Growth Opportunities at Ashian Biotech

On April 3, 2020, Rishi Bhargav, Chief Executive Officer of Ashian Biotech was holding a videoconference
with his senior management team regarding the future of the company. Lately, he had been under fire from
the company’s board, which believed that Ashian was not pursuing new opportunities aggressively unlike
other biotech firms. Krish Rao, Ashian’s founder and chairman, had told Rishi that the board may not renew
Rishi’s three-year contract, which was coming to an end in December 2020, if the growth plans continued
to disappoint them.

Ashian Biotech Ltd. was incorporated in 2007. The company focussed on drug discovery, drug development
and manufacture of vaccines. The biotech industry in India had grown at a rate of around 14% per annum
to approximately USD 51 billion by 2018. The Department of Biotechnology, Government of India, had
set an ambitious target of increasing the industry size to more than USD 100 billion by 2025.

Ashian Biotech had grown much faster than the industry from a small base during 2011-2016. It had made
an IPO in December 2015 of Rs 50 crore. However, growth had slowed down considerably during 2017-
2020. Earnings had not only stagnated but had even begun to decline in recent years. Despite weakening
financial performance, Ashian was still a cash-rich company, as cash and liquid investment balances
continued to remain high.

Rishi had been hired in January 2018 after Krish had decided to separate the role of the chairman and the
CEO. There was attrition in the senior management ranks soon after the change in top management. Rishi
had convinced Krish to let him rebuild the senior management team. The team had been welcomed with
high expectations. However, slowing growth in revenues and earnings had disappointed the investors and
analysts started downgrading their stock recommendations for Ashian Biotech based on absence of visible
triggers for high growth.

It was in this context that Rishi had called for the videoconference with the senior management team
including Anshuman Mittal, (President - New Projects), Bibek Singh (Chief Operating Officer) and George
Cherian (Chief Financial Officer).

Rishi started the meeting by reiterating the key concerns for Ashian Biotech and reminding them about the
discussion they had towards the end of February 2020.

Rishi: Good afternoon to all of you. As you may remember, we had discussed our key problems in February
- the growth slowdown, modest return on equity and the pressure from board and shareholders to increase
returns. We had given ourselves six weeks to work out plans to address the same. I have been exchanging
mails with each of you and believe that significant progress has been made. It is a good time for us to take
stock of each proposal and see where we go. Anshuman would you like to start your presentation?

Investment Proposal 1. AntiCov vaccine

Anshuman: I am happy that we could quickly identify the opportunity of developing our vaccine for Covid-
19. It seemed like such an outrageously ambitious idea in February. Since we could not attract foreign
collaborators given our modest business profile, we decided to develop the vaccine indigenously. We put
select members of our exploratory research lab under the guidance of one of our top scientists. Now they
are confident of achieving a breakthrough soon.

Rishi: What are the next steps?

This case was prepared by Dr. Sachin Mathur, School of Business Management, NMIMS, as the basis for class
discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Do not copy
or distribute without the permission of the author.
Anshuman: We are waiting for virus strains to complete the development of the vaccine. We will have to
do preclinical studies of dosing and toxicity levels. After a review, we will seek approval for starting our
phase-wise trials. Phase I & II trials will be relatively inexpensive involving only a few hundred volunteers
each at select locations, but phase III trials will involve over 20,000 volunteers at multiple locations.

Rishi: How fast can we complete this? Vaccine developments take nothing less than two years at the best.

Anshuman: We will have to do this pretty fast. It looks impossible, but the need for speedy rollouts will
result in accelerated approvals and acceptance. We expect demand to outstrip supply. Although there could
be pricing control, offtake should be remunerative. There can be a possibility of export orders as well.
However, there will be competing vaccine candidates. Early mover advantage should be our foremost
concern.

George: Do we have some idea of investments and returns?

Anshuman: I have used the services of a business consultant who has provided me with some workings
(Exhibits 1a and 1b). These are ballpark estimates. We really do not know how things will ultimately pan
out. But if all works out well, this project can payback very quickly.

Rishi: How do we analyse these figures? Can you please explain.

Anshuman: This requires decision tree analysis, wherein you weigh the cashflows in each phase by the
probability and then calculate the net present value. We have assumed that this is a 2-3 year opportunity
and have decided to use a discount rate of 15%, but of course I will run this by George.

Rishi: This is beyond my comprehension. One thing I understand though is that if this works for us, it will
enhance our visibility and reputation not only in India but across the globe.

George: I agree that the covid vaccine opportunity could be big. But everything depends so much on
probabilities. I am a bit concerned about so many assumptions and so much uncertainty. Our worst
nightmare could be unexpected side-effects halting production after having invested in manufacturing
capacity. Also, funding requirement for third phase trials and manufacturing appears to be large.

Anshuman: We will approach the government for grants to fund the R&D spend fully or partly, given the
likely thrust on indigenous vaccine development.

Rishi: I am sure the two of you can review the funding arrangements. Bibek, you were working on the
acquisition of Myanti Biopharma. Can you please brief us regarding the progress? Anshuman and George,
if you recollect, we started looking at Myanti last year as their products complement ours very well.

Investment Proposal 2. Acquisition of Myanti Biopharma

Bibek: I managed to reach out to the promoters of Myanti through an investment banking contact. It took
them sometime to warm up to the idea. They have shared some financials. The investment banker has given
me preliminary conservative forecasts (Exhibit 2).

Rishi: How much will it cost us?

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Bibek: According to the investment banker, the Myanti promoters are expecting upward of Rs 50 crore for
their stake of 80%. The rest of the stake is held by financial institutions and other private investors. We
should be able to negotiate their offer downwards.

George: One thing I like about Myanti is that its business risk profile seems to be similar to ours. But we
should not pay anything extra in the name of synergy. What are the key strengths of Myanti?

Bibek: Myanti is well-established in biopharma business, has skilled people, and a strong product pipeline.
I believe that it can sustain growth for a long time. As for synergy benefits, I expect an annual reduction by
around 5% of Myanti’s employee expenses.

Rishi: Can you explain how we can achieve the reduction in employee costs?

Bibek: Well I looked at Anshuman’s sheet of Ashian’s surplus R&D and technical staff that are currently
working on exploratory research initiatives awaiting new projects. I reckon that they can replace equivalent
staff at Myanti whom we can offer termination packages. This will of course take up the upfront costs by
Rs 4 crores, in addition to the other acquisition related costs of Rs 5 crores.

Rishi: It is a pity that we cannot use our shares to make the acquisition given our stock prices. George do
you reckon that we will be able to fund both AntiCov and Myanti?

George: It will really depend upon the investment needs compared to our cash, though I reckon that we
could take some debt.

Rishi: That brings us to financing and payout. George, what do you propose regarding the cash and
dividends?

George: Let me share my presentation on financing and payout decisions.

Financing and payout decisions

George: Our stock prices are a major source of concern. They were sliding even prior to the pandemic and
now they have done worse. (Exhibit 3)

Rishi: So, what should we do? Do you think increasing dividend per share will enthuse the investors?

George: I am not sure. Perhaps we can give a large one-time dividend. But we before we payout should
know how much money we require for the investments that we are planning.

Bibek: Why don’t we reward our shareholders with bonus shares?

Anshuman: Also we can give some discount coupons on our biopharma cosmetic products.

Bibek: I also recollect Krish insisting on bringing debt on Ashian’s books. Perhaps we can take debt to pay
out one-time dividend or to repurchase our shares.

George: I did explore the effects of raising some debt. We currently have a AAA quality creditworthiness
thanks to having no debt. An advisor has provided me an estimate of how our cost of debt will change with
debt (Exhibits 4a and 4b). This should give us some idea of how much debt we should take. Remember that
our cost of equity will also increase once we take more debt.

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Rishi: Look, there is no need for us to take debt just because Krish has raised the point. Instead, we could
make a case as to why we should remain a zero-debt company. We can try to fund our requirements
completely using our internal sources. This way we can avoid loan processing or security issuance costs
associated with debt. We could even wait for the equity market conditions to improve and then look at
raising some equity to replenish our war chest of surplus cash and marketable securities.

George: Certainly, though our financial statements and forecasts for 2020-21 suggest that we will anyways
continue to retain a war chest for any future projects or acquisitions (Exhibits 5a, 5b and 5c). Of course,
these numbers are without considering AntiCov or Myanti acquisition.

Rishi: All right then. Let us meet after two weeks with more clarity and details. We will finalise our
decisions and then take them to the board by the end of the month.

Unresolved problems

Despite a lot of ground being covered in the meeting, Rishi retained a sense of discomfort. He was not sure
if they would be able to ultimately solve the business growth problem. He had also not shared with his
management team how Krish had been reminding him that Ashian Biotech had become cash rich only
because of a well-timed IPO and it was time to enhance shareholders’ value. Of late Krish had also been
grilling Rishi on the use of chartered private jets by the senior management to fly to multiple business
locations and other expenses which he considered as wasteful perquisites.

Rishi too had some cards up his sleeves. Two of the board members had told him in confidence that they
disagreed with Krish on debt financing a cash-rich company. They also thought that Krish was not giving
Rishi the free-hand he deserved in running the company. Rishi knew that he could count on their support
when he required it.

Exhibit 1a. AntiCov vaccine R&D phase outcomes

Decision if Decision if
Stage Timeline Investment P (success) P (failure)
success failure
Preclinical T0+3 Conduct Abandon the
Rs 10 crore 0.6 0.4
tests months Phase-1 trial project
Phase-1 T0+5 Conduct Abandon the
Rs 20 crore 0.7 0.3
trials months Phase-2 trial project
Phase-2 T0+7 Conduct Abandon the
Rs 30 crore 0.7 0.3
trials months Phase-3 trial project
Phase – 3 T0+9 Rs 200 Manufacture Abandon the
0.8 0.2
trials months crore vaccine project

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Exhibit 1b. Vaccine manufacturing phase outcomes

Year 1 Year 2
High demand (p=0.7) Net Salvage Value
Cashflow Rs 1000 cr Rs 80 cr

Expand capacity
C2
Invest Rs 200 cr

Low demand (p=0.3) Net Salvage Value

Cashflow Rs 400 cr Rs 80 cr
High demand (p=0.5)
D2
Cashflow Rs 500 cr
High demand (p=0.7) Net Salvage Value
Cashflow Rs 500 cr Rs 40 cr

Manufacturing capacity Do not expand

D1 C1 C3
Invest Rs 200 cr capacity

Low demand (p=0.3) Net Salvage Value

Cashflow Rs 300 cr Rs 40 cr

High demand (p=0.3) Net Salvage Value

Cashflow Rs 500 cr Rs 40 cr

Low demand (p=0.5)

C4
Cashflow Rs 300 cr

Low demand (p=0.7) Net Salvage Value

Cashflow Rs 300 cr Rs 40 cr

Do not invest in
manufacturing capacity
Note: All manufacturing capacity investments are at the beginning of the year. Other cashflows may be assumed to occur near the end of the year.

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Exhibit 2. Financial forecasts of Myanti Biopharma Ltd.
Rs Crore 2019-20 2020-21F 2021-22F 2022-23F 2023-24F 2024-25F 2025-26F 2026-27F 2027-28F 2028-29F 2029-30F
Sales 100.2 105.2 126.3 151.5 174.2 200.4 230.4 253.5 278.8 306.7 337.4
Other Income 0.1 0.3 0.4 0.5 0.6 0.7 0.8 0.8 0.9 1.0 1.1
Total Income 100.3 105.6 126.7 152.0 174.8 201.0 231.2 254.3 279.7 307.7 338.5

Material Costs 63.8 67.0 77.0 88.6 101.9 117.2 134.7 148.2 163.0 179.3 197.3
Employee Expenses 16.2 17.0 19.6 22.5 25.9 29.8 34.2 37.6 41.4 45.5 50.1
Other Manufacturing Expenses 7.8 8.2 9.4 10.8 12.5 14.3 16.5 18.1 19.9 21.9 24.1
Selling & Admin Expenses 6.5 6.5 7.0 8.1 9.3 10.6 12.2 13.5 14.8 16.3 17.9
PBDIT 6.0 6.9 13.7 22.0 25.3 29.1 33.5 36.9 40.5 44.6 49.1
Depreciation 3.8 4.1 4.9 5.8 6.7 7.7 8.9 9.8 10.7 11.8 13.0
PBIT 2.2 2.8 8.8 16.2 18.6 21.4 24.6 27.1 29.8 32.8 36.1
Interest 3.4 4.3 5.0 5.4 5.5 5.4 5.2 4.4 3.3 2.0 0.4
PBT (1.2) (1.5) 3.8 10.8 13.2 16.0 19.5 22.7 26.5 30.8 35.6
Tax - - 0.9 2.7 3.3 4.0 4.9 5.7 6.6 7.7 8.9
Profit after tax (1.2) (1.5) 2.8 8.1 9.9 12.0 14.6 17.0 19.9 23.1 26.7

Equity 11.9 10.4 13.3 20.3 29.2 40.2 53.8 68.9 86.7 107.8 131.6
Debt 25.1 31.6 37.1 40.2 40.4 39.8 38.2 32.3 24.6 14.6 3.1

Capital Expenditure 1.9 6.1 11.3 13.6 13.7 15.7 18.1 16.8 18.5 20.3 22.4

Working Capital
Inventory 5.8 4.0 4.8 5.8 6.6 7.6 8.8 9.6 10.6 11.7 12.8
Trade Receivables 2.1 2.0 2.4 2.9 3.3 3.8 4.4 4.8 5.3 5.8 6.4
Cash 2.0 5.8 7.0 8.4 9.6 11.0 12.7 14.0 15.4 16.9 18.6
Trade Payables 3.1 2.0 2.4 2.9 3.3 3.8 4.4 4.8 5.3 5.8 6.4

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Exhibit 3. Stock price trend of Ashian Biotech vs. S&P BSE SmallCap Index

800 20000
743 18000
700
16000
600
574 14000
500 519
12000
452
400 10000

300 8000
291
6000
200
160 4000
100 2000
- 0
Mar 2015 Mar 2016 Mar 2017 Mar 2018 Mar 2019 Mar 2020

S&P BSE SmallCap (right axis) Myanti's share price

Exhibit 4a. Changes in Ashian Biotech’s cost of debt with leverage

Debt-Equity (Market Value) Pre-tax Cost of Debt

< 0.40 7.60%
0.40 to 0.90 8.40%
0.90 to 1.20 9.90%
1.20 to 2.00 11.40%

Exhibit 4b. Assumptions for Ashian Biotech’s Equity Returns

Risk-free rate 6.4%

Equity market risk premium 7%
Equity Beta (historical, 3 year) 0.80
Marginal corporate tax rate 25%
Note: Debt beta for Ashian Biotech may be assumed to be negligible.

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Exhibit 5a. Balance Sheet of Ashian Biotech

Rs Crore 31.3.2017 31.3.2018 31.3.2019 31.3.2020 31.3.2021F

Property, plant & equipment, net 29.8 37.3 39.3 41.1 43.0

Inventories 16.5 30.0 44.0 55.2 59.5

Trade receivables 9.6 16.5 20.6 30.4 31.0
Cash 3.4 4.2 4.3 4.5 5.1
Marketable securities 51.1 49.5 51.6 44.4 49.5
Total current assets 80.5 100.2 120.4 134.6 145.1
Total Assets 110.3 137.5 159.7 175.7 188.1

Total equity 102.1 125.6 143.9 155.8 170.1

Long-term debt - - - - -
Short-term debt - - - - -
Trade payables 8.2 11.9 15.8 19.9 18.0
Total liabilities 8.2 11.9 15.8 19.9 18.0
Total Equity and Liabilities 110.3 137.5 159.7 175.7 188.1

Number of shares (crore) 1.60 1.60 1.60 1.60 1.60

Exhibit 5b. Income Statement of Ashian Biotech

Rs Crore 2016-17 2017-18 2018-19 2019-20 2020-21F

Net Sales 140.5 163.7 177.0 189.4 204.6
Other Income 4.5 4.1 4.2 4.2 3.8
Total Income 145.0 167.7 181.2 193.6 208.4

Material Costs 76.8 91.0 97.6 105.2 113.6

Employee Expenses 11.9 13.7 22.2 29.9 32.3
Other Manufacturing Expenses 5.8 8.4 9.9 9.5 10.3
Selling & Admin Expenses 12.2 14.0 16.4 20.1 21.7
PBDIT 38.3 40.7 35.1 28.9 30.5
Depreciation 3.1 4.0 5.3 5.9 6.0
PBIT 35.1 36.7 29.8 23.0 24.5
Interest - - - - -
PBT 35.1 36.7 29.8 23.0 24.5
Tax 9.0 9.2 7.5 7.1 6.1
Profit after tax 26.1 27.5 22.3 15.9 18.4

Dividend 4.0 4.0 4.0 4.0 4.0

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Exhibit 5c. Cash flow Statement of Ashian Biotech

Rs Crore 2017-18 2018-19 2019-20 2020-21F

Profit after tax 27.5 22.3 15.9 18.4
Add: Depreciation 4.0 5.3 5.9 6.0
Add: Interest - - - -
Less: Income from investments (4.1) (4.2) (4.2) (3.8)
Less: Increase in inventories (13.5) (14.0) (11.2) (4.3)
Less: Increase in receivables (6.9) (4.1) (9.8) (0.6)
Add: Increase in payables 3.7 4.0 4.1 (1.9)
Cashflow from Operations 10.7 9.3 0.7 13.7

Investments in PPE (11.5) (7.3) (7.8) (7.9)

Investment in marketable securities 1.5 (2.1) 7.2 (5.1)
Income from investments 4.1 4.2 4.2 3.8
Cashflow from Investments (5.9) (5.2) 3.6 (9.1)

Equity issued - - - -
Increase in debt - - - -
Dividend paid (4.0) (4.0) (4.0) (4.0)
Interest paid - - - -
Cashflow from Financing (4.0) (4.0) (4.0) (4.0)

Change in Cash & Equivalents 0.8 0.1 0.2 0.6

Beginning Cash & Equivalents 3.4 4.2 4.3 4.5
Ending Cash & Equivalents 4.2 4.3 4.5 5.1