GENTABS INDIA LIMITED
In the fall of 2009, brainstorming exercises were going on to arrive at the 20% growth targets set by the top management of Gentabs for the next year. Managers wanted to set profitable targets for their divisions. As Mr. SK, Finance Head of Active Pharma Ingredients division, said ---"It is very important for our division to be profitable as it is a measure of our performance. We will grow if our division grows.''
Gentabs India Limited follows a calendar year for its accounting purposes. One year profit, revenue and cost targets are set during a bottom up planning process that starts in September and ends in November every year. All the managers of different divisions prepare the budgets.
CORPORATE PROFILE
Gentabs India Limited, headquartered in India, is an integrated, research based, international pharmaceutical company, producing a wide range of quality, affordable generic medicines, trusted by healthcare professionals and patients across geographies. The Company is ranked amongst the top twenty global generic companies and has a presence in 23 of the top 25 pharma markets of the world. The Company with a global presence in 30 countries with manufacturing facilities of international standards and a diverse product portfolio is rapidly moving towards global leadership, riding on its success in the world's emerging and developed markets. The product portfolio of the company not only includes the dosage/tablets but also Active Pharma Ingredients (API).
The Company's business philosophy based on delivering value to its stakeholders constantly inspires its people to research, innovate, achieve excellence and set new global benchmarks. It aims at providing affordable and innovative medicines for healthier lives. Its vision is to serve the society's important needs for affordable medicines through the Dosage API component and the Global Generics business. Gentabs continues to aggressively pursue its mission to become a Research-based International Pharmaceutical Company and attain a true global leadership position. It reinvents itself to achieve sustained growth. The workforce of the company consists of more than 15000 employees. The Company values diversity.
PRODUCTS
Using the finest R&D and Manufacturing facilities, Gentabs India Limited manufactures and markets generic pharmaceuticals, value added generic pharmaceuticals, branded generics, active Pharmaceuticals (API) and intermediates.
Gentabs offers valued-added services in drug delivery to differentiate its position in the generic API market, and taking its generic API business beyond its exclusive focus on API manufacturing. The Company also focuses on ascending the value chain in the marketing of pharmaceutical substances and is determined to bring in increased revenues from dosage sales.
Gentabs's diverse product basket of over 5,000 SKUs available in over 125 countries worldwide encompasses a wide therapeutic mix covering a majority of the chronic and acute segments. Healthcare trends project that the chronic treatment segments will outpace the acute treatment segments, primarily driven by a growing aging population and dominance of lifestyle diseases. Company's robust performance in antibiotic drugs, antibiotic medicines, therapeutic segments, anti hiv medicines, anti cancer medicines, nephrology medicines, cardiology medicines and cardiovascular therapeutic segments, Central Nervous System, Respiratory, Dermatology, Orthopaedics, Nutritionals and Urology segments, clearly indicates that the Company has strengthened its presence in the fast-growing chronic and lifestyle disease segments. Gentabs's top 20 products, range from Anti-infective to Dermatological, account for revenues of over Rs. 5000 crores.
MOLECULES
The Company is very strong in the following APIs and its formulations. Some of strong products are: Alendronate, Atorvastatin, Amlodipine , Ambroxol, Amoxicillin, Ciprofloxacin, Cephalexin, Ketorolac, Tromethamine, Cefaclor, Clarithromycin, Cefuroxime Axetil
ACTIVE PHARMACEUTICAL INGREDIENTS (API)
Gentabs's API business over the years has grown consistently. In a macro environment of extra ordinary competition and challenges, the API division has moved from strength to strength. The large number of manufacturers crowding the global active pharmaceutical ingredients (API) market has created a distinct lack of capability differentiation. Most participants have similar production capabilities and technology portfolios, and follow equally efficient chemical processes. Given that they use common multi-purpose kits to cater to numerous and varied customer requests, there is little scope for differentiation in terms of service. Manufacturers thus have to concentrate on building strong relationship with pharmaceutical customers in order to secure steady business from them. Additionally, enhancing their production capabilities and improving service portfolios will help them achieve sustainable competitive advantage. Therefore, Gentabs is geared to provide quality products with excellent customer relationship in regulated and fragmented markets in Europe and USA. In addition to markets like China, select markets of Asia, Far East and Latin America it supplies API to more than 50 countries.
The API division has in its portfolio over 50 products covering a wide therapeutic range such as Cardio-vasculars, Anti-infectives, Anti-ulcerants, Anti-diabetics, Anti-depressants, Anti-virals and others.
The objective of this business is to provide total solutions to the customer with regard to the API starting from samples and trial quantities, right up to regulatory assistance required for registration and regulatory compliance. Gentabs's API division is an ideal partner for APIs due to its speed to market, customer orientation, differentiated products providing early market entries, and good quality.
MANUFACTURING FACILITIES API
An organization' capabilities and intent are strongly reflected in the product it manufactures. In other words, the manufacturing competencies and facilities echo truly, the R&D extent and the ability to implement it for the best of the market it targets.
Pursuant to its corporate values of striving for continuous improvement and betterment, the Company has set up its manufacturing facilities in Chennai for both dosage as well as API. The Plant is equipped with modern high-speed machines and integrated packaging lines to be cost efficient.
Gentabs's manufacturing strengths have established it as a producer of world-class generics, branded generics and a major supplier of its range of Active Pharmaceutical Ingredients. The plant is engaged in the production of API primarily semi synthetic aspirin, acetaminophen penicillins, flouroquonolones and bulk antibiotics, anti allergens, anti ulcerants and the chemistries include stereo-selective synthesis, cryogenics, hydrogenations and cyanations.
THE DISPUTE
The Global API division is a decentralized division of the company in which managers are responsible for profits. Managers can either outsource their products or buy it from their manufacturing division. This division has a Marketing Head Mr. GS and a Finance Head, Mr. SK with other team members. Mr. GS along with his area managers is responsible for getting the export orders and the Mr. SK is responsible for approval of the prices quoted for the orders. He has to check that the sale prices are more than the transfer prices of products received from the manufacturing division and also that these are slightly higher than the competitors' export prices. He has to see that the prices are in conformity with the budgeted contributions. Apart from the financing function (Receivables, LOC, FOREX), the major concern of the finance head is to see that: 1) Quoted export prices achieve the required contribution, 2) Sales mix achieves the budgeted total contribution.3) Ensure the smooth functioning of supply chain so that export orders are shipped in proper time, 4) To see that the transfer prices of products from manufacturing division are competitive.
Till 2009, the transfer prices were based on variable cost plus a percentage mark up. This was however masking the full cost of the product and did not give a true picture of the profitability of the products. But for next year the manufacturing divisions wanted to change their pricing policy to full cost basis. The manufacturing division was working at normal capacity. Another problem was that since dosage was the main business of the company, there was more demand of API in that division which meant lesser volume available for direct sales through Global API division.
In 2009, API division achieved a contribution of 20% and a net profit of 12.5%. Manufacturing division was a cost centre and they had unabsorbed costs at the year end of approx 3% of their total spend.
Managers of the manufacturing division therefore wanted to increase their profits and wanted to share the burden of fixed costs with the Dosage and Global API businesses. The production Head, Mr. NP said: "Why should I take the burden of all the fixed costs and have unabsorbed costs?"
During the budgeting process the manufacturing division had estimated that their variable costs would also rise by about 7% which meant increased transfer prices for the Dosage and API businesses.
Under full absorption method, some of the transfer prices might not remain competitive for the global API division and Mr. SK estimated that the profitability levels of his division would go down. He met the Senior VP API and said "How will I achieve my targeted growth rate with such a huge price rise in transfer prices. Already in the current internal and regulatory environment it is difficult the meet the volume in terms of tonnes and if the costs also rise our profits will go for a six". The Senior VP Global API advised to meet with Mr. NP and other managers of API manufacturing division to negotiate a reduction in transfer prices.
In Head Office, the meeting was fixed up where all the divisional managers met to discuss the problem. The manufacturing division was not ready for variable cost plus mark up. After discussions the reasons for increase in variable costs were identified. There was increase in conversion prices charged by the job workers for some of the intermediate molecules. There was also some increase in fixed costs shown by the division.
After few rounds of negotiation, some of the transfer prices are reduced by reconsidering the conversion costs but in case of few products they are still very high and non competitive.
Questions:
1) What should Mr. SK do? Should he outsource the products or buy it from manufacturing division?
2) Identify the products which should be bought from the manufacturing division and which can be outsourced.
3) Which decision is more beneficial for: a) Global API, b) Gentabs c) Both?
4) How can the dispute be resolved? How can the mangers be motivated to work towards achievement of organizational goals?
5) Should the top management interfere?
