Client Profile
A pharmaceutical manufacturing company with operations spanning a parent entity and two wholly owned subsidiaries. The company was seeking a $150 million credit facility secured in part by accounts receivable and inventory collateral.
Engagement Overview
Our firm was engaged to perform a collateral exam with a focus on A/R dilution risk and inventory valuation. The borrower operates in a highly regulated and rebate-intensive industry, requiring specialized analysis of customer credits, accruals, and inventory reserves.
Scope of Work
Our review addressed the unique challenges associated with the pharmaceutical sector, particularly around rebate structures, customer credit methodologies, and inventory reserve calculations. Key areas of focus included:
- Dilution & Rebate Programs: The company had a high volume of pharmaceutical rebate activity, creating complexity in calculating true dilution. We evaluated the company’s methodology for accruing customer credits and how rebates impacted net eligible A/R. Our analysis helped establish appropriate reserves that aligned with lender risk tolerance.
- Customer Credit Management: We reviewed historical credit memos, timing of rebate applications, and reconciliation processes to ensure rebate accruals were supported and systematically tracked. Our testing revealed patterns that informed the development of a tailored dilution reserve.
- Inventory Reserve Analysis: The company’s reporting structure required deep analysis of month-end consolidation files spanning three entities. We assessed multiple inventory reserve categories including:
- Slow-Moving & Obsolete Inventory
- Net Realizable Value (NRV) Adjustments
- Expiration-Based Product Risk
- Consolidated Financial Reporting: We worked closely with the finance team to navigate highly complex consolidation reports, identifying adjustments that affected both inventory and A/R across entities. This process was critical in validating the accuracy of reported balances.
Outcome & Impact
Our findings provided the lender with a detailed understanding of rebate-driven dilution risk and collateral valuation across a multi-entity structure. As a result:
- Tailored dilution reserves were implemented to reflect rebate liabilities and credit exposure
- Consolidated reporting processes were clarified to support ongoing lender monitoring
- Inventory collateral was validated with appropriate reserves applied for obsolescence and valuation risk
Value Delivered
- Quantified and supported dilution reserve linked to complex rebate programs
- Validated collateral quality across parent and subsidiaries
- Enhanced lender confidence through accurate consolidation and inventory reserve analysis
- Supported a $150MM facility with safeguards tailored to the pharmaceutical industry
