Genzyme's Gaucher Initiative: Global Risk and Responsibility 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 Genzyme's Gaucher Initiative: Global Risk and Responsibility case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Genzyme's Gaucher Initiative: Global Risk and Responsibility case study is a Harvard Business School (HBR) case study written by Christopher A. Bartlett, Andrew N. McLean. The Genzyme's Gaucher Initiative: Global Risk and Responsibility (referred as “Gaucher Genzyme's” from here on) case study provides evaluation & decision scenario in field of Global Business. It also touches upon business topics such as - Value proposition, Emerging markets, Government, Marketing, Negotiations, Organizational culture, Social responsibility.

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 Genzyme's Gaucher Initiative: Global Risk and Responsibility Case Study

This case is accompanied by a Video Short that can be shown in class or included in a digital coursepack. Instructors should consider the timing of making the video available to students, as it may reveal key case details.In Egypt, Genzyme's humanitarian commitment to treat all sufferers of the rare Gaucher disease worldwide first confronts its commercial imperative to recoup the huge investment required to bring the drug Cerezyme to market. Here Tomye Tierney must decide how to balance the demands of the sales organization that faces saturating developed markets, but major growth opportunities in developing economies. They believe that as long as the Gaucher Initiative-Genzyme's partnership with Project Hope-is providing free Cerezyme, they will be unable to convince the Egyptian government to authorize reimbursement, which can run from $200,000 to $300,000 per patient annually. CEO Henri Termeer believes Genzyme can hold firm to both the humanitarian commitment and its strong patient-focused commercial objectives. But it is Tierney who is on the front line and negotiates the delicate agreement between Genzyme sales, Project Hope, and Egyptian authorities.

Case Authors : Christopher A. Bartlett, Andrew N. McLean

Topic : Global Business

Related Areas : Emerging markets, Government, Marketing, Negotiations, Organizational culture, Social responsibility

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Calculating Net Present Value (NPV) at 6% for Genzyme's Gaucher Initiative: Global Risk and Responsibility Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10001144)	-10001144	-	-
Year 1	3451784	-6549360	3451784	0.9434	3256400
Year 2	3958058	-2591302	7409842	0.89	3522658
Year 3	3938254	1346952	11348096	0.8396	3306634
Year 4	3234234	4581186	14582330	0.7921	2561816
TOTAL			14582330		12647508

The Net Present Value at 6% discount rate is 2646364

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. Internal Rate of Return
3. Net Present Value
4. Profitability Index

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. Gaucher Genzyme's 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 Gaucher Genzyme's 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 Genzyme's Gaucher Initiative: Global Risk and Responsibility

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 Global Business 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 Gaucher Genzyme's 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 Gaucher Genzyme's 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	(10001144)	-10001144	-	-
Year 1	3451784	-6549360	3451784	0.8696	3001551
Year 2	3958058	-2591302	7409842	0.7561	2992860
Year 3	3938254	1346952	11348096	0.6575	2589466
Year 4	3234234	4581186	14582330	0.5718	1849184
TOTAL					10433062

The Net NPV after 4 years is 431918

(10433062 - 10001144 )

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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	(10001144)	-10001144	-	-
Year 1	3451784	-6549360	3451784	0.8333	2876487
Year 2	3958058	-2591302	7409842	0.6944	2748651
Year 3	3938254	1346952	11348096	0.5787	2279082
Year 4	3234234	4581186	14582330	0.4823	1559719
TOTAL					9463940

The Net NPV after 4 years is -537204

At 20% discount rate the NPV is negative (9463940 - 10001144 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Gaucher Genzyme's 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 Gaucher Genzyme's has a NPV value higher than Zero then finance managers at Gaucher Genzyme's 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 Gaucher Genzyme's, then the stock price of the Gaucher Genzyme's 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 Gaucher Genzyme's 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 uncertainties surrounding the project Initial Cash Outlay (ICO’s). ICO’s often have several different components such as land, machinery, building, and other equipment.

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

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

Understanding of risks involved in the project.

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.

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Negotiation Strategy of Genzyme's Gaucher Initiative: Global Risk and Responsibility

References & Further Readings

Christopher A. Bartlett, Andrew N. McLean (2018), "Genzyme's Gaucher Initiative: Global Risk and Responsibility Harvard Business Review Case Study. Published by HBR Publications.