Capital Gain

Kupin Ltd. was established in year 1980 as a producer of medical drugs (drugs produced and distributed without patent protection) and mainly non-prescription drugs. The firm met with initial success and soon they started investments in R&D in the year 2001. The directors knew that they would have to enter new markets to expand their growth. The company grew at a healthy 16% Per Annum from 1985 to 1989. The company has expanded to include prescription drugs to its product portfolio and for more adverse diseases like malaria, hyperextension etc. The stock price of the company was rising and it looked set to become a major player in the Indian market. Pharmaceutical Market The Indian Pharmaceutical industry has more than 300 large and small players and a total market capitalization of $6 billion and analysts predict a growth rate of 9% p.a. after year 2009. 70% of the domestic demand for bulk drugs is catered by the Indian Pharma Industry, which produces 20% to 24% of the global generic drugs. With the increase in the medical infrastructure, the health services would be transformed and it would help the growth of the Pharma industry further. India has the advantage of the cost, as the cost of labour, the cost of inventory is much lower than other places. The multinational companies could save 30% to 50% of the research and development expenses by investing in India than elsewhere. Also the cost of performing clinical trials in India is one tenth of the cost incurred in US. No doubt, India was the preferred choice of multinationals looking to expand their realms. Introduction of new drugs The competition in the generic drug market was increasing and there was increased pressure from the investors. The company believed that the key to rapid growth in the competitive field pharmaceutical sector was to introduce new drugs. These drugs were to address those diseases which were till then incurable. Kupin had one of the most qualified and productive set of medical and biotech researchers and was successful in introducing path breaking drugs in the past and generate huge profits from them. In light of the need to introduce new drugs into the market and buoyed by its past success, Kupin decided to increase its Research and Development activities in the year 2007. Four such ambitious projects that they began working on were Macrobid, Paclitaxel, Tabloid and Dabigatran. To fund the R&D, staffing and other activities for new drug development, Kupin had to take huge debts from Premier National Bank at an interest rate of 12% compounded semi-annually.

Post Marketing Surveillance is also carried out once the drug is approved and marketed. Drug development is a costly and risky affair involving lots of money and time. Individual sales to patients accounted for a comparatively lower fraction. Exhibit 3 shows the expenditure of the four drugs being developed by Kupin in various stages of its discovery life cycle (per year). The goals of the NDA are to provide enough information to permit FDA reviewer to reach the following key decisions: 1. and purity. During preclinical drug development. The primary ones being the big institutional buyers like hospitals and medical centres. quality. Whether the drug's proposed labelling (package insert) is appropriate. Clinical Stage: The purpose of Clinical Stage studies is to identify metabolic and pharmacological effects of drug in humans and to determine the side effects associated with the drug and its safety profile. Genotoxicity screening is performed. Whether the drug is safe and effective in its proposed use(s). Exhibit 4 shows the income that is expected from the sales of three drugs sold by Kupin at various stages. and what it should contain 3. In addition to these. New Drug Application (NDA): The NDA application is the vehicle through which drug sponsors formally propose that the FDA approve a new pharmaceutical for sale and marketing. The expenditure at various stages of drug discovery is different. Whether the methods used in manufacturing the drug and the controls used to maintain the drug's quality are adequate to preserve the drug's identity.Stages of Drug Development Pre-clinical Research: This stage comprises of study on animals to find out various parameters for a drug under development. The sale of a drug/medicine depends on two major buyers. Clinical studies are also conducted to obtain some preliminary data on the effectiveness of the drug for a particular indication or indications in patients with the disease or condition and risk associated with it. as well as investigations on drug absorption and metabolism. the toxicity of the drug's metabolites. strength. Many compounds that are screened initially fail to make it to next stage of development. and whether the benefits of the drug outweigh the risks 2. a sponsor evaluates the drug's toxic and pharmacological effects through in vitro and in vivo laboratory animal testing. Both the means are very important . and the speed with which the drug and its metabolites are excreted from the body. Market Capitalization Expectation The four new drugs that are under the development and clinical trials stage have been expected to capture the market with different levels.

There are inherent risks associated with the drug development process which decides the time frame after which the drug hits the market even after the last stage of development phases and clinical trials. Scientist’s Salaries and other overheads. Investment Proposal The team of scientists and finance managers developed an investment proposal wherein they were to pump in $ 2150 Million in development of four new drugs. the expenses in each year also varies. For example. This is primarily because of different timelines for each phase of development. 92% of non-Asian sales go to its marketing partners who sell the drug under their banner). . Dabigatran are the four drugs that are under development and have an expected chances of reaching the market as 10%. Exhibit 3 shows the expected time for each drug that it would take to reach the market. Estimated Risk with Drugs Not every drug under development reaches the market. number of patent years left and the profitability of the respective drug. This team was led by Mr. 20% of the sales made are outside Asia and Kupin get a royalty (See exhibit) over these sales (remaining revenues i. Macrobid.for a drug’s sales and vary in accordance with the past records and the age of the drug in the market.e. Manish Kumar. 10%. The expected time to reach the market for each drug also varies. Penetration rate is expected percentage of potential market that exists for that drug. The chances of reaching the market can range from as low as 5% to 35%. They found the new investment because new funds would help fund the huge costs of Research and Development. Exhibit 5 gives a breakup of year wise expenses that are expected to be incurred on a particular drug. These depend on the popularity of the drug. Various drugs command different rates of royalty bonuses. Tabloid. As each drug has different expected time of reaching market. 30% and 35% respectively. tests on animals and finally clinical trials. Exhibit 4 shows the years of patent left for the drug. Marketing expenses. Macrobid is currently in lab trials phase and expected time it would take to reach the market is 8 years. breakup of sales of each drug to various types of buyers and their penetration rate. However the team also knew that the investment was a mixture of risky drugs and needed careful investment plan. Moreover it would enable the company to diversify into new disease areas which were still incurable. It also shows the amount already invested in the drug and total expenses that are a particular drug is expected to incur. Paclitaxel. It is generally observed that the expense on the latter years of the development phase is more than the starting years.

Sujen Remedies sees R&D as a vital component in its expansion plans and hugely invests in it. Equity and available cash of the company is used to fund the project and the rest of the cash requirement is funded by raising a loan. being the financial manager of a US subsidiary company thus has to think about the risk involved in investing in India. Manish Kumar knew that Indian stock markets have a history of being very volatile and thus are considered very risky.9. the annualized standard deviation of Indian Stock market is around 35% while the annualized standard deviation of the US government bond is just 20%. the cost of debt will increase by 1. Smith’s. Due to the volatility of the stock markets in India. Company’s revenues come from a mix of developed markets with America and Europe generating 70% of its sales.5 and a marginal tax rate of 30% and an equity beta of 0. It showed its global presence in 1981 and now has its manufacturing facilities in four countries and its customer base expands to over 70 countries. The firm is set to roll out its first Biogeneric drug in August 2011 which will provide a major boost to its future plans. Manish was told that the cost of debt would be 14% if the Debt to Equity of the company is under 2. Kupin is planning to hire FCI Securities as its investment bank to help it raise adequate amount of money to fund the entire project. a publically traded company similar to Kupin. that operates only in drug manufacturing has a D/E ratio of 1.Kupin needs a huge amount of money to fund its cash requirements for manufacturing the four new drugs. for every basis point of increase in the Debt to Equity. The rate at which government bonds are available is 4. After this. Mr. In a meeting with the bankers of Kupin. Kumar.5%. Sujen Remedies has 3 dedicated facilities and over 1000 personnel for its R&D division.5% and expected return on market portfolio is 12%.75. Over the past couple of years the company has focused much on acquisitions and has acquired 4 players in 3 countries to expand its global outlook. . FCI Securities is ready to give a 15% discount on the total floatation costs for this deal. The future plans for the firm include its focus on potential growth segments like Biogenerics and their researchers have already started working on it. The balance sheets and income statements are given in Exhibit 6 and Exhibit 7. US dollar dominated government bonds have a current yield of 8. The issue concerning Kupin was the Debt to Equity level.15 basis points. Mr. Mr. FCI Securities charges usually charges 8% as its floatation cost but due to good relations with Kupin. Sujen Remedies shows interest in Kupin Sujen Remedies was established in 1963 and went public in 1973.

The final evaluation of this company was done to be around $ 1430 Million. In 1997 Sujen Remedies had tried to acquire a similar company to Kupin named Kopla Ltd. Final Steps towards Decision The annual capital planning process took place during an all-day meeting convened by Mr. interest payments. Prashant and attended by his team of Finance managers of Sujen Remedies. Prashant’s ability to compare projects but his task was very daunting as all the drugs were in different phases of development and all of them had different needs of funds. stronger and larger number of lender relationships. making state of the art laboratories and saving for further drug developments. Kopla Ltd went for a Public Issue and raised an amount of $ 550 million. Kupin was under a huge debt. The projects were risky with very less chances of making it to the market. The pharmaceutical industry expected that the total evaluation of Kopla Ltd would be increased by 135% in the year 2006. fixed costs and increased marketing expenses. Interest payments. Sujen Remedies usually relied on Mr. It is expected that the credit ratings for Kupin would be revised and given an AAA rating in the year 2001 when the company wants to raise money for funding the new drugs. After that. After getting an AAA rating by Crisil. Kupin’s resource profile has gradually improved over the past two years.The Credit Rating of the structured debt owned or to be raised by the company Kupin was given B+ rating in the year 2000. This will increase the chances of getting the converted AAA rating from the credit rating agency and get low costing loans. The entire process of evaluating the deal to buy Kupin was taking too much time and Mr. Kupin is trying very hard to reduce its accounts receivables. The capital budget for next year was to be finalized in a staff meeting which was to be held after 3 months from now. Making a wrong decision would have serious consequences due to increased debts. intrinsic improvement in its asset quality and a continued improvement in its resource profile. The rest of the amount was spent in hiring new scientists. For this. with lower dependence on short-term market borrowing. Kupin can get access to more than $ 1000 million at an interest rate of just 8% compoundable quarterly. $ 150 million was spent in installing new IT solution for drug inventory management. He has to . and lower borrowing costs. Prashant knew that the board of directors was not happy with it. The final evaluated figure was deemed under rated according to Kopla Ltd and the deal was scrapped. They agreed on a prioritization of projects of Kupin and considering related risks and the phase in which each drug was.

Mr. . Prashant knew that he was up against challenges.give his final recommendations in the board meeting later in the week.

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