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Purinex Case Study - Financial Issues

Essay by   •  February 27, 2011  •  Case Study  •  2,407 Words (10 Pages)  •  4,006 Views

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Introduction: Problems of Purinex

The problem facing by Purinex Inc. CFO's Gilad Hapaz is to establish a partnership with a major pharmaceutical company that would enable the company to develop one of its leading compounds into a drug for the treatment of one of the world's most widespread diseases.

Purinex Inc is currently facing financial problems.

The company did not generate sales or earnings and had only $700,000 of cash in hand. The expenses of the company are more than its income. Monthly expenses of the company are about $60,000. Cash level that Purinex holds would only enable the company to survive for another 11 months. Moreover, Purinex need to spend a huge amount of money on Research and Development (R&D) in order to develop an antagonists and agonists program for the treatment of diabetes and sepsis. Early-stage biotechnology firms need excessive access to capital for R&D. According to a study of Tufts University, in order to develop a new human-therapeutic compound, it will cost a company total of $897 million.

A successful deal of partnership between Purinex and a major pharmaceutical company is crucial. If the company is able to secure the partnership, it can solve the financial problem that company is currently facing. Purinex will receive milestone payments, royalties, front fees and co-promotion rights and have enough access of capital for R&D funding. However, there are two partnerships available, one wants a deal for treatment of sepsis while another sought for treatment of diabetes. The first deal for treatment of sepsis, enables Purinex to receive $108 million milestones. The other deal is to give Purinex $80 million milestones. It is believed that there is 60 percent probability that the first deal of partnership will occur. In order for Purinex to go for initial public offering (IPO), securing one of the deals was practically a prerequisite.

Besides that, the drug development and approval process is lengthy and risky. On average, it took 10-15 years to move a drug from preclinical testing to marketing approval. In other words, even if the company has enough access of capital for the drug-development process, there are still some approval problems that need to be addressed by the company. Absence of partnerships and external financing might cause the company to give up developing the drugs that might be bringing potential annual sales to the company.

Comparison among the options:

The CFO is planning to undertake external financing now in case the company fails to establish any partnership which will then put the company into a big trouble. There are three options that considered by Hapaz which are venture-capital round, angel round and wait for the partnership deal in six months and each option came with its own risks. Hapaz need to make decision on which options the company should go for and he need to choose the option that will bring the highest benefits to the company.

Firstly, venture-capital round could secure Purinex Inc $10 million in a one-time round, which enables Purinex Inc to survive another 166.67 months or 13.83 years (10mil/60000), and it just takes 3 months to complete the process. Still, $10 million is definitely adequate for Purinex Inc to continue the research and development on diabetes and sepsis. In addition, Venture capital firm would grant a pre-money valuation of $15 million for Purinex Inc. Therefore, Purinex Inc will still maintain a good reputation and image.. Nonetheless, there are still some risks which Harpaz (CFO) needs to concern with. Since investing in an uncertainty business is highly speculative, venture capitalists will basically come with a significant number of restrictions such as preferences for board appointments, anti-dilution rights and so on. As a general rule, venture capitalists require controlling about 30-40 percent of the equity in the company which they invested; hence it might to bring a certain impact to the company structure and decision. Then, if either one of sepsis and diabetes successfully launch in the future, Purinex Inc will have to share its earnings with venture capital firm based on the agreement On the other hand, Harpaz believed that round of venture capital has the possibility to increase the value of pharma deal by 10 percent.

Do nothing and wait six months for the partnership deal is the second option. Purinex Inc could just do nothing and expect either sepsis or diabetes deal within 11 months. Assuming Purinex Inc has partnership deal for sepsis, its partner for that drug (larger pharmaceutical firm) need to pay the royalty to Purinex Inc as stated in the contracted term, which is 10 percent of its earnings. Next, Purinex's current owners still retain the control of the company completely and preserve a $25 million for the company's valuation, which is the highest compared to another two options. On the other side, since Purinex Inc's cash on hand is just able to make them survive 11 to 12 months, the company could wait only six months before securing additional financing. But, if either the sepsis or diabetes fails during the following six months, it puts the company into trouble. Down round scenario would come to Purinex Inc's investors, which would dilute the value of existing investors and make it worth much lesser or even nothing at all. By this, a pre-money valuation for Purinex Inc possibly would drop till just $8 million or even worse than, as low as $5 million. So, the most crucial component is the short time period to seek for partnership. If no any partnership deal comes through, there is no doubt that Purinex Inc will face a financial distress.

The last alternative is angel round. The similarity between venture capital and angel investors, which is the way they invest in the company. If the CFO chooses this option, the company is not able to raise as much funds as it could from venture capital round. Angel investors are just able to provide $2 million for Purinex Inc, which is just could making Purinex Inc survive to 33 months further, and about six months is needed to undertake this angel round. Compared to venture capital, the funds raise from angel investors are much lesser and take longer time to complete it.

Furthermore, a higher valuation of $17.5 million will be allocated to Purinex Inc with those angel investors, slightly higher than venture capital but loIr contrasted to partnership. Similar with Venture investors, Purinex Inc has to share its earnings with angle investors after the product is gaining the marketing approval and sell in the market.

Qualitative factors under consideration

There are several qualitative factors that

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