Case
Teaching Notes
Supplementary Resources
Abstract
Markus Steuer, director of real estate at Drechtal Pharmaceuticals, must decide where his firm should locate in the immediate future. Drechtal was currently leasing space in seven different buildings, yet the company anticipated a dramatic increase in headcount should its first oncology drug, Trianoline, be approved by Swissmedic. The potential increased demand for space initiated Steuer's investigation of whether it was optimal to continue to lease space or whether or not it should invest in its own corporate headquarters. With its current leases set to expire over the coming 24 months, it was an opportune time to consider Drechtal's options.
This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.
2024 Sage Publications, Inc. All Rights Reserved
Resources
Exhibit 1: Drechtal Pharmaceuticals Income Statement and Balance Sheet (CHF in thousands, except share and per share amounts)
CONSOLIDATED STATEMENTS OF OPERATIONS | 2014 | 2013 | 2012 |
Revenues: | |||
Product revenues, net | 1,261,829.70 | 0.00 | 0.00 |
Royalty revenues | 66,369.91 | 40,133.79 | 37,580.64 |
Collaborative revenues | 543,701.09 | 150,118.20 | 97,626.06 |
Total revenues | 1,871,900.70 | 190,251.99 | 135,206.70 |
Costs and expenses: | |||
Cost of product revenues | 84,430.38 | 0.00 | 0.00 |
Royalty expenses | 22,399.76 | 16,892.71 | 18,846.05 |
Research and development expenses | 939,125.86 | 845,851.03 | 730,213.60 |
Sales, general and administrative expenses | 531,756.77 | 249,210.60 | 172,764.78 |
Restructuring expense | 2,752.20 | 1,991.83 | 8,280.48 |
Intangible asset impairment charge | 140,396.60 | 0.00 | 9,554.40 |
Acquisition-related expenses | 0.00 | 0.00 | 10,341.31 |
Total costs and expenses | 1,720,861.56 | 1,113,946.17 | 950,000.63 |
Income (loss) from operations | 151,039.14 | −923,694.18 | −814,793.92 |
Interest income | 2,492.11 | 2,594.29 | 6,648.27 |
Interest expense | −51,025.80 | −25,577.93 | −17,505.78 |
Change in fair value of derivative instruments | −22,294.93 | −54,710.88 | −2,450.97 |
Loss on exchanges of convertible senior subordinated notes | 0.00 | 0.00 | −24,067.80 |
Income (loss) before provision for income taxes | 80,210.52 | −1,001,388.70 | −852,170.21 |
Provision for income taxes | 25,565.98 | 0.00 | 0.00 |
Net income (loss) | 54,644.53 | −1,001,388.70 | −852,170.21 |
Net income (loss) per share | |||
Basic | 0.23 | −4.43 | −4.49 |
Diluted | 0.21 | −4.21 | −4.39 |
Shares used in per share calculations: | |||
Basic | 241,870 | 225,933 | 189,914 |
Diluted | 257,086 | 237,933 | 193,914 |
Source: Created by the author.
CONSOLIDATED BALANCE SHEET | 2014 | 2013 |
Assets | ||
Current assets: | ||
Cash and cash equivalents | 630,749.64 | 322,722.42 |
Marketable securities, available for sale | 605,863.08 | 996,813.21 |
Restricted cash and cash equivalents | 68,842.11 | 0.00 |
Accounts receivable, net | 243,020.15 | 16,625.98 |
Inventories | 149,194.61 | 0.00 |
Prepaid expenses and other current assets | 19,757.70 | 17,382.37 |
Total current assets | 1,717,427.29 | 1,353,543.98 |
Restricted cash | 45,237.43 | 45,237.43 |
Property and equipment, net | 176,724.55 | 95,985.89 |
Intangible assets | 880,464.50 | 688,314.90 |
Goodwill | 41,126.38 | 34,637.35 |
Other assets | 14,952.64 | 22,800.51 |
Total assets | 2,875,932.79 | 2,240,520.07 |
Liabilities and Shareholders’ Equity | ||
Current liabilities: | ||
Accounts payable | 99,049.93 | 47,574.28 |
Accrued expenses and other current liabilities | 334,800.77 | 178,367.38 |
Accrued interest | 4,462.70 | 4,594.07 |
Deferred revenues, current portion | 59,764.10 | 99,019.41 |
Accrued restructuring expense, current portion | 6,544.76 | 7,294.52 |
Secured notes (due 2012) | 0.00 | 181,787.06 |
Liability related to sale of milestone payments | 0.00 | 103,239.27 |
Income taxes payable (Alios) | 16,023.53 | 0.00 |
Other obligations | 0.00 | 8,161.05 |
Total current liabilities | 520,645.80 | 630,037.04 |
Deferred revenues, excluding current portion | 156,712.07 | 212,385.02 |
Accrued restructuring expense, excluding current portion | 28,372.59 | 31,978.05 |
Convertible senior subordinated notes (due 2015) | 530,800.00 | 530,800.00 |
Deferred tax liability | 323,399.19 | 212,688.91 |
Construction financing obligation | 74,245.65 | 0.00 |
Other liabilities | 9,669.85 | 3,005.66 |
Total liabilities | 1,643,845.14 | 1,620,894.67 |
Total shareholders’ equity | 1,232,087.65 | 619,625.40 |
Total liabilities and shareholders’ equity | 2,875,932.79 | 2,240,520.07 |
Source: Created by the author.
Exhibit 2: Drechtal’s Current Use of Space
Facility | Leased Area (sq. meters) | Functions Housed | Lease Expires | Rent (CHF per sq. meter per year) | Annual Rent (CHF) |
Bürogebäude 1 | 15,000 | Exec, Admin, Finance, HR | 2016 | 400.00 | 6,000,000 |
Bürogebäude 2 | 14,000 | Sales & Marketing, Operations | 2016 | 330.00 | 4,620,000 |
Bürogebäude 3 | 11,500 | Sales & Marketing | 2017 | 345.00 | 3,967,500 |
Bürogebäude 4 | 9,500 | Operations, IT | 2017 | 280.00 | 2,660,000 |
Bürogebäude 5 | 4,500 | IT | 2016 | 290.00 | 1,305,000 |
Laborgebäude 1 | 6,500 | R&D | 2017 | 340.00 | 2,210,000 |
Laborgebäude 2 | 6,000 | R&D | 2018 | 370.00 | 2,220,000 |
Source: Created by the author.
Exhibit 3: Drechtal’s Employees in 2016
Function | Current Headcount |
Admin | 248 |
Sales & Marketing | 451 |
Finance & HR | 224 |
IT | 247 |
Operations | 402 |
R&D | 345 |
Executive | 34 |
Other | 154 |
Total | 2,105 |
Source: Created by the author.
Exhibit 4: Options
Option 1: Renew Current Leases
- Renew leases for ten-year term; base rent increase of 5 percent in first year, and an additional 5 percent increase in Year 5
Option 2: Move And Consolidate
- Consolidate offices into three larger buildings for lease in closer proximity to one another (but not adjacent)
- Three buildings are class A, built in the last ten years; office buildings would be fully leased to the company; R&D building would be mostly leased, with remaining 5,000 square meters leased to a different biotech company
- Gross lease with graduated rent: base rent at 430 CHF per square meter per year for a ten-year term, with a 5 percent increase in Year 5
- Sub-lease space in current buildings whose leases have not expired at 5 percent discount to contracted rent for duration of lease
Facility | Leased Area (sq. meters) | Functions Housed | Lease Expires | Base Rent (CHF per sq. meter per year | Annual Rent (CHF) |
Bürogebäude A | 40,000 | Exec, Admin, Finance, HR, Sales & Marketing | 2026 | 430.00 | 17,200,000 |
Bürogebäude B | 28,000 | Sales & Marketing, Operations, IT | 2026 | 430.00 | 12,040,000 |
Laborgebäude A | 17,000 | R&D | 2026 | 430.00 | 7,310,000 |
Option 3: Buy New Headquarters
- Consolidate offices through purchasing one main headquarters building
- Building is class A, brand new, with top-of-the-line amenities and cutting-edge R&D facilities
- Loan-to-value ratio of 70 percent; company to contribute all equity
- Interest rate on mortgage is 1.2 percent; maturity is ten years, amortization is twenty years; monthly payments
- Sub-lease space in current buildings whose leases have not expired at 5 percent discount to contracted rent for duration of lease
Facility | Area (sq. meters) | Functions Housed |
Hauptsitz | 100,000 | All functions including R&D |
Source: Created by the author.
Exhibit 5: Map of Options
Exhibit 6: Pharma Ownership of Commercial Real Estate
Commercial Real Estate Ownership Intensity For Pharma And Biotech Firms, By Country
Country | Bldg + Land as % of Assets: 2013–2014 | Bldg + Land as % of Assets: 2008–2009 | Change | N Size |
Bermuda | 16.3 | 17.6 | −1.3 | 11 |
Canada | 14.1 | 9.9 | 4.2 | 26 |
Cayman Islands | 9.8 | 12.6 | −2.8 | 26 |
China | 16.3 | 18.9 | −2.5 | 154 |
Egypt | 14.0 | 7.5 | 6.5 | 10 |
Germany | 13.8 | 13.6 | 0.2 | 13 |
India | 16.4 | 14.4 | 2.0 | 132 |
Indonesia | 14.9 | 14.4 | 0.5 | 10 |
Japan | 26.7 | 28.1 | −1.4 | 37 |
Korea, Republic of | 23.7 | 26.4 | −2.7 | 59 |
Malaysia | 31.8 | 18.9 | 12.9 | 11 |
Switzerland | 29.4 | 16.6 | 12.7 | 11 |
Taiwan, Province of China | 30.5 | 27.3 | 3.2 | 40 |
United Kingdom of Great Britain and Northern Ireland | 10.5 | 9.3 | 1.3 | 21 |
United States of America | 8.6 | 12.0 | −3.4 | 200 |
Vietnam | 15.6 | 10.4 | 5.2 | 14 |
Grand total | 16.0 | 16.1 | −0.1 | 912 |
Source: Orbis.
Exhibit 7: Rental Prices in Basel as of Second Quarter 2015
COMMERCIAL OFFICE (CHF per sq. meter per year) | RESIDENTIAL (CHF per unit per month) | |||||||||
1 Bedroom Submarket | 3 Bedroom Submarket | |||||||||
25th Quantile | 50th Quantile | 75th Quantile | Prime | 25th Quantile | 50th Quantile | 75th Quantile | 25th Quantile | 50th Quantile | 75th Quantile | |
City center | 240 | 270 | 310 | 430 | 1,000 | 1,350 | 1,600 | 2,000 | 2,420 | 2,800 |
Breite/St. Alban | 180 | 230 | 290 | 370 | 1,000 | 1,240 | 1,400 | 1,700 | 2,075 | 2,500 |
Gundeldingen | 160 | 220 | 270 | 300 | 905 | 1,100 | 1,280 | 1,425 | 1,860 | 2,230 |
Bachletten/Gotthelf | 200 | 230 | 280 | 300 | 910 | 1,120 | 1,290 | 1,400 | 1,875 | 2,245 |
Iselin | 150 | 190 | 230 | 270 | 850 | 1,010 | 1,175 | 1,220 | 1,670 | 2,100 |
St. Johann | 160 | 200 | 280 | 400 | 980 | 1,280 | 1,400 | 1,810 | 2,100 | 2,460 |
Kleinbasel West | 170 | 220 | 250 | 330 | 950 | 1,140 | 1,350 | 1,500 | 1,960 | 2,345 |
Kleinbasel East | 200 | 240 | 280 | 320 | 940 | 1,120 | 1,300 | 1,480 | 1,910 | 2,200 |
Bruderholz | 180 | 230 | 250 | 250 | 1,050 | 1,330 | 1,550 | 2,100 | 2,335 | 2,670 |
Sources: JLL; Numbeo; Homegate; author’s calculations.
Exhibit 8: Commercial Real Estate Returns in Switzerland, 2014
1 Year | Annualized Total Returns (%) | |||||
Total Return (%) | Income Return (%) | Capital Growth (%) | 3 Year | 5 Year | 10 Year | |
All Property | 5.3 | 4.3 | 1.0 | 6.0 | 6.4 | 6.2 |
Retail | 5.3 | 4.2 | 1.0 | 6.3 | 6.8 | 7.0 |
Office | 4.2 | 4.4 | −0.2 | 5.2 | 5.9 | 5.9 |
Industrial | 4.8 | 5.2 | −0.4 | 5.1 | 5.2 | 5.9 |
Residential | 6.1 | 4.2 | 1.8 | 6.6 | 6.7 | 6.1 |
Other | 4.1 | 4.2 | −0.2 | 5.0 | 5.4 | 5.5 |
Source: 2014 IPD/Wuest & Partner Switzerland Annual Property Index.
This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.
2024 Sage Publications, Inc. All Rights Reserved