Case Study: Rocky Mountain Advanced Genome Inc
In order to provide an accurate valuation of RMAG, the forecast horizon needs to reach the maturity stage the firm’s growth. The product that will take the longest to be marketed, Human Therapeutics is not expected to be earning revenues for RMAG for 4-7 years therefore to allow these products to reach their maturity in generating cash flows, a horizon for longer than 10 years is recommended. 15 years was used for this analysis to ensure that the terminal value of the company was determined when the company is mature not in the growth stage which could greatly skew results.
In order to forecast free cash flow, the first assumptions that had to be made were in regards to sales growth for RMAG;s products. As information regarding diagnostics and agriculture related products is limited and comparable companies are scarce, it was assumed that RMAG’s forecasts were slightly optimistic as to push firm value up therefore an average sales revenue was determined from RMAG and Big Sur’s forecasts. To forecast beyond 2005, sales growth per year was analysed historically and then used to extrapolate future sales until 2010. As the products will originally experience extremely high sales growth due to the unique nature of products, the growth will need to eventually slow to an industry average therefore this is demonstrated in the forecast proforma. Sales growth is expected to slow to 2.5-5%, the range of industry average to economy growth.
Human Therapeutics are expected to be the most lucrative portion of RMAG’s business however some discrepancies are evident between RMAG and Big Sur forecasts regarding when these revenues are expected to be realised. Comparatively, Human Genome Sciences Inc. and Myriad Genetics Inc took 3-4 years to realise revenues from human therapeutics however it is difficult to determine when RMAG will realise profits associated with Human Therapeutics. Therefore it has been assumed that it will take 6 years to realise revenue, longer than RMAG’s forecast but shorter than Big Sur’s conservative valuation. The sales growth was expected to follow a similar pattern to the other products.
COGS was determined to be 39% of sales as a mean from forecasts provided by RMAG and Big Sur. This mean was consistent for both valuations. Contract revenue was assumed to stay fairly constant at $4 million per annum after 2000.
Research and Development costs make up a significant portion of RMAG’s expenses. This is due to the nature of the company and the high investment required developing its products. These R&D costs are assumed to be very high in the near future however as the products are developed and moved onto FDA approval, these R&D costs will begin to decrease and SG&A costs will begin to take over as the main expense as the products are taken to market.
As the company is assumed to be financed with joint ventures and capital, there is no interest expense for RMAG as there is no...