Genzyme Corp case examines the sequence of financings utilized by Genzyme Corporation during 1986-1992 to fund its product development and corporate development activities. The case is taught about midway through the Corporate Financial Management (CFM) course and may be thought of as the first case in the second half of CFM. Its primary purpose is to focus students' attention on a sequence of financings that collectively may be regarded as a financing program.

1. A Case Study on
Genzyme Corporation: A Financing History
Group-62

2. Group Profile
2
Serial No. Name MBA ID
1. Sheikh Saifullah Khalid 2027
2. Nusrat Jahan 2009
3. Md. Ullash Hossen 2227
Group-62

3. About Genzyme Corporation
3
 Genzyme Corporation is one of the largest Biotechnology companies in the world located in
USA.
 It is Founded by Henry Blair in 1981 which is a Biotechnology company specializing in the
R&D
 Their success could put in peril the success projections for the Genzyme until the
development of other drugs in R&D phase
 Their investment partners OAK and BIA
 It is now belonging in growth stage
 Two important new diagnostic products were in Genzyme's product pipeline

4. Industry Analysis of
Genzyme Corporation

5. Porter’s Five Forces
5
Rivalry
among
competitors
Threats of
New
entrants
Bargaining
power of
suppliers
Bargaining
power of
customers
Threat of
substitutes
Moderate High Moderate Low Low

6. PESTEL Analysis
6
P
Political
Factors
E
Economic
Factors
S
Social
Factors
T
Technological
Factors
E
Environmental
Factors
L
Legal
Factors
Political Factors
• Regulatory frameworks
• Pricing pressures
Social Factors
• Aging population
• People Interested in
biotechnology
Environmental Factors
• Populated country
• Ignoring the activity that may
hamper the environment
Economic Factors
• Control over money supply
• Higher federal rate
Technological Factors
• Innovation
• First mover
Legal Factors
• Intellectual property right
protection
• Favorable business laws

7. Company Analysis of
Genzyme Corporation

8. SWOT Analysis
8
S
Strengths
W
Weaknesses
O
Opportunities
T
Threats
Strengths
 It is a strong rivalry company
comparatively.
 Good management
 Heavy investment in R & D
 Revenue generates from different
sources
Opportunities
• Increasing investment in R&D
• Increased market size
• Fast approval of Drugs
Weakness
 Lower rate of success in R & D
 Concentration on some products
mostly
Threats
 Negative Profit Margin
 Invest in R&D is uncertain
 Highly competitive

9. Financial Performance of Genzyme Corporation
9
-
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
1984 1985 1986 1987 1988 1989 1990 1991 1992
Liquidity Ratio
Current Ratio Quick Cash Ratio
1.74
2.26
0.39
0.50
0.74
0.36
0.52
0.42
0.68
-
0.50
1.00
1.50
2.00
2.50
1984 1985 1986 1987 1988 1989 1990 1991 1992
Efficiency Ratio
Total Asset Turnover Equity Turnover

10. Financial Performance of Genzyme Corporation
10
1984 1985 1986 1987 1988 1989 1990 1991 1992
Debt Ratio 0.25 0.27 0.01 0.13 0.09 0.07 0.04 0.27 0.22
Debt-Equity Ratio 0.46 0.77 0.01 0.17 0.12 0.08 0.05 0.39 0.33
Equity Multiplier 1.80 2.82 1.07 1.26 1.27 1.20 1.23 1.49 1.49
-
0.50
1.00
1.50
2.00
2.50
3.00
Leverage Ratio

11. 11
-100.00% -80.00% -60.00% -40.00% -20.00% 0.00% 20.00% 40.00%
1984
1985
1986
1987
1988
1989
1990
1991
1992
Profitability Ratio
Net Profit Margin Operating Profit Margin
Financial Performance of Genzyme Corporation

12. DuPont Analysis
12
0.97 0.80
0.37 0.40 0.58
0.30
0.42 0.28
0.46
1.80
2.82
1.07
1.26 1.27 1.20 1.23
1.49 1.49
-80%
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
1984 1985 1986 1987 1988 1989 1990 1991 1992
DuPont Analysis
Asset Turnover Ratio Equity Multiplier Net Profit Margin ROE

13. Business Risk Analysis of Genzyme Corporation
13
Sales Variability
Year 1984 1985 1986 1987 1988 1989 1990 1991 1992
Sales 7,903 9,667 12,136 16,755 24,607 32,774 50,137 109,486 219,079
Mean Sales 49185.11111
Standard Deviation 14092.56668
CV 3.490
Operating profit Variability
Year
1984 1985 1986 1987 1988 1989 1990 1991 1992
Operating profit 101 -2650 -655 -996 -110 -14072 -38800 8379 43411
% Change in EBIT -2723.76% -75.28% 52.06% -88.96% 12692.73% 175.72% -121.60% 418.09%

14. Business Risk Analysis of Genzyme Corporation
14
Standard of Measuring DOL Risk Status Risk Premium
Less than 1 to 1 Very low 1%
1 to 2 Low 1.50%
2 to 3 Moderate 2.50%
3 to 4 High 3.50%
4+ Very high 4.50%
Business risk is very high
Average DOL : 32.92362
-200 -100 0 100 200 300 400 500
1985
1986
1987
1988
1989
1990
1991
1992
DOL

15. Financial Risk Analysis of Genzyme Corporation
15
Degree of Financial Leverage
Year
1984 1985 1986 1987 1988 1989 1990 1991 1992
EBIT 101 -2,650 -655 -996 -110 -14,072 -38,800 8,379 43,411
Interest -91 -166 695 1,417 793 1,056 4,425 10,502 14,882
DFL 0.526041667 1.066827697 0.485185185 0.41276419 0.121816168 0.930195664 0.897628687 -3.946773434 1.521644642
Average DFL 0.223925608

16. Financial Risk Analysis of Genzyme Corporation
16
Standard of Measuring DFL Risk Status Risk Premium
0 to 1 Very low 1%
1 to 2 Low 1.50%
2 to 3 Moderate 2.50%
3 to 4 High 3.50%
4+ Very high 4.50%
Financial Risk is very low
Interest Coverage Ratio
Year 1984 1985 1986 1987 1988 1989 1990 1991 1992
EBIT 101 -2,650 -655 -996 -110 -14,072 -38,800 8,379 43,411
Interest -91 -166 695 1,417 793 1,056 4,425 10,502 14,882
Interest Coverage Ratio
(TIE) -1.1099 15.9639 -0.9424 -0.7029 -0.1387 -13.3258 -8.7684 0.7978 2.9170
Average TIE -0.5899

17. Altman Z Score
17
Weight
1984 1985 1986 1987 1988 1989 1990 1991 1992
Working Capital/Total
Assets 1.2 0.59 0.50 0.87 0.56 0.50 0.57 0.49 0.13 0.17
Retained
Earnings/Total Assets 1.4 0.04 0.03 0.01 0.01 0.02 0.01 0.00 0.00 0.00
EBIT/Total Assets 3.3 0.01 -0.22 -0.02 -0.02 0.00 -0.13 -0.33 0.02 0.09
MVE /BVLD 0.6 0.51 0.45 0.76 0.14 0.26 0.27 0.29 0.21 0.31
Sales/Total Assets 1 0.97 0.80 0.37 0.40 0.58 0.30 0.42 0.28 0.46
Altman Z SCORE 2.519 1.044 10.143 3.347 3.462 3.578 2.565 1.711 2.185
Avg. 3.395
Z > 2.9 Safe Zone
1.81 < Z < 2.99 Gray Zone
Z < 1.81 Distress Zone

18. Problem Statement of
Genzyme Corporation

19. Problem Statement
▸ 5 years average
sales growth rate
80%
19
▸ High growth maintenance
Developing capital mix to support Genzyme's overall
long-horizon development strategy

20. Available Alternatives and Product Options
20
Option 01 Additional equity issue of $70 million
Option 02 GCP unit issue (convertible debt issue)
▸ Financing alternatives
▸ Real option
Option 01 Thyrozen development
Option 02 Research and trial stage medicines

21. Valuation Assumptions
▸ Sales growth rate
⮚ Justifications for lowering growth rate:
1.Expectation of recession
2.Industry cyclicality
3. Assuming company reaching to its maturity
21
1993(B) 1994 1995 1996 1997 1998 1999 2000 2001
Sales Growth Rate 50% 48% 46% 44% 39% 34% 29% 24% 19%

22. Valuation Assumptions
▸ Cost of goods sales 37% of sales (historic average)
▸ S&A costs 26% of sales (historic average)
▸ Depreciation rate 10%
▸ Terminal growth rate 3%
22

23. Basic Valuation
D/E = 0.379
23
WACC for Basic valuation
Weight of equity 72.48%
Weight of debt 27.52%
Cost of equity 15.20%
Cost of debt (after-tax)* 20.70%
Weighted average cost of
capital 16.71%
Risk free rate (Fed rate) 8.90%
Business risk premium 4%
Financial risk premium 3%
Risk adjusted WACC= 23.71%
*For cost of debt, 5 years’ average interest rate is used (30.55%)

24. Basic Valuation
24
Firm value 250,980
(-) Value of Debt 105,369
(-) PV of agency cost 5,020
(-)PV of distress cost 1,882
Value of Equity 138,709
(+)Value of Genzyme Partnership 47,182
(-) Convertible Option Value 59,486
(+) Real Option Value 530,544
Total Equity Value 656,949
(÷)Number of Shares 21,568
Value per Share $30.46

25. Analysis of Basic Valuation (Simulation)
25
Coefficients of
variations
0.1718 (Less volatile)

26. Real Option Valuation (Research and Trial Stage Medicines)
26
PV of expected CF from real option S $ 1,028,764
Cost to implement project X 1,356,864
Time to Maturity (Years) T 9.00
Riskless Interest Rate (% p.a.) rf 7.38%
Volatility (% p.a.) s 34.84%
d1 0.8932
d2 -0.1520
N(d1) 0.8141
N(d2) 0.4396
N(-d1) 0.18586792
N(-d2) 0.560388372
European Call Value ($) CE $530,543.68

27. Analysis of Alternative 1: Stock Issue (WACC)
27
D/E = 31.20%
Alternative 1- Equity Issue
Cost of Equity 15.20%
Cost of Debt 30.55%
After tax cost of debt 20.70%
Total debt 122,512
Total equity 392,613
Weight of equity 76.22%
weight of debt 23.78%
Base WACC 16.51%
Business risk premium 4.00%
Financial risk premium 3.00%
Risk adjsuted WACC 23.51%
Number of new share Issue 1,767 @ $39.63

28. Analysis of Alternative 1: Stock Issue (Valuation)
28
Firm value 231,894
(-) Value of Debt 105,369
(-) PV of agency cost 16,233
(-)PV of distress cost 4,406
Value of Equity 105,887
(+)Value of Genzyme Partnership 47,182
(-) Convertible Option Value 59,486
(+) Real Option Value 530,544
Total Equity Value 624,127
(÷)Number of Shares 23,335
Value per Share $26.75

29. Analysis of Alternative 1: Stock Issue (Simulation)
29
Coefficients of
variations
0.2702 (Less volatile)

30. Analysis of Alternative 2: GCP Units Issue (WACC)
30
D/E = 37.9% (Unchanged)
WACC for Basic valuation
Weight of equity 72.48%
Weight of debt 27.52%
Cost of equity 15.20%
Cost of debt (after-tax) 20.70%
Weighted average cost of
capital 16.71%
Risk adjusted WACC= 23.71%

31. Analysis of Alternative 2: GCP Units Issue (Valuation)
31
Value of Equity(after debt, agency and
distress cost adjustment) 178,400
(+)Value of Genzyme Partnership 69,826
(-) Convertible Option Value 59,486
(+) Real Option Value 530,544
Total Equity Value 719,284
(÷)Number of Shares 21,568
Value per Share $33.35
Current Asset Value S 39.625
Exercise (Strike) Price X 46
Time to Maturity
(Years) T 7
European Call Value
($) CE 20.236
Value of Warrant Option20.24
No of Shares today21,568
No of Shares Upon Exercise2,625
Value of Each warrant18.04
Total Value of Call Warrant
Issue47,356
GCP Unit Sales 70,000.00
Value of Genzyme in
GCP $22,644

32. Analysis of Alternative 2: GCP Units Issue (Simulation)
32
Coefficients of
variations
0.1919 (Less volatile)

33. Option Valuation: Assuming Successful Thyrozen Medicine
Development
33
D/E = 37.9%, WACC= 23.71% (Unchanged)
PV of expected CF from
real option S $ 1,028,764
Cost to implement project X $ 1,356,864
Time to Maturity (Years) T 9.00
Riskless Interest Rate (%
p.a.) rf 7.38%
Volatility (% p.a.) s 34.84%
T-Bond rate 8.90%
Variance 0.09
d1 3.175885059
N(d1) 0.999253099
d2 2.053387843
N(d2) 0.979982511
Value of the product
patent/project right = $70,506

34. Option Valuation: Thyrozen Medicine (Cont’d)
34
Firm value 290,747
(-) Value of Debt 105,369
(-) PV of agency cost 5,815
(-)PV of distress cost 1,163
Value of Equity 178,400
(+)Value of Genzyme Partnership 47,182
(-) Convertible Option Value 59,486
(+) Real Option Value 601,050
Total Equity Value 767,146
(÷)Number of Shares 21,568
Value per Share 35.57

35. Option Valuation: Thyrozen Medicine (Sensitivity)
35
Coefficients
of variations
0.5675 (Volatile)

36. Recommendations: Financing Program
36
Alternative Value per share CV
Stock issue $26.75 0.2702
GCP units issue $33.35 0.1909
▸ Financing Alternatives
▸ Real Options
Alternative Project value
Trial stage medicine $530,543.68
Thyrozen medicine $70,506

37. Recommendations: Financing Program
37
Stock price Weight
Equity issue 26.75 39%
GCP unit issue 33.35 26%
Thyrozen development 35.57 35%
Combined Value par share $31.55

38. 38
THANK YOU!
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