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:
Profit Margin (%)- 2003- 17.0
Retention Ratio (%) - 2003- 100.0
Asset turnover (X)- 2003- 0.38
Financial Leverage (X)- 2003- 1.64
Growth rate in sales (%) - 2003- 26.1
Profit Margin (%)- 2004- 17.0
Retention Ratio (%)-2004- 100.0
Asset Turnover (X)-2004- 0.49
Financial Leverage (X)-2004- 1.44
Growth Rate in Sales (%)-2004-40.0
Profit Margin (%)- 2005- 19.3
Retention Ratio (%) - 2005- 100.0
Asset Turnover (X)- 2005- 0.55
Financial Leverage (X)- 2005- 1.79
Growth Rate In Sales (%)- 2005- 43.5
Profit Margin (%)- 2006- 22.8
Retention Ratio (%)- 2006- 100.0
Asset Turnover (X)- 2006- 0.63
Financial Leverage (X)- 2006- 1.99
Growth Rate in Sales (%)- 2006- 40.0
Profit Margin (%)- 2007- 23.6
Retention Ratio (%)- 2007- 100.0
Asset Turnover (X)- 2007- 0.62
Financial Leverage (X)- 2007- 2.00
Growth Rate in Sales (%)-2007- 26.3
A.) Calculate Genentech's annual sustainable growth rate for the years 2003-2007.
B.) Did Genentech face a growth management challenge during this period? Please explain briefly.
C.) How did Genentech cope with this challenge?
D.) 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.
1.Calculate Genentech’s annual sustainable growth rate for the years 2003–2007.
8. a. Genentech’s sustainable growth rates are
2003 2004 2005 2006 2007
Sustainable growth rate (%) 10.6 12.0 19.0 28.6 29.3
2. Did Genentech face a growth management challenge during this period? Please explain briefly.
Genentech’s challenge over this period was to manage its rapid growth rate. Actual growth exceeded sustainable growth by a significant margin in each of the first four years. After increasing its sustainable growth rate every year, sustainable growth and actual growth were similar in 2007.
3. How did Genentech cope with this challenge?
The company increased every ratio in almost every year except the retention ratio, which was already at its maximum. Comparing 2003 to 2007, Genentech’s profit margin, asset turnover and financial leverage rose 39 percent, 63 percent, and 22 percent, respectively.
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.
Asset turnover = 0.72 times Sustainable growth = 34.0%
Financial leverage = 2.2 times Sustainable growth = 32.2%
Both changes occur Sustainable growth = 37.4%
To calculate Genentech's annual sustainable growth rate (SGR), we need to use the following formula:
SGR = (Profit Margin) x (Retention Ratio) x (Asset Turnover) x (1 + Financial Leverage)
Let's calculate the SGR for each year:
A.) Calculate Genentech's annual sustainable growth rate for the years 2003-2007.
2003:
SGR = 0.17 x 1.00 x 0.38 x (1 + 1.64) = 0.17 x 0.38 x 3.64 = 0.2312 or 23.12%
2004:
SGR = 0.17 x 1.00 x 0.49 x (1 + 1.44) = 0.17 x 0.49 x 2.44 = 0.1988 or 19.88%
2005:
SGR = 0.193 x 1.00 x 0.55 x (1 + 1.79) = 0.193 x 0.55 x 2.79 = 0.3027 or 30.27%
2006:
SGR = 0.228 x 1.00 x 0.63 x (1 + 1.99) = 0.228 x 0.63 x 2.99 = 0.4340 or 43.40%
2007:
SGR = 0.236 x 1.00 x 0.62 x (1 + 2.00) = 0.236 x 0.62 x 3.00 = 0.4376 or 43.76%
B.) Did Genentech face a growth management challenge during this period? Please explain briefly.
Yes, Genentech faced a growth management challenge during this period. The company's growth rate in sales increased significantly from 2003 to 2005 (26.1% to 43.5%), but then started to decline in 2006 and 2007 (40.0% and 26.3% respectively). This indicates a slowing growth rate, suggesting that Genentech may have faced challenges in sustaining its previous high growth levels.
C.) How did Genentech cope with this challenge?
Unfortunately, the provided information does not specify how Genentech coped with the growth management challenge. It would require additional information or context to determine the specific strategies or actions taken by the company during this period.
D.) 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.
Using the formula provided earlier, we can calculate the sustainable growth rate in 2007:
Assuming an asset turnover of 0.72 times:
SGR = 0.236 x 1.00 x 0.72 x (1 + 2.00) = 0.236 x 0.72 x 3.00 = 0.4832 or 48.32%
Assuming a financial leverage of 2.20 times:
SGR = 0.236 x 1.00 x 0.62 x (1 + 2.20) = 0.236 x 0.62 x 3.20 = 0.4437 or 44.37%
Assuming both changes occur:
SGR = 0.236 x 1.00 x 0.72 x (1 + 2.20) = 0.236 x 0.72 x 3.20 = 0.5338 or 53.38%