


Meitav DS SWOT Analysis / TOWS Matrix

Financial , Investment Services


Mudrick Capital A SWOT Analysis / TOWS Matrix

Financial , Misc. Financial Services


OE Solutions SWOT Analysis / TOWS Matrix

Technology , Communications Equipment