Case Analysis VIII:

Pharmacyclics
Introduction
Pharmacyclics is a pharmaceutical company that manufactures drug to improve existing
treatment of cancer, atherosclerosis, and retinal disease. The president of Pharmacyclics, Dr. Richard
Miller, was considering a $60 million private placement in February 2000. By 1999, the company had
developed four new drugs that were in the process of approval by the Food and Drug Administration. The
four new drugs included are Xcytrin which is Pharmacyclics most promising oncology product and was at
Phase III clinical tests which is the rigorous final phase before Food and drug administration approval for
commercialization. The drug was developed to improve the effectiveness of radiation and chemotherapy
treatment. The product was expected to gain approval late in FY02 and to be adopted slowly outside of
the United States which is expected to realize profits equal to 30% of the revenues. Another product,
Lutrin, was developed to improve the effectiveness of photodynamic therapy which is a new king of
treatment used for cancer treatments. The third and fourth product, Optrin and Antrin, which can replace
the photodynamic therapy for the treatment of age related macular degeneration and photoangioplasty.
The analysts of the product thought that Optrin and Antrins revenue is still unsure.
As for the Xcytrin, Experts gave the drug a rather much better than 50% possibility of success.
The organization had more money than in the past but Research and Development expenses as well as
marketing expenses is unexpected. The company spent $73 million on research and development from
time the company was founded in 1991 through June 1999 which is by then the companys most
promising product, Xcytrin was at Phase III clinical trials by the Food and Drugs Administration. The CEO
preferred the private placements since it does not require a road show, a prospectus, or a discount from
the market price.
In order to meet the anticipated funding for each stage, the company had been continuously
obtained funds to conserve cash to complete development stages. To conserve cash, the company
outsourced the manufacture of the compounds used in testing. Miller believed that funding later would
increase share price and funding less would limit dilution which can motivate employees. The decision of
whether Miller should proceed with the funding needs depend on two factors: the funding needs and the
companys valuation. Miller has to decide whether Pharmacyclics should proceed with the private
placement now or wait until the Phase III clinical trial for Xcytrin was complete.

Statement of the problem

These are the problems presented in the case:
1.) Dr. Miller has to decide whether they should proceed with the private placement now or they
could just wait until the completion of Xcytrins clinical trials. Why do they even need to consider
issuing equity for financing their R&D?
2.) How does the cash flow of the firm change after the approval of Xcytrin and lutrin? What if they
were not approved?
3.) What is the value of the company in either situation in #3?

Osial, Krystal Anne | General, Jan Michael | Padua, Blessy | Ybanez,Noemi Joy
1|P ag e

SWOT, TOWS, Porters

SWOT Analysis

Strengths

reduced labor costs

skilled workforce
barriers of market entry
high growth rate
High profitability

Weaknesses

Opportunities

growing economy

investments in
research and
development
competitive market
future competition
costs
small business units
Threats

increase in labor costs

Strengths
Pharmacyclics hired three scientists from Sesslers Lab which is one of the owner that is why the labor
costs in this company will not be a problem. Given that the owners are skilled and the scientists that they
have hired are already in experience, then it is assured that there is a skilled workforce in Pharmacyclics.
On the other hand, since entry in this kind of industry will need a high cost especially in research and
development, threats for new entrants is very low. As they introduce new drugs, growth rate is increasing
as well. Because of high demand and high potential of the new drug that they will soon release in the
market, there is high profitability and revenue for the company.

Weakness
Since this industry requires a lot of investment in research and development, costs on financing this is a
major issue. They will need to invest in research and development constantly which is expensive for a
small business unit like them. Also, since they are still a small business unit, high threats from giant
companies is very serious, even they have come up with the best drugs but has no fund to put it in trial,
then it will fall either on letting it financed by a larger company or sell its patents to them. Future
competition costs is highly seen because of the competitive market that this industry has.

Opportunities
This industry has a good economy which is good to invest in. Pharmacyclics should continue to finance
their drugs since there is growing economy for them.

Threats
There is an increase in labor costs in the future especially when Xcytrin is already approved by the FDA.

Osial, Krystal Anne | General, Jan Michael | Padua, Blessy | Ybanez,Noemi Joy
2|P ag e

Alternative Courses of Action

1.) In their 2000 balance sheet, the company had cash and cash equivalents at $61,164,000. And
since they value funding needs and valuation, the company should know the effects of costs in
their balance sheet figures. (See appendix 1.) If the company does not sell equity by 2000, their
cash will be negative by the time of the approval decision of Xcytrin in 2002 because of too much
development and Selling and administrative costs.
I.

Proceed with the private placement now.

-

II.

He may want to proceed with the placement now because he can establish a fund for
other drugs and it would help with the completion of Xcytrin. Since he has good hopes
the company being approved of the drugs by FDA, the projections made will likely to
happen and it will be a good thing for the company because they will have their fund to
support their expenses.

Proceed only after phase III completion

-

The approval decision is expected to come out in 2002 and cash flow will be better after
the approval because of the inflows from the projections the company made. The value of
the firm at this point in time may be attractive for investors and it may serve as a catalyst
for them to buy shares of Pharmacyclics. Appendix 5 shows the value of the company
after scenario that it is approved and rejected since it the drugs has 50/50 chance of
getting approved. The cash flow with the approval showed a positive NPV because the
inflows from the drugs affected the revenues so much. But unlike when it is approved, the
rejected scenario made it so that the NPV is negative and it may prove to investors that it
is not the right time to invest in this company which will definitely put Pharmacyclic in
jeopardy.

2.) The cash flow of the company under the approval scenario greatly improved. They have positive
cash flows and the value of the company us positive (See Appendix 5.) The Bottom line values of
the income statement were improved to a level that it offset the losses of the company from year
2000.
3.) The value of the firm is positive when the drugs are approved and negative when they are not.
The company is worth $7,124,161,370.0 when approved and ($1,974,561.06) when not.

Osial, Krystal Anne | General, Jan Michael | Padua, Blessy | Ybanez,Noemi Joy
3|P ag e

Recommendation
Our team has come up with the following recommendations based on the alternative courses of
actions.
Dr. Richard Miller can opt to sell the $60 million of equity now, wait until Xcytrin finish the FDA
approval, or sell the $60 million on a staggered basis for the next 3 or 4 years. If the $60 million of equity
would be sold now, then they would not need to have provided a cushion for funding the Phase III Xcytrin
trial. However, real options must also be taken in consideration because these greatly affect the valuation
of the business investment.
He can also choose to wait until the Phase III clinical trial for Xcytrin to be completed because this
will benefit them since this will help Xcytrin to be more developed. The funds may also be used for the
development of Antrin to further forward its progress towards becoming a potential revenue generator.
PCYC should not proceed with the private placement now and wait for a few more years before
selling the $60 million equity since it will provide the highest NPV among the alternatives shown which will
serve as an advantage for the companys stakeholder.

Osial, Krystal Anne | General, Jan Michael | Padua, Blessy | Ybanez,Noemi Joy
4|P ag e

Appendices
Appendix 1
2000

2001
28,664,000
(57,500,000)

Cash & Cash Equivalents

Projected cash flow

61,164,000
(32,500,000)

Ending Balance

28,664,000

Appendix 2
CAPM
BETA
RFR

(28,836,000)

beta(mrp)+RFR
0.824
6.55%

Market return

14%

Cost of Equity

13%

Appendix 3
Xcytrin and Lutrin Profit - US

Product Portfolio
Xcytrin

Percentage use

Patients
Cost per treatment
course
Contract Revenue
COGS per treatment
COGS per treatment
Gross Profit US
Percentage Use (non
US)

Radiation
patients

Approval rate
50%

2000

2001

170,000

2002

2003

2004

2005

2%

17%

26%

40%

3400
$
10,000
$
34,000,000
$
2,000
$
(6,800,000)
$
27,200,000

28900

44200

68000

289,000,000

442,000,000

680,000,000

(57,800,000)

(88,400,000)

$ (136,000,000)

$
$
0

231,200,000

$
$
0

353,600,000

$
$
0

544,000,000

8,500

25,500

42,500

Revenue (non US)

85,000,000

255,000,000

425,000,000

COGS (70%)

(59,500,000)

25,500,000

Gross Profit (non US)

Total GP Xcytrin'

$
27,200,000

256,700,000

$ (178,500,000)

$ (297,500,000)

76,500,000

127,500,000

430,100,000

671,500,000

20,000,000

450,100,000

Lutrin
Pretax Income
Total Profit - US

$
3,000,000
$
30,200,000

$
$

9,000,000
265,700,000

Osial, Krystal Anne | General, Jan Michael | Padua, Blessy | Ybanez,Noemi Joy
5|P ag e

Appendix 4
Paharmacyclics, Inc
Income Statement
Gross Profit from US
Total Revenue
Research and Development
General And Administrative
Total Operating Expenses
Loss From Operations
Interest Income
Interest Expense
Interest Net
Loss Before Income tax
Provision for Income Taxes
Net Profit (loss)

*In thousands of Dollars

Cash Flow - Approved
EBIT
Tax rate 30% assumed
After tax EBIT
Terminal Value -10% Growth
Cash Flow
NPV - 13%
*In thousands of Dollars
Cash Flow - Not Approved
EBIT
Tax rate 30% assumed
After tax EBIT
Terminal Value -10% Growth
Cash Flow
NPV - 13%

Assume 30% tax

*In thousands of Dollars
2000
1,303
1,303
(27,500)
(5,000)
(32,500)
(31,197)
2,557
(8)
2,549
(28,648)
0
(28,648)

2001
1,303
1,303
(42,500)
(15,000)
(57,500)
(56,197)
2,557
(8)
2,549
(53,648)
0
(53,648)

2002
31,503
31,503
(38,000)
(35,000)
(73,000)
(41,497)
2,557
(8)
2,549
(38,948)
0
(38,948)

2003
267,003
267,003
(44,000)
(53,000)
(97,000)
170,003
2,557
(8)
2,549
172,552
-51765.6
120,786

2004
451,403
451,403
(54,500)
(62,000)
(116,500)
334,903
2,557
(8)
2,549
337,452
-101235.6
236,216

2005
672,803
672,803
(54,500)
(62,000)
(116,500)
556,303
2,557
(8)
2,549
558,852
-167655.6
391,196

2005
556,303
166890.9
389,412
14,278,444
14,667,856

2000
(31,197)
0.00
(31,197)

2001
(56,197)
0
(56,197)

2002
(71,697)
0
(71,697)

2003
170,003
51000.9
119,002

2004
334,903
100470.9
234,432

(31,197)

(56,197)

(71,697)

119,002

234,432

2000
(31,197)
0.00
(31,197)

2001
(56,197)
0
(56,197)

2002
(71,697)
0
(71,697)

2003
(95,697)
0
(95,697)

2004
(115,197)
0
(115,197)

(31,197)

(56,197)

(71,697)

(95,697)

(115,197)

$ 7,124,161.37

2005
(115,197)
0
(115,197)
(3,490,818)
(3,606,015)

($1,974,561.06)

Osial, Krystal Anne | General, Jan Michael | Padua, Blessy | Ybanez,Noemi Joy
6|P ag e