Vibrant Ltd Acquisition of Galaxy Pharma - Case Study Example

Vibrant Ltd Acquisition of Galaxy Pharma Student Name Instructor’s Name Course Code and Name University Date of Submission Vibrant Ltd Acquisition of Galaxy Pharma Executive Summary The pharmaceutical industry in Japan has been experiencing constant growth, which has been attributed to a rise in the aging population and increased government expenditure on health care. In addition, the regulatory environment has been relaxed in favor of pharmaceutical drug makers to ensure that it takes less time and few approvals to launch new drugs into the market. This is likely to drive the growth of the Japanese pharmaceutical market making Galaxy Pharma a viable venture. Furthermore, the purchase price for Galaxy would be cheaper for Vibrant Ltd given that the Japanese yen has been devalued meaning that it would be cheaper for the Canadian company to purchase the company. The major risks are the foreign currency fluctuation and the macro economic factors affecting Japan. Letter of Transmittal Dear sir/ Madam, Enclosed is the report commissioned by Vibrant Ltd on the potential risks and returns of the proposed acquisition of Galaxy Pharma. The main findings of this report include: 1. Japan’s pharmaceutical industry has experienced a CAGR of 10% over a period of seven years majorly due to simplification of the approval process for drugs. 2. That the government has been encouraging the use of generic drugs as a cost cutting measure and has seen an increase in the use of generic drugs. 3. That Galaxy Pharma is a viable venture given that it has been returning profits and has sufficient cash flows to finance its short term obligations. 4. The macroeconomic environment poses a risk of reducing the earnings for Vibrant Ltd due to foreign currency fluctuation. Finally, I thank you for the opportunity to make this report as it has widened my understanding of international trade as well as international mergers and acquisitions. Introduction Globalization has been instrumental in relation to increasing international trade given that it has allowed businesses to expand outside their geographic boundaries. This is majorly due to the ease of movement of factors of production, mostly labor, which has led to cultural transfer. The majority of the companies that expand into the international market seek to increase their market base as well as seek out new business opportunities. This may be the case with the Vibrant Ltd decision to acquire Galaxy Pharma that is based in Japan. Acquisition is one of the most common forms of entry into the international market though businesses have to have a full overview of the company they intend to acquire before making such a decision. Most importantly, Vibrant has to ensure that they have identified the risks involved with operating in Japan and the financial performance of Galaxy over a period of time usually five years. Therefore, this report intends to provide an overview of the types of potential risks and returns that was associated with the potential acquisition. Findings Operating Environment in Japan The most important factor that Vibrant has to consider before going on with the acquisition is the operating environment in Japan in comparison to Canada where they have experience with the Canadian market. The Japanese market is different from the Canadian market first due to the fact that they use a different currency that is the Japanese Yen compared to the Canadian dollar a factor that may have a critical impact on the financial reporting for Vibrant. In addition, the majority of the population in Japan speak Japanese meaning that Vibrant’s products will need to be branded in Japanese so as to fit with the local’s culture. Most importantly, there is need to identify the reputation of Galaxy Pharma in the Japan and the market share they currently occupy as this would ensure that the company invests into a viable venture. If the acquisition goes through Vibrant would ride on the Galaxy’s reputation to concur the Japanese market. The pharmaceutical market found in Japan had been valued at $54.8 billion year 2007, and has moved to approximately $89.1 billion in year 2012 with a compound yearly growth rate (CAGR) of a percentage of 10.2 (Bio Spectrum, 2013, p. 15). In addition, a recent survey has projected that in the period between 2013 and 2020 the pharmaceutical sell or market in Japan that would grow at a CAGR of 2 percent, meaning it would reach $104.5 billion by 2020 (Bio Spectrum, 2013, p. 15). This is a positive trend in terms of how risk averse the Japanese pharmaceutical market is as it shows that it would be a profitable venture for Vibrant Ltd as the market is currently on an upward trajectory. Another factor that may pose a risk to the proposed acquisition of Galaxy would be the regulatory environment in Japan given that the pharmaceutical industry is highly regulated and the regulatory frameworks vary from one nation to another. In particular, the Japanese government has shown an intention to remove the regulatory huddles involved with approving new drugs (Vaidya, 2013, p. 5). This means that the simplification of the regulatory progression acts as the main growth driver as this would see a reduction in the number of reviews required, as well as reduce the duration of approval of timelines to reduce the duration of the drug approval process. For Galaxy Pharma, this means that it would take a relatively short time to introduce new drugs into the market. Evidence to prove this is the fact that a total of 6756 medicines had been approved in 2011 after relaxation of the approval process. This has seen a sharp rise in consumption of generic drugs in the pharmaceutical market as it currently accounts for 28.7% of the market, up from 18.7 in 2007 (Vaidya, 2013, p. 6). Another important aspect is the fact that the Japanese government has been promoting the use of generics as a cost containment tool and as a way of reducing the healthcare expenditure of the country. This, coupled by the fact that there is a growing elderly population in Japan would further contribute to the growth of the pharmaceutical industry. In addition, Japan is the second largest pharmaceutical market globally. This is particularly important given that Galaxy Pharma deals in generic drugs and its market is growing at a faster rate, thus a viable venture for Vibrant Ltd. Most of all, the rising aging population means that the demand for health care services in Japan is expected to rise thus provide a larger market of Galaxy’s drugs (Vaidya, 2013, p. 7). However, Vibrant needs to be more cognizant of the regulations that govern the pharmaceutical firms in Japan as it may pose a risk to their operations as it may result in litigation. Macroeconomic Risks International trade is heavily affected by macro-economic factors as they pose a huge risk on the revenues and profitability of multinational enterprises. In relation to the proposed acquisition of Galaxy Pharma, the macro-economic environment in Japan would have an impact on the financial viability of Vibrant. Of importance is the Japanese Yen, which is the domestic currency of Japan and is the currency that Galaxy publishes its financial statements. On a macro level the yen has experienced a sharp decline in value against other world currencies, meaning that the cost of imports has increased drastically and exports have become cheaper thus may affect the intercompany transactions. In addition, the differences in the reporting currencies may pose a risk to the company’s earnings majorly due to foreign currency fluctuation. More so, the drugs that would be supplied from Canada would be relatively expensive compared to the exports from Japan. However, this may be beneficial to Vibrant given that it may market drugs exported from Galaxy in Canada at a lower rate. Another aspect that could pose a risk to the company’s income is the rate of inflation in Japan, which has been on an upward trajectory as currently its stands at 8 percent and is projected to increase to 10 percent (Bio Spectrum, 2013, p. 20). This might have an impact on the cost of credit to finance the acquisition as it would make debt financing more costly. More so, the Japanese market, the Nikkei was adversely affected by the global financial crisis and has been on a resilient rise, which has seen the market an all-time high of 14,000 for the first time since 2008 (Bio Spectrum, 2013, p. 21). This means that the money markets in Japan have been growing and the economy is experiencing growth, thus the purchasing power of the population is also likely to be improved. Financial performance of Galaxy Pharma The acquisition of Galaxy Pharma is meant to be paid in cash, meaning that Vibrant Ltd has to finance the whole transaction either through debt financing or from the company’s financial resources. Most of all due to the fact that the Japanese yen has been greatly devalued it would be beneficial to the company for the transaction to be based in yens compared to the Canadian dollar. In addition, Galaxy has cash flows that are able to finance the company’s operations even after the acquisition has been effected as the transaction may affect the cash flows of the parent company. Another option that may be available to Vibrant Ltd with regards to raising the purchase price would be to use the company’s fixed assets as well as its portfolio to raise funds through debt financing. The available financial data reveal that the acquisition is a viable venture given that Galaxy has been reporting an operating income of Yen 4,551 million, meaning that it earns and its operations have been financed with the internally generated income. Recommendations From the discussion, it is evident that the acquisition of Galaxy Pharma would be beneficial to both companies as it would provide Vibrant to an existing company that has a long history in Japan while providing Galaxy with the necessary funds to finance their expansion and short term capital expenditure. In addition, due to the fact that the Galaxy is a generic drug manufacturer and the market for generic drugs has been growing at a relatively faster rate compared to the original drugs and has been supported by government policies means that the acquisition could not come at a better time as this would mean more business for Vibrant. However, Vibrant needs to be cautious about the intercompany transactions, especially concerning drugs from the Canadian parent company given the fact that the Japanese yen has been greatly devalued. In addition, Vibrant needs to negotiate another option for settling the purchase price for Galaxy as the cash transaction is likely to increase the liquidity of the company which may pose risks associated with holding excess cash such as theft or the effect of inflation and devaluation of the domestic currency on the purchase consideration. In conclusion, the demographic data in Japan as well as the growth of the pharmaceutical industry makes Galaxy Pharma a must buy for Vibrant Ltd. List of References Vaidya, A 2013, Overview of the Japanese Pharma and Healthcare market. JETRO Seminar. Accessed from http://www.jetro.go.jp/uk/Invest_in_Japan/Event_Reports/healthcareseminar/index.html/Mr_Anil_Vaidya.pdf Bio Spectrum 2013, Japan pharma to grow at 2% CAGR from 2013-20. Accessed from http://www.biospectrumasia.com/biospectrum/analysis/191505/japan-pharma-grow-cagr-2013/page/2 Read More