The BioPharm-Seltek Negotiation

Role for BioPharm, CFO

You are the Chief Financial Officer for BioPharm, a U.S.-based site for $500,000. Your option expires tomorrow. (it cost you
pharmaceutical company that has annual sales of $700 million. $10,000 for that option and you will lose the $10,000 if you
You need to buy or build a plant in the U.S. to produce a don’t purchase the land tomorrow. If you do purchase the land,
genetically engineered (“biotech”) antibiotic compound, Depox. the $10,000 will be credited toward the purchase price.)
You bought a license from the Belgian company that developed
Depox. The Belgian company sold the license because they In the meantime, you discovered that Seltek, a smaller
don’t have plant capacity or other resources to expand the pharmaceutical company with annual sales of $150 million, has
business beyond the European market. The licensing agreement a suitable U.S. plant for sale. The location is not great—it is 70
gives you exclusive right to manufacture and sell Depox in North miles away from your U.S. headquarters facilities where the
America. research group is located—but Seltek’s plant is running and
already has FDA approval. It also has a high-quality, experienced
It makes the most sense to manufacture Depox in the U.S. work force which could save you the costs and time of hiring
because this is your biggest market. Depox has great market and training your own workers. If you were to buy the plant,
potential, and it complements BioPharm’s existing product line you very much want to take over operating it as soon as Seltek
of conventional antibiotics. A special plant is needed because ceases operations. You don’t want them to shut down the plant
manufacturing genetically engineered compounds requires and leave it idle for a while, because the workers may take
special water-processing facilities. You cannot modify an other jobs.
existing BioPharm plant ecause none of these is set up to handle
“biotech” manufacturing with its special water processing Thus, the Seltek plant seems like an ideal “turnkey” facility. Your
requirements. You have two choices: you can build a new plant plant engineers have assured you that BioPharm could start up
or buy a plant that is already set up to manufacture genetically Depox production and distribution immediately.
engineered compounds.
In addition to selling the plant, Seltek wants to sell the patent
It will cost $25 million to build a new plant. It will take 12 on Petrochek, the compound it has been manufacturing at the
months from the time you break ground to the time when the plant. Petrochek is of zero interest to you because it is not a
first shipments of Depox will reach the U.S. market. Part of that pharmaceutical product and you have no way to distribute it.
time is taken up with getting the FDA (the U.S. Food and Drug Petrochek is a genetically engineered bacterium that breaks
Administration) to approve the plant for pharmaceutical down oil into water-soluble compounds (and is sold for use in
manufacturing and to train a new work force in special biotech treating oil spills). Your present sales force specializes in
manufacturing techniques. The Depox compound has already pharmaceutical—selling to doctors, hospitals, HMOs, and drug
been approved by the FDA. store chains in the U.S.. The sales force would be useless for
selling to the oil industry or to government agencies that deal
Depox is ready for manufacture right now, and you would like with water pollution. You would need to set up a new sales
to begin production as soon as possible, since time-to-market is force to market Petrochek, but its not in your strategic interest
a huge competitive advantage. In an ideal world, you would find to do so. You don’t have any sales people to spare, and you
a “turn-key” plant that you could move into immediately and have no one available who could recruit and manage a new
start operating at the end of this month. Each month you wait sales force for this product. Thus, buying the patent would be
for the plant to be ready for production costs BioPharm $1 inconsistent with BioPharm’s corporate strategy. The Board and
million in lost profits. These profits cannot be recovered later: a CEO have said no to buying the Petrochek patent.
sick patient can’t wait for an antibiotic.
You are about to meet with the chief Financial Officer of Seltek.
Anticipating that you will have to build—rather than buy—a You have full authority from the Board and CEO to buy the plant
plant, you have located a suitable site in a new industrial park at any price you deem acceptable. You have up to $40 million
10 miles from your U.S. headquarters’ operations. You need to available for investment. To the right is the available
commit to buying or not buying that site very soon, otherwise information concerning the appraised value of the Seltek Plant.
you might lose it. You took out a 90-day option to purchase that
You have learned that Seltek apparently hasn’t been paying real estate taxes and owes $200,000. This would have to be paid by one
of the parties to remove the tax lien that would hold up transfer of title. The real estate taxes would be the same at either location
you are considering.

Seltek Plant

The following information is in the public domain and was made available to BioPharm.

1. The plant (i.e., the building and land) was appraised by a real estate agent two years ago at $20 million. The local real estate
market has decline 20 per cent in the last two years due to the state of local economy.
2. Public accounting information shows that the plant is valued at $12 million on Seltek’s accounting statements. The land
value is recorded at its original purchase price of $1 million, and the building has been depreciated from an original $20
million down to 11 million, for tax advantages. (The IRS lets a corporation reduce the “book” value of a building every year
as if it were “wearing out,” like an automobile does with increasing mileage. The resulting theoretical “loss” in value can be
deducted from the company’s tax bill.)
3. The building is insured against total loss (fire, explosion, hurricane, etc.) for $8 million.
4. An identical plot of land across the street from the Seltek plant just sold for $500,000 after being on the market for three
years.
5. There are no environmental liabilities pending, but there is a $200,000 tax lien on the property.

Complete the form below before you starts negotiating and submits to your tutor after the negotiation is over.

Name : ______________________

ID : ______________________

BATNA : ______________________

Reservation Price : ______________________

Aspiration Price : ______________________

Issues to negotiate :