Case study details A 2,600 words case analysis into Home Pharmaceuticals’ capability

Referencing Styles : Harvard

Case study details A 2,600 words case analysis into Home Pharmaceuticals’ capability and resource gaps, discuss five possible strategies and then choose two best strategies (one at business level and the other at corporate level), due 29 January 2015, assess your understanding of Lectures 3, 5 & 6 of the course . References You must use at least 15 difference academic references for each of the two case studies Study module references will be highly valuable in both case studies Theoretical concepts used need to be referred to either the prescribed textbook or the Study Book of this course By academic references, we mean referred journal articles, academic books and government reports Referencing The acceptable style of referencing in the Faculty of Business is the Harvard AGPS style. If you need further information about referencing please refer to the USQ Library website for referencing guide in the Harvard AGPS style. https://ift.tt/2mhUWII Key to success You need to focus on conducting theory-guided analysis in both case studies using the templates provided Relate your discussion to relevant theories or concepts of this course as closely as possible Use journal articles as references to support your arguments throughout your case analysis Focus on conducting in-depth analysis rather than giving straightforward description Discuss/analyse from a strategic management perspective. Home pharmaceuticals (HP) 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 2014/15. From 2016 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(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,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 will become more apparent after 2015 when a free

trade agreement with China is likely to result 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 tax rate (24.5%)

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 the country the 12th

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 in the ASEAN nations. Malaysia also ranks third largest in GDP of all ten

ASEAN countries.

Malaysia, notwithstanding its growing reputation, is losing high quality workers to other countries such

as Australia and Singapore according to some reports.9 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.10 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.11

There are twenty three countries within the Asia Pacific region with China having the largest GDP

(US$8,538,400m), Japan second (US$5,960,180m) and Australia third (US$1,564,419m). Malaysia is

ranked eight with a GDP of US$304,726m.12 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 13 and there is a large demand for prescription drugs and

increasing.

14 Products manufactured in Malaysia can be categorised into four areas including prescription

medicines, over-the-counter products, traditional medicines and health/food supplements.15 There are

also imported proprietary drugs, generics manufactured locally (such as those by Home Pharmaceuticals)

and imported generics.16 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.17 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.18

Similarly, imported

pharmaceuticals for generic products are establishing a foothold in Malaysia and a lack of entry barriers

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 19 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.20 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.21 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.22

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.

23 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 $8 billion dollars to the

scheme by 2010. As at 30 June 2013, expenditure on the PBS totalled approximately $9 billion.24 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 sales25 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.26 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 2011-12 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, heads up research and development. The three divisional managers comprising Dr Winnie

Tan Khoo, Dr Ahmed Kumar and CT Ramgopal head up 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 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 managershave 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 2016, 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 2014 alone in order to remain competitive. While retained

earnings are relatively high, equity will be under pressure in the years ahead. While Home will be

relatively profitable in mid-range forecasts into the future (Figure 3), a loss is expected in financial year

2014. 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.

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