Genentech Inc. is a California-based biotech pioneer recently acquired by Swiss

Question

Genentech Inc. is a California-based biotech pioneer recently acquired by Swiss pharmaceutical giant Roche Holding AG. Roche paid $46.8 billion in cash for the 44 percent of Genentech it did not already own, implying a market value of over $100 billion for the entire company. For a look at Genentech's recent sustainable growth challenges, consider the following selected financial data. Calculate Genentech's annual sustainable growth rate for the years 2003-2007. Did Genentech face a growth management challenge during this period? Please explain briefly. How did Genentech cope with this challenge? Calculate Genentech's sustainable growth rate in 2007 assuming an asset turnover of 0.72 times. Calculate the sustainable growth rate in 2007 assuming a financial leverage of 2.20 times. Calculate the sustainable growth rate in 2007 assuming both of these changes occur.

Explanation / Answer

Ans 1 Particulars 2003 2004 2005 2006 2007 Formula SGR = (Profit Margin*(1-Dividend PO ratio)*(1+Debt to Equity Ratio)) / (Asset turnover Ratio-(profit Margin*(1-Dividend PO Ratio)*(1+Debt to Equiy Ratio))) SGR = (Profit Margin*(1-Dividend PO ratio)*(1+Debt to Equity Ratio)) / (Asset turnover Ratio-(profit Margin*(1-Dividend PO Ratio)*(1+Debt to Equiy Ratio))) SGR = (Profit Margin*(1-Dividend PO ratio)*(1+Debt to Equity Ratio)) / (Asset turnover Ratio-(profit Margin*(1-Dividend PO Ratio)*(1+Debt to Equiy Ratio))) SGR = (Profit Margin*(1-Dividend PO ratio)*(1+Debt to Equity Ratio)) / (Asset turnover Ratio-(profit Margin*(1-Dividend PO Ratio)*(1+Debt to Equiy Ratio))) SGR = (Profit Margin*(1-Dividend PO ratio)*(1+Debt to Equity Ratio)) / (Asset turnover Ratio-(profit Margin*(1-Dividend PO Ratio)*(1+Debt to Equiy Ratio))) Details (0.17*((1-0)*(1+1.64)))/0.38-((0.17*(1-0)*(1+1.64))) (0.17*((1-0)*(1+1.44)))/0.49-((0.17*(1-0)*(1+1.44))) (0.193*((1-0)*(1+1.79)))/0.55-((0.193*(1-0)*(1+1.79))) (0.228*((1-0)*(1+1.99)))/0.63-((0.228*(1-0)*(1+1.99))) (0.236*((1-0)*(1+2)))/0.62-((0.236*(1-0)*(1+2))) Year 2003 2004 2005 2006 2007 Sustainable Growth rate 73.2% 43.2% 44.1% 40.0% 43.4% Annual Growth rate in sales 26.10% 40% 43.50% 40% 26.30% Ans 2 Company did face a higher , difficult growth rate mainly due to high debt content and lower asset turnover ratio to maintain the growth momentum. Ans 3 Company managed the challenge in 2004, 2005 and 2006 mainly by external financing and better asset turnover ratio Ans 4 2007 Situation 1 2007 Situation 2 2007 Situation 3 (0.236*((1-0)*(1+2)))/0.72-((0.236*(1-0)*(1+2))) (0.236*((1-0)*(1+2.20)))/0.62-((0.236*(1-0)*(1+2.20))) (0.236*((1-0)*(1+2.20)))/0.72-((0.236*(1-0)*(1+2.20))) 27.5% 46.3% 29.4%

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