Medfields Pharmaceutical Case Solution
Medfield Pharmaceutical was a small pharmaceutical Company in the US, founded by Susanne Johnson who is the Chief Executive Officer of the company. The main objective of the company was to improve the health of its patients, the company experienced massive growth in 2009 and generated the net income of $58 million. The company’s portfolio is comprised of four main drugs, Lodamadal, Orsamorph, Reximet and Fleximat. Majority of the company’s revenue comes from Fleximat, which has only two years remaining for its patent to be over.
Ladamadal was responsible for 12% of the group’s revenue, Orsamorph accounted for 24% of revenue and had 8 years remaining on patent, whereas Reximet was launched in 2012. The US pharmaceutical industry was highly regulated and the company had to comply with various regulations like Food and Drug Administration (FDA) and Hatch Waxman Act. The concept of Drug Reformulation was increasing in the US and various companies achieved success by reformulating the drug whose patent has expired. The company received a purchase offer of $750 million was in a dilemma whether to accept the offer or reformulate the Fleximate drug whose patent expiry was near.
The company’s bestselling drug was going to expire in two years’ time, which left the company with only three drugs in its portfolio, one of which was just approved by the FDA. The competition was also intense in the US pharmaceutical industry, which increased the concern of the CEO, regarding the company’s survival. The CEO was influenced by the idea of reformulation of drugs as many competitors had achieved success by reformulating the drugs. However since its objective was to improve health of its patients, the CEO was concerned the reformulation might cause harm to the patients as proved by past cases. Simultaneously, the company received a purchase offer of $750 million and was in the dilemma of whether to accept the offer or reformulate the drug.
Current Value of Medfield
Based on the NPV analysis, the value of the company amounted to $445 million, which is greater as compared to the offer price of $750 million. The reason of offering a price which is higher than the value of the company is that Medfield enjoyed great reputation with physicians and hospitals, which made it an ideal target for acquisition. Due to the intense competition in the US pharmaceutical industry, large players were attracted to companies with approved products or products in later stages of development, Medfield had high growth potential and its product was just approved, which is why investors were attracted to acquire Medfield and offered higher price
Elimination of R&D
It was assumed that 19% of the revenues of company will be invested in future research and development, when this cost is eliminated from the NPV calculation, the value of the firm amounted $747 million. The investment of $25 million and $35 million required for the research and marketing expenditures of reformulating the drug was also eliminated for this analysis. This analysis would enable the company to reject the offer of acquisition as the company’s value amounted $747 whereas the price offered was $750 million which is lower as compared to the real worth of the company. To calculate this value same growth and cost assumptions of current valuation analysis were used.
Valuation of Reformulation
If the company decides to reformulate the Fleximate drug, $313 million additional value will be created. This has been calculated on the assumption that investment in research worth $35 million will be required in the year 2011 and 2012 and investment of $25 million will be required in the year 2011-2015 for special marketing of the fund. The margin net operating profit after tax of each year have been discounted at the rate of 8.5%, which is the industry average discount rate. The marginal net operating profit after tax indicates the additional operating profit the company would earn in case it reformulates the drug and is based on difference between old sales the company achieved in case the patent of the drug expires and new sales the company will achieve if the drug is reformulated. The direct costs, marketing costs, general and administrative expenses are based on the same assumptions, which were used to determine the value of the company. The marginal pretax cash flow is calculated by deducting all the cost from the marginal revenue and indicates the amount that the company will receive after deducting all its costs from revenues but before tax.
Factors Explaining Value Created from Reformulation
Fleximat has always been a core product of the company and contributes 64% in the company’s revenue. The drug was popular in the market and proved to be effective in curing chronic diseases. One of the core reason of value created by the re-formulation for flaximet is aggressive marketing of the drug by the company as it allocated $35 million for special marketing of the project. Also, the company focused on changing the shape of the pill for making it easy for the customers to swallow the pill. Other factors that contributed towards the additional value created is increasing demand of generics by the customers as these drugs were 50% to 75% cheaper than the branded drugs. In addition, as per the Hatch Waxman Act, several incentives like concessions and increased patent time were provided to the manufacturers in order to develop the generics.
Financial Benefits and Costs
In case of takeover or reformulation, the financial benefits will be enjoyed solely by the CEO, however, since the objective of this pharmaceutical company is to improve health of its patients, the company might donate the funds obtained through the takeover to various rehabilitation centers and local hospitals in order to help the patients. The acquirer will also enjoy benefits in terms of increased profitability as Medfield Pharmaceutical is a profitable organization. In case the firm decides to reformulate the drug, the company will invest the additional value created or profits earned by the reformulation in research and development in order to develop new drugs to cure various diseases, benefiting both the organization and its patients.
The financial costs will be borne by the organization in case of reformulation of drug as investments will be required for marketing, research and various expenses. However, in case of takeover, the acquirer will have to bear the investment cost of $750 million, working capital required for running the day to day matters of the organization and the cost of managing other operations of the organization. The CEO will not bear any financial cost in case of takeover…………….
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