In early 1997, Greg Phelps, EVP of Genzyme Corporation, met with members of a joint- venture negotiating team to develop proposed terms of a joint-venture agreement. The venture would combine capabilities of Genzyme and GelTex Pharmaceuticals to market GelTex’s first product, RenaGel. GelTex was an early-stage biotech research company with two products in its pipeline. GelTex had neither the capital nor the marketing organization to launch RenaGel. Therefore, the company had been looking for a partner that would contribute cash and marketing expertise in exchange for a share of profits in a joint venture.
Genzyme had revenues of $518 million in 1996, and had grown rapidly through the innovative use of joint ventures and alliances. The joint venture with GelTex was attractive to Genzyme for several reasons. In addition to the benefit of increasing earnings through the sale of RenaGel, the joint venture would represent an excellent fit for Genzyme’s specialty therapeutics and allow the firm to tap new markets. Also, building a strong partnership with GelTex might enable Genzyme to strike the same kind of deal for GelTex’s second product, CholestaGel, which was targeting a much larger segment, the multibillion-dollar market of anticholesterol drugs.
Greg Phelps was eager to conclude a deal and launch the venture with GelTex. Important questions, however, had to be addressed before consummating an agreement.
? What was the likely enterprise value of the joint venture? This estimate would need to reflect the risks inherent in investing in a drug not yet approved by the U.S. Food and Drug Administration (FDA). Also, the joint-venture team would need to determine the best way to value a business with no operating history and an uncertain future.
? How much of the venture should Genzyme acquire? Typically, joint ventures between pharmaceutical firms and biotech companies featured an unequal division of interests (e.g., 80% pharma and 20% biotech). Phelps, however, wanted to consider the possible benefits of a 50:50 balance of interests.
This case was prepared by Pierre Jacquet, MD, PhD, MBA ’98, and Robert Bruner and Samuel E. Bodily. The cooperation of Genzyme is gratefully acknowledged. Certain financial data regarding the venture have been disguised. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright 1999 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to firstname.lastname@example.org. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. ◊
? How much should Genzyme pay for its interest? Initial discussions had focused on a lump-sum payment of $27.5 million for a 50% interest. But the amount of any payment would depend on answers to the previous questions, on the assessment of risks, and on the impact on Genzyme’s earnings. Accounting rules required that Genzyme expense investments that occurred before the venture received FDA approval. After approval, Genzyme could capitalize the investment and amortize it over the life of the venture.
Phelps turned to his team for analysis of those issues and proposals for GelTex.
Genzyme Corporation, headquartered in Cambridge, Massachusetts, was the fourth- largest biotech company in the United States. Unlike pharmaceutical companies that manufactured drugs through chemical processes, biotech companies used living organisms or their products to generate drugs. The company’s sales reached $518 million in 1996...