Novartis Case Questions

Novartis Case Questions
1. Comment on the organizational structure of the Pharmaceutical division of

Novartis. Would you argue it lends itself towards a functional or project
management organization?
Mixed organizational structure and it tends to Project Management organization, since

the IMB sets all the roadmap regarding the project management and its portfolio.
2. What are the objectives of the IMB meeting?

“The IMB has two important functions: At its yearly meeting in August, it decides on the shape and
content of the project pipeline by accelerating and delaying projects, and, on a regular basis, the
IMB checks its evolution”
“We needed to allow the IMB five working days to review the documentation associated with the
annual strategic plan. “
The yearly IMB meeting deals with an annual budget of more than 4 billion CHF (US$ 2.5 billion)
and considers approximately 120 projects executed in ten development sites worldwide. Its main
purpose is to decide which compounds to develop and their priority.
Any individual project can be singled out for special attention concerning its expected profitability,
strategic fit and contribution to portfolio or pipeline balance. The projects are subsequently
monitored by the IMB in quasi-monthly meetings which are held to evaluate the performance of the
projects against the objectives established in August.
The planning process starts with the evaluation of the options in the light of the strategic plan and
the analysis of perceived opportunities. On the basis of this information, the decision makers agree
on targets and the optimal portfolio that enables them to reach their proposed objectives.
3. What are heavy weight projects, key projects and foundation projects?
How do they play a role in a diverse project portfolio?
Assign projects to three different categories: Heavyweight projects, Key projects and
Foundation projects. Heavyweight projects are typically close to market and have
blockbuster potential, and have a high priority for accessing resources. Key projects are
also important to the company and have potential, but are still far away from market.
The Foundation projects comprise the bulk of the portfolio.
If the budgetary requirement to continue all the projects in the portfolio exceeds the
available funds, some projects are put on hold.
4. How does Novartis compare with other companies in terms of portfolio
diversification?
The Novartis Pharmaceutical product pipeline is one of the broadest in the industry and currently
comprises a total of 69 projects in clinical development (see Exhibit 5), and 120 projects from the
pre-clinical stage onwards. According to Daniel Vasella, CEO of Novartis: “Novartis’s pipeline is
already one of the strongest in the industry with 10 new molecular entities (NME) approvals in the
US since January 2000, versus four for our nearest competitor.” He added: “We have a number of
strong pipeline compounds as well as limited patent expiry exposure. With 80% of the portfolio
patent protected, this places us in a strong competitive position” 19.
5. How do patents protect Novartis from cheap generic products?

Newly developed drugs are protected by patents, providing pharmaceutical companies with the
opportunity Typically, 20-year patents are granted, although in general this results in a post-
approval patent life of approximately 12 years. After a patent has expired, generic drugs identical to
the newly developed drug can be freely sold without the need for extensive clinical trials.
6. List the sources of risk (Market and technical).

Pharmaceutical R&D activities are subject to a high level of risk, which is an essential ingredient of
all the reports presented to the IMB: project values are expressed as expected values, weighted with
the probabilities of reaching the successive stages and ultimately the market. According to Pius, “In
IMB meetings, we only discuss expected values, e.g. expected sales or expected NPV. It is
meaningless to talk about a potential 5 billion drug without taking into account the probability of the
drug ever reaching the market. Unfortunately, there is little that can be done about the technical
success or failure of a project. Requiring a higher success probability before starting a project would
effectively rule out most projects, especially NMEs. Hence we rely on portfolio diversification.
However, it is essential that we monitor the risk in the portfolio, making sure that any decision taken
results in acceptable risk limits.”
Next to technological risks, Novartis Pharma also faces considerable uncertainty about the sales
that the product will generate once launched. Initial projections are made for a distant future when
the compounds characteristics are still relatively unknown. A typical NPV valuation is presented in
Exhibit 12, in the format used by Novartis’s portfolio review group (the figures are for illustrative
purposes only). The cash flows are discounted using a company-wide weighted average cost of
capital (WACC).
Renner commented: “We need to look at ranges when forecasting sales, instead of just focusing on
the most likely sales figure. However, this is a major challenge for the marketing group.”
GP products account for the majority of sales, but have a relatively low profitability, whereas Niche
and Specialized products offer higher profitability for a smaller sales potential. Different type of
products might also react differently to patent expiry: GP products are usually copied very quickly
and market share loss can be severe.
Notes:
 It is project oriented
 You don’t want to spend more of your patent time in development
 Diversified products: Financial health is not dependant on one drug
 Percentage of success is very extremely low.
 When you look at your portfolio, you want to see all your running projects, and at
which stage is each (looking at table probably of approval), how many are
blockbusters, and how many years their patent runs out, you get this and then
analyse the portfolio.
 NPV profits, cost is loss.
 Expected profit, is 5%*10758 and 95% * (-96), expected value $38 success (from
diagram red circle) but we need more elaborate decision tree not just one tree,
so here we go in each phases, we check the other picture.
 Distribution of NPV you get it from the marketing team
 If it is healthy portfolio you invest more if not you put money somewhere else.
 When mixing projects in and checking the NPV, it will become better, NPV will be
positive (expected value) lower risk to lose, etc…
 eNPV/investment = ePI expected profitability index
IRR uses this main criteria
 First more diversified, one of them loses the other caches up, less risk that is why
they didn’t chose project 4

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Novartis Case Questions

1. Comment on the organizational structure of the Pharmaceutical division of

Mixed organizational structure and it tends to Project Management organization, since

2. What are the objectives of the IMB meeting?

5. How do patents protect Novartis from cheap generic products?

6. List the sources of risk (Market and technical).

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