Assignment :

Case Study:
Benecol;s trading strategy

Submitted To: Respected Madam Sabeen khan.

Course: International finance

Submitted By: Dawood Abid (SP10-MBO-027)

Kamran luni (SP10-MBO-028)

Majid Ali abbasi (SP10-MBO-026)

Aqib Ali (MBO 2nd)

Dated: 22 /04/ 2010

Benecol’s Global Licensing Agreement:

Q1.
How does the global licensing agreement split risk and return, in a financial sense, between
Raisio and McNeil?

Answer:
The success of a global license such as this one depends primarily on how diligently and
effectively the licensor (McNeil) pursues its distribution rights. For the most part, the investments
in product production, distribution, and promotion would be funded by McNeil. Thus McNeil
carries significant financial risks associated with adequate returns on its own investments and
expenditures. For Raisio, although it is not investing capital in any significant way to support the
global distribution of its licensed property, it is subject to the risk that the distributor does not do
a very good job with its exclusive rights. Raisio would therefore suffer the opportunity losses
associated with a lost potential market, but not out-of-pocket expenses or investments as would
McNeil.

Q2.
How will the returns to Raisio accrue over the short-to-medium-to-long term under the
agreement, assuming the product is met with relative success?

Answer:
Under the agreement Raisio receives returns three ways. In the short-term, the milestone
payments represent a known and assured series of cash inflows to Raisio for its intellectual
property. Raisio incurs no direct expenses related to these payments; they are simply returns on
the intellectual property held by Raisio, and in which it has invested years of capital and
intellectual resources to create. On a continuing basis, as Benecol gains wider and wider
acceptance and distribution, Raisio would continue to provide all of the stanol estor Benecol’s
key chemical ingredient manufactured by Raisio alone assuring a continuing sale at an acceptable
transfer price. Note that this is more consistent with Raisio’s traditional core competencies, the
manufacturing of industrial chemicals. (By the way, students may be surprised to find that
margarine is generally regarded as a chemical product.) Over the life of the agreement Raisio
would receive a royalty payment calculated as a percentage of the final retail product price of any
product containing Benecol. This is a very attractive element of the agreement to a company like
Raisio, as it in no way requires Raisio to be involved or concerned with the variety of different
products or ways in which it may finally be distributed. As such, it simply reaps an income
stream on the basis of sales, not profitability.
Q3.
What are some of the possible motivations to Raisio and McNeil behind a milestone
agreement? Assume the milestone payments are agreed upon payments from McNeil to
Raisio if:

1. Raisio successfully completes the expansion of its manufacturing capabilities for

stanol Ester:
Answer:
McNeil may be worried that it will invest and expend in developing and marketing Benecol
based products only to find that Raisio is not prepared to provide sufficient stanol estor for
rapidly expanding sales.

2. McNeil successfully introduces Benecol products in major industrial markets,

overcoming regulatory hurdles and reaching specific sales goals:
Answer:
Given the risks associated with these new products, termed nutriceuticals, McNeil may have
wished for Raisio to share the risks of overcoming initial barriers to market penetration. If Raisio
were to only receive the payments with successful market introduction (however that is measured
in practice in this case), McNeil has reduced its total financial risks associated with the Benecol
product line. Raisio has never fully described the conditions which had to be met in order for the
“milestone payments” to be made. They are generally thought to be a required up front payment
to Raisio, representing a minimum return to the global license and providing an incentive for
McNeil to diligently pursue distribution in order to generate some return on this early payment to
Raisio.