Page 5 - CIMA SCS Workbook November 2018 - Day 2 Suggested Solutions

CIMA NOVEMBER 2018 – STRATEGIC CASE STUDY

A further benefit is that NX1 may open new markets to Novak that currently do not represent
sales opportunities. Use of such a loss-leader may make purchasers of drugs in sub-Saharan Africa
(such as the governments of countries where outbreaks of Algernon’s Disease are reported) look
more favourably on other products within the Novak portfolio.

This could then be extended into other areas of the world. For example, whilst the World Health
Organisation is meant to be an impartial body in the decision as to which company’s products are
purchased in different countries, it cannot hurt to have such an influential advocate thanks to
“responsible” research activities. Governments may well sit up and take notice if the WHO were
to praise Novak for investing in an area of illness that other pharma companies are not prepared
to consider.

An additional benefit may be found in the reaction of capital markets. In the modern world many
investment funds will only invest in businesses that, in their eyes, show a commitment to ethical
trading practices. Novak will no doubt look to raise external finance at some point in the future; it
is possible that this will be made easier if, through its past actions, it can satisfy such ethical
requirements. Investing in a product that is of benefit to patients but which is unlikely to make a
profit can only help improve the company’s reputation in this area.

As you have mentioned, world leaders are due to gather at a forthcoming health summit at which
it may be decided to incentivise or even compel global pharma companies to invest in Orphan
Diseases such as Algernon’s. The worst-case scenario for us and our competitors is that we are
forced in some way to invest in areas we don’t want to e.g. via the introduction of new legislation,
or the threat that governments will no longer purchase profitable drugs unless the manufacturers
show a commitment to loss-making development activities as well. At this stage what will actually
be discussed at the summit is just speculation. However, Novak may well significantly reduce the
impact of the worst-case if it decides now to invest in NX1; world leaders may view our company
more favourably than our rivals if we adopt a pro-active stance on Orphan Disease.

Finally, it would appear that no other companies are researching this disease, and therefore
Novak would have the market to itself. There would therefore be no competitive pressures should
a successful drug emerge from the research.

Risks

There are also a number of risks to investing in NX1.

Firstly, the sums mentioned as an initial budget are considerable. C$200 million is a lot of money;
whilst many research projects cost hundreds of millions of dollars, they would usually be in areas
where there is the possibility of a good return ultimately. The actual sum needed to make NX1 a
marketable product could be a lot more, as this is seen as just an “initial” budget.

In terms of revenue, it is extremely unlikely that Novak will ever achieve payback on this
investment. The areas where Algernon’s Disease cases have been suffered are in poorer
economies; this means that the governments will not have the financial resources to afford our
usual margins, and so sales at heavily discounted prices or even donations of vaccines for free will
be needed for patients to receive medication. This will naturally have an impact on the company’s
global margins and profitability.

Thirdly, it is possible that, even if it were to be given away for free, demand for NX1 would be
limited. Information on outbreaks is uncertain and the rate of incidence low. It would also appear
that there has not been an outbreak in the last 3 years, and therefore unit demand is uncertain

66 KAPLAN PUBLISHING