Study on Lavipharm and Computer Financial Modelling Finance Essay

Lavipharm S.A was established in 1911 and is today a leading pharmaceuticals company with operations in Greece and major international markets such as the USA and France. The Company is mainly a commercial distributor not only of drugs but also of cosmetics. Lavipharm S.A offers products derived from own research as well as high-level services not only to pharmacists but also to consumers. A pioneer in the area of pharmaceutical technology, Lavipharm S.A develops new dynamic strategies that are flexible in the constantly evolving international environment, but are always in line with its vision. At the same time Lavipharm S.A discusses and reviews new collaborations regarding its reinforcement and expansion not only in the Greek but also in the international scene. The company’s strongest elements are its strategic focus on the pharmacy market, it research and development and its international co-operations. In Greece it develops, represents, markets and distributes its own R&D products as well as products for third parties. Lavipharm’s market shares which are mostly therapeutic are: 1st position in antiseptics with a percentage of 52.8% 1st position in drugs for cardiovascular diseases, with a percentage of 46.5% 2nd position in drugs concerning the central nervous system, with a percentage of 36% 4th place in anti-lice products with a percentage of 9.7% The company utilizes an extensive network of agents, medical assistants and professionals promoting pharmaceuticals sales of its own account, as well as for third parties. The pharmaceutical industry in Greece Demand The analysis of the drug demand includes both the description of the factor that determine it, such as demographic and epidemiological characteristics of the population and secondly the approximation of the time path through the sizes of pharmaceutical expenditures. According to the National Statistical Service, in 2006 the Greek population exceeded 11.1 million. Furthermore, in 2007 there were 111.9 thousands of births and 109.9 thousand of deaths.A The average lifespan increases significantly, reaching almost 79.6 years. However, apart from the increase in life expectancy, theA age compositionA ofA theA populationA contributesA more to theA pharmaceutical expenditure. It is clear that half of the population which is still economically active maintains all the others. In 2007 the pharmaceutical expenditure amounted A¢”šA¬5.4 billion representing the 21.6% of the public expenditure. It is noted that drugs are a small part of health expenditures whilst also a social good as the relative cost is covered by 86.5% from the social security. Pharmaceutical expenditure in Greece is associated with the rise of consumption of drugs as a result of socio-economic and financial factors. Specifically, the ageing population and new discoveries of science are factors that lead to an increase in the consumption of drugs. 2010A wasA undoubtedlyA oneA ofA the most challenging periods in recent years, with major changes at all level of the national economy. Specifically, the Greek drug market suffered a lot of disruptions since the beginning of the year which significantly affected sales at pharmaceutical companies. Changes in drug prices were successively held in early June and September prompted a decrease in reserves and resulted in a significant drop in sales, slowing the activity level and influencing margins in the industry. Supply In 2007, there were 150 pharmaceutical wholesales and drugs’ cooperatives. These numbers rank Greece in the 3rd position in Europe, as there were only 9 in France and 16 in Germany. Moreover, relatively to the population, Greece has got the greatest number of pharmacies among other countries of Europe (94.2 pharmacies per 100.000 citizens). During 2009, the total amount of sales was A¢”šA¬5.5 billion, the 72.5% of which has been sales to wholesalers and pharmacies, while the rest were drained to hospitals. Moreover, both the productivity and investments in the sector as well as the number of employees rose. Exports The Greek pharmaceutical sector has become much more extraverted in recent years than it did in the past. Companies export in about 60 countries all over the world and in almost all EU countries. Furthermore, Greek companies have been modernized, with a significant acceptance by other countries as to the quality of the drugs they produce, constantly opening to markets. Porter’s five forces analysis Fig.1: Porter, M., (1980), Competitive Strategy, Free Press, New York. Bargaining power of suppliers Lavipharm depends upon organic chemicals suppliers. The chemical industry is very competitive and fragmented. The chemicals used in the company are largely a commodity. The suppliers have very low bargaining power and Lavipharm can switch from them without incurring a very high cost. However, what can happen is that the supplier can go for forward integration to become a pharmaceutical company Bargaining power of customers Customers of the companies that constitute the industry are mainly pharmacies and wholesalers. Their bargaining power is limited, as the profit margin is institutionally limited. It is claimed that only the big companies of the industry have some bargaining power, which is relevant to the amount of products they trade. This, give them flexibility and an ability of negotiation as for the trading conditions. Threat of new entrants The pharmaceutical industry is governed by a specific institutional framework which creates strong obstacles in new entries. Moreover, new entered competitors have to deal with a significant amount of required capital and the creation of a sufficient promotion network. In the pharmaceutical industry, a new entrant may be faced with various hurdles erected by established businesses, such as: Economies of scale – manufacturing, R&D, marketing, sales, distribution product differentiation – established products, brands and relationships capital requirements and financial resources access to distribution channels: preferred arrangements regulatory policy: patents, regulatory standards switching costs – employee retraining, new equipment, technical assistance The number of companies is already significant, as there are also international instances apart from the Greek once, and covers the needs of the market. Threat of substitute products There are no substitute products for medicine. This is one of the great advantages of the industry. Whatever happens, demand for pharmaceutical products continues and the industry thrives. One of the key reasons for high competitiveness in the industry is that as an ongoing concern the pharmaceutical industry seems to have an infinite future. Competitive rivalry within an industry The total pharmaceutical industry is characterized by a strong competition because of the large number of companies. Strong strategic movements are used from the side of the industry’s companies, through of which they try to create expanded partnerships with collaborations and mergers. They move to acquisitions and establish subsidiaries in order to cope with competition. The larger companies of the industry make investments so as to replenish the mechanical equipment they owe and continuously invest on research and development of new products. In the table shown above, 20 of the largest companies with international presence are classified in accordance to the amount of sales they achieved in 2008. Table 1: The 20 largest international pharmaceutical companies, ranked according to the amount of global sales in prescribed medicine, (2009), IMS Health According to an ICAP research which was held in 2008 the three Greek leaders of the industry are: Genesis Pharma: the first purely Greek company. In 2008 its sales reached A¢”šA¬220 million and its profits A¢”šA¬31 million. Elpen: After an increase of 15% its company’s turnover approached A¢”šA¬121 million in 2008. Accordingly, net income increased by 27.3% and reached A¢”šA¬11.4 million. Demo: Demo was established 42 years ago. During 2007 and 2008 it investment activities reached A¢”šA¬40 million. Its turnover was A¢”šA¬90 million while it had a profit of A¢”šA¬696.000. SWOT Analysis

Strengths

Weaknesses

Products with popular trademarks Organised distribution channels Market experience There are no subsidiaries for drugs, as it is an irreplaceable good Increased demand for drugs as a matter of the increased life expectancy Innovative drug solutions by its international holdings In Greece there is a significant delay on the payments from the side of the public sector (up to 12 months) Difficult to take the licence of authorization for new products The industry of pharmaceuticals is rigid Not a good financial position

Opportunities

Threats

Development of organic and homeopathic medicine Use e-commerce as a new distribution channel for the sector of cosmetics Participation in research processes Enhance of the export activities Changing way of pricing policies of drugs Increased amounts of counterfeit medicine Strong competition from international companies By law, the amount of money which could be used for promotion can be limited Low margins, as in Greece the prices of drugs are regulated by the governmentFig 2: SWOT Analysis

Strengths

Weaknesses

Alternative strategies for Lavipharm S.A

Products with popular trademarks Organised distribution channels Market experience There are no subsidiaries for drugs, as it is an irreplaceable good Increased demand for drugs as a matter of the increased life expectancy Innovative drug solutions by its international holdings In Greece there is a significant delay on the payments from the side of the public sector (up to 12 months) Difficult to take the licence of authorization for new products The industry of pharmaceuticals is rigid Not a good financial position

Opportunities

S – O Strategies

W – O Strategies

Development of organic and homeopathic medicine Use e-commerce as a new distribution channel for the sector of cosmetics Participation in research processes Enhance of the export activities S2, S3, S5 – O4 : Expand abroad and meet the demand S3, O1: Focus on organic and homeopathic medicine and occupy new market shares W4 – O2, O4: Use e-commerce to increase sales and decrease administrative expenses

Threats

S – T Strategies

Changing way of pricing policies of drugs Increased amounts of counterfeit medicine Strong competition from international companies By law, the amount of money which could be used for promotion can be limited Low margins, as in Greece the prices of drugs are regulated by the government S2, S3 – O3 : Decrease threats from competition by taking advantage of the market Fig 3: SWOT Matrix Analysis Strengths One of the main points of industry is the nature of the products and the market they appeal. Drugs are an irreplaceable good with a continuously increased demand. Greek pharmaceutical industries have developed promotion networks as well as a successful growth in research and development of new products. Moreover, during the last decade Greek companies achieved increased exports of their products in almost EU countries as well as to other countries all over the world. Weaknesses The weakest point that the industry faces is the institutionally controlled profit. Furthermore, the public health funds significantly delay their accruals to the companies, usually for about 12 months. This factor in accordance to the limited funding from the side of the banks threatens the operating capital of the companies. Also, it is time and money consuming for a company which has developed a new product to take the licence needed in order to have the acceptance to place this product on market. Opportunities Actions of researching and developing new types of products, as for example homeopathic and biological medicine, as well as the enhancement of their brand names refreshes the demand for products and as a matter of fact commerce. Moreover, e-commerce can play a vital role for the industry and enhance not only their recognition from the market but also decrease the amount of operational costs. Threats A serious threat for the industry is the expansion of foreign companies in the Greek market. Thereby, the share of the market that its company is addressed is getting smaller and competition increases. What is of equal importance is the fact that over the last years a serious amount of counterfeit medicine have been detected and sometimes confiscated at their attempt to enter European borders. Scenarios

Scenario 1: Stability

In this scenario it is assumed that the company will continue to operate like it did during the last year.

A

Scenario 1

Sales Growth Rate

0.24%

Cost of Goods/Sales

74.59%

Administrative Expenses/Sales

36.87%

Fixed assets growth

3.73% Table 2: Stability scenario The sales’ growth rate is 0.24%. Even though the percentage is very low, it could be claimed that mainly because of the global financial crisis, it presents reality. As a matter of fact, the company is going to continue its businesses by producing, promoting and selling the same products. All ratios are considered to remain stable. ROA as well as ROE are slightly increasing during the forecasting years even though they are still negative. The net present value of the company is A¢”šA¬99,974,275.01 and its value of shares is A¢”šA¬1.14. What is disappointing in this scenario is that net earnings are increasingly negative over the forecasted period.

Scenario 2: Maturity

In this scenario it is assumed that the company will continue its operations and gradually mature.

A

Scenario 2

Sales Growth Rate

3.73%

Cost of Goods/Sales

74.59%

Administrative Expenses/Sales

36.87%

Fixed assets growth

3.73% Table 3: Maturity scenario It is assumed that the sales’ growth rate will be 3.73%. In fact, this a rather optimistic scenario as the financial crisis has affected the pharmaceutical sector as well. The company is going to operate in the average of the last five years and gradually enter the maturity phase, by selling apart from the already existing products some new developed ones. All the other ratios will remain stable. It could be claimed that the increase on sales could be a result of developing new lines’ for the company products, as for example biological and homeopathic. The examination of this scenario shows that this could be a very good perspective for the viability of the company. Net present value of the company significantly increases (A¢”šA¬ 192,254,228.74) and the value of its shares reaches A¢”šA¬2.98. It is proposed that the company should re-organize its operations, handling expenses in a different, more efficient way.

Scenario 3: Harsh competition

In this scenario it is assumed that the company will face harsh competition.

A

Scenario 3

Sales Growth Rate

2.50%

Cost of Goods/Sales

74.59%

Administrative Expenses/Sales

28.00%

Fixed assets growth

3.73% Table 4: Harsh competition scenario Despite the good position that the company has achieved to gain, there is always the threat of displacement by other competitors, not only new but existing as well. It is a common phenomenon especially nowadays because of the financial crisis, having companies merged and conquers very good market positions with significant power. The sales’ growth rate of the company s considered to be less than the previous examined years. If Lavipharm S.A has to deal with such a case in the future it should make efforts to decrease its expenses. Net present value continues to be positive and equal to A¢”šA¬69,211,229.95 and it value of shares A¢”šA¬0.53.

Scenario 4: Enter new markets

In this scenario it is assumed that the company will expand in new markets apart from those in which it already does.

A

Scenario 4

Sales Growth Rate

6.50%

Cost of Goods/Sales

74.59%

Administrative Expenses/Sales

36.87%

Fixed assets growth

8.00% Table 5: Enter new markets scenario Lavipharm S.A has embarked in an international course since 1984. France was its first international attempt which was followed by USA and Cyprus. Balkan countries are a very attractive destination for the majority of the Greek companies. This scenario requires an increase in fixed assets as the company is going to need buildings and this is the reason why fixed assets growth is almost doubled. It is also estimated that sales growth rate will increase by 6.50% considering the demand in the new entered country. If this scenario happens, then the NPV of the company will become A¢”šA¬985,454,204.64 and its value of shares is expected to be A¢”šA¬18.82. Even though the company’s cash flows are expected to significantly fall and remain negative. Conclusions As it is presented in the scenarios analyzed above, net present value of the company will remain positive, but its cash flows are in all cases expected to be negative. This is a very crucial observation, important for the viability of Lavipharm. The market experience and its presence, not only in the Greek market but the US and Cyprus as well, cannot change the already bad financial position of the company. At this current time, Lavipharm should be well prepared and ready to handle any situation which may lead to unpleasant and risky for it situation. Its capital should be efficiently and effectively managed.

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Study On Lavipharm And Computer Financial Modelling Finance Essay. (2017, Jun 26). Retrieved October 27, 2021 , from
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