Aqua Bounty Case Analysis
Aqua Bounty, a US-based biotechnology company that has been dedicating itself to commercialization of genetically modified salmons, is right standing at the cross of its future paths. This analysis would utilize financial models to help value the firm ahead of its IPO, in consideration of given senarios and a series of market assumptions.
By the moment when it was spun off its parent company into an independent entity in March 2000, Aqua Bounty had invested about US$ 4 million in developing new technology in aquaculture. Although it made progress in entering Chilean market in that year, this firm soon became controversial because of the property of genetically modification. This technique had not been embraced in animal cultivation by mainstream ideas, despite of its amazing efficacy in raising production of commercial fish. The pivotal approval by FDA was expected to come for another 18 month, with a lot of uncertainty, hence an additional try on shrimps. Hard work pays off. Solutions (Shrimp IMS and anti-virus drug VPX) were developed to prevent commercial-farmed shrimps from bacterias and a specific kind of virus. This pipeline of Shrimp IMS was built by Aqua Bounty in 2005 and then contributed to all of its revenue in 2005. The core business that has huge potential application prospect once commercialized, is still delayed due to regulatory, so does positive net income. The company also needs additional capital for further investments over the coming years. The actual time of approval for genetically modified product lines is yet still uncertain. In order to maintain its operation and to fund its investments, Aqua Bounty made the right decision to IPO, rather than raise fund among small private placements.
The genetically modified (GM) fish could reach marketable size in about half the time of standard fish, which allows farmers to double production without increasing the size of farm or capital investment. This property would beat any other competing strains in current market, if announced to be harmless to human by FDA. Commercial fish farming industry has generated nanual revenues of over US$6 billion by 2006, and is growing at over 5% a year. Once this GM salmons allowed in the market, they will bring rapid increasing market share and enormous profit for Aqua Bounty. Another kind of aquaculture, Aqua Bounty’s shrimp therapeutics, protects shrimps in commercial farms from pernicious disease in two ways, by boosting the immune system to general disease-resistance of shrimps, and by designing specifically to prevent shrimps from developing the most commom and virulent virus. These treatments definitely dominate the existing antibiotics prevention. The shrimp industry has also seen great expansions since the 1970s. It is now esmated to be a global industry worth over US$10 billion, which is quite a hugh market to pursue. Small scale manufacturing in some other countries have shown significant fruition.
The firm has spent over 10 year on GM research and experiments, and approval by FDA is still yet to be awaited. This firm has experienced a 5-year repeated net loss and is in urgent need of additional funds now. Concerns about safety to human as well as to evironment are widely shared by consumers in target markets. Listing in US stock exchanges would be too onerous for a relatively small-cap company, therefore, a European listing becomes more attractive. Given Aqua Bounty’s early stage of development and unusual range of profits, valuing the firm becomes more problematic with its enormous uncertainty around future revenues and the dearth of comparable listed companies.
a) Standard DCF model approach
The standard DCF model gives
Present value of a firm is obtained by sum up the present value of all the future cash flows. However, the problems are, future cash flows and appropriate discount rate are very...
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