Page 10 - CIMA SCS Workbook November 2018 - Day 1 Tasks

CIMA NOVEMBER 2018 – STRATEGIC CASE STUDY

The regulatory authorities have a large role to play in the success of any pharma company. In
order to receive a licence to market a drug, the developer must prove that the product has a
beneficial effect in treating the targeted disease/illness and not have serious side-effects. Most
countries have such a regulatory body; in Cronland it is called the Pharmaceutical Testing
Authority (PTA).
In many countries, such as Cronland, healthcare is funded by the state, and a second regulatory
body will determine the case for any new drug to be approved for purchase on cost/benefit
grounds. If the state does not fund healthcare, patients tend to have health insurance, in which
case insurance companies will decide which drugs it is prepared to pay for. In Cronland the
Pharmaceutical Review Agency (PRA) is the organisation that makes such decisions.

Once a drug has been successfully developed, it stands to reason that the developer wants
protection against rival companies producing copycat drugs and undercutting on price. Patents
offer such protection, and gaining a patent successfully is a critical success factor for these
companies. Typically a patent will offer global protection for 20 years, but can be extended in
certain circumstances. Patents will have different lives in different countries, and so a drug can go
“off-patent” i.e. lose patent protection at varying points in its life. The patents are typically
applied for part-way through the development process, and so will not necessarily have the full
period of protection remaining at the point that the drug first starts to earn revenue.
It is possible to licence a product to a rival pharma company i.e. to receive royalty income in
return for allowing that company to make a product that still has patent protection.
It is also possible to make “generic” drugs i.e. pharma products that were developed by another
company but the patent for which has now expired. Novak is not involved in such activities.
The customers of pharmaceutical companies tend to be large hospitals, large pharmaceutical
companies (e.g. Boots in the UK), and wholesalers who then sell to smaller pharmacies. Sales are
not made direct to patients.
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Novak was founded as a company in the middle of the 19 century, and became quoted on the
Cronland Stock Exchange in 1960. It has 2 research centres, and 1,500 scientists work at each, one
based in Cronland and the other in Westralia. It also has 12 factories at which its products are
made, of which 3 are in Cronland. In total it employs 108,000 people.
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At present, as already mentioned, it is the 7 largest company globally by sales, but such rankings
can be volatile; if a new successful drug is launched, sales can increase significantly. However, the
expiry of a patent can have the opposite effect. Novak saw 2 of its most successful products go
off-patent at the end of 2016.

Novak has a reputation for being highly innovative, and finds that this helps it to attract high-
quality research staff. Its past successes also mean that it has a good reputation amongst the
medical profession. The company has experienced some recent disappointments in the testing of
new drugs, but the Board is confident that it will soon launch 3 major products.
The margin earned on a successful drug can be extremely high; details are given for Mintac, one
of Novak’s most successful antibiotics, which shows that for a cost of C$0.095, each tablet sells for
C$5.27. This is a margin of 98.5%.
During the year to 31 December 2017, Novak patented 98 new compounds, showing on-going
commitment to invest for the future. The company also claims to have the highest commitment
to ethical practices; the scope for examining ethics is very extensive for this case.

Novak is currently working on developing new and effective alternatives to testing on live
subjects. For example, computer simulation and using DNA sequencing can enable new
compounds to be tested using virtual techniques, speeding up the development process and no
doubt meeting with the approval of those who campaign against testing on animals.

6 KAPLAN PUBLISHING