Page 1 - CIMA SCS Workbook November 2018 - Day 2 Suggested Solutions

Day 2 Suggested Solutions

CIMA NOVEMBER 2018 – STRATEGIC CASE STUDY

CHAPTER EIGHT

EXERCISE 1

Email

To: Dirk Lepain, CEO
From: Senior Manager
Subject: Gaining PRA approval

This email will consider possible pricing strategies that Novak could adopt, and then look at
whether the company should engage Richard Stilton.

Pricing strategies

The pricing strategy that Novak has adopted for its drugs in the past can best be described as
premium pricing. This means that a high price has been charged, typically on the basis that each
drug is unique and cannot be bought elsewhere in the market. This will be in respect of those
drugs that are still protected by patent; any off-patent products are now possibly subject to
generic versions being produced by rivals, and will not be the subject of this discussion.

Charging a premium price has always been justified by the very high costs of research incurred by
all pharmaceutical companies, together with the fact that patent protection will not be indefinite.
Companies such as ours can only afford to risk large amounts of capital if the potential return on
launching a new product makes it worthwhile.

However, given the increasing focus on the cost to governments and insurance providers, and the
powers of approval bodies such as the PRA, it is worth considering alternative means of
determining a selling price.

Cost plus

This means of arriving at a selling price would involve taking the cost of making a product and
adding a mark up to it. This could be done by starting with either variable cost or full cost.

If variable cost were to be used (i.e. the incremental costs associated with each tablet/packet of
tablets) a very large mark-up would need to be added in order for the company to report a profit.
If we were to use Mintac as an example, the variable costs per tablet have been calculated as
C$0.095, and the drug is sold for C$5.27. This represents a mark-up of 5,547% on variable cost,
and may cause bodies such as the PRA to instantly question the justification for this should they
learn of it.

If full cost were to be used, then all research costs involved in bringing the product to a saleable
state would have to be factored in. The problem would now be one of anticipating sales volumes
to arrive at a cost per tablet, and hence a sales price once a suitable mark-up has been applied. It
may be difficult to separately identify all the research costs associated with each research project,
as a number of different research projects may begin with a common idea.

62 KAPLAN PUBLISHING