Proposal for Aquisition of LifeCell - Essay Example

Executive summary In today's business world competition has highly become competitive, budget-oriented planning or predict-based planning approaches are not sufficient for a big corporation to survive and flourish. Kotler (1998) clearly states that, for a company to survive and flourish in this competitive business world, it has to engage in strategic planning or management which clearly defines its objectives and examines both the inner and outer situations to formulate a strategy, implement that strategy, evaluate its progress, and make any adjustments where necessary to stay on the track. Among the strategies which companies have engaged to ensure their growth is acquisition, through acquiring small but potential companies, bigger corporations are able to gain competitive advantages. This paper is thus, going to take a critical look at business performance of Lifecell Company which is to be targeted for acquisition by Embry Investment Group (EIG) Introduction LifeCell Corporation deals in developing, processing, as well as marketing of tissue-based products which are used in reconstructive, urogynecologic and orthopedic surgical processes to restore soft tissue defect in America and worldwide. LifeCell's reconstructive products consist of AlloDerm used for plastic reconstruction, all-purpose surgical, burn up, and periodontal processes; in addition to Strattice, a porcine dermis which eliminates cells and lessens a constituent in the xenogeneic rejection reaction. LifeCell's orthopedic tissue restore products include GraftJacket for restoring damaged or insufficient integumental tissue in orthopedic surgical procedures. The company was incorporated in 1992 in the State of Delaware. (LifeCell Company, 2007) Table1: Detailed Description of LifeCell Company Market Value ($ Millions) 888.0 Sales ($ Millions) 105.2 Sales Growth (3-yr. avg. annual) 41.1 % Profits ($ Millions) 14.0 Profit Growth (3-yr. avg. annual) 72.3 % Return on Inv. Capital (3-yr.) 20.0 % Share Price 12-Mo. Hi/Lo 28/12 Share Price As of 4/28/06 27 Return on Equity 13.7 % P/E Ratio 66 No. of Employees 269 Industry Health Care Supplies Source: (Covell, 2006) Product mix Lifecell allograft products consist of: 1. AlloDerm; for plastic reconstruction, all-purpose surgical, periodontal and burn procedures 2. GraftJacket; for orthopedic uses and lower end wounds 3. AlloCraft DBM; used for bone grafting processes 4. Repliform; used for urogynecologic surgical processes 5. Strattic; for specific plastic reconstruction and all-purpose surgical Processes The company has a research and a development team which has ongoing research programs to develop new products required in the clinical applications and surgical applications to enlarge the company's product mix in the highly fast growing bio-surgery industry. (LifeCell Company, 2007) Industry overview Soft tissue, for example dermis, blood vessels, nerve connective tissue and heart valve encloses an intricate, three-dimensional makeup which consists of manifold forms of elastin, proteoglycans, collagen several proteins as well as vessels (tissue matrix). As component of the human body's normal remodeling procedure, cells In a tissue constantly degrade during this process it replaces the tissue matrix. Nonetheless in the occasion of a large port of tissue matrix is lost or destroyed as a result of surgery or trauma, the human body cannot be able to regenerate that destroyed part this results in scar development. In such a case, surgeons encounter several treatment alternatives for repairing physiology and structure function, the alternatives includes using implants materials from the patient's body parts ("autograft") or created allograft tissue or using synthetic products. The company believes that the best alternative is the use of allograft or xenograft from the company which do not cause tissues matrices to undergo any damages. (Covell, 2006): Industry and market data Table 2, below, has estimated market information of the company's main products in the USA market. The information was derived from market research, statistical data, and company estimations industry information and some other public available information. Source; Source; Securities and Exchange Commission (2008) Product /Clinical Applications Targeted U.S. Annual Procedures (1) Revenue per Procedure (2) Reconstructive Tissue Products Head and neck 70,000 $200 - $800 Abdominal wall 150,000 $ 2,500 - $10,000 Breast reconstruction 60,000 $1,500 - $4,000 Orthopedic Tissue Products Tendon and ligament repair 220,000 $300 - $1,000 Lower extremity wounds 200,000 $400 - $550 Spine procedures 200,000 $150 - $650 Urogynecologic Tissue Products Bladder sling 100,000 $350 - $650 Pelvic floor reconstruction 55,000 $650 - $1,300 Marketing and distribution The company currently markets Alloderm in the USA through direct selling and by use of marketing organization. Similarly, Strattice is also marketed in the same way. As at 2007 December, the company had marketing and sales workforce of 117, which included 89 persons in the local sales organization. The sales representatives have a duty of interrelating with general surgeons, as well as plastic surgeons and other surgeons to educate them on benefits of using the company's products. The sales staff thus is highly experienced and professional. (Business Week, 2007) Distributors Implant systems Inc. is the exclusive distributor of life cell products in USA and in particular global markets of Alloderm. Wright Medical Group; is the exclusive distributor of GraftJacket in the USA, and other specific international market. Stryker corporation; is the exclusive distributor of the company's AlloCraft DBM in the USA markets and any other markets. Boston Scientific Corporation; is the exclusive distributor of Repliform in the USA and all other global markets. Securities and Exchange Commission (2008) Government policies Government policies and regulation both locally and in foreign markets are important factor in processing selling and distribution of the company's present products and those being developed. In America life cell products are subjected to Food and Drug Act, Food and Cosmetic Act, and the Public Health Services Act, these regulation acts governs the designing, testing, production, storage and marketing processes of the products. So far, the company has been able to follow these regulations and avoided fines and lawsuits. Securities and Exchange Commission (2008) Competition Medical technology sector is currently undergoing fast and important technological changes. Lifecell has been able to remain competitive through its ability in developing and marketing effective and efficient product mix. Lifecell products compete with autologous tissues and other different commercially marketed products created from synthetic substances and biologic substances of animal or human tissue source. Competitors of Lifecell include companies such as Johnson & Johnson; W.L Gore and Associates, C.R Bard; and Integra Life Sciences Holdings. (Business Week, 2007) Employees As at 2007 December 31, the company had a workforce of 443, out of that 117 employees work in the sales and marketing department which also includes the customer care services. 217 were in production department, 71 of them in research and development section, while 38 were in administration department that also deals with accounting. (Business Week, 2007) Risk factors The company highly depends on earnings from AlloDerm product, if the company for one reason or another fails to maintain, raise or replace the earnings from AlloDerm, then the financial position and operations of the company will be adversely impacted. This can be ascertained from the point that, during 2007, 2006, and 2005 financial year, earnings from AlloDerm represented about, 88%, 85% and 79%, correspondingly of all products earnings. Government policy and regulations; failure of complying with the government regulations pertinent to the company's products could also negatively affect the selling of those products. Thus, the company financial situation and operations could be adversely and materially affected. (Business Week, 2007) Other risks includes 1. Damages claims by third parties, as well as product liability allegations 2. Reliance on a limited amount of supplies for human cadaveric tissue 3. Negative publicity concerning using of provided human tissue in medicinal procedures; 4. Disruption to company's operations 5. The impacts of competition; 6. Inability of protecting company's intellectual property; 7. Reliance on self-regulating sales and marketing agents and distributors to generate part of our revenues; 8. Incapability of developing and commercializing new products(LifeCell Company, 2007) Financial performance Stock The company is listed on the NASDAQ global market, at February 2007, the price of the company's share was $36.80. The table below outlines the low and high stock price for two previous years. (Business week, 2008) Price Range 2007 2006 High Low High Low First Quarter $ 25.82 $ 21.88 $ 24.05 $ 18.09 Second Quarter 32.66 24.41 31.98 20.95 Third Quarter 38.75 29.70 33.00 24.78 Fourth Quarter 48.28 37.50 33.39 20.94 Source; Securities and Exchange Commission (2008) Revenues performance With the increased level of competitiveness in the business world and high tempo of change at present, a company needs to put in place strategies which will ensure that it achieves its financial objectives and goals. LifeCell Company has managed to put in places measures which have seen the company financial performance grow each year. Chart 1, shows how the revenue of the company has been able to grow over the past four years and also indications show that the company is bound to continue growing as the industry is rapidly growing and the market is still wide. The competitive advantage of LifeCell comes from the fact that, LifeCell product mix and innovation advancements of the company coupled by the strong marketing team the company has. (Business Week, 2007) Conclusion LifeCell develops, processes and markets biological or organic soft tissue restore products created from human being ("allograft") as well as animal ("xenograft") tissue. Medical doctors utilize LifeCell products to repair structures, functions and physiology in different of reconstructive, orthopedic and urogynecologic surgical processes. The company business operations and are sound, as ascertained by its profits which have been increasing over the years. The company will be a good acquisition for any company which is looking to increase its market share. The tissue based industry is still young and the market of tissue products is always growing. Thus the company is poised to grow further and even earn much more than it has earned before. Further more the company has a good management and workforce team which can be used to drive the company to new heights. Though acquisitions can offers different challenges, particular financial and management, I believe that acquiring LifeCell will be much more beneficial to the Embry Investment Group (EIG) Reference: Business Week (2007): Business week's hot growth companies Hot Growth Special Report 2006, LifeCell (LIFC) Business week (2008): Biotechnology Industries LifeCell Corp. (LIFC: NASDAQ) March 27, 2008 Covell, J (2006): BNET Business Network: LifeCell Corporation; available online on www.bnet.com LifeCell Company (2007): LifeCell's Technology; available online on: http://www.lifecell.com Accessed on 28/3/2008 Kotler, P. (1988): Marketing Management: Analysis Planning and Control, Prentice-Hall Securities and Exchange Commission (2008): Annual Report; LifeCell Corporation; Washington, D.C, 20549 Read More