St.

Petersburg University Graduate School of Management

Master in Management Program

PROJECT REPORT ON COURSE STRATEGIC LEADERSHIP

TOPIC: LEADERSHIP STRATEGY FOR COST EFFECTIVENESS

PREPARED FOR BIOCAD COMPANY

Performed by the 2nd year students

Master in Management

Adel Dalal

Alexander Belov

Dmitrii Kurzin

Georgy Tautiev

Iana Kurzina

Tatiana Ivanova

Monika Sarkisian

Team coordinator:

Ivan Lavrenov

Company representative:

Michael Usov

13.04.2017

St. Petersburg 2017

Table of Content
Introduction................................................................................. 3
Part 1. The company background...................................................4
Part 2. Problem statement............................................................5
2.1 Generics market overview..............................................................5
2.2 Problem formulation......................................................................7
Part 3. Analysis of a problem.........................................................8
Part 4. Practical recommendations................................................9
Discussion.................................................................................. 10
List of References.......................................................................11
Introduction
Part 1. The company background
Biotech company BIOCAD is a leading Russian innovative company that combines the
R&D centre of a world level, ultra-modern pharmaceutical and biotechnological production
facilities, preclinical and international clinical research infrastructure in accordance with modern
international standards.
The company employs over 1200 people, of which more than 450 are scientists and
researchers. In 2016, the company's sales amounted to more than 14 billion rubles, and the total
amount of international long-term contracts of more than $850 million worth. 1 Facilities and
representative offices of the company are located in USA, Brazil, China, India, and other
countries.
BIOCAD was established in Saint Petersburg in 2011. The founder of the company, ex-
banker Dmitry Morozov, believed that there is science in Russia, but there are no innovations. So
he acquired the Soviet Institute of Immunological Engineering, now the R&D Centre of
Immunological Engineering, and then invested $8 million in the construction of a plant for the
production of biological medicines.
BIOCAD is one of the few global companies that created a full cycle of drugs
development: from the molecules search to the mass production and marketing support. Back
than good-quality domestic analogues did not exist on the Russian pharmaceutical market, so
BIOCAD mostly had to compete with foreign brands. However, their products were significantly
more expensive than the drugs offered by BIOCAD. Furthermore, the company initiated an
extensive clinical trials program approved in seven countries, becoming the leader by the number
of such trials in Russia. Thus, BIOCAD has managed to develop medicaments that are
comparable with western drugs in quality and at the same time are offered at more affordable
price.
At this moment the companys portfolio includes 44 original and generic drug products
for treatment of the most complex and serious health conditions viral infections, autoimmune
diseases and oncology most of which are market leaders in Russia. Besides, more than 40
drugs are under development.
In order to stay innovative and keep leading positions on the pharmaceutical market,
BIOCAD takes extra consideration in its employees, many of whom are doctors, researchers and
scientists. Company has developed a set of business values based on its qualified and ambitious
people, teamwork, group creativity and self-improvement.

1 BIOCAD: About Us (2017). BIOCAD Biotechnology company. [online] Available at: http://www.biocad.ru/we
[Accessed 12 Apr. 2017].
Part 2. Problem statement

2.1 Generics market overview

According to the interview with company representative Michael Usov, Biocad
biotechnical innovative company is planning to enter European market and introduce their
generic drugs. The main idea of generic drugs concept is as follows: generics are copies of
original drugs which patents are about to expire. The peculiar feature is that the manufacturing
inner formula can already be developed, and in most cases, the necessary substance is available
to purchase on the market. In such countries as India or China, companies benefit from R&D and
lower costs, compared to respective factors in other countries. According to the U.S. Department
of Human & Human Services report, generic drugs accounted for 88% of all dispensed retail
descriptions in 2014 in the USA. Despite the fact that generics are playing an important role in
healthcare cost savings both for patients and insurers, manufacturers take the production decision
deliberately. The main foremost consideration, when selecting the generic drug development
product, is the adequate return on investment (ROI) (Lee et al., 2016). The presumable
anticipation of the future demand can be the forecast for the return. Moreover, the prices for
patented drug can as well guide the companies: the higher the average wholesale price, the more
attractive is the production of generic drug.
The competition on generic drug manufacturing market is high, since many companies
prepare couple of years in advance before the patent expiration. Since 2012 there was a growth
of generics segment in pharmaceuticals market from 67,4 up to almost 71% in 2016 (MarketLine
Industry Profile. Generics in Europe, 2017). The forecasted trend is that market will continue to
grow. According to the statistics, Western Europe, Germany and the UK, and Eastern Europe,
Russia and Poland, are characterised with the high levels of generics uptake. Whereas in
countries like France, Italy and Norway, the uptake index is less than a half on the respective
domestic markets. Figure 1 shows the generics segment growth in pharmaceutical market.
 Figure 1. Europe generics market share
The geographical market segmentation is presented on figure 2. As it can be gathered,
Germany and the UK together accounts for more than the quarter of the market volume, whereas
Russian share is about 14% (MarketLine Industry Profile. Generics in Russia, 2017).

Figure 2. Geographical generics market segmentation

Talking about the overall market attractiveness, the level of rivalry is high. The buyer
power is high with the combination of two factors: brand loyalty absence, compared to the
patented pharmaceuticals, and large choice availability. The lack of brand loyalty is a factor,
which influence the price wars on the market between players. Main generics market players are
Teva, Mylan, Sandoz, Abbott, Stada and Esteve. They operate in R&D, production and
marketing of off-patent medicines worldwide (MarketLine Industry Profile. Generics in Russia,
2017; Generics in Europe, 2017).
2.2 Problem formulation
Taking into account the previous section, it can be gathered that the rivalry is intense and
companies compete on the costs basis, since most of the companies are engaged in production of
similar group of products. Among them there are drugs for treating such diseases as
cardiovascular disease, oncology, central nervous system disorders and hepatitis.
Hence, here raises the question of lowering the cost of goods produced. How to minimize
the costs in such a way so that to offer a competitive price on the market, where more than 3
companies compete? The logical solution can be to implement economies of scale. But in the
generics market this strategy is not always applicable. Production volumes for generics can
sometimes be calculated in kilograms per year. In the same way, India and China markets offer
lower labor costs and cheaper raw materials, and are originally working for economies of scale.
The goal is to design and implement such a strategy to ensure total cost-effectiveness in
small parts production cycles. Market entry time frames are tight and production assortment is
diverse, hence the ways to lower costs are in demand. The main principle is in flexibility of
production facilities and keeping the stable low switching production costs.
At the moment, Biocad produces generics under the brand name. But since the brand
loyalty is low in generics market, it may only presumably play a role in clients choice.
Nowadays Biocad performs on one of the most expensive pharmaceuticals generics markets:
oncology, HIV, hepatitis. The drugs against these diseases are prescription based and usually
costly charged. The reason why Biocad chose the particular market segment lies under two man
factors:
1. they have a limited access to resources;
2. they have limited production facilities.
Considering these features it can be concluded that Biocad should try to integrate with
municipal and government establishments, such as healthcare institutions in order to promote
supply of their production.
From the operating point of view, business processes of Biocad should be observed for
the reengineering. Key financial factors are highly impacted by several business processes, such
as supply chain management, new product development and revenue management. Focus on cost
management and operational improvements should become a constant part of managers key
drivers.
Part 3. Analysis of a problem
The initial step of our analysis is the development of cost structure for the project. The
aim of the mentioned project is a market access of generic product on the European market. Our
cost structure is based on similar projects, which are already implemented by competitors of
Biocad.
Teva (name of a product)
Competitor 2;
Competitor 3.
As a result, we obtained current structure with a percentage split.
% of total
1. Investments inv.
Equipment costs 40%
R&D salaries 10%
Commissioning, Qualification,
Validation 30%
Clinical trials and registraton
expenses 20%
Total investments 100%
2. Expenses % of sales
COGS: 35%
Raw Materials
Packaging
Logistics & Warehousing 1,5%
Promotion & Marketing 2%
Other incl. G&A expenses 12%
Total expenses 51%
Our assumptions lead us to conclusion that some of the areas cannot be improved by two
main reasons:
Relation to external stakeholders, not controlled by the company;
Low share of total costs, which will not lead to any substantial improvements.
Thus, we highlighted main areas for further cost-minimization.
improvem
1. Investments ents
Equipment costs x
R&D salaries x
Commissioning, Qualification,
Validation
Clinical trials and registraton
expenses
improvem
2. Expenses ents
COGS:
Raw Materials x
Packaging x
Logistics & Warehousing
 Promotion & Marketing
Other incl. G&A expenses
Mainly, in the section of investments company is able to improve equipment costs and R&D
salaries, since Validation of the product and further clinical trials lay mostly on the behalf of
regulatory authorities (ex. Federal Service on Surveillance in Healthcare).

In expense section, we assume, there is no need to decline costs for Logistics & Warehousing,
since the production is presented by very low annual amounts, thus, such costs are not substantial
for our analysis. Biocad specialises on oncology treatment, which is provided by state budget
(and not by retail pharmacies), that is why Promotion and Marketing are limited by state auctions
for product supply. As we result, we focus on COGS (including Raw Materials and Packaging).

Part 4. Practical recommendations

As was mentioned above, our analysis narrowed for mainly three areas of cost-
effectiveness:
Equipment costs
Raw materials
Packaging
Firstly, we provide common recommendations for all parts of cost structure under
improvement. Then, the further market analysis for each cost-minimization way is provided.

1. Investments Initial recommendations

Switch to cheaper equipment suppliers;
Equipment costs Establish flexible production lines.
2. Expenses Initial recommendations
COGS:
Switch to cheaper suppliers of raw materials.
become a part of a group purchasing
Raw Materials organizations
Minimize design costs;
Packaging Change packaging materials.
Equipment costs
Equipment costs account up to 40% of a total investments into the development of a new
generic drugs. This means that even a subtle percentage reduction of price of purchased
equipment may lead to substantial saving. One of the possible cost-saving initiatives could be
usage of used equipment.
Industry consolidations, loss of patent protections, competition for expensive
manufacturing space, and excess capacity have all led to a global increase in the inventory and
availability of second-hand process and packaging equipment. There is a wide range of
production equipment available to suit the needs of everyone in the pharmaceutical supply chain.
From the chemical reactors and dryers used to manufacture active pharmaceutical ingredients to
equipment used to mix, blend, granulate, compress powders into tablets, and fill capsules, to
packaging areas including aseptic fill-finish, equipment is readily available from reputable
equipment dealers. Many companies are actively reducing redundant manufacturing facilities as
part of cost cutting measures and this equipment was
Most of this equipment is relatively new. The supply, installation and qualification of new
pharmaceutical equipment often take more than a year. Markets can change quickly in that time
which means many 'new' equipment purchases are redundant or unnecessary shortly after start-
up. In many cases, the equipment has been installed and commissioned for only a short time.
Nevertheless, this equipment is now considered 'used'. Additionally, equipment may have been
used in production for only a short period of time before generic competition entered the market.
That equipment was a good investment at the time, but now it is in the way of new products and
processeobsolete, nor non-compliant, it was simply redundant capacity or idled equipment.
New products and processes require different equipment mixes. Many Big Pharma
companies have discovered that the second-hand market provides readily available equipment to
meet different manufacturing needs. Equipment that is already available cuts lead time for
delivery and install, thus allowing faster product launch. The equipment was made by trusted
original equipment manufacturers and often comes with their support and service. This ready
source of reliable equipment allows greater flexibility for market swings and equipment
redundancy should a critical machine fail.
Backup equipment mitigates supply risks. Drug shortages or backorders may occur if
critical equipment does not have a backup. Manufacturers can mitigate this risk by sourcing
backup machines or hard-to-find-spares for critical processes. If the purchase price of the backup
is roughly 30-40% of new equipment, manufacturers can mitigate that portion of the supply
chain risk at much lower prices. This strategy can apply to other pieces of equipment as well, not
just process and packaging.
Support equipment can be sourced effectively when budgets are thin. When funds are
stretched and capital expenditure budget approvals are hard to come by, facility and support
equipment upgrades and replacements may suffer. This equipment is not used directly in the
process of making drug products, but is often just as critical. For example, air compressors,
electric stand-by generators, purified water systems and Clean-In-Place (CIP) skids are all
critical to the manufacturing process but are in the building and support areas of the budget.
Cheaper, available alternatives with trusted names can help meet overall facility needs.
Below me summarized all pros and cons of used equipment as a expense saving measure:
Pros:
1. lower acquisition costs
2. reduced delivery time
3. reduced installation time
4. priveded with technical supoprt
5. allows greater flexibility for market swings
6. ideal alternative (30-40% cheaper) for a backup equipment (used to mitigate the
risk of failure)
Cons:
Trustful dealer is a must
R&D salaries
Product campaigning refers to the scheduling of production runs of different products on
the same equipment and using the same facility. Campaign production generally reduces fixed
facility costs because it allows different products to share the same facility and equipment and
reduces down time of equipment. Costs are incurred in preparing the facility and equipment for
new production runs, but the overall manufacturing process is generally cheaper when dedicated
facilities do not have to be built) https://www.princeton.edu/~ota/disk1/1993/9336/933619.PDF
Raw materials
Our nest recommendation is to focus on reducing the cost of raw materials. As it was
previously mentioned, intense competition usually holds generic drug prices in check. Whereas
the average cost of a name-brand prescription was $268 in 2011, it was only about $33 for a
generic drug.2 In this situation reducing the cost of raw materials appears to be a critical factor
for success. Yet, switching to cheaper supplier is not always possible in pharmaceuticals industry,
because of Raw Materials Shortages and few available suppliers in the market. Despite the fact
that there are multiple manufacturers of a drug, there may be only one or two suppliers of the
raw materials used by all producers. Estimates vary, but about 10 percent of drug shortages are
thought to be related to raw material shortages. Moreover, there is additional burden in changing
vendors, especially for Active Pharmaceutical Ingredients (API) from both regulatory and
validation standpoints. Changing to a new vendor can require a site audit and qualification of
that supplier, as well as developing documentation or specifications for the material
manufactured by that new vendor. Make sure the cost savings are worth the time and effort of
switching to a new vendor.3

2 http://www.ncpa.org/pdfs/st371.pdf
 The regulatory requirements may vary from phase to phase at which the supplier change
happens. However if it occurs at development stage, the process may not undergo a thorough
regulatory scrutiny or review as the product is neither submitted nor approved. Nevertheless, it is
recommended to perform the quality comparisons as well as the risk assessments at these stages
with the previous suppliers. There are four basic stages during which the change of supply can
take place
Development Phase
Submission Phase
Review Phase (prior approval)
Post Approval Phase
Given this constraints of our general recommendation, our next suggestion is to become a
part of a group purchasing organizations (GPO). The GPOs buy large volumes of medical
supplies. The concept is rather simple: band with other pharmaceutical companies and negotiate
prices for supplies as a larger group rather that a lot of small separate buyers. The GPO itself is a
middle man in this structure, which negotiates for supplies, often leveraging better prices from a
small number of manufacturers in return for sole-source supplier contracts.
Certainly, there is a downside of this strategy. The GAO (Government Accountability
Office) identified the role group of purchasing organizations to be the reasons for drug and raw
material shortages. Group purchases that focus solely on price make the supply chain system
more fragile. Moreover, that strategy might be disruptive for pharmaceutical companies, since
they will need to share more information about themselves or professionally manage the
information change with rivals.

Packaging
Packaging is one of the most important parts in pharmaceutical business. It is the driver which
can impact companys success or failure. This segment is one of the first areas where
manufacturer looks in order to cut costs.
However, cutting costs in this area can negatively impact whole business of a company, because
one recall of products, related to problems in packaging area, can drive firm to the bottom.
Company can do packaging with own resources or outsource this function and find converting
partner. Even if company chooses to work with company-partner, it should be sure, that all
requirements can be met. Quality of packaging starts from designing product in order to meet
ability to maintain required volume and cost requirements.
In case of selecting converting company or building own business unit, company should look
for:
Numerous materials, adhesives, and manufacturing capabilities
Extensive medical packaging experience
3 http://www.wellspringcmo.com/blog/what-are-my-options-for-reducing-my-
pharmaceutical-product-manufacturing-costs
 A commitment to a team approach to improving design and solving materials and
manufacturing challenges
Compliance with ISO, FDA, and other relevant standards
Commitment to quality throughout the organization
Nowadays, packaging materials constantly changing in order to meet market needs. Today we
can see that companies use less packaging materials for decreasing costs or use thinner packages.
Also it is important to be familiar with EN ISO 11607, which has specific regulation on quality
of pharmaceutical products package. New business unit for packaging or converting company-
partner should provide:
Precision die-cutting, multilayer laminating, and slitting to tight tolerances Cleanroom
capabilities for both converting and assembly
Access to medical-grade adhesives
Testing capabilities
An experienced converter will have invaluable suggestions to make at every turn in the medical
packaging development process. For example, in a healthcare packaging application, use of an
ultrasonic welding process was suggested for an anti-microbial material, resulting in a much
sturdier package. In another example, cold seal adhesive was used for packaging to keep
adhesion at a minimum during processing, but allow for a strong, durable seal when finally
assembled.
The converter can also provide printing capabilities that include:
Package printing
Tamper-resistant and tamper-evident labeling
Bar-code serialization and labeling
A medical converter will be aware of and meet medical packaging specifications and
requirements. In addition to EN ISO 11607, these could include:
FDA compliance and Current Good Manufacturing Practice (CGMP) standards
ISO 13485 certification
ISO: 9001
Successful medical packaging balances the need for manufacturing efficiency and cost savings,
with compliance and regulations, and the characteristics of the materials and adhesives being
considered. Working with an experienced medical converter or creating own business unit can
greatly improve the development and manufacture of medical packaging.

Other drivers of operating excellence

1)Lean process improvement
2)Bigdata
https://www.forbes.com/forbes/welcome/?
toURL=https://www.forbes.com/sites/mckinsey/2012/06/25/pharmas-great-hope-big-
data/&refURL=https://away.vk.com/away.php&referrer=https://away.vk.com/away.php#7185922
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Discussion
List of References
1. BIOCAD: About Us (2017). BIOCAD Biotechnology company. [online]
Available at: http://www.biocad.ru/we [Accessed 12 Apr. 2017].
2. Lee, C., Chen, X., Romanelli, R., Segal, J. B., 2016. Forces influencing generic
drug development in the United States: a narrative review. Journal of
Pharmaceutical Policy and Practice (2016) 9:26.
3. MarketLine Industry Profile. Generics in Europe. January, 2017
4. MarketLine Industry Profile. Generics in Russia. January, 2017

5. U.S. Department of Health & Human Services, Office of the Assistant Secretary
for Planning and Evaluation. ASPE issue brief. Expanding the use of generic
drugs. 2010. Retrieved from https://aspe.hhs.gov/basic-report/ expanding-use-
generic-drugs.

6.