Situational Analysis:

Founded in 1985, MoGen Inc. (Molecular Genetics) had rapidly become a

leading biotech firm in the industry. This company was among the firsts to deliver

products through emerging sciences focusing on advances in molecular biology and

recombinant DNA. But, like any other biotech firm, the keys to success were finding

new drugs through research and then having the drugs approved by the Food and

Drug Administration (FDA). This approval process required extensive trials that

would take a massive amount of time and can cost hundreds of millions of dollars to

the firm. Therefore, MoGen needed to have a consistent supply of cash to fund R&D

and to maintain financial flexibility for future challenges and opportunities. This is

where the company turned to previous business partner, Merrill Lynch, to assist in

raising the needed funds. MoGen had worked with Merrill Lynch in the past and had

previously raised $10 billion for the company. MoGen estimated that they would

need roughly $10 billion in capital for the fiscal year of 2006. Approximately $5 billion

had been generated internally which they had on hand, while the other $5 billion

would need to be raised externally. Dan Maanavi, the managing director of Merrill

Lynchs Equity-Linked Capital Market Group, prepared a proposal for a convertible

debt offering by MoGen, Inc. The proceeds from the convertible debt offering were to

be allotted for the funding of research and development (R&D) expenses, working

capital needs, capital expenditures, as well as a share repurchase program. With so

much funding needs Merrill Lynch and MoGen had to decide on how to price such a

significant and important financing. The $5 billion offering represented the largest

such single offering in history, therefore, it is critical the pricing be set at a level that

generates sufficient demand without giving away too much. Thus, the problem was
to find the right combination of coupon rate and conversion premium that would be

acceptable to MoGen management as well as suitable to investors.

Alternatives:

1. 15% Conversion Premium; 1.17% Coupon Rate

The first alternative for MoGen is to have a convertible debt offering with 15%

conversion premium and a coupon rate of 1.17% (Appendix 2). This alternative has

pros and cons for both the issuing company and the investors. The pro for MoGen

would be the low coupon rate, which would mean a smaller coupon payment, and

less money paid out. The con for MoGen would be the very low conversion premium.

Management may think they are sending a bad signal to the market with such a low

conversion premium because it could be interpreted as lack of confidence in upside

potential of stock. Now, the pros for the investors in this alternative are that it is a

very low conversion premium. Investors want the lowest conversion premium so they

can have a better chance of reaching it. The con of this alternative is that it is a low

coupon rate so the payment would be pretty low.

2. 20% Conversion Premium; 1.56% Coupon Rate

The second alternative for MoGen is to have a convertible debt offering with 20%

conversion premium and a coupon rate of 1.56% (Appendix 3). This alternative has

pros and cons for both the issuing company and the investors. The pro for MoGen

would be a still pretty low coupon rate. This coupon rate isnt as low as the first

alternative but this option has a higher conversion premium, which would entice even

more investors. The con for MoGen is not a very high conversion premium. Issuing

companies want a high conversion premium and MoGens management believes

their stock is already selling at a depressed price, which represents an excellent buy
for investors. Now, the pro for investors is once again the lower conversion premium.

Most convertible debt offerings have a conversion premium between 10%-40%. This

is still relatively low compared to that range. The con for investors is still a lower

coupon rate. Investors want higher coupon rates to make more money.

3. 25% Conversion Premium; 1.95% Coupon Rate

The third alternative for MoGen is to have a convertible debt offering with 25%

conversion premium and a coupon rate of 1.95% (Appendix 4). This alternative has

pros and cons for both the issuing company and the investors. The pro 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 con for MoGen is the conversion

premium is not as high as it could be. The management will still believe they can

have a higher conversion premium with how the stock is selling right now. Now, the

pro for the investors is the conversion premium. It is still well below the 40% it could

be which makes it a good investment. The con for investors is they will always want

a higher coupon rate to make more money in their investment.

4. 30% Conversion Premium; 2.34% Coupon Rate

The fourth alternative for MoGen is to have a convertible debt offering with 30%

conversion premium and a coupon rate of 2.34% (Appendix 5). This alternative has

pros and cons for both the issuing company and the investors. The pro 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. This can also be a con for MoGen though because the

conversion premium is higher than the previous alternatives and that this may make

the demand decline. With this offering being worth $5 billion, MoGen has to make

sure the demand will be high enough to where investors will want to buy and they

can make the full amount. Now, the pro for investors is the higher coupon rate

compared to previous alternatives. This higher coupon rate will help increase their

investment if it reaches the conversion premium. But, the con is that the conversion

premium is higher than average convertibles and it will be harder to reach it.

5. 35% Conversion Premium 2.73% Coupon Rate

The last alternative for MoGen is to have a convertible debt offering with 35%

conversion premium and a coupon rate of 2.73% (Appendix 6). This alternative has

pros and cons for both the issuing company and the investors. The pro for MoGen is

the high conversion premium. 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 con 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. The pro

for the investors is the higher coupon rate. Having the largest coupon rate of all the

alternatives makes it for a better investment if the conversion premium is reached.

Investors may believe the higher conversion premium is worth the risk and make

more money. The con for investors is the highest conversion premium of all

alternatives. The chances of reaching this conversion premium is much lower than

any other alternative, which could scare away many of the investors, they want.
Fundamental investors dont like to invest in anything 40% or higher and at 35% this

alternative may be to close for comfort for many of these investors.

Recommendation:

Based on the alternatives analyzed I believe the best alternative is the 30%

conversion premium with a 2.34% coupon rate. The previous convertible offering

MoGen had was in 2003 when the stock price was $61 and the conversion price was

$90. By looking at appendix 1, 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%. In 2003, they had

an offering of 47.5%, which made me realize they could have a higher conversion

premium and still get the demanded needed. Now, this was a much larger offering at

$5 billion and I knew it should be lower if they were going to make sure that demand

was met. But, I knew it could be higher than the average based on how well the

stock was doing and managements feelings based on the stock price. Therefore, 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. Next, 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. In addition, MoGen stock price had a five-

year appreciation from 2001 to 2005 of 12.2%. If this trend continued for the next 5

years of this bond then the conversion price would have to be $87.49, which is much

less than the conversion price for this offering. The conversion price for this

alternative is $101.37, which is much less than $87.49. Therefore, the chances of

reaching the conversion premium are very small. In conclusion, those are the

reasons why I believe alternative 5 would be the best choice for MoGen Inc.