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Targanta Therapeutics- Hitting a Moving Target Case Solution
Eli Lilly & Co endeavored to generate revenue by developing the drug from its birth. They invested highly in its research and development. The drug all three phases of clinical trials under their supervision. This is a highly risky strategy, as many such drugs may not pass the trials. However, oritavancin was an exception as it passed the trials. The company also focused mainly on its strategic objectives. Although the company had produced a viable drug with excellent market production, it decided to sell the drug when it was no longer compatible with its business strategy. Instead of selling the drug on a commercial scale, the company sold the drug when it decided to divest from producing antibiotics. For Lilly, strategic focus came before the profit potential of the drug. The strategy of Lilly was also greatly influenced by its ideology on revenue generation. The company recognized that patients using antibiotics are short-term customers as they quit using the medicine when they are cured. On the other hand, patients suffering from chronic diseases are longer-term customers as they continue using medicines for decades. Therefore, the company realized greater profit potential from a longer-term engagement with customers.
Following questions are answered in this case study solution
Employing two business model generation canvases compare and contrast the original revenue generation business model developed by Eli Lilly & Co. with Targanta’s approach to its revised business model.
From an investor’s perspective, discuss why Intermune paid $50 million+royalty commitments and why Targanta was able to buy oritavancin for only $ 1 million?
Did Targanta successfully de-risk the drug? What is the meaning/significance of de-risking a drug?
Case Analysis for Targanta Therapeutics- Hitting a Moving Target
1. The business model of Targanta was quite different. The company decided to invest in oritavancin primarily because they realized a potential for generating profits. The company realized that it could create value by acquiring the rights to the drug and developing it. The company subsequently modified its structure around the new drug by arranging additional financing and hiring new CEO and CFO. The company saw a higher profit in the sale of oritavancin and it jumped the opportunity to exploit it. The operational strategy of the company was subsequently focused around realizing the maximum potential from this opportunity. Their revenue generation approach was similar to Lilly in the sense that they both saw a market opportunity and reacted to it. However, Lilly recognized a market opportunity by divesting away from the drug, while Targanta felt that the antibiotic offered higher potential than its contemporaries did. Lilly tried to create value by engaging in the introductory, high-risk phase of the drug development and realized its return by selling the rights to the drug. Whereas, Targanta bought the rights to an already developed drug and sought to create value by overcoming the regulatory hitches and successfully marketing the drug. Therefore, the companies were engaged in different parts of the same value chain.
2. From the perspective of an investor, the fair price for any asset should be equal to the expected present value of the future cash flows that are expected to be realized from the asset. The expected present value of future cash flows may not remain the same for all companies under all circumstances. The acquisition of one asset may be more beneficial to one company than it is to another. Similarly, the circumstances related to the use of the asset may change from time to time. For instance, technological innovation might render an asset useless in a short period. In such a scenario, a company might have bought the asset for a substantial amount, but can only realize a meager amount from its subsequent disposal following a technological (or any other) change.
Similar logic can be applied to the value of the drug ‘oritavancin’. In perfect capital markets, the value of oritavancin should be equal to the present value of future income the drug is expected to generate in the future. When Intermune was buying the drug, the value of expected cash flows from the drug was considered high. Eli Lilly & Co had already completed the essential clinical testing of the drug and it was expected that the drug would easily meet the approval requirement of FDA. This is why Intermune also agreed to pay royalties on the sale of the drug since Eli Lilly & Co had played a major role in developing the drug. However, the expected future value of the drug decreased drastically when patients developed phlebitis – a skin infection – in one of the trials. It is important to note the profitability of Intermune would remain the same if the company solved the problem. However, the probability of such profitability decreased since the company realized it became much difficult for them to meet the FDA approval. Therefore, the total expected value of the drug decreased.
On the other hand, Targanta realized that the problem faced by oritavancin could be related to the frequency of the dose. Targanta thought that it can establish the cause of the skin infection in the patients and considered it much easier to meet the FDA approval. Targanta assigned a higher probability to gaining the FDA approval than Intermune did. Therefore, the expected value of oritavancin was higher for Targanta than it was for Intermune. This attracted the interest of Targanta towards purchasing the rights to the drug. The company was able to purchase it for a lower price because Intermune now assigned a lower value to the expected cash flows from the drug. It should be noted that the effective price that Targanta will eventually pay for the drug is much higher than $1 million. The company will pay a further $33 million to Intermune in the form of convertible debt and contingent payments. Targanta will also pay $1 million to Eli Lilly & Co in return for a reduced royalty on the sale of drug. Nevertheless, the total price paid by Targanta is much lower than the price that Intermune paid.
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