Acquisition of Galaxy Pharma Company - Case Study Example

Galaxy Pharma Acquisition Report Your name: Institution name: 1.0 Executive Summary This report is about proposed acquisition of Galaxy Pharma Company that is based in Japan. The company is a B Corporation and is organized under the laws of Tokyo. The company is engaged in the business of manufacturing various types of branded generic drugs and other healthcare products. For the year ended 2013, the company had operating income of Yen 4,551 million, fixed assets of Yen 8,337 million, and current assets of Yen 30,250 million (40 per cent of which is cash). For internal purposes only, the proposed purchase price for the Company is Yen 102,000 million to be paid in cash at closing. Closing fees and transaction of Yen 5 million have been estimated, resulting in a total buying cost of 102,005 million for the Company. Under the proposed purchasing structure, the amount of money that is required to complete the deal would be Yen, calculated as follows: Estimated Total Purchase cost Yen 102,005.000,000 Less: Interest Bearing Assumed expenses/liabilities 2,000,000 Less Seller Financed Portion of: Employment Contract 10,000,000 Management Contract 2,000,000 Balance of Purchase Cost to be funded Yen 101,991 Million In order to fund the acquisition of the Galaxy Pharma, the following funding structure have been proposed Balance of Purchase Cost to be Funded Yen 101,991 million Term Debt Funding 100,000 million Equity Funding 1000 million Discretionary Amount overfunded 991 million 2.0 Limiting Conditions and Assumptions This proposal is subject to the following Limited conditions and assumptions: 1. Estimates, opinions and information contained in this report have been acquired from reliable sources (Grover and Davenport, 2001). 2. The company and its directors warranted that the information given was accurate and complete to the best of their knowledge (Eiteman, Stonehill, and Moffett, 2007). The information supplied by the directors has been accepted as correct without further verification. 3. I am not required to give any evidence before court, or be present during any court hearing or depositions, with reference to the firm being acquired, unless arrangements have been made (Grover and Davenport, 2001). 4. The estimates presented in this report will only apply to this valuation and may not be used anyway else (Eiteman et el, 2007). 5. There is an assumption that the firm being acquired will continue with its normal daily operations, and the character of its business will remain intact (Maier, 2004). 6. I have assume all the rules have been followed and there is compliance with all applicable state, federal and local laws and regulation unless they have been specified in this report (Eiteman et el, 2007). 7. This acquisition report has been prepared under the company’s board of directors directions. Neither the expert who worked on this acquisition nor Vibrant Ltd, have contemplated future interest in Galaxy Pharma Company (Grover and Davenport, 2001), any personal interest with respect to the parties involved, or any other interest that might prevent me from carrying out unbiased valuation (Maier, 2004). My compensation is not dependent on an event or action resulting from the opinions, analyses, or conclusion in this report. 3.0 External Sources of Information To ad me in my analysis of the Galaxy Pharma Company, I consulted a number of publicly available sources of information (Maier, 2004). Numerous financial databases and publications were consulted including Standard & Poor’s Industry Surveys, Business Statistics, Galaxy Associates’ Stocks, Bills, Bonds and Inflation 200X Yearbook, Japan Financial Data and Value Line Investment Survey. 4.0 Potential Risk a. Technical Risks The basic technical risk in Galaxy Pharma Company is in the drug development and drugs manufacturing process itself: the loss of control by the pharm customers in assuring the quality of the manufacturing process (Murray, 2007). Other technical risks at the pharma company include incomplete process validation, a lack of planning in the technology transfer between the CMO and the customers, and changing specifications when outsourcing a project. Galaxy Pharma Company has been able to reduce these technical risks, through performing due diligence on a prospective CMO (Maier, 2004). This process has included: reviewing the CMO’s company history, reviewing the CMO’s company history, examining specific illustrations of the CMO’s experience with the particular type of product development involved in the outsourced projects (Murray, 2007), and lastly, checking if a CMO has ever been issued with a warning letter from the regulators (Scott and Vessey, 2002). b. Cost Risks Many new pharmaceutical companies are being developed in third world countries and Galaxy Pharma Company has moved into those countries such as in India and Kenya. But this strategy has risk for the company because of the importance of intellectual property rights (Scott and Vessey, 2002) Galaxy Pharma Company has been able to reduce this type of risk through picking the right partners and places (Murray, 2007), the company knows picking the partners and places will take more than the usual scrutiny or the company will lose its valuable resources (Scott and Vessey, 2002). Most pharmaceutical companies bears higher level of risk because of the high level of uncertainty in regard to the success of a new drug development or failure of a new drug development (Scott and Vessey, 2002). Galaxy Pharma Company has been able to prevent this type of risk through acquiring small pharmaceutical companies that are on the verge of developing new drugs or medicines (Eiteman et el, 2007). According to the recent restructuring program, Galaxy Pharma Company has concentrated itself exclusively in the pharmaceutical segment: in the past 5 years the company has sold some of its non-pharmaceutical segments (food business, latex business, numerous chemical business and so forth) (Murray, 2007). This has increased Galaxy pharmaceutical segment share in total sales. In addition, Galaxy in the last five years has significantly increased its level of outsourcing (Maier, 2004). These two moves have allowed Galaxy to concentrate its energy and its resources on its profitable part of its business segment (Tiwana, 2000). c. Schedule Risk Testing and thorough clinical trials are fundamental to good medical drugs (Scott and Vessey, 2002), but there are numerous accusations of shortcuts (Eiteman et el, 2007), including pressuring for favorable results, testing on people without their proper approval, using drugs for unapproved uses and much more (Murray, 2007). Galaxy Pharma Company has been able to reduce such risk through obtaining consent from people or patients who used the trial drugs (Scott and Vessey, 2002). In addition, the company has been able to assess, evaluate all its risks in regard to new drug manufacturing (Tiwana, 2000). 5.0 Return Analysis Sales and Total assets Table 1 total assets and sales dynamics of Galaxy and its closes competitors (Tiwana, 2000). More detailed analysis of Galaxy has revealed three major drivers of total assets and sales dynamics on micro-level: R& D of new drugs (Scott and Vessey, 2002), acquisition and reorganizations of the company, and the ability of Galaxy to protect exclusivity and patent rights of its drugs available for sale. Table 1. Sales growth of Galaxy Company, 2011-2013 2011 2012 2013 Pfizer 11.3% 38.5% 17.4% Wyeth 4.3% 8.7% 9.5% Galaxy 8.5% -56.6% 2.0% Table 2. Total Assets growth of Galaxy Company, 2011-2013 2011 2012 2013 Pfizer 18.4% 151.9% 5.9% Wyeth 13.2% 19.4% 8.4% Galaxy 15.9% 13.9% 14.7% Source: calculations, data used from Annual Reports of the companies Table 3. R&D costs, % of total revenues 2010 2011 2012 2013 Pfizer 16.5% 16.1% 16.7% 14.6% Wyeth 13.4% 14.3% 13.2% 14.2% Eli Lilly 19.4% 19.4% 18.7% 19.4% Source: Annual Reports of the companies R& D is an important factor that determines the stability of sales in composition of its medicine portfolio and the ability of Galaxy to protect is exclusivity of its drugs. The rule of thumb is that major portion of its sales from any drug comes before the end of its patent (Tiwana, 2000). As soon as the patent period end other companies get go ahead to start manufacturing generic drugs thus causing reduction of its revenue from sales (Tiwana, 2000). To illustrate this point, sales of Claritin developed by Galaxy in 2001 were Yen 300 million; in 2012 its patent expired; sales of Claritin in 2002 and 2003 were Yen 250 million and 200 million respectively. 6.0 Financial Performance Table 3 .Profitability analysis 2011 2012 2013 Pfizer  ROA 21.3% 4.7% 9.4% Profit margin 29.3% 8.5% 21.6% Total Assets Turnover Ratio 0.76 0.45 0.44 Wyeth ROA 18.2% 7.3% 3.8% Profit margin 30.5% 12.8% 7.1% Total Assets Turnover Ratio 0.60 0.55 0.54 Galaxy ROA 11.8% 10.7% 11.7% Profit margin 15.8% 14.1% 16.4% Total Assets Turnover Ratio 0.74 0.87 0.71 Source: calculations, data used from Annual Reports of the companies Financial performance of Galaxy Company is concentrated on two major factors-risk analysis and profitability. Table 3 contains calculated rates of return on assets and its components- total assets turnover ratio, profit margin. 7.0 Recommendation Galaxy has kept its profit margin, ROA and total assets turnover stable. Unlike its closet competitor Wyeth experience significant fluctuation in all its three core parameters (Tiwana, 2000). Galaxy has stable assets growth which can enable the company to pay its short and loan term loan commitment (Tiwana, 2000). Vibrant Ltd should go ahead and acquire Galaxy pharmaceutical company. Reference List Eiteman, D. K., Stonehill, A. I. and Moffett, M. H 2007, “Multinational Business Finance”/13e, Global Edition, Pearson Australia. Grover, V. and T. Davenport 2001, “General Perspectives on Knowledge Management: Fostering a Research Agenda.” Journal of Management Information Systems 18(1): 5-22. Maier, R 2004, Knowledge Management Systems: Information And Communication Technologies for Knowledge Management. 2nd edition, Springer, Berlin. Murray, W 2007, “Implications of SOA on Business Strategy and Organizational Design,” SOA Magazine Issue III, January 2007. Scott, J.E., and Vessey, I 2002, “Managing Risks in Enterprise Systems Implementations .” Communications of the ACM, 45, 4, pp. 74-82. Tiwana, J 2000, The Knowledge Management Toolkit: practical techniques for building a knowledge management system. Upper Saddle River, N.J., Prentice Hall Read More