Delivering Excellence, Partnering Success

Case Study IIIStartup Evaluation

Executive Summary The client is a Multi-National company in the

pharmaceutical sector, with one Manufacturing unit based in Goa, India.

The director of the India unit wanted to launch their products in the Indian market, however, they were not sure of the market potential.

In this regard, the client approached Mangal Advisory Services to conduct a feasibility study for their products in the Indian Market

ProcessReview

of Operati

ons Model

•Understanding of the operation processes and technology requirements•Evaluation of supply chain and vendor relations•Evaluation of manpower requirements and labour markets (availability of qualified labour)

Review of

Marketing

Model

•Evaluation of Product Mix•Examination of proposed marketing channels•Evaluation of distribution networks•Review of pricing based on competitor rates

Evaluation of Industr

y attractiveness

•Estimation of demand by reviewing market research reports•Evaluation of similar comparable companies•Estimation of key success factors

Review of

Financial

Model

•Tie in Macro and micro factors to the projections•Evaluation of projected financial statements

Operations Review - Findings The products to be launched into the Indian

market are being produced outside the country. This meant a high conversion cost.

Initially the procurement planned was 100% captive, hence no problems were envisaged as far as supply chain was concerned. Transportation cost however, was estimated to be high.

Significant cost arbitrage exists in labour markets between India and Europe, especially in the areas of R&D and Sales force. Qualified and experienced personnel are easily accessible.

Marketing Review - Findings Product mix was mainly OTC drugs with a focus on

lifestyle diseases in dermatology and gynaecology. The marketing channels was proposed to be through

ethical means of promotion only, which meant a heavy investment in sales force.

In the first phase of the plan, distributors and C&F agents were identified in the states of Goa, Karnataka and Maharashtra. The company was already in possession of letters of intent from the prospective distributors.

It was found that the proposed pricing was on average 7% higher than the largest competitors. This would prove to be a challenge.

Industry Review - Findings PwC reported that over 40% of the global Pharma industry’s incremental

growth over the next decade is expected to come from the emerging markets (Asia, Australia, Africa and Latin America).

The pharmaceutical industry has been reported to have the potential to grow at an accelerated 15 to 20% CAGR for the next 10 years to reach between US$49 billion to US$74 billion in 2020.

OTC products, a key driver of this growth, constituted USD 1.8 billion of the entire pharma market in India in 2009 and is expected to grow at 18% CAGR to a total value of over USD 13 billion in 2020.

Most of the ingredients required for the manufacture of OTC products don’t fall under the DPCO price controls.

OTC manufacturers enjoy the privilege of a wider distribution network as they are sold not only in pharmacies but also other areas such as departmental stores etc.

The government has no restrictions on the advertisement of OTC products which makes marketing easier for these products

Industry (Dermatology) Review - Findings As per IMS dataset MAT-Mar, 2011, the Indian derma market has

grown by 14.8 per cent over the last year. With growth estimated at around 20% (Express Pharma) over the

next three to four years. While the treatment of skin related disorders remains the primary

segment for derma, the sector driving growth will be cosmetic dermatology since it is of high value.

The total number of dermatologists have almost doubled in last five years, and that clinical dermatology will remain the mainstay, whereas aesthetics/ cosmetology segment will prosper even in the rural areas because of increased awareness and availability of knowledgeable/skilled doctors.

Basic treatments for skin related disorders are always in demand, however, since most medical spending in India is mainly out-of-pocket, the drug sales can be expected to be higher in metros and tier II cities than in all rural areas as well. With an increase in pollution, stress and poor nutrition, many skin disorders have become more common in India, and that will definitely drive the market.

Industry (Gyneacology) Review - Findings This therapeutic segment seems to be he next

growth driver for Indian pharmaceutical companies. Most Indian companies have recently started

marketing wings dedicated to the Gynecology segment: Unichem launched the “Unifem” range of products in

2011 JB Chemicals has launched a new sales wing in July

2011 dedicated to the gynecology segment. Lupin has committed to form a strategic tie up for

marketing their Gynecology products before March 2012.

Financial Review - Findings The projected sales were found to be higher than

could be justified The projected debtors days was calculated at 20

days. The projected creditor period was calculated at

60 days. The sensitivity limits were found to be as follows:

- Revenue – 30% (-ve) Input cost (material) – 50% (+ve) Marketing cost – Not Relevant

Operations - Conclusions The Project, in its existing form is viable but has

a high susceptibility to foreign exchange risks. It is recommended that the Indian unit utilise its

unused capacity to manufacture products for local market in order to reduce costs and hedge against currency fluctuations.

The cost reduction estimated by manufacturing in India was expected at 30-40% on conversion costs and 10% on transportation.

Marketing - Conclusions The current marketing channels, though

viable, is highly expensive. Ethical means of promotion have shown to

have had the lowest ROI amongst all other marketing channels.

Given that the company planned to operate only in the OTC segment, it was recommended that they make use of the Government’s less stringent advertising policy. Such a move could reduce costs by upto 20%.

Industry - Conclusions The OTC industry was found to be a high

growth industry accentuated by liberal Government policies and increasing lifestyle related diseases.

OTC products were found to demand a brand premium which indicates that marketing and advertising is an important driver for success of any product.

Finance - Conclusions As per the independent research conducted, the

revenue sensitivity was estimated at 35% (-ve) which is greater than the limit.

The input cost however was estimated to have a sensitivity of 50% (+ve) which more than compensates for the loss of revenue. This is provided that the manufacturing was shifted to India.

Debtors period was projected at 20 days of sales. As per industry norms, the average debtors period was found to be at 45 days. This would mean an increase in working capital requirement by 125%.

Final Recommendations The project was found to be viable provided that the

following points were addressed: High pricing without any existing brand recognition Operational cost and currency risks need to be mitigated by

initiating manufacture in India The segment is highly influenced by the presence of strong

brands. A mere ethical means of promotion would require a long gestation period for the products to take root.

Considering the fact that the sales sensitivity was found to be greater than the limit it indicated a high probability of the company facing losses. However, these losses would cease to exist if manufacturing was commenced in India. This is evidenced from the fact that local manufacture deceases the input and conversion cost by close to 50%.

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