Mogen Inc. [PDF]

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MBA 7294: Advanced Financial Analysis



CASE STUDY



Mogen, Inc.



Deepthi Kandula



Introduction Mogen Inc. issues $5 billion in convertible bonds. The company was a single-largest convertible bond issuance in history. Merrill Lynch’s equity derivatives group needed to convince Mogen’s management of the best coupon rate and conversion premium for Mogen and issuing the potential investors. This pricing decision requires everyone to understand the concept of valuing of convertible as a sum of a straight bond and the option. Background Founded in 1985, Mogen is the company was the first in the biotechnology industry to deliver on the commercial promises of emerging sciences, such as recombinant DNA and molecular biology. The two products were the blockbuster drugs to emerge from the nascent biotechnology industry. By 2006, the company is one of the leading biotech companies in an industry that includes firms such as Genentech, Amgen, Gilead Sciences and Celgene. Also in 2006, its extensive R&D expenditure resulted in a portfolio of five core products that focused on supportive cancer care. The company has good growth opportunities because of the following reasons: 1) High investment in R & D to diversify its product line; 2) Acquisition of another company is seen to create synergy with existing capabilities of Mogen to support the revenue and income growth; 3) It has consistently registered 29% annual increase in sales for the last 5 years; and 4) EPS has shown improvement from $1.69 in 2003 to $2.97 in 2005.



Financial Analysis Analyses made from Calculation are as follows a) 15% Conversion Premium and 1.17% Coupon rate Mogen is to have a convertible debt offering with 15% conversion premium and a coupon rate 1.17%. This has advantages and disadvantages for both the issuing company and investors. Advantage would be low coupon rate and the disadvantage is having very less conversion premium. The advantage for investors is having less conversion premium, investors want lowest conversion premium so they can have a better chance to reach it. This also may lead to have very less payments as it has low coupon rate. b) 20% Conversion Premium and 1.56% Coupon rate Mogen is to have a convertible debt offering with 20% conversion premium and a coupon rate 1.56%. This has advantages and disadvantages for both the issuing company and investors. Advantage would be low coupon rate and this has higher conversion premium. Issuing companies want a high conversion premium and the Mogen’s employees believe that there stock is selling in depressed price which the investors are benefited. Most convertible debt offerings have a conversion premium between 10%-40%. c) 25% Conversion Premium and 1.95% Coupon rate Mogen is to have a convertible debt offering with 25% conversion premium and a coupon rate 1.95%. This has advantages and disadvantages for both the issuing company and investors. The advantage for investors is a coupon rate much lower than the year-to-maturity (YTM) yield, which is at 5.75%. Maanavi knows the convertible should carry a coupon rate much lower than



the 5.75% and this alternative accomplishes. The disadvantage for Mogen is the conversion premium is not as high as it could be. This tells investors having higher conversion premium. The disadvantage for investors is they will always want a higher coupon rate to make more money in their investment. d) 30% Conversion Premium and 2.34% Coupon rate Mogen is to have a convertible debt offering with 30% conversion premium and a coupon rate 2.34%. This has advantages and disadvantages for both the issuing company and investors. The advantage for MoGen is the fact that conversion premium is higher than the average of normal convertible debt offerings. They are usually between 10%-40%, which would make the average be 25%. This alternative is higher than that average making the management happy with this conversion premium. Investors also having high coupon rate. This higher coupon rate will help increase their investment if it reaches the conversion premium. But, the disadvantage is that the conversion premium is higher than average convertibles and it will be harder to reach it. e) 35% Conversion Premium and 2.73% Coupon rate Mogen is to have a convertible debt offering with 35% conversion premium and a coupon rate 2.73%. This has advantages and disadvantages for both the issuing company and investors. With a conversion premium this high it will be much less likely for the stock to reach it making it a better offering for MoGen. The disadvantage is that with a conversion premium closer to the ceiling of most offerings it makes the demand shrink and will make it more difficult to reach the $5 billion needed. Investors don’t like to invest in anything 40% or higher and at 35% this alternative may be too close for comfort for many of these investors.



Conclusion Based on five analyses, the best is having 30% conversion premium and 2.34% coupon rate. The previous convertible offering MoGen had been in 2003 when the stock price was $61 and the conversion price was $90. I calculated the conversion premium for this offering was 47.5% and the coupon rate was 2.9%. This gave me a good basis on what would work for MoGen in this convertible debt offering. I knew that convertible debt offerings carried conversion premiums in the range of 10%-40%. I believe 30% conversion premium would still generate demand and be able to show investors management has confidence in the upside potential of the stock. , the decision to have the coupon rate at 2.34% was based on equaling the face value of $1,000 per bond. With a 30% conversion premium, to equal the face value the coupon rate would have to be 2.34%. This coupon rate would work well because for the previous convertible debt offering in 2003 the coupon rate was higher and it still never reached the conversion premium.



Those are the reasons why I believe Analyses 5 would be the best choice for MoGen Inc.