Alvogen Case Analysis

1.  What is your assessment of Alvogen?

        At the critical time frame for the case (March 2015 and surrounding months), Alvogen is in a somewhat precarious position.  In addition to the important decisions which needed to be analyzed regarding a path forward (to be discussed later), Alvogen had a history of cash flow issues.  At a few points in the recent past the company had nearly run out of cash, requiring debt financing, restructuring and in some cases personal guarantees by Wessman in exchange for financing.  Because the company had pursued growth in part by acquiring other manufactures and licensing agreements for various pharmaceutical products, cash and a feasible debt structure were vital for continued strategic execution.  On top of this the industry had become extremely consolidated, making acquisitions more complicated.

        Evaluating the industry situation using a PESTEL framework produces the following analysis:

Political: High regulatory scrutiny and barriers to entry, variable compliance requirements by region, multiple regulatory agencies, existence of state-run health systems in certain markets, private others

Economic: Good industry growth, pricing controls, recession resistant products, distribution and logistics complexities due to products, high industry investment in R&D, high R&D costs

Social: Increased sensitivity to pricing, changes in expectation of QOL and wellbeing, cultural norms across Alvogen's markets,

Technology: Rapid advancement in knowledge base and tech, improvements in production methods and scaling, long product development times and potentially short life cycles as competition enters

Environmental:  Growth for generic demand worldwide

Legal:  Increases in consumer protections, high litigation and regulatory cost, variable patent laws, patent time-out for generics

        The overarching theme of the PESTEL analysis is that development and legal costs are high for this industry, with certain markets trending towards lower pricing structures, but due to increased medical knowledge and treatment the demand for generics overall is increasing.  This emphasizes the importance of placing the right products in the right markets.

The factors identified in the PESTEL were used to develop a SWOT analysis of Alvogen (Figure 1)

Figure 1: SWOT analysis of Alvogen in March 2015

After evaluating the industry and market position of Alvogen, the analysis was turned outward to evaluate the competitive landscape.  Figure 2 provides a Five Forces Model of the Pharmaceutical/ Biologics industry in 2015.[pic 1]

Figure 2: Five Forces Analysis of the Pharmaceutical and Biologics Industry in 2015

The Five Forces analysis reveals that the dominating force in the current industry conditions is industry rivalry.  This finding is supported by the aggressive M&A activities across the industry resulting in the current state of consolidation.  Alvogen’s competition in most cases is much larger and has better liquidity.  Using a Porter’s 4 corners analysis, the competition’s Drivers and Current Strategy is very similar to Alvogen’s (Growth through M&A, Drive profitability, Compliance) however the Management Assumptions and Capabilities are different.  Alvogen has competency in difficult to make generics and has a flexible and aggressive management team with impressive experience, the smaller size of Alvogen allows them to react more quickly than their competition.  The competition counters this with scale and cost advantages in Biologics and standard generics.  The implications of this is that Alvogen must continue to grow aggressively to prevent becoming an acquisition target themselves.

Alvogen’s product mix and market selection are also extremely relevant to the assessment and how it relates to the recommended action plan.  

The generic’s market can be broken into roughly three categories:

Difficult to Make:   Alvogen’s main strategic focus – encompasses time release, patches, injectables and controlled substances. Pros: Intricacies with delivery method, production, storage, regulation among others cause these to be difficult to make and Alvogen’s capabilities give them a strategic advantage, already forms a large part of revenue.  Cons:  The slowing rate of generics coming off patent means opportunities for further growth are limited.

Biosimilars:  More recent trend towards growth Pros: High growth, favorable regulatory situation in the USA and EU, high prices. Cons: Outside of Alvogen’s current capability, high production and development cost, relative complexity compared to other generics.

Regular Generics: Other generic drugs sold primarily outside of US. Pros: Purchased at institutional level by national insurers Cons: Lower profit margins

Up to this point, Alvogen’s primary market was the US (60%), with CEE (25%) and APAC (15%) following.  Alvogen’s projections predicted growth in the APAC market to bring the mix to US (54%), APAC (28%) and CEE (18%) by 2015.  In order to assess whether this trend would be sustainable a CAGE analysis was constructed (Figure 3).  Although Alvogen is an Icelandic company, its strong US presence lead the author to analyze its distance from the perspective of the US.