ECONOMIC CONCEPTS, TOOLS AND TECHNIQUES USED IN

KEMICKO PHARMACEUTICLES LTD

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)

May 24, 2015

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May 24, 2015

Dr. A. K.M. Saiful Majid

Professor

Institute of Business Administration

University of Dhaka

Subject: Submission of individual term paper

Dear Sir,

Please accept this term paper that you have assigned me for the course Managerial Economics. The

study involves investigating and relating different economic concepts to the activities of Kemiko

Pharmaceuticles. Through this study, Ive tried to obtain a deeper insight and perform real-world

application of the various concepts that you have taught me in the class.

Lastly, I would be thankful once again if you please give your judicious advice on my effort.

Sincerely yours

A N M Shamsul Arefin (ID No-23,51D)

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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 Origin of the Report ................................................................................................................ 1

1.2 Objectives and Scope .............................................................................................................. 1

1.2.1 Broad Objective ............................................................................................................... 1

1.2.2 Specific Objectives .......................................................................................................... 1

1.3 Scope ....................................................................................................................................... 1

1.4 Limitations............................................................................................................................... 1

2 Methodology ................................................................................................................................... 2

2.1 Research Design ...................................................................................................................... 2

2.2 Research Methods .................................................................................................................. 2

2.3 Instruments of Data Collection ............................................................................................... 2

2.4 Sample Design ......................................................................................................................... 2

2.4.1 Sampling Technique ........................................................................................................ 2

2.4.2 Sample Size ..................................................................................................................... 2

2.4.3 Pharmaceuticals Industry in Bangladesh ........................................................................ 2

3 About the Company ........................................................................................................................ 4

3.1 Organogram ............................................................................................................................ 4

3.2 Product mix ............................................................................................................................. 4

4 SWOT of Kemiko ............................................................................................................................. 5

5 Competition and Market Share ...................................................................................................... 6

6 Relating to 10 Principles of Economics ........................................................................................... 7

7 Factors of Production .................................................................................................................... 11

7.1 Land and buildings ................................................................................................................ 11

7.2 Cost of Capital ....................................................................................................................... 11

7.3 Machinery ............................................................................................................................. 11

7.4 Raw material ......................................................................................................................... 11

7.5 Labour ................................................................................................................................... 12

8 The Circular-Flow Diagram ............................................................................................................ 13

9 Market Forces of Supply and Demand .......................................................................................... 15

9.1 Factors Affecting the Demand of Medicinal Products .......................................................... 15

10 Elasticity of Demand and Supply ............................................................................................... 18

10.1 Price Elasticity of Demand of Medicinal Products ................................................................ 18

10.2 Income Elasticity of Demand of Medicinal Products ............................................................ 18

10.3 Cross-price Elasticity of Demand of Medicinal Products ...................................................... 18

10.4 Price Elasticity of Supply of Medicinal Products ................................................................... 18

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11 Supply, Demand, and Government Policies .............................................................................. 20

12 Pricing Strategy ......................................................................................................................... 21

13 Game Theory ............................................................................................................................. 22

13.1 Zero-Sum Game .................................................................................................................... 23

14 Conclusion and Recommendations........................................................................................... 24

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.

1.1 Origin of the Report The report titled Relating the Concepts of Managerial Economics to a Company Kemiko

Pharmaceuticals Limited has been prepared for Dr. A K M Saiful Majid, course instructor, Managerial

Economics (E501), as a requirement for the individual term paper of this course. The requirement of

this term paper was agreed on April 1, 2013, during regular class session.

1.2 Objectives and Scope

1.2.1 Broad Objective To relate the different concepts of Managerial Economics to Kemiko Pharmaceuticals Ltd

1.2.2 Specific Objectives This research has tried 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

How government policies affect the marketing of Kemikos products

The critical success factors needed to improve performance

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:

Lack of classified data disclosure

Limited concepts covered as much as time allowed

Current political instability caused difficulty in gathering much detailed info

Could not have access to Kemikos mid/lower level employees

Time constraint

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2 Methodology The methodology of this term paper is explained below.

2.1 Research Design The research is descriptive in nature as it mainly describes the qualitative data that was gathered from

the company Kemiko Pharmaceuticals Ltd and related to the different economic phenomenon under

study.

2.2 Research Methods 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.

2.3 Instruments of Data Collection Data collection for primary research is done through in-depth personal interviews with the companys

top management Mr. M.A. Kalam, Chairman and Mr. M N K Aswad, 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.

2.4 Sample Design

2.4.1 Sampling Technique Judgmental sampling technique is used. In this technique, the researcher has picked at his discretion

the appropriate respondents from Kemiko to collect all the required information in carrying out the

term paper.

2.4.2 Sample Size Sample size of this research is simply the two top management individuals of Kemiko Pharmaceuticals

Ltd the Chairman and the Director.

2.4.3 Pharmaceuticals Industry in Bangladesh Pharmaceutical sector is technologically the most developed manufacturing industries in Bangladesh

and the third largest industry in terms of contribution to governments revenue. The industry

contributes about 1% of the total GDP. There are about 250 licensed pharmaceutical manufacturers

in the country; however, currently a little over 100 companies are in operation. It is highly

concentrated as top 20 companies produce 85% of the revenue (Saad, 2012).

According to IMS, a US-based market research firm, the retail market size is estimated to be around

BDT 84 billion as on 2011. Retail sales in the domestic market achieved 23.6% growth in 2011 following

23.8% and 16.8% growth in 2010 and 2009 respectively. High growth in the last three years meant

that the Bangladesh Pharmaceutical market doubled in just over four years. It is one of the fastest

growing sectors in the country with an annual average growth rate of 17.2% over the last five years

and 13.1% over the last decade.

About 80% of the Active Pharmaceutical Ingredients (APIs) are imported as there are only a few local

companies (usually the leading ones) that are engaged in manufacturing APIs. There are two

regulatory authorities - one governmental, the Directorate General of Drug Administration (DGDA)

and one semi-government, the Pharmacy Council of Bangladesh (PCB). DGDA regulates all activities

related to import and export of raw materials, packaging materials, production, sale, pricing,

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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.

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3 About the Company Kemiko Pharmaceuticals Ltd, one of the well-established and fast growing pharmaceutical companies

in Bangladesh, was founded in 1988 and has been manufacturing and marketing for the last 25 years

wide range of branded generics in different dosage forms such as Tablet, Capsule, Syrup, Powder for

Suspension, Injection, Cream, and Ointment.

Number of employees presently working in this company is around 1500 which is increasing with rapid

expansion & production program. The company has got highly qualified & experienced technical

personnel in Production, Quality Control, Quality Assurance and Research & Development (R&D)

Departments. They also have a strong countrywide distribution network comprising 18 depots. Their

website is www.kemikopharma.com.

Kemiko participates generously in the welfare activities of the society as part of its social commitment,

including free treatments to poor patients with acute or chronic diseases such as cancer, diabetes,

hypertension, etc. The company also provides monetary assistance to needy students of the

community to complete their studies, even in higher levels. Kemiko Pharmaceuticals Ltd, with their

skilled, motivated & hard-working people, has been forging Ahead to occupy one of the top most

positions in the pharmaceutical market of Bangladesh.

3.1 Organogram

Figure 3-1: Organogram

3.2 Product mix They have products in almost all therapeutic areas, including Antibiotic, Cardiovascular, Diabetic,

Antithrombotic, Antiulcerant, Steroidal preparation, Non-Steroidal Anti- Inflammatory Drugs

(NSAIDs), and Vitamins & minerals. Also in the pipe line, there are products like Oral Rehydration Salt

(ORS), ophthalmic products, herbal products, and veterinary products. All together they have 29

product categories with over 100 brands of medicine. For this term paper, focus is given on only two

product categories Analgesic and Antipyretics (paracetamols) named Atopen, and a Food

Supplement named Biogen.

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4 SWOT of Kemiko

Figure 4-1: SWOT analysis

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5 Competition and Market Share Table 5-1: Competitor and market share

Rank Name of

Company

Total

Product

Market Share of Total

Company. %

1 Square 13522 14.92%

2 Beximco 7848 10.39%

3 Incepta 8579 09.53%

4 Opsonin 8062 08.61%

5 Acme 4705 06.24%

6 Aristo 5399 05.97%

7 Renata 4797 05.67%

8 SK+F 4134 05.49%

9 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.

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6 Relating to 10 Principles of Economics The 10 principles of economics can be categorized into 3 aspects how people make decisions, how

people interact, and how the economy as a whole works. These aspects can be related to the overall

functioning of Kemiko Pharmaceuticals Limited (KPL).

How People Make Decisions

Principle 1: People face trade-offs

There is no such thing as a free lunch. To get one thing that KPL likes, they usually have to give up

another thing that they like. Making decisions requires trading off one goal against another. Kemiko

has to make decisions about which product categories or brands they need to focus on more than

another depending on their respective prospects in the market.

Principle 2: The cost of something is what you give up to get it

Because Kemiko faces tradeoffs, making decisions requires comparing the costs and benefits

of alternative courses of action. KPL could have tried to increase the market share of their

Analgesic & Antipyretics (paracetamols) product category which they are very much behind

than their competitors but they decided not to; because the opportunity cost of decreased

focus on paracetamols is lesser than that of other more profitable product categories.

Figure 6-1: Trade off between efficiency & equity

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Principle 3: Rational people think at the margin

In many situations, people make the best decisions by thinking at the margin. Economists use

the term marginal changes to describe small incremental adjustments to an existing plan of

action (Mankiw, 2007). KPL thinks at the margin when deciding on higher production of their

pharmacy products which would be more profitable than others without much increasing the

cost of production.

Principle 4: People respond to incentives

Because people make decisions by comparing costs and benefits, their behavior may change

when the costs or benefits change. That is, people respond to incentives. Kemiko acts upon

this principle when they want to improve their sales of medicinal drugs to the chemists

(retailers). What they do is that they give bonuses at a certain ratio and also prizes when

trading their products to the retailers. For instance, if a chemist buys 2 boxes of a certain

medicine, he/she gets a box free, thats bonus. Whereas sales can be boosted with other

incentives like giving gifts s How People Interact

Principle 5: Trade can make everyone better off

Trade allows each firm to specialize in the activities he or she does best. By trading with

others, firms can buy a greater variety of goods at lower cost. Countries as well as business

organizations benefit from the ability to trade with one another. Most of the ingredients of

Figure 6-2: Cost vs benefit

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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.

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Figure 6-3: Contribution on GDP

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.

7.2 Cost of Capital The cost of capital for any given enterprise can be calculated as follows:

Cost of Capital = Cost of Equity (Equity/(Debt+Equity)) + Cost of Borrowing (1-t)

(Debt/(Debt+Equity)) With t being the marginal tax rate, reflecting tax benefits from debt.

Without going into the detail of the calculation, it can be said that the cost of borrowing, at

rates between 10% and 20 %, while high in comparison to developed markets, are not

prohibitive for developing countries. Comparison of the interest rates (for savings, no data for

borrowing) for India and Bangladesh, however, puts India at advantage with an interest rate

of 5,5 % for 12 months in 2005 compared to 8,2 % for Bangladesh. More than the actual

interest rate, the borrowing limits of the banks seem to be a bottleneck for investment in

large-scale facilities like pharma manufacturing plants. The cost of equity is related to the

country risk, but influenced by other country-specific and business-specific factors. It can be

concluded that cost of equity is low compared to the cost of borrowing, since recent

investments by pharma companies have been done with a very low leverage, or even totally

without credit.

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.

7.4 Raw material Roughly the same as said above in terms of cost holds for raw materials, with the added

problem that for many APIs and raw materials, no real market prices exist, and manufacturers

tend to include part of the commercial value of the finished product in the prices for the raw

materials to minimize competition in the finished drugs. Since rawmaterials typically account

for at least 40% of the manufacturing costs, this puts Bangladeshi manufacturers at a

significant disadvantage compared to Indian or Chinese manufacturers. Compared to African

manufacturers, there is no general disadvantage. Backward integration can be a partly

solution for some APIs, since Bangladesh has proven capabilities to build up API

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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.

Figure 7-1: Factors of production

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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8 The Circular-Flow Diagram The circular-flow diagram is a visual model of the economy that shows how money flows

through markets among households and firms. In the pharmaceutical industry, which is this

model, the economy has two types of decision makers households and firms in this case

the firm is Kemiko. Kemiko produces medicines using inputs, which are called the factors of

production i.e. land, labor, and capital. Households own the factors of production and also

use the medicines that the firms produce.

Figure 8-1: Circular flow diagram

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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9 Market Forces of Supply and Demand Supply and demand are the forces that make market economies work. They determine the

quantity of each good produced and the price at which it is sold. They refer to the behavior

of people as they interact with one another in markets. A market is a group of buyers and

sellers of a particular good or service. The buyers as a group determine the demand for the

product, and the sellers as a group determine the supply of the product.

Now, lets consider the factors affecting the supply and demand of medicinal products in a

competitive pharmaceuticals market.

9.1 Factors Affecting the Demand of Medicinal Products Price - The quantity demanded for a good is negatively related to its price. This relationship is

true for most goods in the economy and the economists call it the law of demand. Ceteris

paribus, i.e. other things equal, when the price of a good rises, the quantity demanded of the

good falls; and when the price falls, the quantity demanded rises. However, if the price of a

medicinal product rises, the quantity demanded for the product may fall but by a very

insignificant amount. This is because medicinal products are only bought when prescribed by

the doctors and no matter how much the chemist charges for it, the consumer normally buys

that particular brand of medicine which the doctor prescribed. Hence, it can be said that the

elasticity of demand for medicinal products of Kemiko is pretty low.

Income - If the income of a consumer rises, ceteris paribus, he/she would buy more of a good

and so the demand for that good would increase. This happens in case of a normal good.

In case of Kemikos medicinal products, income plays a little role in its demand, again because

those are prescribed products and hence the elasticity of demand is low. However, the Food

Supplements wing of Kemiko that produces probiotic nutritional supplements called Biogen

tablets for bones, joints, and skin, is essentially a superior good. The Biogen tablets are

relatively expensive and the demand for this food supplement tends to rise with increasing

income, ceteris paribus.

Price of related goods - When a fall in the price of one good reduces the demand for another

good, the two goods are called substitutes. Substitutes are pair of goods that are used in place

of each other. Whereas, when a fall in the price of one good raises the demand for another

good, the two goods are called complements. Complements are pair of goods that are used

together.

Kemikos medicinal products do have many substitutes because there are plenty of

competitors producing the same medicines of different brands. For example, Kemikos

paracetamols, named Atopen, have substitutes such as Napa of Beximco pharma, Ace of

Square pharma, Reset of Incepta pharma to name a few. But then again, it is found that the

prices of the competitors brands vary very insignificantly in any given point in time. So

demand does not tend to be much sensitive to price unless one is extremely price sensitive.

As far as complementary goods are concerned, medicinal products do not usually have any.

Promotional activities - Promotional activities such as advertising, sales promotion, trade

promotion are often undertaken by a company to inform and persuade consumers to buy a

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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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10 Elasticity of Demand and Supply Elasticity is a measure of the responsiveness of quantity demanded or quantity supplied to

one of its determinants. Now lets look at the different elasticity of demand and supply of

Kemikos medicinal products.

10.1 Price Elasticity of Demand of Medicinal Products Price elasticity of demand is a measure of how much the quantity demanded of a good

responds to a change in the price of the good, computed as a percentage change in quantity

demanded by the percentage change in price. The determinants of the price elasticity of

demand of medicinal products are:

Availability of close substitutes - There are ample competitors in the pharmaceuticals

market and thus many close substitutes of a particular brand of medicinal product are

available. However, the demand is still inelastic because the consumers normally buy the

medicine prescribed by the doctor, regardless of its price.

Necessities versus luxuries - The medicinal products are a necessity because consumers must

have it in order to be cured. Paracetamols, for example, is an essential medicine and

therefore, its price elasticity of demand is inelastic. However, food supplements such as

Biogen is not a necessity and hence the price elasticity is more elastic for it.

10.2 Income Elasticity of Demand of Medicinal Products The income elasticity of demand is a measure of how much the quantity demanded of a good

responds to a change in consumers income, computed as the percentage change in quantity

demanded divided by the percentage change in income.

Medicinal products of Kemiko are bought and consumed up to that much what is required.

Regardless of a change in the income, increase or decrease, the consumption of medicine

would remain the same. Hence, medicinal products have pretty much a neutral income

elasticity of demand, neither positive nor negative. On the contrary, food supplements such

as Biogen will have a positive income elasticity of demand.

10.3 Cross-price Elasticity of Demand of Medicinal Products The cross price elasticity of demand measures how the quantity demanded of one good

responds to a change in the price of another good, computed as the percentage change in

quantity demanded of the first good divided by the percentage change in the price of the

second good.

The quantity demanded for medicinal products of Kemiko is not very responsive to the price

of its substitutes. The demand is more dependent on the trade promotion to the chemists

and doctors. Hence, the cross-price elasticity of demand is neither positive nor negative for

medicinal products, but neutral.

10.4 Price Elasticity of Supply of Medicinal Products Price elasticity of supply is a measure of how much quantity supplied of a good responds to a

change in the price of that good. It is computed as the percentage change in quantity supplied

divided by the percentage change in price.

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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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11 Supply, Demand, and Government Policies As mentioned earlier, 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.

On the other hand, government imposed price ceiling for a reason. The reason is that the

demand curve for medicinal products is inelastic. So that Kemiko cannot charge a price at its

discretion to maximize profitability, government put a price control so that medicines can be

afforded by everybody. On top of that, 15% tax is imposed on the selling price, the burden of

which is shared by both Kemiko and the consumers. The diagram below shows the scenario

of a particular product category i.e. paracetamols.

Figure 11-1: Price floor for Paracitamols

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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 8

Biopharma 3

Kemiko 2

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

23

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.

13.1 Zero-Sum Game In game theory and economic theory, a zero-sum game is a mathematical representation of

a situation in which each participant's gain (or loss) of utility is exactly balanced by the losses

(or gains) of the utility of the other participant(s). If the total gains of the participants are

added up and the total losses are subtracted, they will sum to zero. Thus cutting a cake, where

taking a larger piece reduces the amount of cake available for others, is a zero-sum game if

all participants value each unit of cake equally. In Pharmaceutical industry, we find there is

zero-sum game.

Figure 13-1: Zero-sum game

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14 Conclusion and Recommendations From the research findings it can be concluded that the pharmaceuticals industry in

Bangladesh is very complex. The market is packed with more than 100 companies trying to

have a considerable share of the entire market within the restrictions by the government.

With a price ceiling and tax imposed on all the medicinal products, continuous effort to lower

cost of production and improve trade promotions are one of the critical success factors in this

industry, Kemiko Pharmaceuticals Ltd will have to fight a hard but conquerable battle to reach

the likes of Beximco and Square pharma.

The following factors should be considered to improve the performance of KPL:

Leadership skills and highly competent human resources

Recruitment of key sales personnel for personal selling

Improved, technologically advanced production facilities

Creation of a Star brand that will always ensure high sales and demand

More intense training for proper distribution and sales

Introduction of more products to the market

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Aswad, M. N. K. (2013, April 22). Personal interview. Kalam, M. A. (2013, April 18). Personal

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Kemiko Pharmaceuticals Ltd. (n.d.) Retrieved April 3, 2013, from http://www.kemiko

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Malhorta, N. K. (2009). Research Design Classification. In Naresh, Marketing research an

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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

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Samuelson, N. (2010). Economics (19th ed.). Singapore: McGraw Hill.