Professional Documents
Culture Documents
Submitted to:
Professor Dr. A.K.M. Saiful Majid
Institute of Business Administration
University of Dhaka
Submitted by:
A N M Shamsul Arefin (ID No-23, 51D)
Executive Summary
This individual term paper studied the relation of the different concepts of Managerial Economics
with a business organization in the pharmaceutical industry, namely Kemiko Pharmaceuticals Ltd. Both
primary and secondary research methods are undertaken in conducting this term paper. Since the
research topic mainly focuses on the application and relation of different concepts and theories of
managerial economics with a business organization, the study is predominantly qualitative.
Data collection for primary research is done through in-depth personal interviews with the companys
top management the Chairman and the Director. Data collection for secondary research is done
through online articles and text from websites, books, and published reports on related concepts
of managerial economics.
The objectives of the research are to find out how the principles of economics apply to Kemiko
Pharmaceuticals Ltd; the market forces that affect the demand and supply of Kemikos medicinal
products; how elasticity of demand and supply works on Kemikos products; and how government
policies affect the marketing of Kemikos products the critical success factors needed to improve
performance.
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Table of Contents
1
Introduction: ................................................................................................................................... 1
1.1
1.2
1.2.1
Broad Objective............................................................................................................... 1
1.2.2
1.3
Scope ....................................................................................................................................... 1
1.4
Limitations............................................................................................................................... 1
Methodology................................................................................................................................... 2
2.1
2.2
2.3
2.4
2.4.1
2.4.2
2.4.3
Organogram ............................................................................................................................ 4
3.2
7.2
7.3
Machinery ............................................................................................................................. 11
7.4
7.5
Labour ................................................................................................................................... 12
10
10.1
10.2
10.3
10.4
11
12
13
Game Theory............................................................................................................................. 22
13.1
14
List of Figures
Figure 3-1: Organogram .......................................................................................................................... 4
Figure 4-1: SWOT analysis ....................................................................................................................... 5
Figure 6-1: Trade off between efficiency & equity ................................................................................. 7
Figure 6-2: Cost vs benefit ...................................................................................................................... 8
Figure 6-3: Contribution on GDP........................................................................................................... 10
Figure 7-1: Factors of production ......................................................................................................... 12
Figure 8-1: Circular flow diagram.......................................................................................................... 13
Figure 11-1: Price floor for Paracitamols .............................................................................................. 20
Figure 13-1: Zero-sum game ................................................................................................................. 23
List of Tables
Table 5-1: Competitor and market share................................................................................................ 6
Table 13-1: Major players in market ..................................................................................................... 22
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1 Introduction:
Managerial Economics is a branch of economics that can help managers in the business and
administrative decision-making process. It helps managers in reaching optimal decisions under given
situational constraints. Hence, this proposed term paper shall study the relation of the different
concepts of Managerial Economics with a business organization in the pharmaceutical industry,
namely Kemiko Pharmaceuticals Ltd.
1.3 Scope
The scope of this research is limited to the concepts mentioned in the aforementioned objectives
and also the other sub topics that are deemed important and appropriate for this term paper.
1.4 Limitations
This research has the following limitations:
2 Methodology
The methodology of this term paper is explained below.
license, and registration of all kind of medicines. PCB regulates the practice of Pharmacy throughout
Bangladesh.
The National Drug Policy (2005) states that the WHOs current Good Manufacturing Practices
(GMP) should be strictly followed and that manufacturing units will be regularly inspected by the DDA.
Other key features of regulation are restrictions on imported drugs (where these are produced by
four or more local firms); a ban on the production in Bangladesh of around 1,700 drugs which
are considered non-essential or harmful; and strict price controls, affecting some 117 principal
medicines.
3.1 Organogram
4 SWOT of Kemiko
Rank
Name of
Total
Company
Product
Company. %
Square
13522
14.92%
Beximco
7848
10.39%
Incepta
8579
09.53%
Opsonin
8062
08.61%
Acme
4705
06.24%
Aristo
5399
05.97%
Renata
4797
05.67%
SK+F
4134
05.49%
Drug
4157
05.04%
10
ACI
3974
04.69%
11
Orion
2067
02.35%
12
Globe
1308
01.98%
13
General
1403
01.71%
14
Kemiko
995
01.68%
From the table above it can be seen that Kemiko Pharmaceuticals Ltd is ranked 14 among all the other
companies with 1.68% share of the total market in Bangladesh. Square and Beximco pharma are
noticeably in the leading position. It can be deduced from the table that the total products seem to
have somewhat positive relationship with the market share.
Kemikos medicinal products are imported from China and India because they are good at
producing the raw materials more efficiently and less costly than Kemiko can in Bangladesh.
Hence, the concepts of absolute and comparative advantage come here when deciding on
from whom to trade what.
Principle 6: Markets are usually a good way to organize economic activity
In a market economy, the decisions of a central planner are replaced by the decisions of
millions of firms and households. Firms decide whom to hire and what to make. Households
decide which firms to work for and what to buy with their incomes. Households and firms
interacting in markets act as if they are guided by an invisible hand that leads them to
desirable market outcomes. However, all pharmaceuticals companies in Bangladesh,
including Kemiko, have a price ceiling on their medicinal products (except food
supplements) and 15% VAT imposed by the government. When the government prevents
prices from adjusting naturally to supply and demand, it impedes the invisible hands ability
to coordinate the millions of households and firms that make up the economy.
Principle 7: Governments can sometimes improve market outcomes
There are two broad reasons for a government to intervene in the economy: to promote
efficiency and to promote equity. The invisible hand usually leads markets to allocate
resources efficiently. Nonetheless, for various reasons, the invisible hand sometimes does not
work. Economists use the term market failure to refer to a situation in which the market on
its own fails to allocate resources efficiently. Since most of the medicinal drugs are bought
only when prescribed so its demand is inelastic and no matter how much Kemiko charges for
it the consumers have to pay that. But no, its not like that. Government has put a price ceiling
on all the pharmacy products, except food supplements, so that prices are kept under control
and less affluent people can afford medicine for treatment.
How the Economy as a Whole Works
Principle 8: A countrys standard of living depends on its productivity
In nations where workers can produce a large quantity of goods and services per unit of time,
most people enjoy a high standard of living; in nations where workers are less productive,
most people must endure a more meager existence. Similarly, the growth rate of a nations
productivity determines the growth rate of its average income. The Bangladesh
Pharmaceutical market doubled in just over four years. The retail market crossed USD 1.0
billion in size in 2011. It is one of the fastest growing sectors in the country with an annual
average growth rate of 21.4% in the last three years, 17.2% over the last five years, and
13.1% over the last decade. This gives an impression that the productivity of pharmaceuticals
companies such as Kemiko has contributed to some extent to the countrys standard of
living.uch as plates and mugs to the chemists for buying a certain volume of Kemikos
medicinal drugs.
Principle 9: Prices rise when the government prints too much money
When the government creates large quantities of the nations money, the value of the money
falls. Hence more money is required than before to get the same amount of goods. Kemiko
faces trouble dealing with inflation because although their cost of production rises, the price
ceiling imposed by the government limit their ability to increase their profitability
proportionately.
Principle 10: Society faces a short-run trade-off between inflation and unemployment When
the government increases the quantity of money, for instance, it increases the amount that
people spend. So the investors of Kemiko have more money and they invest in
establishing more new product lines which are managed by hiring more employees. Thus
unemployment decreases with increasing in money supply in the short-run until the price of
labor adjusts in the long-run.
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7 Factors of Production
7.1 Land and buildings
Suitable land is scarce in Bangladesh, and the availability of land is a key bottleneck for
investment. There is a 150 million US$ project to establish an industry zone for export
oriented pharmaceutical companies. However, it has been stagnating, and has in fact rather
inhibited investment, since some companies might have been investing on existing facilities
instead of waiting for the industrial zone to materialize. Construction is very competitive, both
in terms of price and in terms of speed.
7.3 Machinery
Machinery for pharmaceutical manufacturing has to be imported. This implies a 15% Value
added tax is applied on CIF and duty. This is lower than the duties in India and in many African
countries. However, according to Doing Business in 2005 by the World Bank, the
largest part of the cost for import are not taxes and duties but ports and terminal handling .
This should be less relevant for high-value goods like machinery, but is still a competitive
disadvantage when comparing Bangladesh to India or China, although importing high-quality
machinery from developed countries may enable higher quality products.
manufacturing, but the scale effects in API manufacturing will not allow this solution for each
API needed, and also similar problems are to be expected with the APIs precursors. Since
Bangladesh has no developed Chemical Industry, backward integration to the level of
commodity chemicals is not an option.
7.5 Labour
Bangladesh is internationally very competitive in terms of labor cost. Over the whole value
chain, the economies of cheaper labor cost may account for up to 50% of the overall
manufacturing cost for APIs. Since Bangladeshi manufacturers are not fully backward
integrated, they can capture only part of this competitive advantage, the rest depending on
the sourcing of the raw materials. The quality of the labor force must also be taken into
account, since in a world-class manufacturing facility, a certain skills and education level is
needed for almost all labor force with the possible exception of the packaging of finished
drugs. Skilled pharmacists and lab technicians etc. are readily available at low cost in
Bangladesh in the pharmaceutical sector, and A-level graduates can be trained to do
operative work at low cost.
In addition to the growing concerns about human health risks from pharmaceutical drugs via
environmental exposures, many researchers have speculated about the potential for inducing
an antibiotic resistance.
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Households and Kemiko interact in two types of markets. First, lets explain in terms of the
inner loop in the diagram above. In the markets for medicines i.e. pharmacy stores and
hospitals, households are buyers and Kemiko is the seller. In particular, households buy the
medicines that Kemiko produces. Whereas, in the markets for factors of production,
households are sellers and Kemiko is the buyer. In these markets, households sell to Kemiko
the inputs required to produce medicines, which in turn are sold to households in the
markets for medicines. The inner loop of the circular-flow diagram represents the flow of
medicines between households and Kemiko.
The outer loop of the circular-flow diagram represents the corresponding flow of money. The
households spend money to buy the medicines from the pharmacy-stores and hospitals
where medicines are sold by Kemiko. Kemiko uses some of the revenue from these sales to
pay for the factors of production, such as the salaries of their employees, rent for factory,
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office, and warehouses. Whats left is the profit of the Kemiko owners, who themselves are
members of households. Hence, the spending on medicines flows from households to
Kemiko, while the income in the form of salaries, rent, and profit flows from Kemiko to
households.
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brand of good. This in turn increases the demand for that particular brand of good. However,
companies operating in the pharmaceuticals industry are not allowed to advertise their
medicinal products publicly to general consumers, unless the products are food supplements.
Kemiko Pharmaceuticals Ltd, therefore, like all other pharmaceuticals companies, competes
for market share through trade promotion. What KPL does is that they give bonuses at a
certain ratio and also prizes when trading their products to the chemists (retailers). For
instance, if a chemist buys 2 boxes of a certain medicine, he/she gets a box free, thats bonus.
Sales can also be boosted with other incentives like giving gifts such as plates and mugs to the
chemists for buying a certain volume of Kemikos medicinal drugs.
Seasonality Seasons can affect the demand for certain medicinal products. For example,
during particular time of the year when most people normally catch cold and fever due to a
seasonal change, demand for anti-fungals and antipyretics products are prescribed more. Also
when there is flood in Bangladesh, people get diseases like cholera and dysentery, as a result
demand for Kemikos medicines to cure such diseases increases in hospitals and pharmacies.
Factors Affecting the Supply of Medicinal Products
Price - When the price of a good increases, suppliers get more profits from selling that good
and hence they tend to produce more of that; as a result quantity supplied of that good
increases. In case of Kemiko pharmaceuticals, price of medicinal products is regulated by the
government via price ceiling and so there is a limit to which suppliers are willing to produce
and make profits. However, the supply curve will be fairly elastic due to the profit motive of
Kemiko whenever theres an opportunity.
Cost of production - Production costs are primarily determined by the price of inputs and
technological advances. Technological advances can include anything from scientific
breakthroughs to better application of existing machinery and processes (Samuelson, 2010).
If the price of inputs required making medicinal products increases, ceteris paribus, then
Kemiko will have to lower the supply since it becomes less profitable than before. Whereas
technological advances in producing medicines can improve Kemikos efficiency and
productivity, as a result supply of medicinal products increases.
Exchange rate - When a good is traded in overseas, the currency exchange rate can affect the
quantity of goods traded with the respective countries. Since Kemiko imports raw materials
mainly from China and India to produce its medicinal products, the currency exchange rate
plays a role in determining the cost involved in importing them. If the value of Bangladeshi
taka depreciates with respect to the value of US dollars, then it will cost Kemiko more to
import the raw materials from overseas and hence production will decrease, decreasing the
supply of medicinal products in the process.
Government policies - A market can be regulated by government policies such as price control
and tax. Kemiko Pharmaceuticals Limited is affected by both these policies. Price ceiling is
imposed on all medicinal products (except food supplements) along with a tax rate of 15% on
the selling price. This reduces the supply of KPLs brands of medicine since the profitability is
suppressed. This will be explained more in detail later using diagrams.
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Expectation - Suppliers can expect the demand of a good to increase in the near future and
hence decide to produce it at present in order to make their brand familiar to the consumers
which would eventually help them take up a good chunk of market share when the demand
for it reaches peak. Kemiko sees good prospects for food supplements such as Biogen in near
future and thus has recently started producing and supplying it in the market. The supply will
be greater when demand will reach peak after four to five years and the price for Biogen will
be higher than it is now.
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Kemikos medicinal products have a fairly elastic price elasticity of supply. This of course
comes from the motive of profit maximization. However, the profit maximization is limited by
the government via price ceiling.
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12 Pricing Strategy
In a market economy the interaction of consumers and producers determine the price of a
product or service. Theory of demand and supply helps explain how prices are set. This theory
also explains how responsive both demand and supply are to the changes in price. The
medicines that are not essentials, buyers could credibly refuse to buy them will have more
elastic prices. On the other hand, medicines that are considered necessary are inelastic and
buyers are less sensitive to higher prices. Kemiko Pharma uses perceived value based Pricing
strategy. Value-based pricing (also value optimized pricing) is a pricing strategy which sets
prices primarily, but not exclusively, on the value, perceived or estimated, to the customer
rather than on the cost of the product or historical prices. Where it is successfully used, it will
improve profitability due to the higher prices without impacting greatly on sales volumes.
In the pharmaceuticals market of Bangladesh, there is not much price differentiation, in
general, among the different companies due to the highly competitive nature of the industry.
Whatever price differentiation is there, it is between the multinationals and the national
companies. It is due to the fact that the multinationals charge a premium price for their
product.Moreover, price is not a very important factor due to the nature of the product.
Quality is more important. However, the purchasing capacity of the patients is also an
important consideration. Therefore, it is important for the companies to charge a reasonable
price for their product.According the survey, most of the doctors perceive Kemiko as offering
reasonable pricing for their product (Figure 06). It may be due to the fact that Kemiko has
recently come up with a very competitive price for some of its key products. Square hold the
second position. Whereas, the others are not perceived to be providing reasonable prices
given the quality of their products.
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13 Game Theory
Major players in Esomeprazole market
Table 13-1: Major players in market
Companies
Market share
Beximco
30
Square
22
Incepta
20
Ibn Sina
15
Aristopharma
Biopharma
Kemiko
Patent: NOVARTIS spent nearly 15 years seeking a patent in India for Glivec, a medicine for
chronic myeloid leukemia. That quest reached its dead end, at last, on April 1st. Indias
Supreme Court rejected the Swiss drugmakers patent application. Glivec (marketed in
America as Gleevec) is a blockbuster, earning the Swiss drugmaker $4.7 billion last year. The
case was watched closely by virtually everyone with an interest in selling medicines or
benefiting from them, including drug firms, trade officials and patient advocates. Drug
companies, facing paltry growth in rich countries, want to sell medicines to developing ones
where demand for new drugs is rising along with rates of chronic disease. But governments
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are keen to boost their own pharmaceutical firms and are wary of patented drugs high costs.
As a result, brawls over patent protections and prices have broken out from Brazil to Thailand.
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References
Aswad, M. N. K. (2013, April 22). Personal interview. Kalam, M. A. (2013, April 18). Personal
interview.
Kemiko Pharmaceuticals Ltd. (n.d.) Retrieved April 3, 2013, from http://www.kemiko
pharma.com/home.php
Malhorta, N. K. (2009). Research Design Classification. In Naresh, Marketing research an
applied orientation (pp. 78-79).
Mankiw, G. N. (2007). Principles of Economics (4th ed.). India: Baha barkha Nath Printers
Pharmaceutical industry in Bangladesh. (n.d.). Retrieved April 3, 2013, from http://en.wiki
pedia.org/wiki/Pharmaceutical_industry_in_Bangladesh
Saad, K. S. (2012). An Overview of the Pharmaceutical Sector in Bangladesh. Brac EPL Stock
Brokerage Limited.
Samuelson, N. (2010). Economics (19th ed.). Singapore: McGraw Hill.
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