Arab Center For Pharmaceutical And Chemical Industries Co.

University of Jordan Faculty of Business Strategic Management Arab Center for Pharmaceutical and Chemical“ ”.Industries Co Case Study

Prepared By Fathi Salem Mohammed

2009

Table of Contents Page 3 3 3 4 6

Topics

Introduction History Vision and Mission PESTEL Framework Porter’s Five Forces Framework External Audit CPM-Competitive Profile Matrix External Factor Evaluation (EFE) Matrix Financial Ratio Analysis Internal Audit Internal Factor Evaluation (IFE) Matrix SWOT Matrix SPACE Matrix Grand Strategy Matrix The Boston Consulting Group (BCG) Matrix The Internal-External (IE) Matrix The Quantitative Strategic Planning Matrix (QSPM) Recommendations EPS/EBIT Analysis References

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7 7 8 9 10 11 12 13 14 15 15 16 18 18 19

Introduction The Arab Center for Pharmaceutical and Chemical Industries Co. (ACPC) is a leading manufacturer of empty hard gelatin capsules, made from the best quality pharmaceutical grade gelatin (100% Halal Beef and free from BSE). The dyes used in the manufacturing process are FDA certified and approved for use, as dye for food, drug and cosmetics (F.D and C.) ACPC is led and operated by well experienced teams of technical and professional people, committed to provide and guarantee the highest quality of empty hard gelatin capsules manufactured in its plant. ACPC have a certificate of Quality Management System (ISO 9001, 2000).

Major ACPC Historical Milestones • In 1983, The Arab Center for Pharmaceutical and Chemical Industries was founded as a public company with capital JD1.6 million. • In 1986, ACPC entered Iraqi market. • In 1990, ACPC entered Egyptian market • In 1991, Shareholders of ACPC raised its capital to JD5 million. • In 1992, ACPC raised its production capacity by 50%. • Between 1992 and 1995, ACPC entered Yemeni, Syrian, and Palestinian markets. • In 29 May 2007, ACPC come by ISO 9001:2000. • In 2007, ACPC entered Saudi market. • IN 15 July 2008, ACPC come by certificate of suitability from European Directorate for the Quality of Medicines and HealthCare.

Vision We aim at achieving leadership and integrity in the pharmaceutical industry through the provision of best quality capsules. Mission The Arab Center for Pharmaceutical and Chemical Industries is a leading manufacturer of empty hard gelatin capsules committed to providing the pharmaceutical industries sector in Jordan and the region with the best quality products while adhering to the accredited international standards and specifications. this is achieved by employing best-in-class practices at every aspect of our business, bench marketing performance, developing our most precious assets; human resources, building strategic partnership and focusing on our quality of services and the way we deal with our valued customer

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PESTEL analysis Political forces • The pharmaceutical industry is unusual; as in many geographic markets there is effectively only one powerful purchaser, the government. • In the 1980s and 1990s, governments around the world began to focus upon pharmaceuticals as a politically easy target in their efforts to control rising health care expenditure and demand greater ‘value for money’. • As the industry globalizes and ownership and employment become concentrated in fewer countries, this may result in less benign intervention. • Regulators have been challenged not to overburden new growth areas in biotechnology research. • There are growing pressures arising from inter-country pricing disparities and parallel trade. Economic forces’ demand • Patients (i.e. ultimate users) have traditionally had little influence on the choice and price of pharmaceuticals; • First, it was doctors who made the prescription and the medical practitioners tended to favor branded products instead of memorizing complex chemical names. • Secondly, incentives to shop were diminished as costs were assumed or reimbursed by insurers, employers (in the US) or health care authorities (in Europe). • During the 1990s, funded systems found it hard to cope with rampant health care costs. • It was recognized that health care had none of the normal checks of a free market that would balance supply and demand, and so free-market incentives were introduced to control demand. • The high margin branded prescription market has globalized, reflecting worldwide convergence in medical practice and regulatory harmonization. • Big pharmaceuticals have proven expertise to mass-market products on a global scale. However, the market appears set to become more US centric, leaving the industry heavily exposed to fluctuations there. Supply • The global pharmaceutical market remains relatively fragmented, with no company holding more than an 8% market share in 2005 (i.e. Pfizer). • At the same time, the industry still features relatively strong noninternationalized players based in Japan, Europe and the developing world (notably India). • Spending on R&D has grown while the number of new products 4

reaching the market has fallen. Social forces • As the ‘baby boom’ generation approaches retirement, there have been new efforts to develop drugs for the treatment of the elderly. • Final consumers are now better informed, have higher expectations and want greater say in their treatment, this could open new marketing opportunities but, at the same time, educated consumers have become more demanding of advances in therapy. • There are significant differences for R&D and marketing amongst international trading blocs. • R&D is primarily driven by European and North American needs while ‘satellite economies’ are major markets for generic products and antibiotics. Technological and environmental forces • Potential new ways to discover drugs, to better target their use and to conduct medical trials suggest there could be a major reorganization of the industry. • The introduction of ‘cradle to grave’ policies in the EU should result in greater need for ‘green’ (i.e. environmentally friendly) management. • Genetic research has yet to have an impact on drug discovery or clinical trials. Legal forces • The intervention of health authorities is a key to determine the length of patent protection as well as approving new products to be marketed. • The move towards international harmonization of regulatory controls could bring significant benefits in terms of reduced costs and accelerated time to market for pharmaceutical companies. • Clinical trials demand the greatest share of resources to develop a drug. • Big pharmaceuticals will point the finger at cumbersome regulation as responsible for lengthy trial periods. • This is partially true but taking a drug through the trial-and-approval process still requires from 10 to 12 years because (a) the trials themselves are more and more difficult to conduct, and (b) because of the trend to target diseases that take a long time to manifest themselves (such as osteoporosis). • Pharmaceutical companies often find problems in enforcing patent protection in developing countries (particularly Asia).

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Five forces analysis Factors Threat of potential entrants Power of buyers

Power of substitutes

Power of suppliers Competitive rivalry

Firms specializing in moving specific molecules along the value chain could be tomorrow's main competitors. Emphasis on high-priced niche drugs for high unmet need diseases likely to support market entry by biotechs. (LOW) Controls on pricing, reimbursement and market access continue to tighten (‘value for money’ is a top concern on both sides of the Atlantic). Growth of managed care continues deteriorating the profitability of big pharmaceuticals regardless of the outcome of regulation. (HIGH) Biological generics appear. Diversification into generics protects volume share (but not the profit) of big pharmaceutical companies. Functional foods preferred as safer alternative to drugs. (MODERATE) Emergence of China and India as key outsourcing locations. Cost of licensing deals drives companies towards more acquisitions. (MODERATE) Continued industry consolidation in static market results in fewer larger global companies, focused on specific franchises, with intense rivalry within therapeutic franchises. (HIGH)

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External Audit Opportunities

Threats

1. Demand in Europe market for Vegetarian Capsules is expected to increase by 29% between 2010 and 2012. 2. Europe market demand for capsules that are made from pure bovine gelatin increased by 5% in 2008 3. Saudi market demand for empty hard gelatin capsules expected to increase by 8% annually. 4. Advancements in technology can minimize production cost by 30%. 5. Swine flu affecting empty gelatin capsules sales for manufacturer that use pig skin in producing the capsules. 6. Barriers to entry are high.

1. Children preferred liquid medicines rather than capsules. 2. Threats of global business in dealing with varied regulatory environments and currency fluctuations. 3. Increased consumption of natural supplements.

CPM – Competitive Profile Matrix ACPC

Capsuline

Weight

Rating

Weighted Score

Rating

Weighted Score

Organizational Structure Price Competitiveness Advertising Product Quality Sales Distribution Customer Loyalty Market Share Global Expansion Demographics Financial Position Research and Development Innovation

0.05 0.10 0.04 0.10 0.10 0.03 0.11 0.11 0.03 0.15 0.13 0.10

2 3 1 3 3 2 1 3 2 2 2 1

0.10 0.30 0.04 0.30 0.30 0.06 0.11 0.33 0.06 0.30 0.26 0.10

4 3 2 4 3 3 3 4 3 3 4 3

0.20 0.30 0.08 0.40 0.30 0.09 0.33 0.44 0.09 0.45 0.52 0.30

Total

1.00

Critical Success Factors

2.26

7

3.50

Erawat Pharma Limited Rating Weighted Score

1 3 4 3 2 3 2 3 3 2 3 2

0.05 0.30 0.16 0.30 0.20 0.09 0.22 0.33 0.09 0.30 0.39 0.20 2.58

External Factor Evaluation (EFE) Matrix Critical Success Factors Opportunities 1. Demand in Europe for capsules made from vegetarian materials is expected to increase by 10% between 2010 and 2012. 2. Europe market demand for capsules that are made from pure bovine gelatin increased by 5% in 2008 3. Saudi market demand for empty hard gelatin capsules expected to increase by 8% annually 4. Advancements in technology can minimize production cost by 30% 5. Swine flu affecting empty gelatin capsules sales for manufacturer that use pig skin in producing the capsules. 6. Barriers to entry are high Threats 1. Children preferred liquid medicines rather than capsules 2. Threats of global business in dealing with varied regulatory environments and currency fluctuations 3. Increased consumption of natural supplements 4. Hindu and Buddhist consumers may require gelatin from non-bovine sources. Total

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Weight

Rating

Weighted Score

0.12

3

0.36

0.12

3

0.36

0.10

3

0.30

0.10

2

0.20

0.10 0.06

4 3

0.40 0.18

0.10

2

0.20

0.08 0.12

2 2

0.18 0.24

0.10 1.00

1

0.20 2.62

Financial Analysis 12/2008 Financial Ratios

ACPC

Industry

Turnover Ratio %

7.70

15.51

Earning Per Share (JD)

0.02

0.05

Dividend Per Share (JD)

0.05

0.06

Book Value Per Share (JD)

1.54

1.33

115.63

64.29

2.62

1.98

302.69

127.41

Price to Book Value (Times)

1.24

2.18

Gross Margin %

11.92

48.21

Margin Before Interest and Tax %

6.67

9.68

Profit Margin %

6.02

6.02

Return on Assets %

1.00

3.55

Return on Equity %

1.07

3.39

Debit Ratio %

6.90

27.56

Equity Ratio %

93.10

72.44

Interest Coverage Ratio (Times)

-

3.55

Total Assets Turnover (Times )

0.17

0.41

Fixed Assets Turnover (Times)

0.56

1.33

Working Capital Turnover (Times)

0.46

1.23

Current Ratio (Times)

6.27

2.54

Working Capital (JD)

3,007,377

57,317,450

Price Earnings Ratio (Times) Dividend Yield % Dividends Per Share to Earning Per Share %

Net Worth Analysis 12/2008 1. Stockholders’ Equity + Goodwill = 7135883 + 0 2. Net income x 5 = JD82593 x 5= 3. Share price = JD1.5/EPS 0.017 =JD 88.24x Net Income JD82593= 4. Number of Shares Outstanding x Share Price = 5000129x JD 1.5= Method Average

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JD 7135883 JD 412965 JD 7288006 JD 7500194 JD 5,584,262

Internal Audit

Strength

Weakness

1. ACPS is the only manufacture that produces empty hard gelatin capsules in Jordan

1. Assets deceased by 14% in 2008, and Selling, general, and administrative expenses are gradually increasing from 2006 to 2008

2. Holds 75 % of market share in Jordan.

2. Produce only 4 from 8

3. ACPC have a certificate of Quality Management System (ISO 9001, 2000).

types of empty hard gelatin capsules

3. There is no increasing in

4. Almost 60 percent of sales are generated internationally

ACPC's production capacity since 1997

4. Enters new market on

5. ACPC provide their customers with customized shades as per their requirements.

account of current market due to shortage of capacity

6. All of ACPC capsules are made from pure Bovine Gelatin, Halal, and free from Dioxin.

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Internal Factor Evaluation (IFE) Matrix

1. 2. 3. 4. 5. 6.

1.

Critical Success Factors Strengths ACPS is the only manufacture that produces empty hard gelatin capsules in Jordan Holds 75 % of market share in Jordan. ACPC have a certificate of Quality Management System (ISO 9001, 2000). Almost 60 percent of sales are generated internationally ACPC provide their customers with customized shades as per their requirements. All of ACPC capsules are made from pure Bovine Gelatin, Halal, and free from Dioxin. Weaknesses Assets deceased by 14% in 2008, and Selling, general, and administrative expenses are gradually decreasing from 2006 to 2008

Weight

Rating

Weighted Score

0.15

4

0.60

0.15

4

0.60

0.08

3

0.24

0.10

4

0.40

0.08

3

0.24

0.15

4

0.60

0.05

2

0.10

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2. Produce only 4 from 8 types of empty hard gelatin capsules 3. There is no increasing in ACPC's production capacity since 1997 4. Enters new market on account of current market due to shortage of capacity TOTAL

0.05

1

0.05

0.11

2

0.22

0.08 1.00

1

0.08 3.13

SWOT Matrix

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Strengths 1.

deceased by 14% in 2008, and Selling, general, and administrative expenses are gradually decreasing from 2006 to 2008.

Holds 75 % of market share in Jordan.

3.

ACPC have a certificate of Quality Management System (ISO 9001, 2000).

2. Produce only 4

Almost 60 percent of sales are generated internationally

3. There is no

5.

6.

1. Demand in Europe market for Vegetarian Capsules is expected to increase by 29% between 2010 and 2012. 2. Europe market demand for capsules that are made from pure bovine gelatin increased by 5% in 2008 3. Saudi market demand for empty hard gelatin capsules expected to increase by 8% annually. 4. Advancements in technology can minimize production cost by 30%. 5. Swine flu affecting empty gelatin capsules sales for manufacturer that use pig skin in producing the capsules. 6. Barriers to entry are high.

Weaknesses 1. Assets

2.

4.

Opportunities

ACPS is the only manufacture that produces empty hard gelatin capsules in Jordan

ACPC provide their customers with customized color as per their requirements.

All of ACPC capsules are made from pure Bovine Gelatin, Halal, and free from Dioxin. S-O Strategies

1. Produce vegetarian capsules (S4, O1) 2. Enter European market (S1, S2, O1, O2)

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from 8 types of empty hard gelatin capsules increasing in ACPC's production capacity since 1997 4.

Enters new market on account of current market due to shortage of capacity

W-O Strategies

1. Produce all types of empty hard gelatin capsules (W2, O3) 2. Increase capacity by 50% (S1, S2, O2, O3)

SPACE Matrix Financial Strength Return on assets Leverage Net Income ROE Working capital Average

Rating 6 5 3 5 6 5.0

Competitive Advantage Market share Product Quality Customer Loyalty Control over other parties Technological know-how Average

Rating -6 -2 -1 -1 -2 -2.40

Environmental Stability Rate of inflation Technological changes Price Elasticity of demand Competitive pressure Barriers to entry new markets Average Y-axis Industry Strength Growth potential Financial stability Ease of entry new markets Resources utilization Profit potential Average X-axis

Directional vector point is :( 1.60, 2.60)

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Rating -3 -4 -4 -4 -2 -3.40 +1.60 Rating 6 4 6 4 5 5.0 2.60

FS Aggressive

Conservative

C A

IS

Defensive

Competitive ES

Grand Strategy Matrix Rapid Market Growth Quadrant II

Quadrant I

Weak Competitive Position

Quadrant III

Strong Competitive Position

Quadrant IV Slow Market Growth

The Boston Consulting Group (BCG) Matrix

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Market share position

Question mark

Stars Industry Sales Growth Rate

ACPC

Cash Cow

Dogs

The Internal-External (IE) Matrix The IFE Total Weighted Score

Strong 3.0 to 3.99 High 3.0Ito 3.99

IV

Medium 2.0 to 2.99 II

Low 1.0 to 1.99

III

V

VI

The EFE Total Weighted Medium ACPC Score 2.0 to 2.99

VII

VIII

IX

Low 1.0 to 1.99

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The Quantitative Strategic Planning Matrix (QSPM)

Key Internal Factors

Strategy 1

Strategy 2

Increase ACPC's production capacity by 50%

Enter European market

Weight

AS

TAS

AS

TAS

ACPS is the only manufacture that produces empty hard gelatin capsules in Jordan

0.15

4

0.60

2

0.30

Holds 75 % of market share in Jordan

0.15

3

0.45

1

0.15

ACPC have a certificate of Quality Management System (ISO 9001, 2000)

0.08

1

0.08

3

0.24

Almost 60 percent of sales are generated internationally

0.10

1

0.10

4

0.40

ACPC provide their customers with customized shades as per their requirements All of ACPC capsules are made from pure Bovine Gelatin, Halal, and free from Dioxin

0.08

-

-

-

-

0.15

2

0.30

4

0.60

Assets deceased by 14% in 2008, and Selling, general, and administrative expenses are gradually decreasing from 2006 to 2008

0.05

4

0.20

1

0.05

Produce only 4 from 8 types of empty hard gelatin capsules

0.05

-

-

-

-

There is no increasing in ACPC's production

0.11

4

0.44

2

0.22

Strengths

Weaknesses

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capacity since 1997 0.08

Enters new market on account of current market due to shortage of capacity

1.00

SUBTOTAL

Key Internal Factors

4

0.32

4

2.49

0.32

2.28

Strategy 1

Strategy 2

Increase ACPC's production capacity by 50%

Enter European market

Weight

AS

TAS

AS

TAS

0.12

-

-

-

-

0.12

3

0.36

4

0.48

0.10

4

0.40

1

0.10

0.10

-

-

-

-

0.10

3

0.30

3

0.30

0.06

-

-

-

-

Children preferred liquid medicines rather than capsules Threats of global business in dealing with varied regulatory environments and currency fluctuations Increased consumption of natural supplements Hindu and Buddhist consumers may require gelatin from non-bovine sources

0.10

-

-

-

-

0.08

-

-

-

-

0.12

2

0.24

2

0.24

0.10

-

-

-

-

SUBTOTAL

1.00

Opportunities Demand in Europe market for Vegetarian Capsules is expected to increase by 29% between 2010 and 2012 Europe market demand for capsules that are made from pure bovine gelatin increased by 5% in 2008 Saudi market demand for empty hard gelatin capsules expected to increase by 8% annually Advancements in technology can minimize production cost by 30% Swine flu affecting empty gelatin capsules sales for manufacturer that use pig skin in producing the capsules Barriers to entry are high

Threats

SUM TOTAL ATTRACTIVENESS SCORE

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1.30 3.79

1.12 3.40

Recommendation ACPC must increase its capacity by 50% at least to sustain its domestic and international market share and to enter in Europe market; to implement the two strategies that will cost JD 1 million.

EPS/EBIT Analysis $ Amount Needed: JD 1,000,000 Stock Price: JD 1.50 Tax Rate: 15% Interest Rate: 9% # of Shares Outstanding: 5,000,129 EBIT INTERSET EBT Taxes EAT # of Shares EPS

EBIT INTERSET EBT Taxes EAT # of Shares EPS

Common Stock Financing Recession Normal Boom 400,000 600,000 800,000 0 0 0 400,000 600,000 800,000 60,000 90,000 120,000 340,000 510,000 680,000 5,666,796 5,666,796 5,666,796 0.060

0.090

0.120

70 Percent Stock - 30 Percent Debt Recession Normal Boom 400,000 600,000 800,000 27,000 27,000 27,000 373,000 573,000 773,000 55,950 85,950 115,950 317,050 487,050 657,050 5,466,796 5,466,796 5,466,796 0.058 0.089 0.120

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Recession 400,000 90,000 310,000 46,500 263,500 5,000,129 0.053

Debt Financing Normal Boom 600,000 800,000 90,000 90,000 510,000 710,000 76,500 106,500 433,500 603,500 5,000,129 5,000,129 0.086

0.120

70 Percent Debt - 30 Percent Stock Recession Normal Boom 400,000 600,000 800,000 63,000 63,000 63,000 337,000 537,000 737,000 50,550 80,550 110,550 286,450 456,450 626,450 5,200,129 5,200,129 5,200,129 0.055 0.088 0.120

References 1. 2. 3. 4. 5.

www.acpc.com.jo Annual reports for years from 2004 to 2008 www.jsc.gov.jo Exploring Corporate Strategy 8th Edition Euromonitor International, site www.euromonitor.com

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