For Friady 22/2013

 

This a finantialroject analysis of a Medical stent products. please see word document attached with the explanation. There are 2 Excel sheets attached as a samples of excel spread sheet. They don’t have to be exactly or changing numbers on it  is just a guideline of a Excel spread sheet.

  

1. For this basic scenario, calculate the project’s cash flows, WACC, NPV, IRR, Payback Period, Profitability Index, Discounted Payback, and MIRR. Graph an NPV profile. Evaluate whether the project should be undertaken.

 

2. For this more advanced scenario, calculate the project’s cash flows, NPV, IRR and MIRR.

 

3. Risk analysis:

Perform a sensitivity analysis for NPV for the more advanced cash flow case. Graph on the same axes the NPV for 5%, 10%, 15% and 20% deviations from the base case for the parameters: initial size of cardiac stenting market, Year 5 ultimate percent market share for cardiac stents, initial market size for carotid stents, materials cost per unit, and selling price.

  

Scientific’s Stent

Scientific (KS), a regional manufacturer and developer of healthcare devices, is considering licensing the rights to manufacture and distribute a new drug eluting stent, tentatively named the VolStent, for use in coronary and carotid arteries. The VolStent improves upon both bare and current generation drug eluting stents with its ease of insertion, superior radio-opacity and visibility during imaging, and statistically significantly reduced restenosis rates. The stents have passed clinical trials, are FDA approved, and it is only a matter of licensing the intellectual property rights and setting up manufacturing facilities in order to produce, market and sell the VolStent.

The percutaneous coronary intervention market is large, with

6

00,000 PCIs per year and

9

00,000 stents placed per year in the U.S. alone. Of these, about

7

1

% are placed during an emergency while the remaining

2

9% are placed in non-acute cases either as a result of chest pain associated with stable heart disease, or in asymptomatic patients as a result of screening. A recent study found that roughly half of the non-acute PCIs were either entirely inappropriate or of uncertain benefit relative to medical management, and at an average PCI cost of over $20,000, it is likely that the number of stents placed in non-acute cases will shrink under health care reforms. Scientific’s analysts predict that the non-acute use of stents will decline by a total of

3

0% over the next five years while the acute use will remain constant. The analysts also predict that Scientific can initially capture

5

% of the U.S. stenting market with this percentage increasing to 25% in the 5th year.

The market for stenting in carotid stenosis is smaller and more variable. The benefits of stenting over endarterectomy have been questioned over the years, leading to uncertainty in the size of the future market for stents in treating carotid stenosis. Roughly 1

4

0,000 endarterectomies are performed each year in the U.S. and Scientific’s incomplete data suggests that roughly that same number of carotid stents are placed in lieu of endarterectomy each year. More recent studies have found that outcomes from carotid stenting are similar to, if not slightly better than, outcomes from endarterectomy, and so Knoxville Scientific’s analysts predict that the number of carotid stents placed will increase by a total of 20% over the next five years, replacing some of the endarterectomies. Although the VolStent has a superior restenosis rate compared to other stents when used in the carotid, the significant complication rate during the insertion procedure is similar to that of other stents and so the analysts predict that the VolStent will initially capture 5% of the market, increasing to

15

% of this market by the third year.

The intellectual property underlying the VolStent is fully patent-protected, however the pace of technological advancement is extremely rapid and Scientific’s analysts predict that once introduced into the market, the VolStent will maintain market share for only 7 years, after which it will be replaced by a new stent developed by either Knoxville Scientific or a competitor.

Basic analysis:

The VolStent is relatively inexpensive to produce and sells at a high price. The selling price will be $2,

8

00 per stent initially, but declining reimbursements will cause the amount received per stent to decline at a rate of 5% per year. Raw and pre-finished materials obtained from suppliers total $200 per stent. The stent production line would require an increase of 1.0 FTE (full time equivalent) employees at a fully-burdened annual cost of $

12

0,000 per employee. One additional management staff will be required at a fully-burdened salary of $190,000 per year. Marketing and sales would be handled by the existing sales force. The sales force operates on a commission basis, and commissions total 15% of the selling price.

Startup costs, however, are quite significant. A licensing arrangement has been agreed upon which consists of an initial payment of $200 million immediately, and then annual payments of $50 million at the end of each year for the duration of the 7-year licensing period. The licensing fees are considered expenses for federal tax purposes. The equipment required for coating the stents will cost $

10

0 million, with shipping and installation costs of $15 million. The equipment falls in the 15-year MACRS category. Knoxville Scientific estimates that it can sell the equipment for $20 million at the end of the 7-year production run.

In addition to purchasing capital equipment, KS will need to invest in working capital. KS’s CFO estimates that working capital, consisting of raw and finished goods inventory and accounts receivable net of payables will total 35% of annual sales, and that this amount must be on hand at the beginning of each year.

Scientific’s capital structure consists of 100 million shares of common stock trading at $40 per share, and face value of $1 billion of 20-year, 7% coupon bonds with semiannual payments, trading at a yield to maturity of 5%. Scientific’s beta is 1.3, the risk free rate is 4%, the market risk premium is 6.5%, the company’s dividend yield is 5%, and its dividend growth rate is 4% per year. KS’s tax rate is 40%.

1. For this basic scenario, calculate the project’s cash flows, WACC, NPV, IRR, Payback Period, Profitability Index, Discounted Payback, and MIRR. Graph an NPV profile. Evaluate whether the project should be undertaken.

Note: The 15-year MACRS depreciation schedule is

5.91%

5.90%

5.91%

5.90%

5.90%

5.91%

5.90%

Year

Depreciation Rate

1

5.00%

9

5.91%

2

9.50%

10

5.90%

3

8.55%

11

4

7.70%

12
5

6.93%

13

6

6.23%

14

7 15
8

16

2.95%

Additional cash flow analysis:

The addition of the VolStent to Scientific’s portfolio of products is not without externalities. KS spent a total of $30 million in marketing and technology research over the past 3 years investigating the VolStent. In addition, KS currently markets an older generation drug eluting stent which, although inferior to the VolStent, still has some adherents, with last year sales of 60,000 units. If introduced, the VolStent will completely replace the older generation stent. If the VolStent is not introduced, KS’s analysts project that the older generation stent’s sales will decline at a rate of 15% per year. This older generation stent has the same variable cost structure as the new stent but a selling price of only $1,800 per stent last year. Because of declining reimbursements, this price too will decline by 5% per year. Its production requires only 8 FTE production employees and 1 manager and the commission fee structure is the same, as is the percentage of revenues working capital requirement. As KS owns the fully-depreciated intellectual property associated with the older stent, there is no licensing fee. Because of the difference in technologies, the machinery used in production of the older stent could not be used for the VolStent. This older machinery was initially purchased 5 years ago for $70 million and fell into the MACRS 15-year category. It could be sold now for $20 million. If the equipment were used over the next 7 years, the salvage value would decrease to $10 million.

2. For this more advanced scenario, calculate the project’s cash flows, NPV, IRR and MIRR.

3. Risk analysis:

Perform a sensitivity analysis for NPV for the more advanced cash flow case. Graph on the same axes the NPV for 5%, 10%, 15% and 20% deviations from the base case for the parameters: initial size of cardiac stenting market, Year 5 ultimate percent market share for cardiac stents, initial market size for carotid stents, materials cost per unit, and selling price.

Excel Hints:

· When using a data table to conduct your sensitivity analysis, be sure that the base case value is hardwired into the left hand column of the data table otherwise you’ll get a circular reference which Excel won’t flag as an error, but you’ll get the wrong answers!

· A 15% reduction in a number like $2,800 is 2800×0.85. A 15% reduction in a percentage like 35%, is calculated the same way: 0.35×0.85.

KS’s analysts have determined that the success or failure of the project depends on a number of factors which, when combined, yield three five different scenarios: a best case (5% probability), a good case (20% probability), the base case (30% probability), a bad case (25%), and the worst case (20%). The parameters and the probabilities of the five cases are given below.

Case/Parameter Worst Bad Base Good Best

Probability 20% 25% 30% 20% 5%

Initial selling price $1,800 $2,300 $2,800 $2,900 $3,000

Rate of decrease in

Selling price 3% 7% 5% 5% 7%

Ultimate percent

Of cardiac market 15% 20% 25% 28% 30%

Ultimate percent of

Carotid market 10% 13% 15% 18% 20%

Materials cost per

Stent $300 $250 $200 $200 $200

Calculate the expected value, the standard deviation, and the coefficient of variation of the NPV and the IRR under these scenarios.

Excel Hint: You can use the Scenario Manager to enter these 5 scenarios and then use the Scenario Summary to display the NPV and IRR under each scenario. Then you can calculate expected value, standard deviation and coefficient of variation.

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