What does your typical due diligence look like? Pouring over earnings, contacting investor relations, compiling industry statistics, and scanning message boards and newsletters? When considering the investment of your hard-earned money into a company, would you go so far as to take a trip to its physical location? What if the company is headquartered overseas?
QualityStocks managing director Michael McCarthy has set a high bar for due diligence on behalf of the investment community, boarding a plane to fly more than 6,000 miles to Southern Moscow to see Rafarma Pharmaceuticals’ sprawling 270,000 square-foot pharmaceutical production facility for himself.
It may seem like a drastic measure until you consider the skepticism reverse-merger Chinese companies have triggered in the small-cap space in recent years. In 2011, toxicity from illicit reverse-merger companies bled through the Chinese sector and prompted an SEC bulletin warning investors of potential fraud in the arena and how to avoid it. The ordeal left a foul residue on the entire Chinese sector and overseas-based small caps in general, whether they were derived from reverse-merger or not. But the potential of one Russia-based pharmaceutical was enough to spark the interest of McCarthy, who responded to Rafarma’s invite and loaded up the QualityStocks camera crew to fully vet the management and operations of the company on its own soil.
“This client stands out because its state-of-the-art pharmaceutical plant has taken four years of persistent effort and massive investment to get to this point. The other side is that with the onslaught of all the funky China deals, Russia-based companies are often met with skepticism from investors,” McCarthy stated. “On paper Rafarma’s plant looks amazing, but looks can be deceiving. So we brought our camera crew to produce an HD video of the facility, which we will share with investors very soon.”
Rafarma is a Russia-based multi-product pharmaceutical company producing generic antibiotics and specialty pharmaceuticals in addition to its own line of proprietary products that are approved by the Ministry of Health of Russian Federation. The company recently constructed a world-class manufacturing facility capable of producing all types and forms of medical drugs of various pharmacological groups.
The Location
Rafarma is located in the economic zone of Terbunsky, Russia, roughly 300 km south of Moscow, the highly modernized megacity boasting more than 11.5 million residents. The city is the financial epicenter of Russia, with many business sectors, including pharmaceuticals, achieving outstanding growth rates as the Russian government executes a comprehensive strategy to encourage domestic growth and minimize the nation’s dependence on foreign medicines.
Rafarma’s state-of-the-art pharmaceutical plant has been supported by the government of Lipetsk region of Russia, the Ministry of Health of Russian Federation, and the Ministry of Industry and Trade of Russian Federation, which listed Rafarma as one of the leading and most prospective projects in the modern Russian pharmaceutical and medical industry. All this sounds impressive on paper, but the real value lies in the impressive brick and mortar facility itself.
The three-level facility is surrounded by guards and barbed wire, which are reinforced by security checkpoints and key card access throughout the entire facility. What struck McCarthy first and foremost was the sheer size of the facility. Rafarma owns 75 acres, 5 of which are occupied by the company’s manufacturing plant. The remaining acreage serves as a cushion against land lock, and also provides ample room for future expansion. Because the facility is located in an economic zone, when the plant is fully operational it will be exempt from paying local taxes for the first five years of operations.
“Most pharmaceutical plants in the United States and Europe are geographically bound by land lock,” McCarthy stated. “Rafarma, however, has acres and acres of land that will allow it to expand in the future. The Russian pharmaceutical industry is reaching new heights and Rafarma has provided itself the opportunity to grow with it.”
It took two hours for McCarthy and his team to see the entire facility. Rafarma management walked them through different labs and production facilities, which McCarthy describes as immaculately clean, sterile and secure.
“When you see the video the QualityStocks team is producing, you will get a good feel for the plant and its size. But when you’re there in person, hearing and seeing the machines, walking the halls and laboratories, it is absolutely stunning. You’ve got to see it to believe it,” he said.
The Operations
Once the facility is in full operations, it will be a buzzing honeycomb mass producing pharmaceutical products through the entire manufacturing process – from the actual making of the drugs to each pill being sealed in blister packs and shot down a conveyer belt and into packaging where they are boxed, labeled and ready to be shipped out.
As of now Rafarma has 125 employees on its payroll, though the company anticipates increasing its number of employees up to 400 as manufacturing gets underway.
“These guys have the space, equipment and means to run the full spectrum of pharmaceutical operations. From manufacturing to packaging and shipment, they are very close to getting clearance to have all systems on go,” McCarthy explained.
The company’s manufacturing facility is GDP and GDP compliant, and GCP and GMP standards are in their last stages of approval. Rafarma is also working to become GLP compliant, at which time it will be the only Russia-based pharmaceutical company representing the complete cycle of the world’s highest pharmaceutical standards (Good Distribution Practice, Good Clinical Practice, Good Manufacturing Practice, Good Laboratory Practice).
The Future
Rafarma anticipates being completely compliant to industry standards and fully operational by the summer of 2013. The company’s goals are to produce high-quality pharmaceutical products for the domestic market, aiming to reduce prices on certain pharmaceutical products by 30%-40%.
The company is already considered the principle supplier to the Russian Public Health system and the Russian Army, is backed by the biggest bank in Russia, and has invested roughly 100 million euros in its own facilities.
McCarthy notes that big pharmaceutical companies will be drawn to Rafarma’s ability to offer flexibility in meeting mass demand since the company’s facility has the ability to both increase in physical size and maximize capacity.
“This is the Ferrari of pharmaceutical plants,” he said. “The general concern regarding overseas investment may cause some to hesitate, but I believe long term this is going to be a fantastic story. The management team is highly professional and focused. I’m thinking millions of potential profits for these guys long term – they are definitely one-of-a kind.”
The Evidence
Back in the United States, QualityStocks’ media production team is editing hours of video footage of Rafarma’s manufacturing facility and management interviews to produce high-definition videos that fully encapsulate Rafarma’s state-of-the art manufacturing facility and relay its legitimacy, opportunity, and enormity in the best way possible, short of an actual visit to the site. The first trip to Rafarma’s facility was enough to warrant another trip, which QualityStocks has planned later this year to observe the production facility in full swing.
“If Rafarma Pharmaceuticals continues to do what it’s doing and we at QualityStocks can continue to help them grow, we’re going to have a fantastic relationship,” McCarthy stated.
For more information on Rafarma Pharmaceuticals, visit www.rafarma.com
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