Question: WG plc was formed 4 years ago following the merger of two large pharmaceutical companies. Prior to the merger the two companies had been competitors: they believed that by combining forces the shareholders of each company would benefit from increased profits arising from the rationalisation of manufacturing facilities, distribution networks and concentration of resources, towards more focused research and development. With operating outlets in Europe, Asia, the USA and Africa, WG plc regards itself as a global company. It employs approximately 50,000 people worldwide and has developed a wide portfolio of products. Its profits before tax last year increased by 20 per cent and represented approximately 35 per cent of turnover.
The company declared that its earnings and dividends per share in the same period each increased by 15 per cent over the previous financial year. All manufacturers of pharmaceutical products claim that their pricing policies need to be set at a level to achieve high profitability in order to attract funds from investors. They argue that this is necessary to meet their high research and development commitments. In recent years, WG plc and other pharmaceutical manufacturers have encountered public and governmental challenges to their high levels of profitability. WG plc encounters strong competition from other world-class pharmaceutical manufacturers, but these are few in number. High research and development costs present a major obstacle to potential competitors tempted to enter the industry.
Mission and objectives The directors of WG plc have defined their overall corporate mission as being to ‘combat disease by developing innovative medicines and services and providing them to healthcare organisations for the treatment of patients worldwide'. The directors have confirmed that their main objective is to sustain profitability while achieving the company's overall mission. They have also explained that WG plc aims to work towards eliminating those diseases for which the company is engaged in providing treatments. Achievement of the profitability objective is continually threatened by patents coming to the end of their lives. Patents give the sole right to make, use and sell a new product for a limited period.
Product development A large proportion of the company's turnover in recent years has been derived from one particular drug. The patent for this drug expires next year and it is expected that its sales at that time will represent no more than 10 per cent of total turnover. Four years ago, the sales of this drug produced almost half the company's entire turnover.
A new product, Coffstop, has now completed its rigorous development phases and is being marketed to pharmaceutical stores throughout the world by WG plc. It is in competition with a similar drug, Peffstill, produced and marketed by a direct competitor of WG plc. Medical research and opinion has concluded that Coffstop is generally more effective than Peffstill in treating the condition for which they are intended. Both drugs are available over the counter from pharmacies. The directors of WG plc are optimistic that Coffstop will become very popular because of its improved effectiveness over other market products. The retail market price of Coffstop is £1.50 per bottle, compared with £10 per bottle of Peffstill.
However, the recommended dosage of Coffstop is six times more than that for Peffstill. The bought-in costs per bottle to the retail pharmacist are £0.50 and £ 7.40 for Coffstop and Peffstill respectively. Initial indications to the management of WG plc are that retail pharmacists tend to prefer to stock Peffstill on the basis that it achieves 2.6 times the level of gross contribution per bottle compared with Coffstop. It is estimated that the cost to the retailer of holding Coffstop is £0.40 per bottle and £0.80 for Peffstill. The availability of shelf space is a limiting factor for most retailers. The shelf area occupied by each bottle of Coffstop is 18 square centimetres and 60 square centimetres for each bottle of Peffstill. Early indications show that the average weekly sales volume for retail outlets stocking both products are 120 bottles of Coffstop and 20 bottles of Peffstill.