Financial Management of Corporate Projects and Programme

Group Assignment - Free State & Northern Cape Group

Financial Management of Corporate Projects and Programme (M6)

CASE: GLAXO ITALIA S.p.A.: The Zinnat Marketing Decision

A comprehensive report to the Board of Directors

1. Executive Summary

Glaxo Italia S.p.A, the oldest Glaxo Holdings subsidiary, had the third largest market share in the highly fragmented Italian pharmaceutical market. It had manufacturing facilities producing most of Glaxo Holdings' products and its sales in 1991 were expected to be 719 billion Italian lira.

This situation prompted Emilio Rottoli, the financial controller of Glaxo Italia S.p.A, in September 1990, to evaluate competing strategies for the launch of a promising new product in Italy, Zinnati, which was a new formula of oral antibiotic.

Due to past pharmaceutical experiences of selling new products, Emilio Rottoli believed that Zinnati oral antibiotic offered a new competitive remedy to current drugs for influenza like feverish diseases.

Zinnati's launch would be a major opportunity and a challenge for the company to support and expand its presence in the antibiotic segment

The year 1990 was a successful one for Glaxo Holdings, a parent company to Glaxo Italia S.p.A, in which it ended being the world's second largest pharmaceutical company in terms of sales, which totalled $2,894 million in the fiscal year ended June 30, 1990, and were expected to grow to $3.4 billion in 1991. The company's growth have being phenomenal: $1 invested in the company in 1979 was worth $85 in 1990, approximately a 50% annual compound rate of growth in value. And with an equity market value of $23 billion, the company had the distinction being the largest capitalization stock traded on the London stock market and the 26th largest in the United States. The main highlight was the company being a leader in products for the relief of peptic ulcers and of asthma and major supplier of antibiotics and treatment of skin disorders.

With the success of Zantac, articular drugs that was co marketed with Hoffmann - La Roche, co-marketing was Glaxo Italia S.p.A's major best selling strategy and Glaxo believed Zinnat will perform more than previous products.

It also decided to use direct selling which will assist Glaxo to exploit its new product fully because its sales force would be the sole channel of distribution.

2. Problem / Decision Statement

A recent trend in the development of new drugs in the pharmaceutical companies' market have indicated that 'medicines which are now emerging from the development pipeline are more complex than their predecessors, this inevitably complicates the necessary process of satisfying regulatory authorities' (Sir Peter Giroli, chairman of Glaxo - Glaxo Italia S.p.A: The Zinnat Marketing Decision case study, Page 257)

The major challenge for the current pharmaceutical companies is that 'the laws of the marketplace now apply as much to pharmaceutical companies as to consumer electronics: once armed with a new product, a company must establish its market share as quickly as possible, before rival firms produce competitive brands. In the past, drugs brought in good profits for a decade or more' (Ernest Mario, Chief Executive Officer of Glaxo Holdings, The Economist, September 6, 1990).

During the evaluation of strategies for the launch of Zinnat, a new promising formula of oral antibiotic, the following problems emerged:

* Effective new product (drug) patent life fell from 13 to 5 years between 1965 and 1985, which means there might be a further 4 years drop in the next decade between 1985 and 1995 if the situation remains the same, which will make it difficult for Zinnat to yield any profits in the next projected six years, between 1990 and 1996.

* Uncertainty about the time at which the competitors might launch a similar product to the market makes it difficult to know how much time was necessary to recover the investment made on the new product

* Co-marketing enables a competitor to understand the product patent life and when to prepare to launch attack, thereby making the market vulnerable and impossible for the new product to survive and recover the capital invested.

* Only manufacturing and promotional materials are considered by investors when a product is marketed. Items such as general and administration, historical costs, real financial charges are not taken into account but impacts negatively on the return on investment. Glaxo Holdings didn't take into account the appropriate discount rate on the cost equity capital and cost of Glaxo Italia S.p.A debt in relation to IRR. It was only interested in evaluating the marginal profitability between direct sales and co-marketing which might eventually yield negative results.

* 80% gross profit anticipated by Glaxo Holdings on sales of key chemical compounds to Glaxo Italia S.p.A was exorbitant, given the fact that Glaxo Italia S.p.A still has to pay 20% variable cost of transfer price and 4% for customs fee and transportation. This will bankrupt Glaxo Italia S.p.A and would make it difficult to secure a co-marketing pharmaceutical company to launch Zinnat and return the invested capital and make any profit.

3. Critical key Issues

Glaxo Italia S.p.A's is a pharmaceutical company mainly manufacturing and producing chemical compounds, packaging antibiotic, and antihistaminic drugs, researching and marketing and selling the end products.

Its main objective in this case was to launch Zinnat, as a new drug and dampen its profitability in the short term, but within five years, the heavy investment and debt-based financing were forecasted to pay off in the sevenfold growth of profits

This called for a rapid and massive approach to ensure that Zinnat's distribution into the market captures a large market share quickly. This was to be achieved by utilising different strategies and