Client Situation
Cedar assisted a private equity fund in evaluating an investment opportunity in a pharmaceutical company.
Private equity client was looking at an investment in the fast growing generic pharmaceutical opportunity and ride the growth curve over the next 24-48 months. Cedar was asked to conduct a commercial due diligence covering market assessment, internal assessment, overall strategic assessment and recommend next steps.
The global pharmaceutical market is growing at 7-10%. The overall market at US $ 420 billion provides opportunities in across various segments. While branded formulations is 80% of the market, the generic space is growing fast and providing significant business potential. As major drugs go off patent, almost US $ 55-60 billion between 2004-2008 in the regulated markets like US and Europe, entering the market at the right time with a generic drug could yield significant revenues. It is critical that entry is timed right and also executed rapidly.
The regulated markets present their own challenge in the pharmaceutical industry. Regulatory approvals are mandatory in US and Europe and other geographies. US FDA, UK MCA and other regulatory authorities are stringent on the approval process before they allow a generic drug to be launched. For pharmaceutical companies in the developing countries, the generic opportunity in regulated markets provides a major potential to transform business profile from a low margin high volume bulk product to higher margin, significant volume generic drug.
The target company had been operating in the pharmaceutical market for almost 20 years. It had significant strengths in the domestic and international bulk product markets; primarily unregulated markets. Business overall had been growing at 15%+ with profitability growing at 10% +. In order to transform business and become a large generic player in the regulated markets, the target company was looking at entering US first since the generic market in the US is 40-45% of the global generic market. In order to reach that milestone, internally the target company has begun preparatory activities like upgrading manufacturing plants and setting up new plants designed for those markets, filing ANDS and DMFs in the US and Dossiers in Europe.
Cedar’s client was primarily concerned with the achievability of this business transformation. While the target company was overall a high performing player in the current markets and products, it was necessary for the client to understand how feasible was the generic play, were timelines realistic, were there regulatory hurdles that could seriously impact market entry, what was the organizational and leadership capability to achieve the business plans.
Cedar’s Approach
Cedar addressed the following aspects for the due diligence
- Internal assessment on financials, customer/geographic revenues, product mix revenues, profits, margins, manufacturing capacity and costs, further capex investments required, organization structure issues, sales and marketing capabilities. Cedar met with senior management of the target company and conducted extensive meetings on various issues.
- External market assessment covering US, Europe and other relevant geographies. In this, Cedar looked at market growth rates, relevant segment growths, size of segments, level of competition, profiles of competitive players. Business development challenges in the US market benchmarked against competitive experiences.Cedar teams conducted meetings/conversations with key participants in the international markets.
- Regulatory assessment covered US FDA ANDA and plant approval processes and key aspects for successful approvals. Conversations were conducted with US FDA and independent plant auditors to understand implications.
- Raw material sourcing arrangements and the cost advantages in sourcing from countries like China which are a significant source of pharmaceutical raw materials. Plant and market visits were conducted to assess the raw material situation.
- Overall alignment of business projections against Cedar’s assessment of the market opportunity.
Outcome
Based on the comprehensive assessment conducted, Cedar articulated a series of recommendations
- The target company was attractive to invest overall.
- There was a need to strengthen the sales and marketing capability to address the regulated market opportunity.
- While the overall revenue growths expected were largely achievable, segment revenue projections were realigned based on potential vs. capability.
- Key costs – selling expenses and others – were adjusted to reflect the investment required in market entry.
- Overall, cost growth needed to be contained in order to improve long term profitability.