Page 18 - CIMA SCS Workbook November 2018 - Day 2 Suggested Solutions

SUGGESTED SOLUTIONS

more onerous than for human medication so that suggests we would be well placed to deal with
them.

Costs

As with human medication the testing and approval process is likely to be quite costly. Some of
the machinery and technology used within Novak already may be suitable to be redeployed into
veterinary medication, but it is likely to be fully utilised already so there could be significant
capital expenditure on new equipment to start the research process within Novak.

Margins

Finally, there is a risk that margins in the veterinary medication market fall short of current
expectations and so would be disappointing for shareholders. The only price mentioned does
sound very appealing, but we do not know how much the cost of such an item would be to make
and what margins the manufacturer would get.

Controls

As you suggest there are ways to mitigate some of the risks that I mention and the below sets out
some of the ways Novak could control the risks mentioned.

Acquisition

The timing issue could be mitigated somewhat by acquiring an existing veterinary medication
provider and using our strategic capabilities to help increase the returns that they yield. Novak
has experience of acquisitions, having completed three just last year, and so this could speed up
parts of the acquisition process. We would hopefully be acquiring some successful products, but
also some current research and development that we would only need to guide through the final
stages before more returns came through. Any target company should also have testing and
research centres of their own, thus reducing the capital expenditure of an organic move into this
market.

Separate brand

Acquisition would also help with the branding issue, as we could maintain the brand of the
organisation that we purchase therefore avoiding any confusion between human and veterinary
usage. This would also help if the venture were to struggle as there would be less damage to our
current brand image. The issue of staffing, knowledge and unknown regulatory approval
processes would also be lessened by acquiring a current player in this market, although care
would need to be taken to make sure the key staff were retained. Furthermore, as you are already
aware from experience, acquisition is not without its own risks.

Recruitment

If Novak chose to attempt this through organic growth then recruitment would assist with the
knowledge, staffing and regulatory issues. A new division could be set up and a director of
veterinary medication could be hired to lead the venture. Hiring the right individual to lead this
challenge would be vital, and would assist with making sure that the division was well controlled.

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