Critical analysis of Novartis pulling out its R&D from India following Supreme Court's verdict

1. Prepared & Presented by: Group B7
Kunal Kumar Singh (PGDM 12024)
Samanvitha Mahen (PGDM 12040)
Indu J (PGDM 12091)
Akilan P (PGDM 12123)
Sharanya L S (PGDM 12139)
Rheetam Mitra (PGDM 12156)
Shreetha (PGDM 12176)
BPSM STRATEGIC MEMO

2. quits investing in R&D in India
Your 01

3. Novartis
• Novartis is a Swiss multinational pharmaceutical company
based in Basel, Switzerland, ranking number two in sales
(46.806 billion US$) among the world-wide industry in 2010.
• Novartis is a full member of the European Federation of
Pharmaceutical Industries and Associations (EFPIA), the
International Federation of Pharmaceutical Manufacturers
and Associations (IFPMA) and the Pharmaceutical
Research and Manufacturers of America (PhRMA).
02

4. Novartis (Contd.)
• Novartis was created in 1996 from the merger of CibaGeigy and Sandoz Laboratories, both Swiss companies with
long histories.
• Novartis has its major bases for R&D in Basel
(Switzerland), Hyderabad (India), Shanghai (China), and
Cambridge (USA).
03

5. The Novartis Saga: a timeline
1
1997: Novartis files a patent application in India for its drug Gilvec
2
2005: India introduces the Indian Patent Act preventing frivolous patents
3
Jan 2006: The Patent Controller in Chennai denies Novartis a patent
4
May 2006: Novartis challenges the Indian government and four other
companies in the Madras High Court
5
Aug 2007: The Madras High Court rules against Novartis’ case
6
June 2009: The Intellectual Property Appellate Board rejects a fresh appeal
7
August 2009: Novartis approaches the Supreme Court of India
Your 04

6. R&D Myth
Revenue
India’s drug production is of over Rs.
100,000 crore.
Novartis’ turnover is a little over Rs.
1,000 crore.
Which constitutes to be around one
per cent
R&D
Total expeenditure incurred by
Novartis India in 2012 was Rs. 800
crores.
Out of the total expenditure, Rs. 29
lakhs was for R&D,
Which is around 0.03 per cent.
Your 05

7. Strategic Group
 R&D strategy


Applied R&D
Basic R&D
 Strategic Group of Novartis


Sun Pharmaceutical, Cipla, Dr. Reddy's Laboratories
GlaxoSmithKline, Pfizer, Novartis
Your 06

8. Ethical issue in Novartis
 Ethical dilemmas
 Drug pricing and marketing,
 Role of intellectual property rights and patent protection
 Moral and economic requisites of research
 Sales team - bribing stockist
 Massive discounts to push sales
 Drug for free on some occasions, up to 20% discount
 Fired the sales man who generally follows the strategy formulated by the top
management
Your 07

9. Corporate Governance in Novartis
 Board of Directors
 Four Directors - Executive and three Non- Executive
 50% of the Board - Independent Directors
 Audit committee
 Provisions of Clause 49 of the Listing Agreement and Section 292A of the Act
 External and Internal Auditors
 Information access from records
Your 08

10. Corporate Governance in Novartis
 Remuneration Committee
 Criteria of payment of Managerial remuneration
 Shareholders’/Investors’ Grievances Committee
 Shareholders’ and investor complaints/grievances
 Means of Communication
 Quarterly, half-yearly and annual results of the company are published in
newspapers.
Your 09

11. Stakeholders’ Strategy
 Employees’ point of view
 Restricted Shares and Tradable Options granted under “Select” plan
 Benefit Plans for post-employment benefits -Provident Fund, Gratuity, Leave
Encashment, Non-Contractual Pension Plan and Post-retirement Medical
Benefits
 Long Service Awards
Your 10

12. Stakeholders’ Strategy (Contd.)
 Society’s point of view
 Fight against leprosy
 Donation of cash and drugs worth 15 million RMB - earthquake-stricken Sichuan
 Challenge to reduce and formulate price based on country’s economy
Your 11

13. Pharmaceutical policy
 Patent law
 Applied to all inventions, whether mechanical, pharmaceutical or electronic, the int
erpretations of patent law made by government patent granting agencies and cour
ts are very subjective.
 Licensing

Licensing involves the approval of a product for sale in a jurisdiction. It is controlled by Central
Drugs Standard Control Organization under the ministry of health department, Indian
government.
Your 12

14. SWOT Analysis
Threats
1. Increasing obsolesce of technology
2. Competition from peers
Weakness
1. Case regarding Indian patent laws also
created a problem for the brand
2. Company’s image was affected due to the
unethical advertisement
3. No formulation for children; only one
formulation is available
4. Failure of Galvus to position Novartis in the
Diabetes market
Opportunities
1. High market growth rate due to increasing rate of diseases
2. Venture into health needs in under-developed and poor
countries
3. Broad-based medical innovation (in technologies and
businesses)
Strengths
1. Market leader in terms of sales (Has a global reach in over 140
countries)
2. Core businesses in health care sector
3. Wide range of products in pharmaceuticals, vaccines, consumer
health, generics and animal health
4. Well established Research and Development
5. Strong brand image
Your 13

15. SPACE Matrix
Sl. No.
Financial Strength (FS)
Rating
1.
Growth of Net Worth @16.34%
6
2.
Growth of Market Cap @ 18.46%
6
3.
Debt-Equity Ratio of 0.00 since March ‘09
4
TOTAL
Sl. No.
16
Industry Strength (IS)
Rating
1.
India is poised to become Pharma-hub of the world
6
2.
Increase in medical expenditure
5
TOTAL
11
Your 14

16. SPACE Matrix (Contd.)
Sl. No.
Environmental Stability (ES)
Rating
1.
Change in Patent rules
-4
2.
Broader and stronger consumer base
-6
TOTAL
Competitive Advantage (CA)
Sl. No.
-10
Rating
1.
Worldwide patents
-4
2.
R&D
-6
TOTAL
-10
Your 15

17. SPACE Matrix (Contd.)
•
Based on the above internal and the external dimensions, the directional
vector coordinates are as follows
–
–
X coordinate = CA Rating + IS Rating = -10 + 11 = +1
Y coordinate = FS Rating + ES Rating = +16 – 10 = +6
8
3
-2
-1.5
-1
-0.5
-2 0
0.5
1
1.5
-7
-12
Your 16
2

18. QSPM
Stop investing in R&D India
Key
Weight
AS
1. Worldwide R&D
0.2
2. Product range
3 Brand Image
Continue investing in R&D India
TAS
AS
TAS
1
0.2
4
0.8
0.1
3
0.3
4
0.4
0.2
1
0.2
3
0.6
1. New Patent Laws
0.3
2
0.6
2
0.6
2. Unethical advertisement
0.2
1
0.2
3
0.3
SUBTOTAL
1
Strength
Weakness
1.5
2.7
Opportunities
1. High Market
0.2
2
0.4
4
0.8
2. Purchasing power
0.3
3
0.9
3
0.9
3. Increase spending
0.2
3
0.6
1
0.2
Threats
1. obsolescence
0.1
4
0.4
5
0.5
2. Competition
0.2
1
0.2
3
0.6
SUBTOTAL
1
2.5
3
Your 17

19. QSPM (Contd.)
•
•
•
•
QPSM table clearly indicates that continuing the R&D in India has a relatively higher
attractiveness score by comparing the two alternatives based on the key factors both
internal and external.
As calculated above, it is very much evident that Novartis can have huge prospects
by trying to capitalize on its strengths and utilize the current opportunities rather than
being defensive.
Also the magnitude of the difference between the grand Total Attractiveness Score
clearly indicates the relative desirability of choosing to continue investing on R&D
rather than not to invest.
Considering the growth of pharmaceutical industry and the increased spending of
customers, Novartis could have tried to capitalize upon its strong brand image and its
wide product range.
Your 18

20. Change Platform
Organisation
structure and
culture
Diversity and
Inclusion
Abosorb and
internalize the
change
At Novartis, performance-oriented culture and responsible approach are the
foundations of success. They recognize that their business depends on the
creativity, dedication and performance of associates. They encourage associates to
focus on achievement through collaboration and innovation.
Novartis is committed to equality of opportunity, fairness, work and lifestyle, mutual
respect and dignity at work for all associates. Novartis values differences including
disability, sexual orientation, race, ethnicity, age, thinking style, gender and religion.
Inclusion establish and reinforces behavioural standard that fosters at collaborative
culture and work environment ,which will enable individuals and groups to contribute to
their fullest potential.
Top-down and bottom-up approach to absorb the best practices around, adapting with the
inevitable changes.
Your 19

21. Methods for Dealing with Resistance to Change
Education and Communication
1
This approach can be used where there is a lack of information or inaccurate information and analysis
among the individuals in the organisation. Once the objective of the change is made clear then people
will often help with the implementation of the change.
Participation and Involvement
2
2
This approach can be used where the initiators do not have all the information they need to design the
change, and where others have considerable power to resist. People who participate will be committed
to implementing change, and any relevant information they have will be integrated into the change plan.
The drawback of this approach is that if participators design an inappropriate change, it consumes time
to rework on the same.
Facilitation and Support
3
This approach can be used where people are resisting because of adjustment problems.
Your 20

22. Strategy for Novartis
 Stockholders’ point of view

Novartis should transform itself from pharmaceutical company to become a broad-based
health care company.

They should focus on four high growth segments like eye care, generics, consumer health and
vaccines and diagnostics.

Increase more involvement in medicine for diseases like cancer, HIV, Diabetes.
Your 21

23. Strategy for Novartis (Contd.)
 Stockholders’ point of view

This particular sector is served by few organization like DTIC-Dome, Cytostar-U.

There is a gradual increase in the cancer patients. The company has its medicine for breast
cancer patient like Afinitor. The sales expected from this is 1bn dollar by 2017.

They can manufacture more advanced medicine for lungs cancer and blood cancer as they
are competent in this area.
Your 22

24. References
•
•
•
•
•
•
business-standard.com. (n.d.). Retrieved from http://www.businessstandard.com/stocks/company-overview/243-novartis-india
chiefexecutive.net. (n.d.). Retrieved from http://chiefexecutive.net/new-growth-strategy-for-novartis
business-standard.com. (n.d.). Retrieved from http://www.businessstandard.com/stocks/company-overview/243-novartis-india
chiefexecutive.net. (n.d.). Retrieved from http://chiefexecutive.net/new-growth-strategy-for-novartis
(2011). David, F. R. (2011). . In F. R. David, Strategic Management - Concepts and Cases 13th
Edition . Pearson education.
economictimes.indiatimes.com. (n.d.). Retrieved from
http://articles.economictimes.indiatimes.com/2013-06-17/news/40027590_1_stockists-pharmaindustry-drug-maker
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25. References (Contd.)
•
•
•
•
•
•
financialexpress.com. (n.d.). Retrieved from ttp://www.financialexpress.com/company_info
indianexpress.com. (n.d.). Retrieved from
http://www.indianexpress.com/videos/business/25/healthy-growth-of-health-care-sector-in-india--/15572
money control.com. (n.d.). Retrieved from http://www.moneycontrol.com/news/current-affairs/willfdi-policy-shapefuturepharma-sector_910192.html
Novartis.com. (n.d.). Retrieved from http://www.info.novartis.com/newsroom/corporatepublications/annual-report-2012.shtml
smallbusiness.com. (n.d.). Retrieved from http://smallbusiness.chron.com/top-ethical-issuesfacing-general-business-community-25417.html
wikipedia.org. (n.d.). Retrieved from
http://en.wikipedia.org/wiki/Novartis_v._Union_of_India_%26_Others#cite_note-43
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26. Thank You!