XLRI GMP – Tata Steel (2019-20)

Case: Medfield Pharmaceuticals

Submitted by:
CGT 19008 – Ankur Garg
CGT 19018 – Prabhat Kumar Singh
CGT 19024 – Sakshi Sharma
CGT 19027 – Sourabh Basu
CGT 19029 – Sushil Kumar Tripathy

1. Case Background
There is an inflection point in pharmaceutical industry wherein most of the drugs which
were developed earlier were nearing / already crossed their patent period. Additionally, the
cost of developing new drugs has increased manifold and companies are looking for novel
means to overcome this situation.
Medfields is a pharmaceutical company which is facing a similar situation wherein 2 of
the 3 drugs it manufactured were nearing their patent period. While Medfield enjoyed
excellent reputation with both physicians and hospitals owing to its strong marketing and
sales force, it has to take some strategic decisions so as to decide on the state of its current
and future products as also the question of allowing Medfield to be taken over by another
company.

2. Five critical financial problems

1. Determining the value of the company: With the recent changes in the landscape
of pharmaceutical industry, there has been an exceeding trend of companies with
approved products or products in the later stages of development to be acquired by
bigger pharmaceutical companies.
There has been a recent offer of $ 750 million to buy Medfield Corporation. At the
same time the company is trying to make strategic decisions regarding future
investments for those drugs which are nearing their patent validity periods. It is
therefore very important for the CEO of Medfield Corporation Ms. Johnson to
determine the value of the company and therefore decide whether the offer was
reasonable enough to be considered. In case it is so, it would have an impact on the
company’s existing and potential future products.
2. What should be strategy for drugs near end of patent period: Fleximat which
contributes to 64percent of revenue of the company is ending, is scheduled to go
off patent in two years ,meaning there by Fleximat would not generate any sales
after 5 years in case any strategic intervention is not done .there are 4 possible ways
with difference in expenditure and cash flow . she needs to decide on best
alternative.
3. Rising development cost: Pharma industry is facing downturn since 2002, lack of
new patents, stringent laws, increasing cost are major problems .the cost of
bringing drug to market has increased from 802 million in 2001 to 1.3 billion in
2005 . Challenge before companies including midfield is to reduce cost

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4. Lack of classification of fixed costs: In making future estimates, the company has
ties most of the expenses to sales, either directly or indirectly and there is very little
classification of fixed costs. In most of the cases (including for pharmaceutical
industry), this is not a realistic situation and therefore would not lead to a correct
valuation of the company.
5. Financial impact of Reximat (new drug) is not fully understood: in terms of
capital investment required, impact on sales of existing drugs (Fleximat and
Reximet both are effective for arthritis – will Reximet impact sales of Fleximat).

3. Analysis and interpretation – possible directions of solutions

a. Determining the value of the company:
Valuation Methods: There are many other valuation methods lying between the
two extremes – selling off the business at bankruptcy prices and using valuing
methods which focus on the inherent value of intellectual property and the strength
of a company’s brands.
The three major approaches for valuation of a company are shown below.

Cost Approach:
Replication value: An acquirer can place a value upon a target company based
upon its estimate of the expenditures it would have to incur to build that business
“from scratch.”
Medfield case: This method cannot be used due to lack of information needed for
it.
Market Approach:
Comparison analysis: Comparable company analysis is a relative valuation
method in which the current value of a business is compared to other similar
businesses by looking at trading multiples like P/E, EV/EBITDA, or other ratios.
Information about comparable acquisitions can be gleaned from public filings or
press releases, but more comprehensive information can be obtained by paying for
access to any one of several private databases that accumulate this information.
Medfield case: This method cannot be used due to lack of information needed for
it.
Intrinsic Value Approach:
Discounted cash flows: One of the most detailed and justifiable ways to value
a business is through the use of discounted cash flows. Under this approach,

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the acquirer constructs the expected cash flows of the target company, based
on extrapolations of its historical cash flow. A discount rate is then applied to
these cash flows to arrive at a current valuation for the business.
Medfield case: Forecasted financials are given. Depreciation and working capital
are considered to be zero. Based on various scenarios, NPV can be calculated using
the projected Cash Flows.
The other methods are as follows:
Calculate the Value of the Assets: Valuation of assets is required to estimate the
total valuation of the company. Also, valuation of intangible assets like goodwill
of company in the market (brand name), strength of R&D team etc. is also essential
to arrive at true valuation of the company.
Medfield case: Medfield has a strong R&D. However, in the case no information
has been provided to assess such intangible assets
Liquidation value: The amount of funds that would be collected if all assets
and liabilities of the target company were to be sold off or settled.
Medfield case: Since this company is solvent, this method should not be used.
Also, it does not consider the valuation of the brand value of the company.
Book value: Book value is the amount that shareholders would receive if a
company’s assets, liabilities, and preferred stock were sold or paid off at
exactly the amounts at which they are recorded in the company’s accounting
records. It is highly unlikely that this would ever actually take place, because
the market value at which these items would be sold or paid off might vary by
substantial amounts from their recorded values.
Medfield case: Can be calculated for this case.
Relief from royalty: A possible approach is the relief-from royalty method,
which involves estimating the royalty that the company would have paid for
the rights to use an intangible asset if it had to license it from a third party. This
estimation is based on a sampling of licensing deals for similar assets.
Medfield case: For one of the drugs the patent is about to expire, but for the others
at what price the patent would be valued cannot be determined here.
Enterprise value: It is the sum of the market value of all shares outstanding,
plus total debt outstanding, minus cash. Enterprise value is only a theoretical
form of valuation, because it does not factor in the effect on the market price
of a target company’s stock once the takeover bid is announced.
Medfield case: Can be used.
Multiples analysis: It is quite easy to compile information based on the
financial information and stock prices of publicly-held companies, and then
convert this information into valuation multiples that are based on company
performance. These multiples can then be used to derive an approximate
valuation for a specific company.
Medfield case: The stock values and data for market performance of other
companies has not been given.
Influencer price point: A potentially important point impacting price is the
price at which key influencers bought into the target company. For example, if

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someone can influence the approval of a sale, and that person bought shares in
the target at $20 per share, it could be exceedingly difficult to offer a price that
is at or below $20, irrespective of what other valuation methodologies may
yield for a price. The influencer price point has nothing to do with valuation,
only the minimum return that key influencers are willing to accept on their
baseline cost.
Medfield case: This is relevant to the case. As we know, the key influencer is
Johnson herself and even on making the assumption that the entire equity belongs
to her, the offer supersedes this value.
IPO valuation: A privately held company whose owners want to sell it can wait
for offers from potential acquirers but doing so can result in arguments over
the value of the company. The owners can obtain a new viewpoint by taking
the company public in the midst of the acquisition negotiations. This has two
advantages for the selling company. First, it gives the company’s owners the
option of proceeding with the initial public offering and eventually gaining
liquidity by selling their shares on the open market. Also, it provides a second
opinion regarding the valuation of the company, which the sellers can use in
their negotiations with any potential acquirers.
Medfield case: Required information is not given in the case, so the above method
cannot be used.
Strategic purchase: The ultimate valuation strategy from the perspective of the
target company is the strategic purchase. This is when the acquirer is willing
to throw out all valuation models and instead consider the strategic benefits of
owning the target company. For example, an acquirer can be encouraged to
believe that it needs to fill a critical hole in its product line, or to quickly enter
a product niche that is considered key to its future survival, or to acquire a key
piece of intellectual property. In this situation, the price paid may be far beyond
the amount that any rational examination of the issues would otherwise
suggest.
Medfield case: Will be evaluated comparing the offer price and the company’s
worth derived using other methods.
b. What should be strategy for drugs near end of patent period: There are 4
possible alternatives to deal with the situation:
• Launch a renewed marketing effort:
• Engage in evergreening tactics: A company may continue to maintain the
benefits of patents through aggressive litigation.
• Manufacture the generic form of Fleximat in-house: Medfield has the option to
partner with a generic drug manufacturer once the patent lapses so as to continue
manufacturing the drug Fleximat.
• Reformulate Fleximat: This option would allow the company to file for a new
patent by reconfiguring the medication and thereafter get FDA approval.
Medfield case: The R&D team at Medfield is very capable and is confident of
implementing the reformulation strategy for Fleximat. Also, the company can opt
for a mix of generic and reformulation based on the expected benefits.

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Additionally, going for a generic drug manufacturing would be in line with the
company’s vision and mission of “We bring wellness”
c. Rising development cost: There are various options before companies to remain
viable including restructuring, cutting internal R&D and most importantly looking
at mergers and acquisitions. In Medfield case, there is also an offer to buy the
company. Now, Medfield needs to assess whether it would be prudent for it to go
for this option or work on other strategies to cut down on costs.
d. Lack of classification of fixed costs: There is a need to classify fixed costs as well
along with variable costs while computing the financials of the company. This
would help in more accurate valuation of the company.
e. Financial impact of Reximat (new drug) is needs to be fully understood in
terms of the capital investment impact and cannibalization if any.

4. Specific recommendations and implementation

Valuation of the Company:

NPV (in mn of
Valuation Method Remarks
dollars)
DCF Case1: Sales of 4 drugs until patent
419 Details in annexure 1
expiry
DCF Case 2: Reformulation of Fleximat 403 Details in annexure 2
Book Value 361 Details in annexure 3
Enterprise Value 270 Details in annexure 3
Valuation considering reformulation of other drugs at the end of their patent expiry term
has not been considered for two reasons:
1. The contribution of Lodamadal and Orsamorph to sales is only 12% and 24%
respectively which is very less compared to Fleximet.
2. The cost estimates for reformulation and marketing, and the corresponding increase
in sales of these drugs has not been provided.
Using the estimates for Fleximat, DCF could have been be calculated but since the sales
contribution is low, NPV will not be considerably boosted.
The options available for Johnson:
▪ Launch a new renewed marketing effort: Estimates for increase in marketing cost
and corresponding increase in sales are not available. Therefore, NPV for this
option could not be evaluated. However, the NPV considering sales for the 4 drugs
up till the respective patent expiry terms and without any reformulation is 419 mn.
▪ Engage in evergreening tactics: Cost involved in litigations has not been provided.
So, NPV using this option too could not be evaluated.
▪ Manufacture generic form of Fleximat in-house: Cost and Sales estimates are not
available but, in any case, the financial benefits would not be comparable to other
strategies. Therefore, the NPV would be lower than other options.

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▪ Reformulate Fleximet: Using the given estimates (Cost of 35 mn for reformulation,

25mn for marketing, 50% decline in 2013, 2% increase for next 8 years and
dissipation at 50% in next years), the NPV calculated is 403 mn.
▪ Sell the company: Since, the company is solvent, the proceeds from selling the
company would go to the promotors, and for them the NPV would be 750 mn.

Of all the above, selling the company seems the most profitable option since the offer of
750 mn is much higher compared to the NPV calculated using various methods. Although,
engaging in tactics to maintain the benefits of patents through aggressive litigation could
have been for more profitable, it would undermine the values that this company stands for.

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Annexure 1: DCF considering sales of drugs until the patent expiration

Costs of Sales 23.00% Direct Marketing 27.00% Taxes 32.00%

Research 19.00% General and Admin. 4.00% Discount Rate 8.50%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
Fleximat 2% 2% -50% -50% -50%
Sales 210.56 214.77 219.07 109.53 54.77 27.38
Cost of Sales 47.46 49.4 50.39 25.19 12.6 6.3
Lodamadal 2% 2% 2% 2% 2% -50% -50% -50%
Sales 39.67 40.47 41.28 42.1 42.94 43.8 21.9 10.95 5.48
Cost of Sales 10.55 9.31 9.49 9.68 9.88 10.07 5.04 2.52 1.26
Orsamorph 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% -50% -50% -50%
Sales 78.97 80.55 82.16 83.8 85.48 87.19 88.93 90.71 92.52 94.37 96.26 98.18 100.15 102.15 104.19 52.10 26.05 13.02
Cost of Sales 18.46 18.53 18.9 19.27 19.66 20.05 20.45 20.86 21.28 21.71 22.14 22.58 23.03 23.49 23.96 11.98 5.99 3.00
Rezimet 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% -50% -50% -50%
Sales 80 81.6 83.23 84.9 86.59 88.33 90.09 91.89 93.73 95.60 97.51 99.46 101.45 103.48 105.55 107.66 109.82 112.01 114.25 116.54 58.27 29.13 14.57
Cost of Sales 18.4 18.77 19.14 19.53 19.92 20.32 20.72 21.14 21.56 21.99 22.43 22.88 23.33 23.80 24.28 24.76 25.26 25.76 26.28 26.80 13.40 6.70 3.35

Total Sales 329.2 335.79 422.5 317.04 266.42 243.27 197.43 189.99 188.09 186.27 189.99 193.78 197.66 201.61 205.65 155.58 131.60 120.69 109.82 112.01 114.25 116.54 58.27 29.13 14.57

Cost of Sales 76.47 77.23 97.18 72.92 61.28 55.95 45.41 43.7 43.26 42.84 43.70 44.57 45.46 46.37 47.30 35.78 30.27 27.76 25.26 25.76 26.28 26.80 13.40 6.70 3.35
Research 62.46 63.8 80.28 60.24 50.62 46.22 37.51 36.1 35.74 35.39 36.10 36.82 37.56 38.31 39.07 29.56 25.00 22.93 20.87 21.28 21.71 22.14 11.07 5.54 2.77
Direct Marketing 91.22 90.66 114.08 85.6 71.93 65.68 53.31 51.3 50.78 50.29 51.30 52.32 53.37 54.44 55.52 42.01 35.53 32.59 29.65 30.24 30.85 31.47 15.73 7.87 3.93
G&A 13.94 13.43 16.9 12.68 10.66 9.73 7.9 7.6 7.52 7.45 7.60 7.75 7.91 8.06 8.23 6.22 5.26 4.83 4.39 4.48 4.57 4.66 2.33 1.17 0.58

EBITDA 85.11 90.66 114.08 85.6 71.93 65.68 53.31 51.3 50.78 50.29 51.30 52.32 53.37 54.44 55.52 42.01 35.53 32.59 29.65 30.24 30.85 31.47 15.73 7.87 3.93

Taxes 27.15 29.01 36.5 27.39 23.02 21.02 17.06 16.41 16.25 16.09 16.41 16.74 17.08 17.42 17.77 13.44 11.37 10.43 9.49 9.68 9.87 10.07 5.03 2.52 1.26

NOPAT 57.96 61.65 77.57 58.21 48.91 44.66 36.25 34.88 34.53 34.2 34.88 35.58 36.29 37.02 37.76 28.56 24.16 22.16 20.16 20.57 20.98 21.40 10.70 5.35 2.67

NPV Till End USD 418.46

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Annexure 2: DCF when Fleximat is reformulated

Costs of Sales 23.00% Direct Marketing 27.00% Taxes 32.00%
Research 19.00%
General and Admin.4.00% Discount Rate 8.50%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
Fleximat 2% 2% -50% 2% 2% 2% 2% 2% 2% 2% 2% -50% -50% -50%
Sales 210.56 214.77 219.07 109.53 111.72 113.96 116.24 118.56 120.93 123.35 125.82 128.34 64.17 32.08 16.04
Cost of Sales 47.46 49.40 50.39 25.19 25.70 26.21 26.73 27.27 27.81 28.37 28.94 29.52 14.76 7.38 3.69
Lodamadal 2% 2% 2% 2% 2% -50% -50% -50%
Sales 39.67 40.47 41.28 42.1 42.94 43.8 21.9 10.95 5.48
Cost of Sales 10.55 9.31 9.49 9.68 9.88 10.07 5.04 2.52 1.26
Orsamorph 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% -50% -50% -50%
Sales 78.97 80.55 82.16 83.8 85.48 87.19 88.93 90.71 92.52 94.37 96.26 98.18 100.15 102.15 104.19 52.10 26.05 13.02
Cost of Sales 18.46 18.53 18.9 19.27 19.66 20.05 20.45 20.86 21.28 21.71 22.14 22.58 23.03 23.49 23.96 11.98 5.99 3.00
Rezimet 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% -50% -50% -50%
Sales 80 81.6 83.23 84.9 86.59 88.33 90.09 91.89 93.73 95.60 97.51 99.46 101.45 103.48 105.55 107.66 109.82 112.01 114.25 116.54 58.27 29.13 14.57
Cost of Sales 18.4 18.77 19.14 19.53 19.92 20.32 20.72 21.14 21.56 21.99 22.43 22.88 23.33 23.80 24.28 24.76 25.26 25.76 26.28 26.80 13.40 6.70 3.35

Total Sales 329.2 335.79 422.51 317.03 323.37 329.85 313.66 308.55 309.02 309.61 315.80 322.12 261.83 233.70 221.69 155.58 131.60 120.69 109.82 112.01 114.25 116.54 58.27 29.13 14.57

Cost of Sales 76.47 77.23 97.18 72.92 74.38 75.87 72.14 70.97 71.08 71.21 72.64 74.09 60.22 53.75 50.99 35.78 30.27 27.76 25.26 25.76 26.28 26.80 13.40 6.70 3.35
Research 62.46 63.80 80.28 60.24 61.44 62.67 59.59 58.62 58.71 58.83 60.00 61.20 49.75 44.40 42.12 29.56 25.00 22.93 20.87 21.28 21.71 22.14 11.07 5.54 2.77
Direct Marketing 91.22 90.66 114.08 85.60 87.31 89.06 84.69 83.31 83.44 83.60 85.27 86.97 70.69 63.10 59.86 42.01 35.53 32.59 29.65 30.24 30.85 31.47 15.73 7.87 3.93
General and Administrative 13.94 13.43 16.90 12.68 12.93 13.19 12.55 12.34 12.36 12.38 12.63 12.88 10.47 9.35 8.87 6.22 5.26 4.83 4.39 4.48 4.57 4.66 2.33 1.17 0.58
Reformulation Cost 35 35
Extra Marketing Cost 25 25 25 25 25
EBITDA 85.11 30.66 54.08 60.60 62.31 64.06 84.69 83.31 83.44 83.60 85.27 86.97 70.69 63.10 59.86 42.01 35.53 32.59 29.65 30.24 30.85 31.47 15.73 7.87 3.93

Taxes 27.15 9.81 17.30 19.39 19.94 20.50 27.10 26.66 26.70 26.75 27.29 27.83 22.62 20.19 19.15 13.44 11.37 10.43 9.49 9.68 9.87 10.07 5.03 2.52 1.26

NOPAT 57.96 20.85 36.77 41.21 42.37 43.56 57.59 56.65 56.74 56.84 57.98 59.14 48.07 42.91 40.70 28.56 24.16 22.16 20.16 20.57 20.98 21.40 10.70 5.35 2.67

NPV Till End USD 402.47

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Annexure 3: Book Value and Enterprise Value of the firm

MEDFIELD PHARMACEUTICALS
BALANCE SHEET (in thousands of dollars)

2007 2008 2009 2010

Cash 21,465 28,227 29,542 32,251

Receivables 28,815 39568 39,117 41,927
Inventory 24,704 24,316 27,859 30,559
74,984 92,111 96,518 1,04,737

Property and Equipment 1,02,977 1,18,553 1,27,498 1,29,171

Other Assets 45,937 49,312 61,569 67,718
2,23,898 2,59,976 2,85,585 3,01,626

Accounts Payable 25,187 26,460 27,070 30,142

Accrued Expenses 39,236 52,634 55,256 59,850
Current LTD 2,882 3,373 3,801 4,501
67,305 82,467 86,127 94,493

LTD 17,069 23,609 25,278 26,850

Equity 1,39,524 1,53,900 1,74,180 1,80,283
2,23,898 2,59,976 2,85,585 3,01,626

Book Value 3,60,566

Enterprise Value 2,69,375

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