2012

Executive Summary Team Innovators

Nipun Duhan Team Captain Avinash Singh Pundhir Abhey Rawat

Institute of Management Technology, Ghaziabad 7/20/2012

In recent years we can see there is a downward trend in the profit margins of global pharmaceuticals 1 companies. The year on year growth rate for global pharmaceutical companies is approx 4.1% in 2010 . Such decline can be contributed to the following factors: Drugs going off patent Declining R&D productivity Strict regulations over drug prices Changing regulatory environment

The Road Ahead: These all challenges are forcing pharmaceutical companies to look for other revenue generating opportunities across the globe. The following are the major criteria which we should evaluate before investing in any segment as a venture capitalist: Which companies are worthy for future investing Of the chosen companies what is the most lucrative segment to push forward With whom we are expected to compete in 3 to 5 years of time How to access full range of outcomes from the potential investment How to predict probability of success or failure of new initiatives How much additional capital these companies will need for successful exit

Our framework to evaluate investment segments assign different weights to each of these parameters and further score each segment on a 1 to 5 scale, 1 being least rated and 5 being highest rated with respect to the segment.

Criteria

Assigned Weightage Health Care & IT Tele-Health Devices Wellness Clinic Point of Care Diagnostics Clinical Research Organization Healthcare Training Accountable Care Organization Solutions
1

Competition Market Growth Potential Attractiveness Historical Future Growth Market Growth 0.1 0.2 0.1 0.2 5 3 5 5 2 5 3 4 2 5 4 3 2 4 3 4 2 1 5 3

Open Opportunities of Investments 0.15 4 1 1 2 3

Synergies Final Rank with Scores Current Business 0.25 1 3 4 5 5 3.55 2.5 2.85 3.85 3.8 3 5 4 1 2

4 5

1 1

2 0

2 5

1 2

2 2

1.85 2.5

6 5

Source: CRISIL research report

The following are the criteria for assigning scores for the parameters defined in the above table: a) Competition in the segment is identified on the basis of the market share held by top five players in the segment. b) Market attractiveness is rated based on current market size of the segment. c) Growth potential in the segment is evaluated on the basis of historical and future market growth potential. d) Open opportunities in the segment are evaluated based on the number of mergers and acquisition happened in the specific segment. e) Synergies with current business line are evaluated based on how much potential exist in the segments to leverage our existing knowledge and other resources required.1 Weights are assigned to the factors based on clients consideration of the opportunity- market size, high future growth, competition and possibilities of leveraging existing industry knowledge. Framework to Filter Companies in Prioritized Segment2 We propose the following framework to filter companies in the target segment. In the model we have identified four factors which will help to rate company and investment opportunities in that company.

Entry
Innovation (Uniqueness of idea) Company's Market Share Minimum Funding Requirements Speed of Market Penetration

Survival
- Managerial Capability - Low Barriers to Entry by Competition - Resistance to Environment

Sustainable
Product Differentiation Adaptation to Technology change Product Turnover ratio Return on Investment

Exit
- Cash Out Potential - Country Regulations - Ease of Liquidation

1 2

Refer appendix for detail method of rating criteria. Reference: Evaluation Criteria of Venture Capitalist-adapted from (Tybejee and Bruno, 1984)

Entry: We should first evaluate the product/service idea of the company in the target segment and make sure that the target market is large enough to support substantial growth. We should also look for the amount of funding requirements and try to identify after how long the investments will start to generate a positive value for our company. We should look for the potential market penetration to calculate this factor. Sustainable: The idea in which we are going to invest should also be sustainable to give us returns in long run. Such ideas can be evaluated by looking for the factors such as product differentiation. This is determined by the ability of the company to apply its technical capabilities in creating a product which is unique and can deter competition through patents and enjoy a high rate of margin. Survival: For the evaluation of survival factors we should first look for the managerial capabilities of the ventures founders. This capability results from skills in managing business functions and is associated with favorable references given to entrepreneurs, management skills, marketing skills and financial skills. We should also look the external factors which may result from obsolescence due to changing technology and sensitivity to economic conditions or from low barriers to entry by competition. Exit: Cash-out potential represents the extent to which the venture capitalists feel that the investment can be liquidated, harvested, exited in order that they could realize profits to their share holders. If we are looking for international opportunities we should also evaluate the regulatory environment of the target country. Target Screening for Clients Identified Companies:

When a management team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.
- Warren Buffett

Unique Product/Tec hnology Existing Human Assets Existing Revenues

Controlling Stake

Ideal Funding Target

Managerial Capabilities

Synergies with Existing Line of Business

Potential New Entrants

Assessment of the Target Companies:

Alpha Unique product/Technology Robust Business Model Existing Revenues Managerial Capability Potential of New Entrants Synergies with Existing Line of Business Controlling Stake in the Company Total Score 5 5 5 5 4 3 1 28

Beta 4 3 1 5 4 3 2 22

Gamma 3 4 4 3 3 2 2 21

Sigma 2 3 4 2 1 1 4 15

Delta 5 1 2 4 2 5 5 24

After assessing the given companies on the basis of data provided by client we have identified that Alpha is the most lucrative investment option followed by Delta. The following are the reasons we have rated Alpha as most lucrative option: Product is based on disruptive technology which is in sync with the clients requirement for an innovative model. Business model is robust hence can be termed as a low risk with high market potential. Management team with strong references indicates its capability to grab market opportunities and provide an edge over competitors. Among the listed companies CEO of Alpha Company has got strongest market references. Alpha is a strong market player. We can safely assume that the threat from new entrants is minimized and can be handled in a proactive manner. Alpha has already received a few rounds of funding. It will require large amount of funding from the client to hold the position as first decision maker. High revenue suggests that the company is in high growth stage and will ensure continuous revenue for client.

Appendix: Method for Scoring Segments: For Competition : If Market Share of Top 5 Players 0-15% = 5 16-40% = 4 40-60% = 3 60-80% = 2 >80% = 1

For Market Attractiveness: Market Size < 500 = 1 500 - 700 = 2 700 - 1000 = 3 1000 - 2000 = 4 > 2000 = 5

For Growth Potential: Historical Growth

If Historical Growth of Segment 0-4% = 1 4-7% = 2 7-8% = 3 8-12% = 4 >12% = 5

Future Growth
If Future Growth of Segment 0-4% = 1 4-7% = 2 7-8% = 3 8-12% = 4 >12% = 5

Open Opportunities of Investment: Number of M&A's 0-15 = 1 16-30 = 2 31-45 = 3 46-70 = 4 >60 = 5