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UVA-F-1014
Glaxo Italia, S.p.A.: The Zinnat Marketing Decision

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UVA-F-1014

GLAXO ITALIA, S.P.A.: THE ZINNAT MARKETING DECISION

The laws of the marketplace now apply as much to pharmaceuticals as to consumer

electronics: once armed with a new product, a company must establish its market
share as quickly as possible, before rival firms produce competitive brands In the
past, drugs brought in good profits for a decade or more.
Ernest Mario, chief executive officer of Glaxo Holdings, PLC1
In September 1990, the laws of the pharmaceutical marketplace prompted Emilio Rottoli,
financial controller of Glaxo Italia, S.p.A.,2 to evaluate competing strategies for the launch of a
promising new product in Italy. Zinnat was a new formula of oral antibiotic. After a research and
development (R&D) cost of more than 200 billion Italian lire (ITL),3 the product represented a
significant innovation in its market segment. The huge quantity of competing antibiotics and
antihistamines, however, made success of the product launch unpredictable.
Glaxos general approach to launching a new product called for rapid and massive
distribution into the target market in order to capture a large market share quickly, but Rottoli had
decided to evaluate two competing strategies for selling Zinnat:

Co-marketing distribution: under which Glaxo would permit another pharmaceutical

company to make and market the same product but under a different brand name. Glaxo
would receive a fee from the co-marketer, plus profits on the sales of certain ingredients to
that firm. This arrangement would sacrifice some market share for Glaxos own brand,
Zinnat. Glaxo had used co-marketing arrangements to promote other products. The major
market for Glaxos best selling product, Zantac, an anti-ulcer drug, was developed under a
co-marketing agreement with Hoffmann-La Roche, whose sales teams organized the

Quoted in The Economist (6 September 1990).

Societa per Azioni; literally, a business under share ownership, like a public corporation in the United States. Also,
PLC means a public limited company.
3
On September 14, 1990, one U.S. dollar could purchase 1,165 Italian lire.
2

This case was prepared from field interviews and public information by Matteo Davoli, Giuseppe Geneletti, Marco
Ghiotto, Diogo Rezende, and Professor Robert F. Bruner. Some financial information has been disguised. The
cooperation of Emilio Rottoli and Glaxo Italia, S.p.A. is gratefully acknowledged, as is the financial support of the
Citicorp Global Scholars Program. Copyright (c) 1992 by the University of Virginia Darden School Foundation,
Charlottesville, VA and INSEAD, Fontainebleau, France. All rights reserved. To order copies, send an e-mail to
sales@dardenpublishing.com. No part of this publication may be reproduced, stored in a retrieval system, used in a
spreadsheet, or transmitted in any form or by any meanselectronic, mechanical, photocopying, recording, or otherwise
without the permission of the Darden School Foundation. Rev. 3/00.

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introduction of the product among doctors in the United States. The tremendous success of
this initiative had built up an appetite (and an expertise) within the company for such
arrangements.

Direct sales: under which Glaxos own sales force would be the sole channel of distribution.
This approach would permit the company to exploit the potential gains from its new product
most fully. Under this approach, demands on Glaxos sales organization would be greater
than in co-marketing, however, and market penetration for the product would take longer.

The choice between the two approaches would hinge not only on financial criteria (such as payback
and internal rate of return) but also on qualitative factors such as the potential strength of the brand,
uncertainties about the future regulation of a possible over-the-counter (OTC) product, the need to
generate cash in the short term to sustain a large R&D budget, uncertainties about the rate of
technological change in the pharmaceutical industry and the development of products competitive to
Zinnat, potential price wars, and the peculiar aspects of the Italian market.

Glaxo Holdings, PLC

Glaxo Italia, S.p.A. was a wholly owned operating company of Glaxo Holdings, PLC,
headquartered in London. Glaxo Holdings was the worlds second largest pharmaceutical company
in terms of sales, which totaled (British pounds)GBP2,894 million in the fiscal year ending June 30,
1990, and were expected to grow to GBP3.4 billion in 1991.4 The companys growth had been
phenomenal: GBP1 invested in the company in 1979 was worth GBP85 in 1990, approximately a
50% annual compound rate of growth in value (see Exhibit 1). Glaxos shares were listed for trading
in London, New York (as American Depository Receipts), Tokyo, and Paris. With an equity market
value of $23 billion, the company had the distinction of being the largest capitalization stock traded
on the London stock market and the 26th largest traded in the United States.
Glaxo was a leader in products for the relief of peptic ulcers and asthma and was a major
supplier of antibiotics and of treatments for skin disorders. For several reasons, many of Glaxos
new drugs eventually achieved dominant market positions. First, Glaxo focused its research on
unmet medical needs. Second, the company always coupled its R&D strategy with a fast track record
in new drug approval time. Third, Glaxo had built up one of the worlds biggest sales forces for
drugs, 9,500 representatives. Fourth, its marketing machine went into action early in a products life.
While the new drug was being developed, Glaxo held costly symposiums to which it invited opinion
leaders who knew about the disease the drug was designed to treat. The idea was to build and gauge
market potential. Once a drug was presented to regulators for approval, the marketers used publicrelations firms to work out ways to create demand. Doctors were flooded with medical literature and

On September 14, 1990, GBP1 = ITL2,212 and US$1.898.

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given guidelines on how to diagnose the disease. Medical authorities were persuaded of the
economic savings from the product introduction. Almost immediately after a drug had been
launched, Glaxo established small studies to monitor the performance of the drug in a normal
population in order to spot any new adverse effect. Doctors were paid for their contributions to the
studies.

Glaxo Italia, S.p.A.

Glaxo Italia, S.p.A. was the oldest Glaxo subsidiary. Exhibit 2 reveals that the subsidiary
had the third largest market share in the highly fragmented Italian pharmaceutical market. Based in
Verona (in the northeastern part of the country and the setting of Shakespeares Romeo and Juliet),
Glaxo Italia had manufacturing facilities producing most of Glaxo Holdings products. The company
workforce was about 2,000 people, 400 of whom were involved in research.
Glaxo Holdings granted unusual autonomy to its operating subsidiaries, including discretion
over product positioning, the choice of promotional mix, the timing of line extensions, and resource
allocation to various products. Glaxo Italias objectives were to achieve a turnover5 of ITL2 trillion,
which would represent 9% of the market, with a 50% profit margin, by the turn of the century. In
order to achieve those challenging goals, the company was rapidly expanding its sales force and had
invested heavily in new research facilities (ITL156 billion), which was one of the five most
important R&D centers for Glaxo Holdings. Last but not least, Glaxo Holdings had selected Italy as
the site for the Glaxo Management School.
As shown in Exhibit 3, this expansion strategy was expected to dampen profitability in the
short term, but within five years, the heavy investment and debt-based financing were forecasted to
pay off in a sevenfold growth of profits. Glaxo Italia sales in 1991 were expected to be ITL719
billion, which included ITL183 billion of sales by licensees and co-marketers. The total would
represent 6.2% of the pharmaceutical market (3.8% through direct sales only). Exhibit 4 reveals that
a quarter of these sales would derive from licensees in co-marketing agreements; Exhibit 5 indicates
that continued sales growth depended significantly on new products and sales by licensees.

Zinnat
The Zinnat oral antibiotic offered a new competitive remedy to current drugs for influenzalike feverish diseases. Zinnats launch would be a major opportunity and a challenge for the
company to support and expand its presence in the antibiotic segment. The product would be
introduced in two formulations: (1) a package of 12 pills of 250 milligrams each with a retail price
of ITL34,400 and (2) a 2.5-g. syrup with a retail price of ITL29,880. The manufacturers price was
61% of the retail price. Gross margin was 53% of the manufacturers price. The cost of goods sold
consisted mainly of the costs of raw materials, local production, bottling, and fees. The raw material
5

Turnover is equivalent to sales revenue.

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was sold to Glaxo Italia S.p.A. and any co-marketers from Glaxo Holdings at a transfer price of
1,566 ITL/gram. Glaxo Italia would pay an additional 4% of this price for customs fees,
transportation, etc. The transfer price consisted of variable costs (20%) and the products share of
R&D expenses incurred (80%). Glaxo Italia and any co-marketers had to anticipate a 20% cost for
local production and bottling.

The Ethical and OTC Pharmaceutical Markets

Glaxo planned to introduce Zinnat solely into the ethical-drug market, although at some point
in the future, Zinnat might convert into an OTC drug. (When a drug was prescribed over a long
period of time, it could develop a strong brand image.) These two main segments of the market were
significantly different.
In the ethical-drug market, a doctors prescription was necessary to obtain the product;
therefore, the doctor was the gate keeper to the end user and the target of marketing efforts by the
manufacturers.
Italian doctors were renowned in Europe for their interest in new drugs. As a result, the
average lifecycle of ethical drugs tended to be shorter in Italy than elsewhere. Glaxo managers
believed that aggressive use of sales-force marketing (both direct and co-marketed) would have a
strong effect on Zinnats market share.
OTCs, by definition, could be purchased directly from retailers (usually, but not necessarily,
pharmacies). No patents applied in the case of OTCs, and all OTCs were branded. In most countries,
OTCs could be directly advertised to the public, while ethical drugs were subjected to government
regulations that allowed them to be advertised only in media targeted to the medical profession.
In general, manufacturers decided whether a drug they were developing fit the ethical or the
OTC market, but a final decision was made by national drug-control authorities. OTC drugs were
usually established remedies for minor illnesses, such as coughs, colds, and flu or preventive
preparations such as vitamins and tonics. For a new drug to be launched straight into the OTC
market was extremely rare.
Ethical drugs might, however, be sold over the counter when their patents expired. This
conversion could occur when an ethical drug, after a number of years on the market, was found not
to have significant side effects and its potency for conditions, other than those for which it was
prescribed, was limited. When government regulators were satisfied that a drugs side effects and
potency were limited, they would permit the drug to be sold without a prescription.

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Marketers at Glaxo believed that OTC marketing would increase for several reasons: (1)
tighter control of national health-service budgets was leading to increasing incentives for selfmedication; (2) patients were becoming increasingly able to take on active roles as consumers; and
(3) liberalization in national drug-approval agencies had increased the number of products in this
market (for instance, in Denmark, H2 antagonists6 such as Zantac had been permitted to go OTC in
1989).
Antibiotics, because of their consumption patterns and intrinsic characteristics, were one
product category that might experience movement into the OTC market early in their lifecycles.
Glaxo Holdings wanted to enter this segment first, however, because of its large share of revenues.
But Glaxo Holdings considered itself an ethical-drug company and was structured accordingly
(substantial R&D facilities and investments, marketing and distribution organizations centered on
sales representatives rather than on advertising or brand management). One Glaxo Holdings
executive was quoted as saying that strong brand images were not our area. OTC was a different
sort of business.7 But the company was prepared to adapt.

The Policy of Rapid Product Launch: The Role of Co-Marketing

Glaxos strategy of rapid market penetration for new products sought to create several
advantages: (1) the snowball effect from word-of-mouth advertising within the medical
community; (2) economies of scale and scope (the introduction costs, such as presentations to
doctors and hospitals, conferences, advertising, were relatively fixed) could be gained if the costs
were spread across the largest possible volume; and (3) raised barriers to entry (preemption of
market space). Rapid penetration also served the fundamental need to generate positive cash flows in
the shortest possible time in order to finance investments in R&D for future products. Glaxos new
products that reached the launch phase were, in fact, extremely profitable, with internal rates of
return generally greater than 200%. In the pharmaceutical industry, one R&D project in 10 became a
commercialized new product; thus new-product development in a growing company such as Glaxo
required significant investment.
Glaxo Italia possessed two direct sales force teams or lines that currently employed 320 sales
representatives each. In co-marketing agreements, Glaxo would pursue rapid market penetration by
adding the sales efforts of the co-marketer as each marketed its own brands of the same product.8
With co-marketing, Glaxo anticipated various benefits: volume would be higher and would be
reached more quickly than when Glaxo marketed solo. In addition, establishing close ties with other
firms could provide additional lobbying leverage in regulatory environments where the registration

H2 antagonists (also called H2 blockers) block the histamine receptor (H2) in the body and thus reduce the
production of gastric acids believed to cause stomach ulcers.
7
Financial Times, 8 November 1989.
8
Another classic joint marketing arrangement included co-detailing (same product, same brand name).

-6-

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process for new products was particularly slow and bureaucratic. The co-marketer could benefit in
two ways. First, that firms sales force could carry more products and thereby make each sales call
more productive. Second, a broader product line might help keep the sales force productive during
any trough in the firms business cycle.
On the other hand, the presence of a distribution partner had several disadvantages. First,
Glaxo had to increase its sales force and marketing efforts to compete against the co-marketers
products. Second, the co-marketer, which was also a pharmaceutical company in 90% of the cases,
might be tempted to reformulate the product (and thus sidestepping licensing fees) if it proved to be
successful. Co-marketing strategies were also vulnerable to price wars and litigation over allocation
of resources and territories, and risked saturation of the doctors attention.

Product Life and Patent Life

Product life and patent life were important influences on the Zinnat marketing decision.
Product life consisted of the remaining years of effective patent life, plus any years thereafter when
the product might continue to be sold without the benefit of patent protection. In theory, the product
life of Zinnat could be infinite. Even after the patent expired, Zinnat might continue to be prescribed.
The earliest antibioticpenicillinwas still being prescribed by doctors, well after the expiration of
patent protection. But the rate of innovation in the development of new antibiotics was increasing,
raising the likelihood that Zinnat would be displaced by some new drug. Practically, Rottoli doubted
there would be any appreciable sales of Zinnat after the fifteenth year.
Patent life was the number of years of protection for inventors from uncompensated direct
imitation of their invention. The total patent life in the United States was 17 years, whereas in
Europe it was 20 years. Patent life was taken up by (1) the time required to develop the specific
application after the new compound had been developed; (2) the time necessary for registration; (3)
the time required to introduce the product; and (4) the remaining effective patent life. Exhibit 6
shows that effective patent life fell from 13 to 5 years between 1965 and 1985. As Sir Peter
Girolami, chairman of Glaxo, had recently said, Medicines, which are now emerging from the
development pipeline, are more complex and more powerful than their predecessors; this inevitably
complicates the necessary process of satisfying regulatory authorities. A shortening of effective
patent life could reduce the time during which protected profits could be made on a drug. Rottoli
predicted the Zinnat cash flows out to the sixth year in the belief that the product should prove that it
could earn its return during that window of effective patent protection.
While patent life had shortened, R&D expenditures were constantly increasing. One widely
accepted estimate of the average cost to discover and bring a major new drug to the market was
US$100 million. The implication of those high costs was that large revenues had to be generated to
pay for them. According to one study of the Wellcome Foundation, to achieve an adequate return on
an R&D expenditure of $100 million, a drug had to reach peak annual sales of over $200 million and

-7-

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total sales revenues of 11 times the amount of R&D spent.9 Rottoli estimated that a delay of just one
week in development time represented a loss in terms of revenues of $1 million to $2 million. At the
same time, the reduction in effective patent life led to a quicker significant drop in sales revenues
when the price had to be reduced to face competition from the generic product. Co-marketing could
increase the risk of competition when a patent expired, because the co-marketer might be prepared to
manufacture the product in house. To manufacture Zinnat, for instance, the co-marketer would have
to pay a licensing fee and would be required to purchase some ingredients from Glaxo Holdings.
Without the protection of a patent, the fee and the supply arrangement would disappear.

Financial Criteria
Glaxo Italia used two main criteria as the basis for evaluating decisions about sales
strategies: payback and internal rate of return (IRR).

Payback: Any new product launched had to have a payback period of less than three years.
This period reflected the companys strategic emphasis on rapid market penetration. The use
of the payback criterion was justified on two grounds. First, given the extended industry
practice of cross-subsidization among products, senior managers needed to know when a
new product would start to generate a cash surplus that could be used to finance new R&D
projects. Payback helped focus managers attention on the cash-flow breakeven. Second,
uncertainty about the time at which competitors could launch a similar product made it
relevant to know how much time was necessary to recover the additional investment to
market the product.

IRR: The more desirable strategy would have the higher IRR. Glaxos minimum required
IRR on projects in Italy was the firms cost of debt there (12.5% in September 1990).10
Exhibit 7 contains information on current capital-market conditions.

When asked if an appropriate discount rate should take into account the cost of equity capital
as well as the cost of debt, Rottoli answered:
Investors expect to get higher returns? Well, if I produce good returns, theyll get
them. If I dont, they wont! To begin with, lets start from zero cash and a new
project on the way. At this point in time, the firm, hypothetically, can borrow money
from a bank at, say, 12.5%; that represents the cost of debt. After this initial cost is
entirely paid back from the project cash flows, what is left to the shareholders is the
project net IRR (i.e., net of financial charges). Thus we do not fix any target for
shareholders returns, be they based on market averages or historical trends or even
9

Trevor M. Jones, Improving the Development Process, paper presented at the World Pharmaceutical Conference,
London, March 1990.
10
The yield-to-maturity of Glaxo Holdings long-term debt in the United Kingdom was 12.5%. Its book value of
debt amounted to GBP420 million. Its market value of equity was GBP12,193 million. Also, Glaxo could borrow longterm funds in Italian lire at 12.5%.

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future forecasts. It is sufficient for the net IRR to be greater than zero to justify the
investment. It then falls to the investors to accept the expected rate of return on the
project or to reject it. However, the net IRR is still clearly higher than what the
shareholders will ultimately get from the business. I mean, we need yet to include
and subtract all the fixed and structural costs necessary to run the business before
getting to the investors payoff. Those are basically the reasons why I tend to
consider discounted cash flow based on the project WACC (weighted-average cost of
capital) premature at this stage.
Referring to the choice of costs and cash flows included in the forecast, Rottoli said,
Only manufacturing and promotional costs are considered relevant. The remaining
itemssuch as G&A (general and administrative), historical and future R&D (at
local and group level), medical testing cost, real financial charges, taxesare not
taken into account.11 Not at all! We are really interested in evaluating the marginal
profitability between direct sales and co-marketing. Therefore, all of those items
being shared by the two alternatives end up complicating the measures while not
dramatically improving the final decision.

Financial Projections
To evaluate the strategic choice between direct sales and co-marketing, Rottoli had prepared
a financial model as presented in Exhibits 8, 9, and 10. Assumptions underlying the model are
summarized in Exhibit 8. Aspects of the forecast that required some judgment were the following:

Product mix: In the first year, the model assumed this mix: 85% pills and 15% syrup. From
the second year on, the mix was assumed to be 80% pills and 20% syrup. The licensee was
assumed to weight the product mix differently: 40% pills and 60% syrup. Those assumptions
were based on prior experience.

Marketing costs: These costs included (1) the cost of drug samples given to doctors and
clinics, (2) the cost of medical promotions (trials to hospitals, clinics, and local healthcare
units), (3) the cost of seminars, congresses, and social promotions (one-hour short
conferences plus dinners held by technical/scientific sales representatives), (4) the cost of
training the sales force, and (5) sales force compensation. Assumptions about those costs
were also based on prior experience. Sales-force compensation costs could be saved if Glaxo
chose to market Zinnat directly, rather than with a co-marketer. Rottoli believed that the
sales force would spend about 25% less time on Zinnat if the product were marketed
directly, instead of with a co-marketer. This reflected the highly motivational effects of
competition.

11

Glaxo Italias marginal tax rate was 47%. Glaxo holdings marginal tax rate in the United Kingdom was 29%.

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Market share: The effect of competition from the co-marketer would be reflected in higher
market share for Zinnat in the antibiotic market, and earlier attainment of a notable position.
Figure 1 compares the two market share forecasts projected by the Glaxo Italia staff. The
lower market shares for Zinnat under the direct sales strategy were consistent with
experience on other products, though Rottoli believed that the share forecast for direct sales
was perhaps conservative. The market shares for the direct sales strategy could be as much
as one, two, or three percent higher.
Figure 1. Zinnat market share by strategy.

14.0%

Share of Antibiotic Market

12.0%
10.0%
8.0%

Direct Sales
Co-Mktg.

6.0%
4.0%
2.0%

19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05

0.0%

Year

Sales force: Zinnat was assigned principally to the sales force named Line 1. In the first
year only, sales force Line 2 would support the launch. The cost of the direct sales force
was calculated according to the estimated percentage time to be spent on the specific
product. Historically, the cost per salesperson had increased by 12% each year on average;
the forecast assumed this growth rate in salesperson costs over the forecast period.12 The
sales force in Line 1 was supposed to grow from 320 to 440 representatives within three
years, but Rottoli wrestled with the question of whether this increased sales-force
promotional time was a marginal item or just a reallocation of corporate resources that would
be needed anyway. He said:
It was an eternal source of discussion between me and [Giuseppe] Ferrari, the
Sales V.P. I told him that as long as new employees were hired for newproduct promotional support, the sales structure was an incremental expense
of this product launch. Ferrari argued that the sales force supported the

12

Beyond year six, one could assume that the cost per salesperson would grow at the rate of inflation in the lira, 4%.

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company as a whole and that, therefore, the cost of new sales recruits should
not be included in the forecast.
The financial forecast prepared by Rottoli charged Zinnat for the percent of actual sales force
time that the product was assumed to require.

Group profit on parent-subsidiary transfer of ingredients: This figure was the profit that
Glaxo Holdings, PLC (the parent) made on the sales of the key chemical compounds to
Glaxo Italia (the subsidiary). Glaxo explained that this profit was a means of reimbursing the
parent for R&D expenses. The ingredients could be directly packaged by Glaxo Italia or
possibly resold to the co-marketer. The price per gram of the ingredients was ITL1,566,
which included a gross profit of 80% to Glaxo Holdings.

Capital generated and interest: Glaxo Holdings viewed the product launch as having a cash
flow (or flow of capital generated) equal to the product margin less the working-capital
requirement (equivalent to two months of sales.) The Zinnat product line in Italy would be
charged interest for capital used, or credited interest for net capital supplied to Glaxo
Holdings. The interest charge or credit was equal to the current yield on Glaxo Holdings
debt, multiplied by the cumulative capital used or generated at the end of the previous year.
The initial phase of a project was somewhat similar to an entrepreneur venturing upon a new
business. Initial exposure for a new-product launch was burdened by interest expenses at the
stated rate until the early outlays were recovered. From then on, the businesss profits would
be loaned to new emerging projects at the same stated rate, according to the following
logic: One line generates cash, while anotherinternallyabsorbs part of it, as Rottoli
said. The capital employed then turned from a use () to a generation of cash (+). Investors
expected higher returns from a project, however, than from purchasing securities on the
market.

Time horizon: Although the product lifecycle of pharmaceutical products was typically
between 10 and 20 years, the forecast was carried out only to six years. Product managers
and marketing directors found extending a forecast beyond six years difficult. They believed
that Zinnat in Italy would enjoy its strongest competitive standing in its first six years of life.
From the seventh year on, the products share of the antibiotic market would decline. Rottoli
estimated that a reasonable rate of decline would be 4% per year.13 He wondered, however,
whether the rate of decline and/or the cash flows beyond the forecast horizon mattered.

Fees from the licensee: Under the contemplated arrangement, the Italian co-marketer would
pay Glaxo Holdings an annual fee equal to 4% of its revenues from Zinnat sales. However,
the size of this fee would be the focus of tough negotiation. The ultimate arrangement could
entail a fee lower or higher than 4%.

13

That is, share of market in year two would be 95% of the share of market in year one.

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Conclusion
The data in the forecasts Rottoli was holding (Exhibits 8, 9, and 10) suggested he should
undoubtedly recommend that the company go forward with co-marketing instead of direct sales:
IRR
Payback

Direct Sales
690%
1.1 years

Co-marketing
1,013%
0.2 year

He wondered, however, whether the base-case results adequately captured the richness of the
problem. For instance, how robust was the preference for co-marketing to considerations such as
these:

What combinations of license fees, sales force savings, and market share would leave Glaxo
indifferent between the two marketing strategies?

Taking Ferraris argument, should the cost of the field sales force be considered to be
incremental to the Zinnat launch?

The combined action of two firms would allow reaching a high maximum market share in 24
months, whereas the effort of only one firm required 36 months in the forecast to achieve a
lower market share. How significant was the benefit of the incremental speed and market
penetration?

After the product proved itself in the marketplace, a co-marketer might defect to its own
brand; thus direct selling could have a distinctly different set of cash flows beyond year six.
In addition, the appearance or nonappearance of newer products could affect the more distant
cash flows. What should be done about cash flows beyond the five-year forecast horizon?

On top of those concerns, Rottoli wondered if the forecasting system with which he was
endowed captured the best insights. Glaxo had delivered abundant value to shareholders. Would the
current financial evaluation of the Zinnat marketing decision promote that value? Were IRR and
payback the best decision criteria? Was he missing any relevant cash flows?

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Exhibit 1
GLAXO ITALIA, S.P.A.: THE ZINNAT MARKETING DECISION
Annual Value of GBP1 Invested in Glaxo Holdings Stock in 1979
(indexed so that the value for 1979 equals GBP1;
uses yearly median stock prices; adjusted for 100%
stock dividends in 1983 and 1985)

90.00

80.00

70.00

60.00

50.00

40.00

30.00

20.00

10.00

0.00
1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

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Exhibit 2
GLAXO ITALIA, S.P.A.: THE ZINNAT MARKETING DECISION
Shares of Pharmaceutical Market
(Italy, 1990)
SIGMATAU (4.2%)
MENARINI ((3.8%)
GLAXO (3.6%)
ROCHE (3.1%)
MSD (2.7%)
FIDIA (2.6%)
FARMITERBA (2.6%)
BRISTOL-SQUIBB (2.4%)

OTHERS (75%)

Source: Glaxo marketing department.

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Exhibit 3
GLAXO ITALIA, S.P.A.: THE ZINNAT MARKETING DECISION
Glaxo Italia Financial Performance
(historical and projected, 19891995)
200

150

Billions of Italian Lire

100

CAPITAL INVESTMENTS
50

PROFIT AFTER TAXES

LOANS

-50

-100

Source: Glaxo Italia, S.p.A.

19
95

19
94

19
93

19
92

19
91

19
90

19
89

-15-

UVA-F-1014

Exhibit 4
GLAXO ITALIA, S.P.A.: THE ZINNAT MARKETING DECISION
Glaxo Italia Product Portfolio, 1991
(projected revenues, ITL720 billion)

OTHERS (5.0%)
TOPICAL CORTISONE (2.1%)
ANTIASTHMA (4.7%)
LICENSEES (25.4%)
CARNITINES (5.3%)

ORAL ANTIBIOTICS (8.6%)

INJECT. ANTIBIOTICS
(20.0%)
ANTIULCER (28.9%)

Source: Glaxo Italia, S.p.A.

-16-

UVA-F-1014

Exhibit 5
GLAXO ITALIA, S.P.A.: THE ZINNAT MARKETING DECISION
Glaxo Italia Sales Composition
(historical and projected, 19801995)
700

600

Sales (in billions of Lire)

500

400

Existing Products
New Products
OTC Products
Sales to Licensees

300

200

100

0
1989

Source: Glaxo Italia, S.p.A.

1990

1991

1992

1993

1994

1995

-17-

UVA-F-1014

Exhibit 6
GLAXO ITALIA, S.P.A.: THE ZINNAT MARKETING DECISION
Effective Patent Life of Drugs in EC
1965 and 1985

14

12

10

0
Time in R&D

Time in Registration

Time to Introduce
1965

Source: Economist Intelligence Unit, 1989.

1985

Effective Patent Life

-18-

UVA-F-1014

Exhibit 7
GLAXO ITALIA, S.P.A.: THE ZINNAT MARKETING DECISION
Capital Market Conditions, September 1990

Yield on long-term government bonds

June
September

United Kingdom
11.01%
11.32%

Expected
inflation rate

5%

Italy
11.32%
11.60%

4%

Price/Earnings
Ratio

Share Price (US$)

Beta

15.6
18.5
17.6
16.1
7.5
17.5

30
66
77
81
9 3/8
16

0.90
1.00
1.10
1.05
1.05
1.15

Glaxo Holdings, PLC

Bristol Myers-Squibb
Eli Lilly
Pfizer
Rhne-Poulenc Rorer
Schering Plough Corp.

Equity market risk premium

(64-year geometric mean)

5.6%

Sources: Financial Times, Risk Measurement Services, ValueLine Investment Survey.

-19-

UVA-F-1014

Exhibit 8
GLAXO ITALIA, S.P.A.: THE ZINNAT MARKETING DECISION
Forecast Assumptions
1990

1990

Price to

Pills sold by Glaxo

Syrup sold by Glaxo
Pills sold by Licensee
Syrup sold by Licensee

Years from Sept. 1990

Transfer price of ingredients per gram (lira)
Glaxo Price to customer - pills (lira)
Glaxo price to customer - syrup (lira)
Gross margin/direct sales, Glaxo Italia
Gross margin/ingredient sales, Glaxo Holdings

0.0%
0.0%

0.25
1,566.0
20,984.0
18,226.8

Sales force #1 -- salespeople

% time on Zinnat (if direct marketing)
% time on Zinnat (if co-marketing)
Sales force #2 -- salespeople
% time on Zinnat (if direct marketing)
% time on Zinnat (if co-marketing)
Cost per sales rep (millions of lira)

Sources: Company analysis and case writers analysis.

Transfer Price
Of Ingredients

First Year

Years 2+

Retail Cust.

Key Raw

Price to

Product Mix

lira

Materials (gr)

Retailer

80%
20%
40%
60%

(lira/gr)

34,400.0
29,880.0

3.0
2.5

20,984.0
18,226.8

1,566.0
1,566.0

47.0%
29.0%
0.0%
5.0%
12.0%
4.0%
25.0%
4.0%
16.7%
12.5%
1990

Market forecast of antibiotic demand (millions of units)

Market share for Zinnat, direct sales strategy
Market share for Zinnat, co-marketing strategy
% Zinnat volume sold by Glaxo, co-marketing strategy

Manufacturer

Product Mix

85%
15%
40%
60%

Marginal tax rate - Italy

Marginal tax rate - UK
Expected inflation rate - Italian lira
Expected inflation rate - UK, pounds, sterling
Yearly percentage increase in cost per sales rep.
Yearly decline in market share after year 6
Savings in promotional effort direct sales vs. co-marketing
Licensee fee (% of Zinnat revenues to licensee)
Working capital required/Sales
Glaxo Holdings, interest rate and internal charge for capital

1990

Content of

80%

1991

1992

1993

1994

1995

1996

52.3
5.1%
9.0%
45.35%

46.6
9.0%
13.0%
61.79%

46.6
9.1%
12.5%
63.78%

44.6
9.1%
11.5%
67.40%

46.3
9.1%
11.0%
71.38%

47.2
9.1%
10.0%
71.63%

1.25
1,566.0
20,984.0
18,226.8
53%
80%

2.25
1,566.0
20,984.0
18,226.8
53%
80%

3.25
1,566.0
20,984.0
18,226.8
53%
80%

4.25
1,566.0
20,984.0
18,226.8
53%
80%

5.25
1,566.0
20,984.0
18,226.8
53%
80%

6.25
1,566.0
20,984.0
18,226.8
53%
80%

320
20%
26%
320
13%
18%
105.0

350
25%
33%

400
18%
24%

400
16%
21%

400
17%
23%

440
17%
23%

117.6

131.7

147.5

165.2

185.0

-20-

UVA-F-1014

Exhibit 9
GLAXO ITALIA, S.P.A.: THE ZINNAT MARKETING DECISION
Financial Forecast: Direct Sales
(all figures in ITL billions)

1990

1991

1992

1993

1994

1995

1996

1958
710

3491
700

3644
600

3656
400

3816
400

3948
350

40.28
21.4

71.34
37.8

74.46
39.5

74.70
39.6

77.97
41.3

80.67
42.8

3.2
0.7
5.1
0.4
10.2

2.7
0.7
4.5
0.4
9.5

1.8
0.7
2.2
1.2
9.3

1.8
0.8
2.4
1.2
11.4

1.6
2.5
1.3
14.0

0.7
-0.7

3.3
0.4
5.6
1.4
6.6
5.9
23.1
-1.8

19.6
18.2

17.9
21.6

15.3
24.3

17.7
23.7

19.4
23.3

Glaxo Holdings
Profit on sales of ingredients to Glaxo Italia
Capital charge (-), income(+)
0.0
Profit: Zinnat product line
-0.7
Investment in NWC
0.0
Capital Generated
-0.7

9.8
-0.1
7.9
6.7
1.2

15.2
0.1
33.5
5.2
28.3

15.4
3.6
40.6
0.5
40.1

14.7
8.6
47.7
0.0
47.6

15.3
14.6
53.5
0.5
53.0

15.6
21.2
60.1
0.4
59.7

0.5

28.8

68.9

116.6

169.6

229.2

Quantities of units (000)

volume sold direct
samples
Glaxo Italia: Profit
Revenues
Gross margin
Marketing expense, direct sales:
Samples expense
Medical promotions (trials)
Seminars, congresses, etc.
Sales force training
Compensation: sales force #1
Compensation: sales force #2
Total marketing expense
Profit: Direct sales

Cumulative Capital
Used (-) or Generated (+)
IRR on Capital Employed
Payback Period

0.0

0.2
0.2
0.3

-0.7
690%
1.1 years

Sources: Company analysis and case writers analysis.

-21-

UVA-F-1014

Exhibit 10
GLAXO ITALIA, S.P.A.: THE ZINNAT MARKETING DECISION
Financial Forecast: Co-Marketing
(all figures in ITL billions)

1990

1991

1992

1993

1994

1995

1996

50
200
250

1,813
710
2,895
5,419

3,308
700
2,746
6,754

3,336
600
2,494
6,430

3,185
400
1,941
5,526

3,352
400
1,744
5,496

3,132
350
1,591
5,073

0.0
0.0

37.3
19.8

67.6
35.8

68.2
36.1

65.1
34.5

68.5
36.3

64.0
33.9

0.2
0.2
0.2
1.0

3.2
0.7
4.7
0.3
13.6

2.7
0.7
4.1
0.3
12.6

1.8
0.7
2.0
1.0
12.4

1.8
0.7
2.1
1.1
15.2

1.6
1.9
1.0
18.7

1.6
-1.6

3.3
0.4
5.2
1.3
8.7
5.9
24.8
-5.0

22.5
13.3

20.5
15.6

17.9
16.6

20.9
15.4

23.2
10.7

1.1
0.8
0.2

22.9
18.3
2.2

28.6
22.8
2.1

27.2
21.7
1.9

23.4
18.7
1.5

23.2
18.6
1.3

21.4
17.2
1.2

Capital charge (-), income(+)

Profit: Zinnat product line
Change in working capital
Capital Generated

0.0
-0.6
0.2
-0.8

-0.1
15.5
9.9
5.6

0.6
38.9
6.0
32.9

4.7
44.0
-0.1
44.2

10.2
47.1
-1.2
48.2

16.3
51.7
0.5
51.1

22.6
51.8
-1.0
52.8

Cumulative Capital
Used (-) or Generated (+)

-0.8

4.8

37.7

81.9

130.1

181.2

234.0

Quantities of units (000)

volume sold direct by Glaxo
samples distributed free
sold by licensees
Total
Glaxo Italia: Profit
Direct sales by Glaxo Italia
Gross margin, direct sales
Marketing expense, direct sales:
Samples expense
Medical promotions (trials)
Seminars, congresses, etc.
Sales force training
Compensation: sales force #1
Compensation: sales force #2
Total marketing expense
Profit: Direct sales, Glaxo Italia
Glaxo Holdings: Profit and Fees
Ingredient sales to Glaxo Italia and licensee
Profit: ingredient sales, Glaxo Hldgs.
Fee from licensee

IRR on Capital Employed

Payback Period

1013%
0.2 year

Sources: Company analysis and case writers analysis.