Case study: To trim or not to trim

By Ankit Agarwal Rahul Dobhal Shubhanshu Payal

Profile of the Company

Novartis Pharmaceuticals is the merger of Ciba-Geigy and Sandoz (December 20th, 1996 ). Market leader in several therapeutic areas like immunology and inflammatory diseases, as well as strong positions in central nervous system disorders, cardio vascular diseases, oncology, dermatology and asthma. It has around 250 product brands such as Sandimmum, Voltaren, Lamisil and Foradil.

About the case

In 1999 the top 20 brands of the company accounted for 79% of the revenues while the remaining brands constituted 21% . The 50 smallest brands account for approximately 2.7% of the product sale. 15 other products generate very small revenue (2.4 million) which caters very important medical needs (Beta blockers and Serotonin 1a receptors).

Issue 1
Whether to keep Brands Pertofran and Visergil in their product portfolio or not. Pertofran: Total revenue 1million Variable Cost incurred 0.9 million Fixed cost incurred 0.2 million Suggestion: Not to drop. Visergil: Total revenue 1 million Variable cost incurred 5.9 milllion Fixed cost incurred Nil Suggestion: To drop the product.

Issue 2
Strategic Factors to be considered in deciding whether to drop all 50 products (exhibit 1) and 15 other products brands (para 3) Factors: The contribution given by the product. The capacity utilization i.e. in case a firm is having idle capacity, the production of any type which can contribute towards the recovery or fixed cost can be justified.

Contd
The long term prospective in the market for the product. The effect on sales of other products. In some cases the discontinuance of one product may result in heavy decline in sales of other products affecting the overall profitability of the firm. Usage of the product with respect to different countries. Relationship with Health Maintenance Organizations, doctors and patients.

Issue 3
Whether to drop all 50 products or not? Solution: Not to drop the products from its product portfolio as it is earning revenue from these products and also eliminating these products can affect their relationship with Customers.

Issue 4
What price should Novartis charge the buyer for all 50 products (exhibit 1). Solution: Any price above the cost incurred by the firm on the fixed asset of the company. i.e. 30.8 CHF million for the 1st year and half its value in the following years. The company can used cost based pricing method. And can also fix price according to the uniqueness of the product needs.

Issue 5
The incentive system: The country sector heads and their sales organizations were evaluated on the basis of sales minus local country costs hence the effect of pruning or divesting products is that overall country sales revenues could be adversely effected without a corresponding decrease in local country costs. This could have a negative impact on a countrys performance measures and hence on managers bonus payments.

Issue 6
Recommendations with respect to the 50 products (exhibit 1) and 15 product brands (para 3). Company should not trim its product portfolio with respect to 50 products showcased in Exhibit 1 and 15 products in Para 3 of the case. This statement is derived by taking into account the strategic factors discussed earlier in the case.

Thank You