Rocky Mountain Advanced Genome Essay

2297 Words Apr 10th, 2012 10 Pages
Case Study 2: Rocky Mountain Advanced Genome

This paper provides an objective valuation of Rocky Mountain Advanced Genome (RMAG) to be adopted by Big Sur regarding the purchase of a 90% equity stake for $46 million.

Forecast Horizon: The forecast horizon was lengthened to 15 years, as RMAG is a young, “highly promising, high risk” firm, only established 15 months prior, it should reach maturity in 2010 as sales, expenses and free cash flows stabilise (Fig.1). RMAG exhibits characteristics of a high growth firm with no dividends, high risk, high CAPEX expenditures and no leverage. Furthermore, it would be inadequate to adopt the forecast horizon dictated by RMAG and Big Sur of 10 years as cash flows only breakeven in Year 8 (Fig.2).
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Secondly, no descriptive information was given regarding Other Diagnostics but from the cash flow forecasts provided, appears the only profitable product category from 1995. Hence, Other Diagnostics was estimated as a similar growth model to Cancer Diagnostics yet will mature faster, with 5% in 2006, whilst the growth rate falls by 0.5% thereafter. Agricultural sales were forecasted to grow at 4% in 2006-07 then 3.5% in 2008-10. This consistency in figures is because disease-resistant corn and commodity plants reflect a staple societal need yet there is foreseeable competitiveness in this segment due to strategic alliances and significant interest by producers. Human Therapeutics as “the most economically attractive segment” is also the riskiest due to the prolonged FDA process, uncertainty in R&D stages and external competitiveness with “most of the activity in this segment funded by major pharmaceutical companies under joint ventures”. Hence, it is expected that explosive sales of 7% in 2006 fall sharply by 1% until the forecast horizon. COGS, R&D and SG&A were all modeled as percentage of sales figures and it was assumed that these accounts stabilized as sales plateau and efficiencies in production are realised. Hence COGS, R&D and SG&A were predicted at 30%, 8% and 22% respectively. Due to the consistent nature of Contract Revenue at $3.5