In this case, Medfield Pharmaceuticals deals with four major products which are Fleximat, Reximat, orsamporph, and Lodamadal. The mission of the company is to promote the lives of patients within their scope of operation. Fleximat was the primary product as it contributes 64% of the revenues in the Pharmaceutical Company. However, its expiry is in two years, and this means that the company will be left with the other three products, and as such, the returns will not be lower than those in the past. The company was given a purchase offer of $750 million. Susan Johnson is the CEO of the company, and her contribution towards the final decisions on the path that the company should take will be highly regarded. Given the situation, the company has other alternatives to embrace with regard to its future. One of them is the reformulation of fleximat products to fit in the current situation (Aviandy, 2016). Also, the company has the option of organizing efficient marketing campaigns to enhance the growth and development of the company in both the short and long-run basis.
The other alternative is that of merging with other big pharmaceuticals to enhance the progress of its activities with regards to the production exercise. Here, the company will embark on the in-house production of the Fleximat product in a generic form. Among these alternatives, the CEO faces a dilemma on the best choice to consider for the welfare of the company’s future, and as such, it is crucial to critically and carefully analyze the situations and the results expected in the future.
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Analysis
Given the situation of the company, the patent of the significant product, Flexmat, is about to expire, and as such, after two years, the substitutes of the products will substitute its sales in the market. Besides, given the high market volatility in the industry, it is challenging to come up with a new product to fill the different gaps in the target consumers (Ball, Shah & Wowak, 2018). The situation explains the rampancy of mergers and acquisitions to cater for the needs of the respective companies with regards to the long-term development and expansion. To further analyze the situation, the discounted cash flow analysis can be applied. The figures can depict the past and present values of the company to help in the decision making process. Besides, the projected financial situation in the period between 2010 and 2034 can be further applied in the estimation of the progress of the company and the most viable decision to make. Through these methodologies, the enterprise value of the company is estimated at $786 million. The value is slightly higher than the available purchase offer of $750 million. Markedly, this is lower than the fair market value, and if the company proceeds to accept the offer, it should be braced for $36 million losses. However, on further analysis, it is established that if the organization rejects the offer and continues with its operations, it is bound to reduce its value in the long-run.
Financial value if Medfield choses to reformulate the products
If it resolves to embrace the most reliable strategies to enhance its progress, by the year 2034, these values will decline to $444 million. Notably, these will reflect lower prices than the current market and offer prices. Thus, if the company resolves to reject the offer, the offer price after this period will be lower than $444 million, and this depicts even lower prices. Whereas acceptance of selling the company at the current offer price will lead to $36 million losses, selling it after 2034 will result in $342 million losses or more.
Additionally, rejection of the offer would call for additional financing and implementation of proper strategies to minimize the effects that will result from the expiry of the patent. Since the product produces 64% of the sales, this means that its absence in the market will result in continuous research and development to ensure that the other remaining products will increase in their sales to enhance the overall sales in both the short and long-run phases. Another scenario that is likely to be considered upon the rejection of the offer is the consideration of the reformulation of all the three products rather than fleximat alone. The move requires extra capital to meet the market needs and other operational requirements to enhance the short and long-term success of their effects (DiMasi, Grabowski & Hansen, 2016). The move will result in an NPV and company value of $334 million.
On the other hand, the reformulation of the significant product alone will result in a higher NPV and value by 2034. The values will be $434.8 million and $440 million, respectively. Besides, based on the cash flow valuation, these values can be lower than the estimated ones, and therefore, regardless of the number of products to be reformulated, the resulting future values are lower than the current enterprise price and current offer.
Comparison between reformulation and takeover
According to this analysis, accepting the current offer is the most viable decision to make in the present scenario. On comparing the offer price of $750 million and the reformulation effects, the current price is a better deal. The conclusion is attributed to the reflected lower prices of the company and the NPV values. Besides, even without the reformulation of these products, the company’s fate has been determined as it is bound to lose $342 million in the long-run. The losses are higher than those that will be incurred if the company and the Chief Executive Officer accept the current market offer. Here, the company risks losing $36 million, which is almost ten times lower than what the company is bound to lose in the long-run. The price does not include the effort and funds set aside to enhance its progress and growth in both the short and long-term situations.
Moreover, even though the company and the stakeholders may have the willingness to risk and engage in the reformulation of all the three products in anticipation of higher returns through the synergistic effect of all the product returns (Borgen, 2019). However, based on the projected values, this decision may not yield to the expectations of the company and the overall stakeholders. In all the alternatives, the projections show that once the patent expires, the resulting values are lower than the current ones. Besides, the other possible alternatives require the injection of capital without the assurance of maintaining the current values even after the expiry of the patent of the main product. Given the long-term projected values, the current offer is better than the resulting figures that depict a high deviation.
Effects of reformulation of the Flexmit and the other products
Also, based on the company history, the Flexmit product is responsible for 64% of the sales. Once its patent expires, it is expected that the company will be operating below its normal profits. The situation is attributed to the low contribution of the combination of the other three products. They only result in around one-third of the total sales and profits, unlike the major product which is responsible for almost two-thirds of the sales and profits. No doubt, its reformulation will not yield similar profits, and regardless of the methodologies applied in coming up with a new product, the generic one will not result in the profits and sales of the original one. The same applies to the thought of reformulating the other three products as the company will be assured of lower productivity as compared to the original products. Thus, in the end, the company will experience reduced profits or even losses if it rejects the current offer.
Additionally, given the condition of the current pharmaceutical industry, it is not easy for a new or reformulated product to penetrate the market to result in remarkable profits. It is because of these challenges that other companies facing similar woes prefer to merge or even get acquired to minimize the chances of making losses in the future (Ding, Eliashberg & Stremersch, 2016). Therefore, given the situation of Medfield, it should reduce the future loss burden that is attributed to poor decision making. It should look at the benefits associated with the current decision and weigh them against future outcomes. In this case, the benefits of accepting the offer outweigh those of the reformulation of a single or all the other products in the company.
Even though the company is devalued by the current offer, accepting the offer reduces the chances of its high devaluation in the future. The bottom line is that in the end, the company is bound to make losses regardless of the decision that is arrived at. Thus, this calls for a decision that can result in the lowest losses. In view of this situation, it is clear that accepting the purchase offer price is better than proceeding with the company operations. The choice results in a $36 million loss while keeping it results in a $310.9 million loss in the long-run. The value is arrived at by subtracting the highest and lowest value
Also, the company may choose to consider reconfiguring fleximat and getting FDA approval and patent for the new product. The disadvantage of the strategy is that it requires extended research and development. By the time the company comes up with the product, it would have injected a high amount of capital and time. Given the pressure to meet the existing profits within the next two years, the company may not give the other products the time and strategies that they deserve to achieve the best. Considering the sensitive nature of drugs, the company may find itself entangled in the bureaucratic situation in the pharmaceutical industry, and as a result, this may increase the costs associated with the reconfiguration, acceptance, and acquisition of a new patent. Equally, normal profits may not be attained immediately. The low productivity is associated with the uncertainty of the reception of the new products in the market (Colleran et al., 2019). It is not a guarantee that the resulting product will do as well as the original form of Fleximat, and as such, the company is likely to experience losses in the present and future prevailing conditions.
Recommendations, moral and ethical considerations
Given the company situation, there is a need to accept that it be sold at $750 million as it is the best price among the available alternatives. The company embraces the slogan of enhancing wellness. In this case, it should take into consideration the welfare of the patients and that of the employees. Regardless of the current situations, the employees are the current pillars of the company, and as a result, during the sealing of the deal, their welfare should be considered. Given her position in the company, Susan Johnson, the CEO, should ensure that their needs are catered for by signing that they should be absorbed by the buyers. With this move, both the employees and the patients can be catered for. The employees will secure their jobs while the patients will be assured of the continuous provision of drugs to cater for their health needs regardless of the circumstances surrounding the company. Continuous operation of the company will jeopardize the welfare of the stakeholders, employees, and even the clients as it will end up in losses and collapse in the long-run. Through being acquired, the company CEO Susan Johnson ensures that the purpose of the company is upheld and, as a result, the legacy of the company lives on. Accordingly, the company should be sold to enhance the job security of the employees, save the current owners from the impending losses in the long run and enhance the welfare of the clients through the continuous provision of the drugs without the fear of being closed indefinitely.
References
Aviandy, R. (2016). Analysis of Financial performance affecting Stock Price on Pharmaceutical Industry. Business and Entrepreneurial Review , 7 (1), 69-77.
Ball, G. P., Shah, R., & Wowak, K. D. (2018). Product competition, managerial discretion, and manufacturing recalls in the US pharmaceutical industry. Journal of Operations Management , 58 , 59-72.
Borgen, C. V. (2019). Financial Analysis and Valuation of ANI Pharmaceuticals, Inc. EPS , 1 (2.98), 3-56.
Colleran, J., Sun, J., Pickle, B., & Kim, H. (2019). Comparative Company Stock Valuation through Financial Metrics. arXiv preprint arXiv:1909.06332 .
DiMasi, J. A., Grabowski, H. G., & Hansen, R. W. (2016). Innovation in the pharmaceutical industry: new estimates of R&D costs. Journal of health economics , 47 , 20-33.
Ding, M., Eliashberg, J., & Stremersch, S. (2016). Innovation and marketing in the pharmaceutical industry . Springer-Verlag New York.
