Venture Capital and the Finance of Innovation, Second Edition

EXHIBIT 11-9
REALITY-CHECK DCF FOR AMGEN
11.4 DCF ANALYSIS: THE REALITY-CHECK MODEL 211
Exit (T) Graduation (S)
Years until Graduation (S-T) 7
Expected Inflation 3.0%
Analysts’ Estimate (consensus, nominal) 9.0%
Analysts’ Estimate (consensus, real) 6.0%
Revenue 15.6 23.4
Operating Margin 38.3% 30.1%
Tax Rate 40.0% 40.0%
Assets 29.6 21.7
Stable Growth (nominal) 3.0%
Stable Growth (real) 0.0%
Discount Rate (nominal) 11.5% 11.5%
Discount Rate (real) 8.5% 8.5%
R(old) (nominal) 22.6%
R(old) (real) 19.6%
R(new) (real) 8.5%
IR 0.0%
Depreciation % of Assets 10.0%
NPV $56.09
GV $49.58
Exhibit 11-10 shows a series of changes that would either positively or negatively
affect NPV. Moving down the rows in Exhibit 11-10 shows the combined impact of all
changes above and including that row. If we assume that Amgen maintains the 14 percent
nominal growth rate for the next seven years, its NPV will go up to $64.97B; further
assuming that R(new) 5 20 percent (second row) and g 5 5 percent (third row) raises the
NPV further to $72.59B. Finally, assuming that the operating margin perpetually stays at
38.3 percent pushes up the NPV to $82.93B. These together are very aggressive assumptions
indeed, and do not look very sustainable.
Now what changes to our baseline assumptions could lower the NPV? Recall that we
used industry estimates of the drug industry, since they were more favorable than those of the
biotechnology industry. If the operating margin matches that for the biotechnology industry
(26.9 percent), the NPV declines to $53.61B; increasing the cost of capital (r) to 12.3 percent
lowers NPV to $49.93B; decreasing the return on old capital to 14.8 percent further pushes
NPV down to $40.41B; finally, assuming a very conservative growth rate of 5 percent for the
next seven years lowers the NPV to $38.15B.