Pharma Industries Limited (Pharma) is a pharmaceuticals holding company that manufactures and distributes pharmaceutical products. The group is listed on the Johannesburg Stock Exchange (JSE) and has a level 6 BBBEE rating. In 2001, Pharma started a Research and Development Department to develop and register generic products. Consequently, Pharma acquired technologically advanced manufacturing equipment and was successful in registering a wide range of generic products. During the past three years, the research and development of new pharmaceutical products were severely hampered by the lack of experienced scientists and medical professionals within the company. Many of Pharmas employees have been poached by competitors offering more attractive remuneration packages and working conditions. Currently Pharmas sales comprise of products produced by the group. The groups customers are the Department of Health, medical care groups and retail groups. Over the past year Pharmas accounts receivables have doubled as a result of slow payment from customers. Since the Covid-19 pandemic and the introduction of various regulations by government, Pharma has experienced severe raw material shortages. This has been further exacerbated by the new generic imports from South East Asia which have flooded the Southern African pharmaceuticals market. The pharmaceutical industry in South Africa is highly regulated and legislated. Legislation, such as the Consumer Protection Act and the Medicines and Related Substances Act regulate the marketing, distribution and packaging of pharmaceuticals. The Medicines and Related Substances Act also regulates the price at which certain medicines and scheduled substances can be sold, and further stipulates a principle known as Single Exit Price. Single Exit Price dictates that medicine manufacturers may only sell products and its variants at a single price to all customers, regardless of sales volume. In addition, the Minister of Health releases a Government Notice on an annual basis, stipulating the maximum annual price increases.

Note 1 Pharma issued 15 million ordinary shares of R1 each and the shares are currently trading at R42.62. The dividends that were paid during the last three years were as follows: 2019 2020 2021 200 cents per share 217 cents per share 235,45 cents per share The Directors are expecting the trend in dividend growth to continue into the foreseeable future. Note 2 A long-term loan of R 80 million was raised on 1 March 2021. The loan bears annual interest at prime less 0.75%. The loan is repayable in four equal annual payments comprising capital and interest. The market rate for similar loans is 0,5% below the contractual rate of the loan. The loan qualifies as an instrument and is deductible for taxation purposes in terms of Section 24J of the Income Tax Act. Note 3 100 000 9% Redeemable preference shares of R 100 each were issued on 1 March 2019. These shares are redeemable on 28 February 2024 at a premium of 5%. Market analysts recently reported in the press that similar shares yield 7% per annum. NEW PROPOSAL The Research and Development Department have researched a new drug and have proposed that Pharma proceed with its development. Research cost have amounted to R5 million to date. Research conducted estimates that Pharma could sell 5 million units of the drug during the first year of production and that demand will grow by 10% per year for the next three years. The details of the development are summarized as follows: The manufacture of the new drug would require the acquisition of a new machine costing R 10 million, with 96% payable upfront. The outstanding 4% is payable after one-year. Pharma plans to sell the machine after four years and the estimated market value of the machine at that time is R 2 million. Working capital required at the start of production will be R 120 000 and this requirement is estimated to grow to R 220 000 at the end of year one. A further R 80 000 will be spent on working capital during the second year of production. In the third year of production the balance of working capital is estimated to be R 360 000. It is expected that the total value of working capital will be recovered at the end of the project. The drug will be manufactured and packaged per treatment unit. During the first year, the selling price per unit will be R 32. This selling price is expected to increase by 20% after the first year, and in the third year, it will only increase by 10%. During the final year the selling price will be R 45. Packaging costs will be R 1 per unit during the first year and is expected to increase by 50 cent every year thereafter.

QUESTION?

Discuss the weaknesses and threats of Pharmas business, based on the principles of a SWOT analysis. Ignore the effects of any potential investments/acquisitions but incorporate general knowledge of the relevant industry in your answer.