Page 12 - CIMA SCS Workbook November 2018 - Day 1 Tasks

CIMA NOVEMBER 2018 – STRATEGIC CASE STUDY

3 KEY THEMES

There are a number of important themes that emerge from the Novak pre-seen:

Decline in performance
Novak’s sales and profits have declined in 2017, although this may be due to 2 successful products
going off-patent at the end of 2016. It has also recently suffered disappointments in its
development programme, and its share price has fallen by a third over the last 5 years.
Shareholders may be putting pressure on the Board to show improvement.

Power of regulatory bodies
Any pharmaceutical company must prove to the relevant regulatory body that its product is safe
and has beneficial effects on the disease targeted. It must then receive approval from a second
body on the grounds of cost/benefit before sales can be recorded.

Intellectual property
It is vital to seek and gain a patent over a new compound that a drug company is developing in
order that it can then be protected against rival companies producing their own, copycat variant.
Failure to do so can result in millions being lost on research and potential sales. Illegal counterfeit
drugs are also a problem for the industry.

High dividend pay-out
Novak paid out C$9 billion as a dividend in 2017, 90% of its earnings. The company needs to re-
invest much of its profits in researching new drugs for the future, and it is possible that this level
of pay-out will need to be reviewed.

Takeover/merger activity
There is a lot of takeover/merger activity in the pharmaceuticals sector. Often it is easier and
more cost-effective to buy a new company with exciting research projects than develop products
in-house. Novak itself has a history of growing by both organic means and acquisition; it made 3
such deals in 2017.

Advances in technology
There have been many areas in recent times in which pharmaceutical research has advanced –
stem cell research, genetic engineering etc. There have also been developments in how research
is conducted – artificial intelligence, computer simulation and DNA-based testing. This is all with a
view to reducing the testing done on live subjects and speeding up the overall R&D process.

Orphan disease

An orphan disease is one whereby there are only low numbers of people affected. This means low
sales potential for pharma companies, and therefore reduced incentive to invest the cash needed
to create a drug to target the disease. One incentive currently given is longer legal protection

8 KAPLAN PUBLISHING