The global market for drugs is large and growing with half of all sales

8002 Strategic Management Pharmaceuticals Case Study
Introduction
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 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

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.

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.

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