MGT 8002 Strategic Management | Innovative Biotechnology
Introduction MGT 8002 Strategic Management
MGT 8002 Strategic Management are a pharmaceutical private company1 headquartered in Malaysia and owned by the Osman family. The chairman of the Board is Mr Haji Mohd. B. Osman. Mr Mohammad was a highly respected chemist who began to design new products from the back of his chemist shop in Subang Jaya. From these humble beginnings, he began to sell his products through suppliers to local Doctors and hospitals. This was the forerunner to an innovative culture inherited by the present company. In 1995, Mr Mohammad employed a dynamic CEO, PK Hong Lee (known as PK) who has progressively grown the business. While the Chairman and his daughter, Siti Bt. Osman sit on the Board, they leave all the running of the business to PK. Miss Siti however is increasingly scrutinising Home’s financial returns and is increasingly pressing PK for more profit as her father allows her to play a more prominent role in the business to protect the family’s interests. This comes on the back of Miss Siti’s graduation from an Australian university with an accounting degree.
From its early beginnings in 1985, the company has progressively established a culture of research with a largely focused strategy of producing over-the-counter (OTC) drugs. During the last decade however, the company has progressed its research into new products including bio-medical and health food supplements (HFS) including more recently radical innovations in hearing devices (HD). Approximately 80% of its products are locally researched by scientists in Malaysia with some product licenses recently acquired from Australian manufacturers to produce and market OTC drugs and health food supplements. However this is only at an early stage. Earlier growth patterns belie more recent trends of slow growth in OTC; in future years, the company envisages much stronger growth in its new innovations spurred on by capital injections of US$30million in OTC and US$40million in 2015/16. From 2017 on, HP has reworked their strategic plan to grow market share. This is particularly relevant given that the market in the Malaysian region has witnessed slow to medium growth with many large global pharmaceutical companies already establishing strong market presence. The Malaysian market however is expected to continue to grow. While HP relies on a highly innovative approach, this has mostly been within the
Malaysian context. While much of the company’s staff is highly trained and skilled, general management staff are not globally experienced. Similarly, while HP has enjoyed much success in OTC, larger competitors are gaining market traction and the industry is highly competitive. Global competitive firms for instance appear to dictate key success factors even though smaller firms such as HP are well entrenched. While staff appears to be loyal and dedicated given the high level of staff buy-in to innovation, there is increasing concern that the company will continue to lose market share unless something can be done. More recently, the local Minister for Health was starting to enforce stricter drug approval procedures following entry into the World Trade Organisation and tighten laws related to intellectual property rights following recent patent infringements between and across Asian countries.
Global Pharmaceutical Industry Factors
The pharmaceutical industry across countries is technology intensive with research and development activities at the vanguard of most industries. Governments from highly developed countries openly support the national industry given its potential for new innovations and exports and contribution to national health. The industry in generally dominated by OTC medicines and the production of innovative drugs with a worldwide industry growth of 7.5% per annum expected between 2014 and 2019. Central/Eastern Europe is expected to grow by 9.7 per cent, the Americas (7.3%), Middle East and Africa
1 This is a close representation of an actual company however for the most part, it is entirely fictional. The case is specifically designed for the purposes of students studying the MBA & Masters programs in Strategic or Corporate Strategy. Similar names, places or events described are purely coincidental. The background to the case has been researched based on publically available research data however third party reports and accuracy of the data cannot be guaranteed. Permission to use this case is required with the copyright, Peter A. Murray, USQ Business School.
(8.6%), Asia-Pacific (4.9%) and Western Europe (6.8%).2 With a high global growth rate expected, global annual sales of pharmaceuticals is expected to reach US$1,158.5 billion in 2014; given forecasted annual growth at 7.5%, this translates into one of the highest global growth rates for any industry from 2015 through to 2020. A number of global industry attributes define the key success factors (KSFs). These include – but are not limited to – global funding partnerships for research, a high proportion of innovative biotechnology companies, high rates of R & D, strong rates of commercialisation, Government support nationally including funding mechanisms, national pharmaceutical industry strategy groups, capacity to work with industry stakeholders, capacity to develop a strong innovation culture and strong regulatory environment.3 The global market for drugs is large and growing with half of all sales made by the top 10 global companies. However, across countries, international competition at an industry level is quite pronounced however there appears to be room for low cost generic products and niche high-end quality products.
Asia-Pacific Region & National Pharmaceuticals
The Malaysian economy in 2014 and beyond reflects many years of economic and political transformation that aims to transform Malaysia into a high-income nation by 2020;4 with the country ideally located at the heart of the ASEAN nations that when combined, extend the broader regional population to over 600 million people.5 This is a significant market reach. Major economic sectors appear to be relatively strong such as the banking sector and in recent years, the country has liberalised the education sector with the population becoming more qualified with tertiary graduates. The banking and finance sector in particular have strong credit policies and this comes on the back of a strong domestic economy which contributes up to 60% of GDP. The employment rate is steady at around 3.5% and the country has enjoyed a current account surplus and a low inflation rate of around 2%. This compares favourably with many leading economies in the region such as Australia and Japan. However, Malaysia is heavily dependent on major trading partners because of a relatively small domestic economy in GDP terms resulting in Government debt ballooning to over US$165 billion leaving some economists to ponder that the debt-to-revenue ratio of 250% is similar to that of Italy.6 The country is too dependent on palm oil and gas as an export and this became more apparent after the amendment to the ASEAN- China Framework Agreement (22 November 2015) enhancing economic cooperation with a free trade agreement with China. This resulted in a flood of both cheap and expensive imports. Similarly tax reforms are needed. The government is searching for new industries into the future to carry the load since government revenue has not increased in tandem with GDP.7 Politically the country has a democratically elected government and a vibrant opposition which sends an important signal to global countries wishing to invest in global ventures. Global MNEs increasingly favour strong politically stable domestic environments. Also, businesses are attracted to Malaysia because of the low standard corporate tax rate (24% in 2017) and ease of commencing a business with less bureaucracy than new business start-ups in other countries. The latter for instance confirms recent investment reports by the World Bank ranking (2016) the country the 23th best in which to do business.8 Similarly, foreign direct investment is a strong sign of a countries political, economic and social outlook and according the World Investment Report of 2013, the country is the third largest recipient of FDI (Foreign Direct Investment) in the ASEAN nations. Malaysia also ranks third largest in GDP of all ten ASEAN countries. Following a surge in foreign investment in 2015, global FDI fell by 2 percent in 2016 and a moderate rise of FDI flows is expected to continue into 2018, according to the World Investment Report of 2016.9
2Adapted from the Department of Industry, Australian Government, accessed February, 2014. See also freeassignmenthelp.com/Pages/default.aspx
MGT 8002 Strategic Management | Innovative Biotechnology
7Op cit 5
Malaysia, notwithstanding its growing reputation, is losing high quality workers to other countries such as Australia and Singapore according to some reports.10 The country has not moved to a high income society reflective of the country’s passion for global investment. That is, the Government has not invested in local high value added businesses to any great extent with most of this growth attributable to MNEs. This has translated into a low wage income model, the abandonment of productivity growth and poor technology know-how industries more generally. This view can be contrasted however by recent reports that suggest the pay-to-productivity ratio is ranked 3rd globally outranking countries such as China, the US and Australia.11 Generally however, high pay-to-productivity ratios could be the result of lower overall wages and salaries, not necessarily higher productivity output per worker, suggesting that socially at least, the standard of living may be lower than close trading partners. Malaysia is a success multi-culturally though in the same way Australia relies on a diversity mix of ethnic backgrounds. This is a strong feature and testimony to country factor conditions and access to a strong pool of workers for global investors. The country also boasts one of the world’s great vibrant cities (Kuala Lumpur).
Together with a number of neighbouring cities, Malaysia offers a wide choice of cultural entertainment, fine food restaurants, educational and housing options and is continuing to develop the country’s road network by building a convenient transportation system.12
There are twenty three countries within the Asia Pacific region with China having the largest GDP (US$11,392 billion), Japan second (US$4,730 billion) and Australia third (US$1,257 billion) (2016 ranking). Malaysia is ranked below these countries with a GDP of US$303 billion.13 Within the Asia- Pacific region, the three countries of China, Australia and Malaysia are large players in the pharmaceutical industry but for different reasons and broadly represent the region. Out of a population of approximately 28 million in Malaysia, 63.4% is aged between 15 and 64 with a large young population (32.2%) with 4.4% of people aged over 65 years. The population nonetheless is ageing spurring demand for pharmaceuticals; health care in the region is expected to grow at 13 per cent per annum 14 and there is a large demand for prescription drugs and increasing.15 Products manufactured in Malaysia can be categorised into four areas including prescription medicines, over-the-counter products, traditional medicines and health/food supplements.16 There are also imported proprietary drugs, generics manufactured locally (such as those by Home Pharmaceuticals) and imported generics.17 Proprietary drugs that are increasingly based on new innovations allow local companies to establish a stronger presence in the Malaysian market. Home pharmaceuticals demand schedule and breakdown by product (Figure 1) is represented by one or more of the above areas.
According to Hassali et al. (2009), new possibilities are available for national firms including major drug companies searching for outsourcing. Local companies such as Home are capable of producing licensed manufacturing given that many global firms seek to concentrate more on time consuming ‘gene hunting’
R&D methods for discovering new drugs.18 For instance, the current estimates of bringing a new chemical or biological entity to market are around US$1.3 billion generally in large global firms and drug development requires a combination of longer development and approval times, larger and more complex clinical trials and increased expenditures on new technologies.19 Similarly, imported pharmaceuticals for generic products are establishing a foothold in Malaysia and a lack of entry barriers
10Op cit 5
11Op cit 4
12Op cit 4
13For the purposes of this case, we will focus on China, Australia and Malaysia broadly representing the wider region. See also
14Hassali, Yuen, Ibrahim, Wong, Ng, Ho (2009), Malaysian Pharmaceutical Industry: Opportunities and challenges. Journal of Generic Medicines, 6:246.
16ITALIA, Istituto nazionale per il Commercio Estero, December, 2012.
17Yu , C . P . , Whynes , D . K . and Sach , T . H . ( 2008 ) Equity in health care ?nancing: The case of
Malaysia . International Journal of Equity Health 9 (7): 1 – 15 .
18Op cit 15
19Op cit 2
has not helped. For instance, the Malaysian Government have only recently instituted procedures to inspect foreign manufacturing facilities compared with regular inspection of local firms.
For its part, the pharmaceutical industry in China is rapidly expanding although much of the industry is fragmented and inefficient 20 when compared to Malaysia and Australia. The industry for instance is extending basic health insurance so that the population has greater access to health products but this is not as advanced for instance as the Australian pharmaceutical benefits scheme which is a government mechanism to provide family access to a range of medicines for all Australians.21 According to Wikipedia, China accounts for only 1.5% of the global drug market yet is predicted to become the world’s third largest prescription drug market going forward.22 Beyond 2014, and given the country’s entry into the World Trade Organisation, China is expected to tighten regulations related to the industry. At present, the industry is geographically scattered, has many outdated technologies, has weak international trading competitiveness and lacks patented pharmaceuticals that are developed nationally.23 Similarly, average annual growth rates of 16.72% point to China as a frontier for future market prospects evidenced by the recent expansion of a global pharmaceutical (Novartis) establishing a stronger R&D centre for drug development.24 While regulations in China have been tightened, strong prospects have to be balanced however with poor evidence of KSFs generally including differences in the treatment of local versus foreign firms, a lack of government incentives, poor drug approval methods and poor intellectual property rights laws.
Australia’s pharmaceutical industry by comparison is highly regulated in terms of the pharmaceutical benefits scheme (PBS) with the Australian Government contributing over $9 million dollars to the scheme by 2014/5. As at 30 June 2016, government expenditure on the PBS totalled approximately $7,964.9 million.25 The industry consists of mainly bio-medical research and biotechnology firms, originator and generic medicines companies and service related segments including wholesaling and distribution. By 2009-10, the industry employed over 40,000 people with a turnover in excess of $22 billion; while Australia’s population is relatively small to global standards, it consumes over 1% of total global sales26 and is expected to export over $5 billion from 2014 given forward projections. To place the Australian industry in context, the drug market ranks 12th largest by Sales in the world while simultaneously ranking 55th on population. This compares with China for instance with a drug market ranking approximately 8th but with the largest population in the world of 1,360 billion people.27 Much of the success in the Australian industry is its spending on research and development and its investment in bio-technology research intensive industries. Figure 2 graphs total turnover reached in the years 2011-13 with growth patterns expected to increase in the years ahead despite the relatively small Australian market overall.
Home Pharmaceuticals & Competitive Trends
The current CEO for Home pharmaceuticals is PK Lee while Mary Chua is the chief operating officer. Dr Paul Greenwood, an Australian, together with a team of thirty highly qualified specialist technical and science staff, are responsible for research and development. The three divisional managers comprising Dr Winnie Tan Khoo, Dr Ahmed Kumar and CT Ramgopal, are in charge of OTC, Hearing Devices and the Health Food supplements strategic business units (SBUs) respectively. Each SBU has a separate manufacturing manager, product manager, and approximately 200 workers in the factory. Home has a relatively flat structure with a small SBU staff enabling quick responses to competitive attacks, at least on paper, but this theory is currently being stretched by global firms and generics invading the home
21Op cit 2
22Op cit 19
23Op cit 19
24Farah, Paolo Davide & Cima, Elena (2010) ‘[
26Op cit 2
market. Marketing and sales up until now has been located with PK in the Head Office along with centralised accounting and computing systems. There is only one major manufacturing facility near Kota Damansara situated in Sungoi Buloh Industrial Park in Kuala Lumpur and this centre facilitates all manufacturing for each division and product distribution. The centralised Head Office is also located here. The company has its own fleet of transport. The manufacturing hub is relatively easy accessed by Damansara-Puchong Expressway however traffic jams often restrict the easy flow of products to suppliers and retailers. The distance travelled between the factory and the airport in recent times has become problematic and PK has been concerned about compromising product-to-market services by air. PK has also been concerned with the lack of global management experience by senior managers as most of these have strong technical backgrounds. While the small marketing team consisting of a brand manager and three product managers have performed well in the local market, PK is unsure how they will respond to much more intense global pressure and the increasing need to manage products strategically. While Figure 1 forecasts indicate reasonably strong growth in future years, specifically 2018, this depends on borrowed capital to inject new innovation and technology. Future market growth is a concern for the company even though they have done well in previous years in growing the company in existing markets. Much of the concern by PK is knowledge of global markets and international strategy. Similarly, he is concerned about the strong capitalisation needs of US$70million in 2016 alone in order to remain competitive. Although capital injections will significantly increase new innovations, debt to equity may increase with possible negative return on investments. He is also worried about the Osman family’s response to such large capital injections at a time of increasing competitive pressures. He has also discussed in detail with the marketing team the dynamics between strictly SBU strategies versus corporate strategy priorities going forward.
Recently, Mary supplied PK with forecasted growth for each SBU by unit and price (Figure 1). After reviewing Figure 1, PK was concerned about SBU 1 and 3 marginal rates of growth going forward even though these SBUs in the past have carved off 5% market share for Home. While OTC represents the largest turnover, this is offset by the need for large capital investments just to remain competitive. In comparison to major competitors however, turnover by size is small 28 although PK is excited about the spur in growth expectations in 2018 in some SBUs. The company has tended to carve out small niche products in the past with high margins. Mary has advised however that SBU1 and 3 forecasts are mostly based on small increment increases or decreases based on current competitive attacks while SBU 2 is reliant mostly on a 50% split between national and export sales going forward. For instance, future pricing of hearing devices 29 is of some concern for Home products together with increasing competition by some of leading brands such as Sonova, William Demant, Siemens, and GN ReSound in the hearing industry. Future potential is being driven however by a low penetration rate and reimbursements of hearing aids by national Governments. The creation of wireless, bluetooth and FM technology are major innovations in the industry driven by an ageing population where 1 in 6 people suffer from hearing impairment and higher in developing countries. Other challenges for Home are common to most businesses such as a social stigma related to hearing loss and rising prices but innovation for PK is the key to hearing aids going forward. He believes that with retailers charging upwards of US$2000 or higher for a unit and newer low-cost firms entering the business from China, Home’s wholesale price will come under threat and he remains uncertain how to position the devices. He notes that an increasing reliance on retail sellers places the spotlight on the quality of current audiologists in Malaysia and the services they provide.
The high margins of the past may in fact be very difficult going forward. Apart from SBU2 where growth expectations reflect market development, Mary explained to PK that the forecasts across the SBUs do not take into account retaliatory business strategies by Home or possible diversification strategies going forward to any great extent. Mary admitted that much of the forecast was based on Home sales staff actively engaged in selling the products to suppliers such as medical doctors and
28In the absence of perfect information & available data, students may make assumptions on the total sales achieved by competitors
freeassignmenthelp.com.choice.com.au/reviews-and-tests/food-and-health/general-health/conditions/saving-on-hearing-aids.aspx. Also see freeassignmenthelp.com.prweb.com/releases/hearing-aid-industry-2013/research- report/prweb11361737.htm
retailers and their assessments going forward about how units will trend. For instance, sales staff has advised that many medical doctors, chemist chains and local hospitals are starting to favour global generics administered by some very large pharmaceutical MNEs who have established a manufacturing presence in the country. This feedback has at least placed in PKs mind the attraction of a no-frills national brand.
The prospect of increasing MNE presence as well as the increasing cost of medicines and drugs available to consumers is a concern for Home. PK has noted that the Government does not have the same level of expenditure on public health compared to some countries such as Australia. The CEO together with his division SBU managers have realised that balancing both proprietary and generics, however conceived and managed, are necessary going forward. For instance, Home currently has patented over thirty local drugs and more recently new designs in hearing aids and hearing technological devices. Similarly, the company name is quite well known throughout the Malaysian region because of its research profile and is quite possibly one of the most research intensive firms although much smaller than some research intensive competitors. A strong distribution system despite Home’s location has been useful in the past with the company owning all of its trucks and vans. Similarly, people are loyal and dedicated and PK is a popular yet somewhat charismatic individual who is well known in the industry for engaging high profile politicians and lobbying important committees. Together with global experiences, distribution costs however have been increasing together with the high cost of technical services and research. Home currently receives no assistance from the current government for research and development nor substantial tax write-offs. PKs best estimates, based on current and forecasted demand, is that market share could fall by 0.5% in Home sales with an increasing heavy reliance on Hearing Devices going forward. He has also been concerned about rising manufacturing costs in technology processes and an over reliance on older technological processes to develop and test new products.
The Malaysian pharmaceutical industry’s Ministry of Health oversees the Drug Control Authority with the latter licensing up to 234 pharmaceutical companies. Out of these, there are 167 traditional medicine and 67 modern medicine firms.30 Moreover, there are six major local companies which comprise Home’s major competitors including healthcare groups. They include Pharmaniaga Manufacturing Berhad, Kotra Pharma (M) Sdn Bhd, Hovid Berhad and CCM Duopharma Biotech Sdn Bhd.31As noted earlier, large MNEs are making inroads with companies such as Pfizer, Novartis and Astra Zeneca setting up licensing arrangements with local incorporated companies with more to follow. Interestingly, Pfizer and Novartis are ranked 1 and 2 in the world in terms of revenue with Astra Zeneca ranked 6th.32
Pharmaniaga Berhad is an investment holding company. Through its subsidiaries, the company manufactures, markets, and distributes pharmaceutical drugs and medical products to government hospitals and private institutions. Pharmaniaga also provides web portal services for online trading of health care products. Kotra pharma by comparison boasts state-of-the-art research facilities mainly focusing on healthcare solutions in therapeutic areas. Kotra is one of Malaysia’s most trusted brands under the Vitamin / Health Supplements Category according to Reader’s Digest Trusted Brands Awards and exports to five countries in the South East Asian region (30 countries in total) which represents 10% of Kotra Pharma’s turnover.33 Hovid Berhad is one of Malaysia’s leading pharmaceutical manufacturers of high quality and innovative medicinal preparations and health supplements with more than 400 products distributed over 50 countries globally.CCM Duopharma from its opening in 1979 has developed and manufactured tablets, capsules, injectables, haemodialysis and irrigation solutions. In more recent years, Duopharma have signed exclusive distributorships for international products and joint
MGT 8002 Strategic Management | Innovative Biotechnology
ventures in bio-similar products. 34 In a greater effort to provide health services for all Malaysians, more recently the Malaysian Government increased the national health budget by 14.5% which appears to amount to a similar PBS scheme in Australia. The Government is arguably motivated by key growth areas for the country such as biotechnology, new drug discoveries, technology acquisition and licensing, generic drug production and new opportunities in the halal pharmaceuticals area. A new European free trade agreement will be beneficial for the country going forward as well. Similarly, the Government is concerned about rising communicable and non-communicable diseases such as diabetes with at least 4.5 million sufferers predicted by 2020.35 It is also useful to note that private healthcare providers such as BP Healthcare group and Ramsay Sime Darby Health Care are expanding their services with the latter group expanding its hospital network.36
While national pharmaceutical companies appear to hold substantial market share, global MNEs have a powerful presence because of the transfer of economies of scale to local importers in what appears to be an industry with reasonably low entry barriers. Switching costs are expected to be high though because of the cost of technology and long-term investments. Local importers and distributors are increasing quite possibly posing an increasing threat to local proprietary products despite significant innovation. Lobbying by some pharmaceuticals is significant pointing to the increasing role to be played by the Malaysian Government going forward. While the Government no doubt sees significant benefits for the industry and the country, there are concerns that regulations, such as the good manufacturing practice (GMP) certification may not be implemented correctly. 37 There are also concerns that the Drug and Cosmetics Regulations have not been effective in preventing non-certified products from entering the country. After arriving home after another 12 hour day, PK was pondering the company’s next stage of growth amidst the pressures of competition, of regulatory bodies, of current market share, of comparative capabilities and increasing demands from the family. He decides to have a second look at Home’s Profit and Loss (Figure 3) and Balance Sheet (Figure 4) while simultaneously enlisting your services as a strategy consultant to advise the business.38 He is very much searching for advice that matches financial reality with novel and careful strategies going forward. He is wondering whether he is making full use of his assets.39
34 Please note, students should examine these companies with a view to assessing key company capabilities for comparative purposes
36http://store.businessmonitor.com/malaysia-pharmaceuticals-healthcare-report.html; see also
38Note, students can make at least two assumptions about staff, about sales and competitors, about comparative capabilities of the two nearest competitors. These should be noted in an appendix.
39See also freeassignmenthelp.com
7Figure 1: Forecasted Growth by Units and Price for Home Pharmaceuticals
in US dollars
Avg price per unit
Rate of Interest
SBU 2: Hearing Devices
in US dollars
Avg price per unit
Rate of Interest
SBU 3: Bio HFS
in US dollars
Avg price per unit
Rate of Interest
% growth rate
8Figure 2: Total Turnover for Australian Pharmaceuticals
Source: Australian Pharmaceuticals Industry Data Card 2014 rmaceuticalsIndustryDataCard.aspx
Source: Australian Pharmaceuticals Industry Data Card 2014 rmaceuticalsIndustryDataCard.aspx
9Figure 3: Forecasted Income Statement for Home Pharmaceuticals (in US$)
Less sales returns and allowances
COST OF SALES
Plus goods purchased/manufactured
TOTAL GOODS AVAILABLE
Less ending inventory
TOTAL COST OF GOODS SOLD
GROSS PROFIT (LOSS)
Advertising & Commissions
TOTAL SELLING EXPENSES
Salaries and wages
Electricity and heating
Interest on loans