The pharmaceutical industry is considered as an engine of innovation and that they do spend 2. 5 time s more on marketing and administration compared to what they spend on research. Almost 33% of the drugs in the market were first discovered in small biotech companies or at universities and these are then marketed by the big drug companies. Then trend of the drugs these days are “me too” drugs and the new ones coming up are identical to current treatment options already in the market, which comprises of 75% of the drugs approved by the FDA.
They get the go ahead even if they are slightly better than placebos. The global Pharmaceutical industry is dominated by the companies such as Pfizer(87% market share) with 46 million in revenues followed by GlaxoSmithKlinea and Johnson and Johnson. The pharmaceutical industry is undergoing a period of transformation. The majority of “Big Pharma” companies generate high returns and hence have excess cash for increased growth at times through mergers and acquisitions.
The big companies do enjiy economies of scale in terms of administrative costs clinical trials as well as in marketing efforts. Another part of the transformation for this industry is the formation of collaboration, alliances and joint ventures. “Big Pharms” companies are constantly looking for strategic synergies to help get ahead of their competitors. For example the collaboration of Sanofi-Aventis and Bristol-Meyers Squib resulted in the drug Plavix which is a top selling product for each of these companies.
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Big Pharmas are also selling off the low profitability parts of their companies and tend to focus only on the cash cows. Purinex is a small pharmaceutical company that is considering partnerships with some large pharmaceutical companies which would give Purinex the financial support needed to complete its research for release a drug with huge market potential and huge curing potential for diseases like diabetes and sepsis. Purinex has about 35 patents already issued or are pending in its field and the company wanyed to proceed with this drugs to clinical trials.
The strategy for Purinex was to use its process for creating the small molecules which acted as selective activators or antagonists (blockers) for specific receptors. So, Purinex wanted to use the pharmacodynamic effect and design drugs without any negative effects. This partnership was also key before Purinex goes public with its Initial Public Offering (IPO) in order to generate large capital for the company. Harpaz, Purinex’s CFO is busy considering the possibility of a partnership, on how to raise adequate capital to avoid imminent insolvency and also if there are any other risks involved.
Historically the pharmaceutical industry has been one of high growth and valued at 530 billion dollars in global sales. The US bio technology sector has also grown from 8 billion dollars in 1992 to nearly 40 billion at the end of 2002. Purinex has 14 employees and incurs about $60000 as monthly costs for pursuing its research. Purinex’s goal is to product drugs to help in treatments of severe ailments without negative outcomes. Diabetes is one of the conditions that Purinex is developing compounds for.
Diabetes is a long term condition where the body is not capable of absorbing the glucose and this affects the eyes, kidneys and the heart over time. The market potential for selling a diabetes drug is believed to be about 4 billion dollars. The second condition that Purinex targets is Sepsis which is a bacterial condition that becomes life threatening and impacts the geriatric population. Purinex believes that sales for sepsis drugs could be around 500 million dollars.
Purinex had arrived at a relatively stable stage for its products for sepsis and diabetes. The initial clinical trials were positive and so Purinex has initiated collaborations with several large pharmaceutical companies. Improvements in the US economy and an improvement in the global economy mainly the Asian economy will increase the volumes and the demand for the pharmaceuticals and chemicals. The drug industry is also undergoing massive consolidation as evident from the large number of partnerships.
Some of the other possible mergers are Warner-Lambert with Pfizer, Glaxo and SmithKline, etc. Pharmaceutical companies are measured both on profitability as well as the new drugs in their pipelines and the associated patent expirations. Putting a price tag on a pharmaceutical company can be done using several methods. One of them is called the Discounted Cash Flow method where each of the promising products of the company is treated as a company and then the cash flow from such drugs are then used to determine the current value of the company as a whole.
Purinex would seek partnership in only one of the drugs and retain the other one for later. So the value for sepsis is 10. 8 million and that of diabetes it is 9. 6 million. Harpaz himself considers the market valuation for both combined as 15 million. The different financing options that he has been considering such as seeking some seed money from venture capitalists to help seal a better partnership deal.
Wait for a few months with the current 700,000 that he has remaining and assuming the current burn rate of 60000 a month and some federal research grants Harpaz believed that he could just wait for some more months before starting to negotiate, however, the deal value could depreciate in the mean time to 8 million or even 5 million. The other option was borrowing from Angel Investors and that would give him at most 2 million dollars. Happaz believes that a better capitalization would ensure a better partnership deal.
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