Novak Pharmaceuticals

EDABS Case Study 3

CASE SUMMERY Pharmaceutical Industry -1

• Industry segments – Prescription Medicine - needs a doctor’s prescription – Over the counter (OTC) medicine - no prescription needed – Anticeptics and disinfectants – Plasters, bandages, surgical and wound care – Consumer medical devices

• Novak – Prescription medicine segment only – The board of directors wants to explore other segments

Pharmaceutical Industry -2

• Highly regulated industry - medicines cannot be marketed in a country wihtout approval from local regulators

• Local regulators consider approval from Food & Drug Administration (FDA) in USA or WHO approval in granting local use approval

• Most pharmaceitical firms are global

• Have R&D and manufacturing facilties in key markets

• Having these facilities in local markets allows firms to get faster regulatory approvals and adoption by doctors as well Pharmaceutical Industry -3

• Pharmaceutical discovery and commercialisation process

Pharmaceutical Industry -4

• Discovery and commercialisation of new medicines is long, complicated and expensive

• A potential medicine may not get to the commercialisation stage even after millions spent on development (90% of potential medicines are abandoned before commercialisation stage)

• Side effects and lack of efficacy are two main reasons for potential medicines to get abandoned before commercialisation process

• Inovak usually spends between C$250 million to C$1 billion in developing, getting approval and commercialisation of a new medicine Pharmaceutical Industry -5

• Most countries have strict regulations about the licensing and use of pharmaceutical products.

• These regulations are intended to ensure that new drugs have been properly tested in accordance with national and internationally accepted procedures. Each country has its own organisation to ensure that its laws have been complied with.

• Each country requires pharmaceutical companies to submit applications that fully detail the tests carried out and the results that have been obtained before a drug can be passed as safe for use.

Pharmaceutical Industry -6

• Pharmaceutical companies are protected in two ways, through patents and regulatory exclusivities. A world-wide patent is usually 20 years, allowing a firm to recoup massive R&D and approval costs which may exceed C$1 billion.

• Regulatory exclusivities are an additional source of protection and incentive to pharmaceutical companies. Essentially, they extend the protection offered by patents Pharmaceutical Industry -6

• Each country has strict regulations for approval, prescribing, stocking, transporting and retailing prescrition medicines.

• Approval is by each national regulatory authority - usually wait till FDA (US) and or WHO (UN) approves a drug before it is approved locally

• Manufacturing, importing, storing, retailing and prescribing precription medicines are tightly controlled

• Only a registered doctor can prescribe prescription medicine and only a licenced pharmacist can retail them

Pharmaceutical Industry -7 • In some countries, health care is managed by the government and private citizens get their medicines from government hospitals. (E.g. NHS of UK) Therefore, the government is the major buyer of pharmaceuticals.

• Other countries have a mixed system where there is govenment healthcare as well as private hospitals and private health care providers (private doctors).

• In these countries, the government as well as private hospitals and private pharmacies are the three major groups of buyers

• Some countries like USA have very large pharmacy chains such as CVS Health and Walgreens. Each of these chains have 9000+ outlets and have significant bargaininig power over pharmaceutical companies Pharmaceutical Industry -8

• Over the Counter Medicine (OTC) – These are treatments for common ailments sold without a prescription. E.g. Panadol – They are a big revenue earner as well. Commonly sold OTC drugs are pain killers, anti-allergy drugs, antiemetic (control vomiting), worm treatments etc.

• Medical supplies – Bandages, plasters, disinfectants, syringes and other surgical and wound care supplies

• Medical Equipment & Test kits

Pharmaceutical Industry - Generics

• Generic is the term used in the phama industry to describe out-of patent medicines that are manufactured by companies other than the inventor of that medicine.

• Example - Co-Amoxyclav (a very popular antibiotic) Invented in 1979 by Smithkline Beecham (now GSK) Original Brand Name - Augmentin Out of patent by 2007 Currently manufactured as a generic drug by hundreds of companies. Generic brands available in Sri Lanka - Clavamox, Enhancin, Curam, Zifam Novak Pharmaceuticals

• Novak is a Canadian pharmaceuitcal company

• Currently enjoying 5.7% global pharmaceutical market share

• Listed in the Toronto Stock Exchange

• One of the largest phamaceutical manufacturers in the world

Novak Pharmaceuticals 2 • Four major R & D Centers - Toronto, New Jersey, Manchester and Shenzen

• Tweleve factories in different countries of the world

• Has many licencing agreements in countries where it does not have factories

• Sell its products in every country in the world Novak - Marketing 1

• Novak medical representative meets doctors to promote its products. Usually provides free samples of its products to doctors to try on patients

• Provides doctors with leaflets and booklets containing information regarding its products

• Provides doctors with clinical studies which shows the effectiveness of its medicines

• The medical representatives are fully trained in ethical behaviour and marketing practices

Novak - Marketing 2

• Novak is also one of the largest sponsors of medical conferences and clinical research by doctors.

• Marketing officials of Novak work closely with all types of doctors and other registered medical practitioners and parmacists

• Each country office of Novak work closely with the national regulator of medicines as well as national and provincial/state health officials Novak - Marketing 3

• Most medical supplies to government hospitals and medical centers are purchased using local and world-wide tenders.

• Novak competes fiercely with its rivals in each country to win these tenders. Novak will offer special prices and payment terms to these tenders which can run into millions of dollars.

• However, Novak will not engage in any unethical practices to win tenders and supply contracts. This may not be the case with some non-western competitors who (it is alleged) engages in unethical practices to influence awarding of tenders.

Novak - Pricing & Costing

Costs of making a tablet of Mintac and selling prices of a tablet Novak - Pricing & Costing

• Cost of making Mintac tablet C$ 0.095 • Price of a Mintac tablet C$ 5.27

• Many activists, governments and even WHO considers this type of pricing as an exorbitant rip-off

• However, this allegation ignores the following facts – It took Novak 8 years and an investment of C$ 1200 million to develop and get approval for Mintac. That is C$ 150 million investment per year. – The patent cover is only for 20 years and another 5 year extention

Novak - Pricing & Costing 2 • This mean that Novak has to earn C$ 48 million each year from selling Mintac just to cover the C$ 1200 million it invested.

• Pharmaceutical prices are highly regulated around the world and eventhough the list price of a Mintac tablet is C$5.27, Novak very rarely able to sell a tablet at that price.

• Government buyers (tenders) and purchase orders of very large hospital chains and pharmacy chains have a lot of bargaining power (bargaining power of buyers) to force Novak to quote much lower prices.

• Our competitors also have similar drugs to Mintac and compete for the same orders and they may compete on lower prices (competitive rivalry) NOVAK - PRICING & COSTING 2

Further, the listed price of C$ 5.27 also includes importer, wholesaler, and retailer margins which goes to the respective channel partners.

In addition, it must also cover the cost of marketing the drug which can be very expensive. Pharmaceutical drugs cannot be advertised on mass media.

Novak must use the services of a global force of 19,700 medical representatives and thousands of area managers to ensure that all doctors, nurses, pharmacies, hospitals and other healthcare professionals are met regularly and reminded of Novak products. This is very expensive.

ISSUES & DEVELOPMENTS HIGHLIGHTED AT CEO’S PRESENTATION & AT THE BOARD MEETING Issues raised by CEO • Forecast for FY2021 of C$ 83,500 does not include the CEO’s estimate of 22% revenue loss due to Covid-19. Therefore, it has to be restated as C$ 73,780

• FY2021 C$ 73,780 is after adjusting for loss of revenue from two off patent product

• Three promising compounds that were expected progress to Stage 2 patient trials had to be abandoned as the compounds showed adverse side effects. An investment of C$270 million to be written off.

• No major product launches for FY 2021 or FY 2022/2023. Therefore, product pipeline for these two years can be stated as dry. Could seriously affect the top and bottom line growth as well as the stock price.

Positive developments

• A number of R&D partnerships Novak signed with biotech and genetics start-up firms are beginning to show results.

• Six different compounds are expected to go into stage 1 human trials in FY 2022 and FY 2023.

• Novak will have exclusive manufacturing and marketing rights for the successful compounds.

• However, these developments will have no positive impact on the company for FY 2021/2023. Urgent issues highlighed by the Board

• Issue of falling revenue due to patent-loss of two drugs.

• Lack of new products in the pipeline for FY 2022/2023

Growth issues highlighed by the Board

• Diversification options need to be explored

• Explore partnerships and M&A in India and China.

SUMMERY OF MAJOR ISSUES IDENTIFIED IN THE ANALYSIS AS WELL AS RAISED BY CEO AND THE BOARD ISSUE 1

• Loss of revenue – Covid : 22% loss of revenue from forecasted revenue for FY 2021 – Off Patent : Loss from the off patent drugs for FY 2021 and beyond

• Total anticipated loss of revenue – Covid C$ 9.7 billion for FY 2021 – Off Patent C$ 1.05 billion for FY 2021

• ISSUE 1 - Strategies to recapture C$ 10.75 billion of lost revenue?

ISSUE 2

• Three promising compounds that were expected progress to Stage 2 patient trials had to be abandoned as the compounds showed adverse side effects

• These products could have been launched during FY2022 and FY2023 respectively

• Now, there are no new products in the pipeline ready to be launched before FY 2024

• ISSUE 2 - Strategies to resolve the lack of new products in the pipeline ISSUE 3 • The Board has ordered to explore diversification options.

• There are many options – Generics – OTC Medicines including Vitamins and Nutritional Products – Surgical Supplies – Consumer Medical Devices

• ISSUE 3 - Which of the above options should Novak pursue? Develop market entry strategies for selected options

ISSUE 4

• Need to explore partnerships with biotech and bioscience industries in India and China

• There are many potential partership opportunties in China and India

• ISSUE 4 - Which are the most potential Indian and Chinese biotech firms to enter into partnership. What is the strategy to evaluate their suitability? ISSUE 1 - Strategies to recapture C$ 10.75 billion of lost revenue • OPTION 1 - Takeovers of smaller new drug developer firms with already approved or about to be approved pharmacetical products - Novak can take them to market

1. These firms can be Canadian or from any developed market 2. Should be professionally managed firms meeting all regulator requirements of their country of origin as well as global best practices 3. A thorough assessment has to be made of the revenue forecast of their new products 4. A complete assesment has to be made of their patents, knowhow, physical assets and talent pool

• OPTION 2 - Takeover of well managed overseas generic drug manufacturers who have a strong revenue and cashflow.

1. This option will support the directive by the Board to diversify Novak’s business lines and reduce dependancy on discovering and marketing new drugs 2. Generic pharmaceutical products are a huge revenue generator as there are thousands of popular medicines of all kinds that are off patent but still heavily used by doctors 3. Risk is very little as these products are well proven, approved by all regulatory authorities and their side-effects are known 4. There are many highly successful generic drug firms in emerging markets such as China, India, Bangaldesh, Vietnam and Thailand

5. Novak must explore the posibilities of taking over some of these firms that match our requirments such as; Professional management Meets all national regulatory requirments Meets all international regulatory and manufacturing standards Strong product portfolio Strong cash and revenue flows Good quality manufacturing facilities that are managed professionally by well trained staff

• OPTION 3 - Takeover of well managed medical and surgical consumables manufactures overseas.

1. This option will support the directive by the Board to diversify Novak’s business lines and reduce dependancy on discovering and marketing new drugs

2. Medical and surgical supplies are hundreds of disposable items including dressing, casts, hypodermic needles, syringes, cannulas, clinical swabs, applicators, blood and other specimen collectors, sponges, pads, tongue depressors, wooden spoons, cotton balls, antiseptic wipes of all types. 3. There are many possible takeover candidates around the world.

4. However, China is leading the world in low cost, high quality medical supplies. Cost is a very important factor for disposable supplies that are used millions of times.

5. Most major Western and Japanese manufacturers are based in China and therefore, China has the best supply chain and trained workers in the world for this type of manufacturing.

6. Novak should focus on China for choosing possible takeover candidates for medical supplies

6. Main criterea for evaluation

Professional Management Meeting internaitonal quality and manufacturing standards Product portfolio Client portfolio who buy in very large quantities regularly Revenue and cashflow Modern manufacturing facilties Patents, trademarks and other intelluctual property Talent pool ISSUE 1 - Strategies to recapture C$ 10.75 billion of lost revenue • SUMMERY OF STRATEGIES

• OPTION 1 - Takeovers of smaller new drug developer firms with already approved or about to be approved pharmacetical products - Novak can take them to market

• OPTION 2 - Takeover of well managed overseas generic drug manufacturers who have a strong revenue and cashflow.

• OPTION 3 - Takeover of well managed overseas medical and surgical consumables manufactures who have a strong revenue and cashflow.

ISSUE 1 - STRATEGIES TO RECAPTURE C$ 10.75 BILLION OF LOST REVENUE

EVALUATION OF STRATEGIES All three strategies proposed are based on takeovers

• POTENTIAL BENEFITS AND RISKS OF PROPOSED STRATEGIES

• BENEFITS – Rapidly increase revenue and cashflow – Rapidly enter new product markets – Acquire new product portfolios – Acquire new products in development (new product pipeline) – Acquire new patents and other intangible assets – Acquire new clients – Acquire new supply chains – Spread risks by diversifying.

• LIMITATIONS – Time and high cost of evaluating potential takeover candidates – High cost involved: with the takeover price could be too high – Anticipated benefits might not materialise – The takeover could be very unpopular among the local employees, customers or even the government. – Hidden problems: there could be hidden problems with taken over firms which could reveal itself later – Problems of integration (change management), including resistance from employees – Incompatibility of management styles, structures and culture • OPTION 1 - Takeovers of smaller new drug developer firms with already approved or about to be approved pharmacetical products - Novak can take them to market

• Specific issues of Option 1 – Finding suitable small drug developer firms meeting the evaluation criteria could be difficult • Small size • Available for take over • Price is right • Has the required new product pipeline

– The new product pipeline might not deliver marketable products • There could be last minute concerns forcing the product to be withdrawn or re-evaluated • Might fail in the market after the lauch - doctors may not adopt the product • Hidden side effects might surface after the launch. E.g. Vioxx by Merck - Received FDA approval in 1999 for the treatment of arthritis. Became a widly used new drug by 2002. Merck had to widhtraw the product from the market in 2004 after evidence of an increased heart-attack risk became known.

– There could be government (political) or regulatory (mergers and aquisition codes) of Canada or the host country blocking the deal • OPTION 2 - Takeover of well managed overseas generic drug manufacturers who have a strong revenue and cashflow.

• Specific issues of Option 2

– There may not be any issue from Canadian regulators as Novak is not a generic drug manufacturer upto now. However; – Finding suitable candidate firms who are available for takeover may be difficult – Government and Regulatory approval from the host country may be blocked – Some of these firms may be considered as national champions in the host country and there could be public opposition for the takeover by a foreign drug manufacturer

– Might lose large government contracts of the host country as the firm is now considered foreign owned. – There could be hidden issues, liabilities and malpractices that might surface after the takeover. These could create huge legal and regulatory costs and may delay the benefits sought by the takeover. – Being a foreign company, Novak may be accused of exploiting labour and there could be labour disputes that might increase labour costs and take long time to resolve. – Novak could be accused of trying to exploit the taken-over firms contacts and contracts with the government and other large buyers. – There could be resistance to change and might delay urgent changes needed to bring the firm upto Canadian and western standards. – There could be arguments that takeover by Novak (a foreign company) is a threat to the national health system or patient rights. • OPTION 3 - Takeover of well managed overseas medical and surgical consumables manufactures who have a strong revenue and cashflow.

• Problems and issues discussed for Options 1 and Options 2 are applicable to Option 3 as well and hence will not be repeated. • An addional problem could be that unlike pharmaceuticals (Option 1 and 2) Option 3 deals with consumables and disposable items which depend on; – Different manufacturing processes – Different supply chains – Different regulatory approval processes – Different buying processes and different contract & tender procedures • Novak being a pharmaceutical company, may not have the management or technical expertise to properly understand and manage these effectively

ISSUE 2 - Strategies to resolve the lack of new products in the pipeline • ISSUE 1, OPTION 1 Provides an important solution to this probem as well. Takeovers of smaller new drug developer firms with already approved or about to be approved pharmacetical products - Novak can take them to market. Since it was discussed at length, will not be repeated here.

• CEO’s Presentation - A number of R&D partnerships Novak signed with biotech and genetics start-up firms are beginning to show results. Six different compounds are expected to go into stage 1 human trials in FY 2022 and FY 2023. Novak will have exclusive manufacturing and marketing rights for the successful compounds.

• This will feed the product pipeline beyond FY2024. The problem is the pipeline for FY2022 and FY 2023 • If the solution proposed for ISSUE 1, OPTION 1 is successful, Novak will be able to secure some marketable new products for FY2022 and FY2023 through takeovers.

• ISSUE 2, OPTION 2 - Explore the possibility of obtaining licences to manufacture and market new drugs discovered by small firms who may not be willing to be taken over by Novak, but willing to enter into a licensing agreement as they do not have the manufacturing expertise, manufacturing infrastructure, supply chain and the global marketing network that Novak possesses.

• This could be win-win for the drug discoverer and Novak. We can fill immidiate gaps in our new product pipeline, and they get a global partner who can turn their new discovery into a global cash cow.

• Relevant example of how this strategy might work is shown by Pfizer- BioNTech Covid-19 vaccine.

• This vaccine was developed by a German biotech company called BioNTec. By global pharmaceutical industry standards BioNTech is very small (2019 revenue USD 145 million and staff of 1300 - comparision Novak 2017 revenue was C$ 77 billion/USD 67 billion)

• BioNTech partnered with American pharmaceutical giant Pfizer (2020 revenue $42 billion) for regulatory approval, production and global marketing of the Covid-19 vaccine.

• This is the strategy proposed in ISSUE 2 OPTION 2 as another solution for the short-term boosting of the Novak product pipeline. ISSUE 2 - Strategies to resolve the lack of new products in the pipeline • SUMMERY OF STRATEGIES

• OPTION 1 - Takeovers of smaller new drug developer firms with already approved or about to be approved pharmacetical products - Novak can take them to market.

• OPTION 2 - Explore the possibility of obtaining licences to manufacture and market new drugs discovered by small firms who may not be willing to be taken over by Novak, but willing to enter into a licensing agreement as they do not have the manufacturing expertise, manufacturing infrastructure, supply chain and the global marketing network that Novak possesses.

ISSUE 2 - STRATEGIES TO RESOLVE THE LACK OF NEW PRODUCTS IN THE PIPELINE

EVALUATION OF STRATEGIES • OPTION 1 - Takeovers of smaller new drug developer firms with already approved or about to be approved pharmacetical products - Novak can take them to market.

• Specific issues of Option 1 – Finding suitable takeover candidates • There is intense hunt in the market by giant pharmaceutical firms of US, UK and Europe to spot promising takeover candidates • If there is a suitable firm with ready to market products, large firms would start a bidding war and the highest offer which makes the investors of the small firm very rich usually gets the takeover opportunity. • Novak may lose out if the bidding price is too high.

– Takeover may be blocked by competition regulators – Unforseen regulatory issues might delay or prevent launch of the new products • Pharmaceutical approval process is not a guranteed process. Any discovery of side effects will delay or prevent approval – Other hidden problems may come to light after the takeover. • Could be anything from technical, financial, legal or even patents or intelluctual property. • Example - Theranos (US) was a high profile biotech company which received millions of start-up capital on claims of a break-through rapid blood test technology called “Lab on a Chip”. Company had a valueation of $10 billion by 2014. Later it was discovered that the test results the company filed were fake and that the technology did not work. The founder Elizabeth Holmes and her business partner Ramesh Balwani is facing criminal charges for fraud and destruction of evidence. • OPTION 2 - Explore the possibility of obtaining licences to manufacture and market new drugs discovered by small firms who may not be willing to be taken over by Novak, but willing to enter into a licensing agreement as they do not have the manufacturing expertise, manufacturing infrastructure, supply chain and the global marketing network that Novak possesses.

• Specific issues of Option 2 - Similar to the issues facing Option 1 – There is intense competition to license discoveries by new firms who are unwilling to be taken over. – Many issues can derail the successful regulatory approval of the licensed product. – The marketed product(s) may fail in the market.

ISSUE 3 - What are the diversification options should Novak pursue? Develop market entry strategies for selected options

• There are many options – Generics – Surgical Supplies – OTC Medicines including Vitamins and Nutritional Products – Consumer Medical Devices Option 1: Generics

• This option is discussed and evaluated as the ISSUE 1, OPTION 2

• It is a viable diversification option as it is a related diversification and the risk is less.

• However, there are many issues to be anticipated when implementing this strategy.

• These have been discussed previously,

Option 2: Surgical Supplies

• This option is discussed and evaluated as the ISSUE 1, OPTION 3

• It is a viable diversification option.

• However, the risk is high as this is a different industry altogether.

• These have been discussed previously, Option 3: OTC Drugs including Vitamins and Nutritional Suppliments • Over the Counter Medicine (OTC) – These are treatments for common ailments sold without a prescription. E.g. Panadol

• They are a big revenue earner. Reported market size in 2021: 151.7 Billion (USD)

• Most major American and European pharmaceutical firms are competing in this market.

• Major players are - J&J (USA), Bayer (German), Sanofi (French), Pfizer (USA), Mylan (USA), Novartis (Swiss), GlaxoSmithKline (UK), Glenmark (India), Merck (USA), Teva (Israel), Boehringer Ingelheim (German)

• OTC Market - Product Types – Cough/cold/flu treatments, – Analgesics (pain killers), – Anti-allergy drugs, – Antiemetic (control vomiting), – Worm treatments, – Gastric-reflux treatments, – Dermatological products (skin treatments), – Weight-loss products, – Opthalmological products (eye treatments) – Sleeping pills. OTC Drugs Market Analysis

• Threat of new entrants is high as the regulatory barriers to enter the OTC market is much lower than prescription medicines market. Most OTC drugs are generics where patents are expired allowing anyone to copy the drug.

• Large pharmacy chains and supermarket chains have moderate bargaining power as they buy bulk.

• Supplier power is less. Enough substitute suppliers avilable.

• Threat of substitutes moderate. Each product has many substitutes in the market, but customers are brand loyal and do not like to change brands

• Competitive rivalry is moderate as this is a consumer market OTC Drugs - Market Drivers

• The switch from Prescritption to OTC refers to the transfer of proven prescription drugs to non- prescription drugs. Due to the switch, many people can conveniently buy without consulting the doctor. This can save quite a bit of money for the consumer.

• Consumers understand and want to be involved in caring for their health. They demand more information about all forms of health care; as a result, patients are more knowledgeable. They have a better understanding of what medicines are for and how to use them

• The changing health care environment, particularly in the United States and Europe, will accelerate the pace of prescription-to-nonprescription drug switches. This is an attempt by governments to control rising medical costs.

• Regulatory agencies, including the United States Food and Drug Administration (FDA), are facilitating the growth of OTC pharmaceuticals. Examples are advertising and patient information directives in the European Community that promote self-care

OTC Drugs - Market Restraints

• Main restraint is the growing problem of OTC medicine abuse. This results in large number of hospital visits.

• Apart from USA and EU, regulators of other major and growing markets, especially in Asia Pacific are not very favorable to grant OTC permits to many drugs that are sold OTC in USA and EU. Mostly due to fear of abuse.

• There are resistance from the medical fraternity to the liberalising the OTC drugs market mainly due to abuse concerns and also due to worries about wrong self-medication through wrong self-diagnosis. OTC Drugs - Market Entry

• Impossible to enter the market through takeovers as the players are well established giants in the pharmaceutical industry

• Novak will have to develop their own OTC range using off-patent drugs.

• Given the expertise and capabilities of Novak, this part is not difficult. However, the difficulties will be in marketing. – OTC drugs are sold in parmacies as well as in supermarkets and grocery outlets. Therefore, new ditribution networks have to be developed – OTC drugs are consumer products with permission for mass media advertising. Therefore, Novak has to develop the skills such as brand building, mass media advertising and consumer market reserch

Option 4: Consumer Medical Devices

• Also called Home Medical Devices Market, Consumer Medical Devices is vast. • There are very large number of products in this segment. – Home Respiratory Therapy Equipment – Home IV Equipment – Home Dialysis Equipment – Home Therapeutic Equipment – Mobility Assist & Patient Support Equipment (Wheel chairs etc) – Home Patient Monitoring Equipment

• Out of this vast array of product segments, Home Patient Monitoring Equipment is the biggest. Option 4: Target Segment - Home Patient Monitoring Equipment • Blood Glucose Monitors • Blood Pressure Monitors • Holter Monitors (Portable ECG Machines for home use) • Peak Flow Monitors (Monitors lung airflow for home use) • Apnea Monitors (Breathing during sleep) • Heart Rate Monitors • Baby Monitors (Remotely monitor sounds and movements of a baby) • Electronic Thermometers

• This is the largest and the fastest growing product segment. The market is growing rapidly in emerging markets as well is in developed market.

• Market Drivers – Increase in prevalence of chronic dieases and lifestyle related disorders – Increased awarness of people regarding the need to monitor and control their illnesses to improve their quality of life and longevity – Increasing purchasing power of people in the Asia Pacific emerging markets is boosing demand – Technological advanced making such equipment, very powerful, easy to use and cheaper

• Market Restraints – High R&D Costs – Intelluctural property related to these devices concentrated in a small group of firms in US, EU and Japan – Long R&D times – Lenghty regulatory approval processes • Growth Prospects – Amid the COVID-19 crisis, the global market for Digital Patient Monitoring Devices estimated at US$ 47.4 Billion in the year 2020, – Projected to reach a revised size of US$ 200.9 Billion by 2027 – Growing at a Compound Annual Growth Rate (CAGR) of 22.9%

• Market Entry – Home patient monitoring is a technology industry with its own ecosystem of supply chains, R&D and Innovation suppliers, Distribution Networks, Marketing Channels and After Sales Providers – Therefore, the only way to enter the market is through the Aquisition route.

ISSUE 3 - Which diversification options should Novak pursue? Develop market entry strategies for selected options

Evaluation of strategies • Option 1: Generics – Already evaluated as part of a previous strategic option

• Option 2: Surgical Supplies – Already evaluated as part of a previous strategic option

• Option 3: OTC Drugs including Vitamins and Nutritional Suppliments – Specific issues of Option 3 Diversification Strategy is discussed in the next slide.

• Aquisition route is very difficult as the OTC market is dominated by major players who are well established Multinational pharmaceutical companies

• There are no small firms with significantly large OTC product portforlios that can help Novak break into this market.

• The most viable market entry option is to develop our own OTC products – Needs R&D – Needs regulatory approvals in all markets – Needs to develop competencies in branding and FMCG marketing – Needs to develop a special wholesaler and retailer distribution networks – Can be an expensive and time consuming strategy – However, success would mean Novak will own a share in a fast growing market with significant revenue stream • Option 4: Target Segment - Home Patient Monitoring Equipment

– A market with massive growth potential – There are many small firms with excellent products and technology Novak could license – However, a completely different industry more closer to electronic device manufacturing and marketing – Regulatory approvals needed to market – After sales service provision is essential – Distinct competencies and supply chains are needed • The most reliable market entry mode will be an Aquisition