Theta Pharmaceuticals

Case written by Shivram Apte as part of a case study competition to be conducted at Business Schools. Theta
Pharmaceuticals and Carlo Pharmaceuticals are not real companies and the names of personnel in this case are also
entirely fictional – any resemblance to a real persons or corporations is co-incidental. Case facts are for discussion
only and are not intended to be a demonstrator of correct or incorrect handling of management situations.

Carlton Whitfield, CFO of Theta Pharmaceuticals (Theta), took a break from studying the
dossier on his computer and stared out the window of his corner office overlooking the river
Charles. Theta had grown rapidly across the last two decades due in large part to a successful
execution of their strategy of acquiring manufacturing capacity in low cost countries such as
India. Theta had evolved to become the preferred supplier to the World Health Organization
and the United Nations for low cost pharmaceutical and vaccine products. Theta’s CEO had
been attending regular meetings with senior personnel at WHO to discuss how the malaria
problem across the developing world could be addressed by a program revolving around a
malaria vaccine that was likely to be approved within the next couple of years. The WHO had
asked Theta to come up with estimates of number of people who would be targeted with a
malaria vaccination program.

Carlton was tasked with figuring out a fair price for acquiring Carlo Pharma, the company that
was expected to receive approval for the malaria vaccine.

He had to submit their first Expression of Interest (EOI) bid for the acquisition of Carlo
Pharmaceuticals (Carlo) before the end of the month. His dilemma was not new to any person
involved in the valuation and acquisition of companies and opportunities. Bid too little and they
would get excluded from the subsequent stages of the race; bid too much and they risked being
saddled with an acquisition that failed to deliver the requisite Return on Investment.

Carlo Pharma had been founded by Carlos Monte Cristo, after he had been conferred his PhD
in Biochemistry at the Universitat de Barcelona and the company had grown rapidly in the last
couple of decades on the back of successful R&D and launch of vaccines. One of the products
in the R&D pipeline at Carlo, a vaccine expected to provide effective protection against malaria,
was the reason the company had become an attractive acquisition target for Theta.

Background

The Wikipedia page on Malaria (https://en.wikipedia.org/wiki/Malaria) states that Malaria afflicts over
200 million people per year and results in an estimated 441,000 to 731,000 deaths. Most cases
and deaths occur in Africa where the economic impact of the disease is estimated to be about
US$ 12 Billion per year because of increased healthcare cost and reduced productivity of
affected people. India is another country with a large population and a correspondingly large
number of cases and it is suspected that the numbers reported for India are grossly
underestimated.

Refer the following article.

http://www.mrcindia.org/MRC_profile/profile2/Estimation%20of%20true%20malaria%20burden%20in%20India
.pdf

Epidemiology (Source: Wikipedia article on Malaria referenced above)

The WHO estimates that in 2015 there were 214 million new cases of malaria resulting in
438,000 deaths. Others have estimated the number of cases at between 350 and 550 million
for falciparum malaria. The majority of cases (65%) occur in children under 15 years old. About
125 million pregnant women are at risk of infection each year; in Sub-Saharan Africa, maternal
malaria is associated with up to 200,000 estimated infant deaths yearly. There are about 10,000
malaria cases per year in Western Europe, and 1300–1500 in the United States. About 900
people died from the disease in Europe between 1993 and 2003. Both the global incidence of
disease and resulting mortality have declined in recent years. According to the WHO and
UNICEF, deaths attributable to malaria in 2015 were reduced by 60% from a 2000 estimate of
985,000, largely due to the widespread use of insecticide-treated nets and artemisinin-based
combination therapies.

Governments and the medical fraternity are particularly concerned about the rise of Drug
Resistant Malaria in the Thai-Myanmar and Thai-Cambodia border regions. Refer this article in
Nikkei Asian Review: (https://asia.nikkei.com/NAR/Articles/Drug-resistance-threatens-Asia-s-health-and-
economy)

As one epidemiologist put it, the drug resistant strain is one flight away from India and another
flight away from Nairobi, Kenya travelling in the blood stream of a carrier human being.

Given the rise of drug resistant strains, an effective vaccine against malaria becomes far more
valuable. The new vaccine has shown promise in the petri-dish but needs to progress through
various stages of clinical trials. These clinical trials are likely to cost between USD100 million
and USD500 million and can take a couple of years to complete. However, the payoff can be
lucrative given the large number of people at risk who would need to be vaccinated especially
if drug resistant strains move from South-east Asia to India, Africa and South America.

Theta Pharma needs to assess the theoretical maximum market size in number of patients
across the world and then come up with approaches to estimate potential revenue. Carlton
assumes that the vaccination initiative could potentially target people within the ages of 2-70.
Historically, WHO and UN backed vaccination programs like those for the MMR (Mumps
Measles and Rubella) vaccine have seen vaccination rates between 60% and 90% of the target
population across different countries. The rates were lower in strife torn or war-torn countries
during the period of strife but regressed to the mean within a decade after the end of war or
strife.

The primary approach for modelling would be relatively straightforward i.e. one would start with
the sizes of populations that are at risk in the regions where the Anopheles mosquito thrives,
primarily in tropical regions, and then estimate the vaccination rate for a malaria vaccine over
the next 25 to 30 years. However, the complexity increases when one considers that the model
would have to account for the fact that a vaccinated person would no longer be a part of the
target pool, thereby reducing the target pool over the years. The model would also need to
handle differing and receding fertility rates across different countries.

To further complicate the model, the effects of global warming on the incidence of malaria are
murky at best. Some researchers believe that global warming will put a larger population at risk.
Refer: https://www.independent.co.uk/news/science/climate-change-is-increasing-the-risk-of-malaria-for-
people-living-in-mountainous-regions-in-the-9174448.html and

https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3066711/

Conversely, a study on rodent malaria at the Pennsylvania State University at University Park
appears to suggest that warmer temperatures appear to slow the transmission of malaria
causing parasites by reducing their infectiousness. The researchers expect the pattern to apply
to human malaria. (https://www.scientificamerican.com/article/global-warming-wilts-malaria/)

Carlton believes that modeling a simulation that can model differing rates of vaccination by
country with their differing rates of population growth and declining fertility rates across the next
30 years will be a starting point.(http://data.un.org/Data.aspx?d=PopDiv&f=variableID%3A54 )The
model would then have to account for differing rates of climate change which would in turn
increase the latitudinal range of the Anopheles mosquito putting a greater population at risk.
This would help him arrive at a range of revenue outcomes and give him the ability to ascribe
a probability of occurrence to those revenue possibilities.

He believes the team can then rapidly rework the model to compute revenue potential at
differing price points for the vaccine. Historically, the WHO has paid between USD 0.25 to USD
2.00 per vaccine dose with USD 0.75 being the modal price. The malaria vaccine is currently
undergoing clinical trials to evaluate efficacy with single dose, two dose and three dose
administration. After initial discussions with Carlo Pharma, Carlton believes that the
manufacturing cost initially will be close to 15 cents per dose and will reduce to 10 cents per
dose after the first 3 years once manufacturing scales up.

As Carlton thought more about the complexities involved, it became apparent that his internal
analytics team, already stretched with their routine tasks of forecasting demand for their inline
products, would be unable to build a model in time for him to decide on his bid. He made up his
mind to outsource the model development to an analytics company.

• For computing Net Present Values of future cash-flows, Theta Pharma used a discounting rate
of 9% per annum which was the ROI expected by investors.