This article is the second of a two-part article written for Pharma’s Almanac discussing the unique value proposition of used pharmaceutical manufacturing equipment. All manufacturing organizations need to responsibly manage assets, but pharmaceutical equipment requires unique strategies to manage and recapture its value.
Investment Recovery for Pharma Equipment,” the first of two-part article, can be read in its entirety in the Q2 Pharma’s Almanac. This is a short synopsis of Part I, which discussed the various affects that both mergers and acquisitions, and an ever-changing product mix, have on pharmaceutical companies. Often the result is two distinct challenges — one is managing surplus inventory, and the second is managing an effective capital equipment investment recovery strategy that addresses the surplus inventory challenge.
There are a number of best practices for viable equipment investment recovery strategies. The first half of this article introduced us to five investment recovery practices for a pharmaceutical manufacturer to consider.
The five strategies were:
- Inventory identification
- Valuation of the inventory
- Internal uses or redeployment
The first three were covered in the first article and are revisited here briefly.
Identifying surplus inventory, while time- consuming, is the essential starting point. Starting with a solid asset list for the area is the best starting point for an equipment inventory. The inventory identification is a critical step in determining what items are available for sale and addressing the three main considerations:
- Cleaning and decommissioning
- Proprietary considerations
- Approvals and documentation required to sell.
Once the equipment has been inventoried, its value needs to be established. This will typically involve internal and external research.
Every capital asset should have two values in the accounting records, purchase price and net book value. However, neither value is conclusive when assessing fair market value. Fair market value represents what the equipment is worth on the market, either wholesale or retail. Wholesale is what a dealer would be willing to offer. Retail is what a final end-user would pay and is generally the higher number of the two.
Both prices have some art and science behind them and are a function of the overall secondary market for such items. Formal appraisals can provide guidance toward either price. Formal appraisals, most often associated with the due diligence required for loans or mergers and acquisitions, are based on what the equipment would sell for in an orderly liquidation and is based on insight from used equipment dealers. The greatest value is almost always from internal reuse or “redeployment.
Many companies implement redeployment programs within their manufacturing networks. Often, the same makes and models of equipment are used in different facilities. This is especially true of lab equipment. Redeployment, or moving a piece of equipment from one facility to another within your network, is the most efficient use of idled or surplus assets. The equipment history is known and experiences are easily transferred. This all works in theory. In practice, the process can be quite cumbersome.
Once the inventory has been identified, accurately valued, and reviewed for possible internal redeployment, the next steps are removing the equipment and, if it is not being reallocated internally, preparing it for sale.
Whether redeploying or selling externally, the costs and options to remove and transport the equipment should always be evaluated within the context of the project.
Whether redeploying or selling externally, the costs and options to remove and transport the equipment should always be evaluated within the context of the project. Sometimes, the cost to remove and transport the equipment exceeds the value of that equipment. In redeployment situations, there is a question of who bears the cost of removal. This is usually defined in the redeployment policy, but it may also be a case-by-case situation as well. Most often, the receiving site will pay the removal costs. Removal costs and who bears them are a significant factor to consider when selling externally.
There are a number of different ways to approach the external market for surplus equipment sales. The approach you choose will depend on the following factors.
- The organization of the investment recovery group
- The requirements of the project
- The assets themselves
To simplify this discussion, the assumption is that the surplus assets are not being sold as a going concern or as part of a complete facility sale.
The first step is to determine how many resources are available to support the sales effort. This is dependent upon the organization. There are two organization models being considered, a dedicated investment recovery department versus an ad-hoc team approach.
- A dedicated investment recovery department is staffed and resourced to sell to the external market. All of the required policies and procedures are in place.
- An ad-hoc team approach involves third-party auctioneers and dealers.
For example, auctions and liquidations usually focus on a specific end-date at which point all of the assets must be removed. Since auction buyers generally pay for removal as part of the purchase price, the seller can enjoy significant cost savings, even if the auction-sale value itself is lower than expected.
There are three potential types of offers for an auction; a lump sum sale, a guaranteed minimum return and a commission sale.
Lump Sum Sale
A lump sum sale transfers all of the assets to the buyer and provides a target date for removal. This puts the speculation risk on the lump sum buyer, but allows for no sharing of any potential upside in the marketplace.
Guaranteed Minimum Return
A guaranteed minimum return ensures a minimum lump-sum sale price while allowing the dealer and seller to share in the upside of a positive sale after the dealer recovers the guaranteed minimum. The dealer also recovers some amount for the expense of running and marketing the sale.
A commission sale usually puts the return risk on the seller, where the dealer recovers expenses and then a commission from the sale. Not every project is fit for a liquidation or auction. The asset class will help determine the best method for selling a group of equipment. In general, goods that are commonly used among different industries are more likely to have a successful auction, as opposed to goods that are specialized or have a narrow use.
Additionally, not every project requires the liquidation of all of the assets of an area or an entire facility. Equipment in storage or only certain pieces of equipment may be best on an item-by-item sale. In an item-by-item sale, a reputable dealer will be in a good position to help identify the inventory, evaluate removal alternatives and costs and suggest shipping and sales methods that can be helpful for the person who does not have resources available to help with investment recovery activities.
Surplus and idled pharmaceutical equipment cost pharmaceutical manufacturers money. They consume rented space or, even worse, highly valuable warehouse or GMP manufacturing areas.
If they are in a manufacturing space, they are visible clutter to inspectors. They are also listed as assets (which make no money) on the financial books. A solid investment recovery strategy helps pharma manufacturers manage this surplus equipment inventory and maximize that equipment’s value in the marketplace according to project timelines.