BENEFICE LIMITED

PRESENTATION BY TEAM 5
THE TEAM…

Sl. No. Roll. No. Name

1 1914074 Shruti Vijay
2 1914001 Niraj Agarwal
3 1914061 Praveen Sasidharan
4 1914022 Hardik Gandhi
5 1914046 Akash Mishra
 BENEFICE LIMITED & ONCOCURE
BENEFICE LIMITED A pharmaceutical firm (Acquirer)
• Grown by acquisition of companies engaged in drug discovery & development.

ONCOCURE A pharmaceutical firm (Acquiree)

• Owns the rights to several product candidates
• Engaged in R&D in immunotherapy, which promises the treatment of cancer with fewer side effects.

The Scenario
Benefice acquired Oncocure Limited including
• Rights to all of its product candidates
• Testing & development equipment
• Scientists formerly employed by Oncocure
 DEBRIEFING THE CASE

Management

• Seasoned in acquisition processes

• Robust system is in place for all stages of acquisition.
• Most acquisitions have worked well.
• SPOT-ON, Benefice’s valuers, uses standard methods based on income and cash flows.

Rupali’s Concerns

• Valuation of Oncocure’s business.

• Patents & in-process research and development (IPR&D) are the most contentious.
• Target company’s owners often over-value the intangibles.
RUPALI
• Unease within Benefice on how to allocate purchase price
(Finance Controller)
• External auditors raised concerns about valuation methodology
• SEBI & MoCA are taking aggressive actions on acquisition-related practices, especially for intangible
assets.
PROCESSES OF ACQUISITION

Implementation

Financing

Purchase & Sales

Contract
Due diligence

Negotiation

Valuing &
Evaluation
Acquisition
Planning
Searching the
Target
Acquisition
Criteria
Acquisition
Strategy
 IMPORTANT CONCEPTS (IND AS 38)
• A resource
• controlled by an entity as a result of past Ind AS 38
Asset events; and Definitions
No.8
• from which future economic benefits are
expected to flow to the entity
• Identifiable non-monetary asset without physical Ind AS 38
Intangible Asset Definitions
substance. No.8

• It is probable that the expected future

Ind AS 38
Recognition of economic benefits that are attributable to the Para 21 (a)
Intangible asset asset will flow to the entity & (b)
• The cost of the asset can be measured reliably
 INTANGIBLE ASSETS & GOODWILL
Examples of Intangible assets
Technology Customer Marketing Artistic/Creative Contract Based
Patented & Customer Contracts Trademarks Copyrights to market Licensing
Unpatented Tech arrangements
Database Customer Lists Distribution Copyrights to movies, Royalty Arrangements
Networks plays
Customer Brands Copyrights to Books
Relationships

GOODWILL- It’s a long-term (or noncurrent) asset categorized as an

intangible asset.

Goodwill=(Cost to purchase the business) – (fair market value of the

tangible asset) – (fair market value of intangible assets) – (liabilities
obtained)
 HOW TO MEASURE AN INTANGIBLE ASSET (IND AS 38)

An intangible asset shall be measured initially at cost. (Para 24)

Separate Acquisition (Para 25)- The drivers of price an entity pays to acquire separately an intangible asset
 expectations about the probability that the expected future economic benefits embodied in the asset will flow to the entity
 the probability recognition criterion in paragraph 21(a) (Recognition of intangible asset) is always considered to be satisfied.

Manual measurement (Para 26)

 The cost of a separately acquired intangible asset can usually be measured reliably, when the purchase consideration is in
the form of cash or other monetary assets.

Cost of intangible asset comprises of (Para 27)

its purchase price, including import duties and non-refundable purchase taxes, after deducting trade
discounts and rebates
any directly attributable cost of preparing the asset for its intended use.
 MEASUREMENT OF INTANGIBLE ASSETS DURING BUSINESS
COMBINATIONS
An intangible asset shall be measured at its fair value at the acquisition date (Para 33)

Economic Benefits
 the entity expects there to be an inflow of economic benefits, even if there is uncertainty about the timing or the amount of
the inflow
 probability recognition criterion in paragraph 21(a) is always considered to be satisfied for intangible assets acquired in
business combinations

Cost
 If an asset acquired in a business combination is separable or arises from contractual or other legal rights, sufficient
information exists to measure reliably the fair value of the asset
 reliable measurement criterion in paragraph 21(b) is always considered to be satisfied for intangible assets acquired in business
combinations.
 WHY COMPANIES OVERVALUE THE INTANGIBLE ASSETS
It’s been seen that the pharmaceutical companies generally overvalue
the intangible assets.

Greed can be the prime motivator for it, as it leads to short term
benefits. Acquire

Fear of losses is another reason for over valuation which leads to
the ‘Over valuation Trap’.
Vicious

The Over-valuation Trap: Once this cycle starts, companies are circle of
forced to over value assets in order to cover up for the previous
valuation errors aggressive
approach

How do such companies justify their over-valued buys?
In long run, Overvalue
 By claiming synergies and “platform value” that can theoretically justify
their valuation.
incur loss asset
 The company keeps making acquisitions so that the rosy picture can
stay, until the whole edifice comes crashing down.
EXAMPLE- VALEANT (VRX).
VALUATION MEASUREMENT METHODS
Approaches for
Valuation of
Intangible Assets

Used by
Market Income BENEFICE
Cost Approach
Approach Approach

Discounted
Public Company Cashflow
Comparables (intrinsic Value) Cost to build
Precedent method Replacement
Transactions cost
Forecast future
cashflows
 Q1 & Q2: ISSUES AND THE IMPACT ON BUSINESS
SELECTING THE RIGHT VALUATION METHOD
Acquiree-based valuation method
Current Scenario: Benefice’s valuer (Spot-on) uses ‘income method’ for all acquisitions (including Oncocure)

Risks:
• Income method uses the future cash-flows / revenue potential to calculate cost of intangible asset
• This is highly subjective, especially, when there is no market reference or similar products in market
• This might lead to over-valuation of the asset

Suggestion:
• In cases like Oncocure, better to use Cost Method
• Easier and more accurate valuations
• Probability of over-valuation will be lesser
 Q1 & Q2: ISSUES AND THE IMPACT ON BUSINESS
PURCHASE PRICE ALLOCATION – AGGRESSIVE V/S CONSERVATIVE
AGGRESSIVE CONSERVATIVE
Short-Term Long-Term* Short-Term Long-Term
Asset
Expense
Profit

*Assuming a competitive and unstable market

 Q3: LEARNINGS FROM THE CASE
1 year 2 years 4 years 5 years
Particulars
Aggressive Conservative Aggressive Conservative Aggressive Conservative Aggressive Conservative Assumptions
Asset 90 10 81 9 72 8 1 1 1. Initial expense is kept as 5.
Expenses 15 95 14 6 14 6 76 12
Revenue 50 50 50 50 50 50 50 50 2. Revenue is considered same
Profit 35 -45 36 44 36 44 -26 38 throughout at 50.
ATR 0.6 5.0 0.6 5.6 0.7 6.3 50.0 50.0
Profit Margin 0.7 -0.9 0.7 0.9 0.7 0.9 -0.5 0.8 3. Amortisation @10% considered.
4. In the 5th year, scenario is
considered when company decides
to expense the asset as it sees no
benefit out of it in the future.
Q3: LEARNINGS FROM THE CASE

Seeing the trend of profit margin it can be seen that in case of aggressive
accounting, in longer term profit margin tends to be negative.

The company might be forced to acquire again to hedge the losses.

Whenever in doubt, expense it!!!

Conservative approach also gives opportunity to pay lower tax in short
term.

Approaches of valuation

Market Approach- Its done when precedent is available

Income Approach- Forecast the future performance of business (about 5
years).

Cost Approach- Replacement cost
THANK YOU