Pricing, Ratio Analysis, and Budgeting: Novartis South Africa PTY

This report delves into the financial resource management of Novartis South Africa PTY Ltd, a subsidiary of Novartis International AG. It examines critical economic issues such as pricing, utilizing Porter's Five Forces model to assess the impact of pricing strategies on the company. The report further explores the application of ratio analysis in decision-making within Novartis South Africa, highlighting its role in performance comparison, trend identification, and operational efficiency assessment. Lastly, it evaluates the benefits and limitations of budgeting in the context of Novartis, providing insights into financial planning and control. Desklib offers this and many other solved assignments for students seeking comprehensive study resources.

Managing Financial
Resources MFR

Table of Contents
INTRODUCTION...........................................................................................................................3
PART A...........................................................................................................................................3
Discussion of Pricing issue and its impact over the Novartis South Africa PTY Ltd using the
porter five forces model...............................................................................................................3
PART B............................................................................................................................................6
Uses of Ratio Analysis and decision-making within Novartis South Africa PTY Ltd................6
PART C..........................................................................................................................................13
Benefits and Limitations of Budgeting to Novartis South Africa PTY Ltd..............................13
CONCLUSION..............................................................................................................................15
REFERENCES................................................................................................................................1

INTRODUCTION
Managing financial resources is basically an important role of the finance manager of the
company with the help of which the complicated issues related to financial planning and
controlling is being addressed. The present report will be based on the Novartis South Africa
PTY Ltd which is a branch of Novartis International AG organization. Novartis is one of the
largest Pharmaceutical companies in the world which was founded in the year 1996. The
company has its headquarter in Basel, Switzerland and US and provide Pharmaceuticals, generic
drugs, over the counter drugs, diagnostics, contact lenses, animal health medicines etc. The
physical resources and financial resources of the company is quite strong. Revenue earned by
Novartis from its South Africa operation in the year 2021 was US$ 20.96 million while in the
2020 was US$ 28.38 and 84.38 (Gronde, Uyl-de Groot and Pieters, 2017).
On the other hand, the total number of employees in the same year is 360 total employees
across its all locations. Basically, Novartis South Africa Pty Ltd is a corporate family of 774
companies. My role in the organization is finance manager which are responsible for maintaining
the financial health of the business. This report will discuss the economic issues and ratio
analysis of the company, Lastly, the report will also cover the benefits and limitations of
budgeting in the context of Novartis organization.
PART A
Discussion of Pricing issue and its impact over the Novartis South Africa PTY Ltd using the
porter five forces model
The various forces are as follows:
Competition in the industry
The pricing issue is basically a part of economic issues which affects the overall economy
and companies operated in that industry. Price is the cost plus mark up value of the products and
services that offered by the company to its industry. Pharmaceutical company such as Novartis
offers variety of products to their national as well as international customers. The prices set by
the company for its drugs and medicines products are quite high in market and the impact of
which the low and middle income customers unable to afford it. The competition in the
pharmaceutical industry is high. It is found out in the researched that, Novartis incurred large
amount of research and development expenses in order to bring that particular drugs in the

market (Mulcahy, Hlávka and Case, 2018). This is one of the main reason behind the high prices
of new drugs. The treatment facility and medicines of cancer and heart diseases are popularly
provided by the Novartis all over the world including South Africa.
The impact of which they charge high prices for these products and services from the
local as well as international customers. That's why the high pricing of the pharmaceutical
products and services is the main economic issues all over the world. The pharmaceutical
companies have the pricing power, the impact of which the companies basically sets high prices
of their products in order to keep themselves in competition. The impact of which Novartis
company also set their prices of the medicines and generic drugs very high. The reason behind
the high price of the drugs is that drugs uniqueness, competitions, drug effectiveness, research
and development cost etc. Thus, Novartis company also charge high prices for the vaccine from
its customers after the pandemic and Covid-19 (Wouters, Kanavos and McKee, 2017).
Potential of new entrants:
The impact of pricing issues over the Novartis company is that it causes difficulties for
the company to make presence in the highly competitive market. The customer base of the
company get highly affected because of its pricing strategy. For example, because of the
government has provided free Covid vaccine to their people, the sales of the vaccine is get
drastically reduces. However on the other side, In order to address with the pricing issues, the
government of country such as US, South Africa etc. keep their eye over the companies that what
prices are set by them. It is because in South Africa, the price of the prescription drugs are
relatively unregulated. The new entrants in the pharmaceutical industry is a low force. The
impact of which Novartis company are always under scrutiny of the government that whether
they are charging unnecessary high prices from the customers or not. The government
intervention over the pharmaceutical companies related to high price issues affects the Novartis
company to large extent (Tran and Zafar, 2018).
Beside this, it is also identified that the consumers of ordinary and patented medicines are
not in a position to avoid the product's consumption until the price of the medicines and drugs
decreases. The impact of this inflated prices over the Novartis company is that they able to
generate more revenue that they will further use it for the purpose of drug development. The
majority of the revenue of Novartis company is generated from its steadily increasing prices of
drugs beyond the inflation and demand of the customers. But, it is advisable to the Novartis

company that before setting the price of its products and service they also need to consider the
prices charge by their competitors. It is because if the company charge the excessive price for the
same prescribed drugs from its customers then the impact of which the government can sue the
company and permanently disclose it. Not only that, the government can also seize the company
for its mistakes or for charging unfair prices from customers.
Power of supplier:
Pricing a drug incorrectly is one of the biggest mistake that is done by the pharmaceutical
companies which can leads to its decrease in brand value. For example, in case if Novartis
company charge incorrect price from the company than the impact of which the brand value of
the Novartis company get decreases in the eye of government, customers, society and local
community. The power of supplier of pharmaceutical industry is low. The pharmaceutical
company have to understand that pricing too high and too low for the drug has a potential impact
over the success and failure of the business. It is identified in the research that, pharmaceutical
companies need to increase its focus towards the development of speciality drugs in the recent
years. Such increase in the number of the speciality medicines, healthcare companies need to
charge high prices for the products (Booij, Price and Danen, 2019).
Power of customer:
When the company set high prices for its products, it reduces the chances of the company
that the customers will buy it from the organization. For example, if the Novartis company
charge high prices for its cancer treatment and drugs then its impact over the company is that
they face low sales and limited customer base. Further, this also affects the company
manufacturing and supply of the medicines of the cancers. The high price of the medicines are
not affordable to all people around the world thus in that case the supply of the medicines in the
company is higher than the demand for the same. The prices of the rare diseases is also one of
the reason behind the less affordability. The power of customer of pharmaceutical industry is
high. Now, if the company such as Novartis unable to sale its goods on time than it may get
spoiled because of its expiry dates. This will further lead to high cost of production than the sales
revenue which means heavy loss to company. The pricing issues also affect the Novartis
company in the term of price secrecy and discriminations. This means the high price will raise
finger on the company that they keep their final price secret in order to charge different price
from different patients (Easton and et.al., 2018).

Threat of substitute product:
The main objective of the Novartis company behind setting high prices for its products
such as drugs and medicines is to earn high revenue. Now, this objective is a reason behind
creating pricing issue in the economy and further the impact of which they face huge competition
in the market from the company which offer the same drug at relatively low cost. Thus, before
setting high prices of the drugs the Novartis company have to analyse its effectiveness. It means
they have to look out whether such new drug have the potential to cure the special diseases such
as cancer. Threat of substitute product in the pharmacy industry is low. Basically, the impact
of pricing issues over the business is quite higher because the patients will prefer the company or
not is depended upon the quality service and the price of the service. As in present time, the high
prices is considered as fair by the government and society only when the company disclose its
research and development cost related to the same (Wild, 2019). So, it is advisable to the
Novartis company that they have to disclose its R&D cost on annual report in order to keep
themselves out from the misconception.
PART B
Uses of Ratio Analysis and decision-making within Novartis South Africa PTY Ltd
Uses of ratio analysis:
The various uses of ratio analysis that help the Novartis South Africa in achievement of
their business objectives are as follows:
 Comparison: With the help of ratio analysis, the company can analyse and identify its
own current performance with the comparison of the previous year. Beside, this they can
also compare the performance with that of its competitors. For example, if Novartis
company wants to know its financial performance and identify the market gaps then they
can use the ratio analysis tools. Further, it will also help the management of Novartis to
know its competitive advantage, strength and weakness as well.
 Trend Line: The companies can also use the ratio analysis to identify that whether their
any trend exist in the financial performance or not. For example, Novartis South Africa
company on the basis of its current and past ratio trends can forecast its next year income
and revenue.

 Operational efficiency: It also helps the companies is identifying the degree of
efficiency in the management of their assets and liabilities. For example, in case if any of
the drug making equipment of the Novartis company is out dated than they have to sale it
to reduce the holding cost of such assets. It will further help in the money management of
the company (Osadchy and et.al., 2018).
Calculation of Ratios:
Novartis South Africa
Particulars Formula ACT 2018
(R million)
ACT 2019
(R million)
ACT 2020
(R million)
ACT 2021
(Oct) (R
million)
Net Sales 20.67 23.69 28.38 20.96
Gross Profit 14.58 16.93 18.81 14.38
Net Profit 9.33 11.66 12.47 7.59
Total
Functional
cost
5.25 5.27 6.34 6.78
Gross
Margin
Gross profit/ Net
sales* 100
70.50% 71.50% 66.30% 68.60%
Net Profit
Margin /
Return on
Sales
Net profit/ Net
sales* 100
45.10% 49.20% 43.90% 36.20%
Total
Functional
cost Margin
Total functional
cost/ Net sales*
100
-25.40% -22.30% -22.30% -32.40%
Comment on Navortis South Africa Performance:

Gross Profit Margin
Interpretation:
On the basis of above data and its graphical representation, it is analyzed that in the year
2021 till Oct the gross profit of the company is higher than the previous year i.e., 2020. It is
because in the year 2021 (Oct) the gross profit margin of the Novartis South Africa is 68.60%
while on the other hand, the same ratio in the year 2020 is 66.30%. This positive change in the
gross profit margin is indicated that the company is able to manage its cost of production well.
This also indicate that the performance of the company is quite better even after the Covid-19
situation. The gross profit of the company means that after the subtraction of cost of goods sold
from the sales revenue how much the company left over from the products sales. However, on
the other side, the widely fluctuation of GP margin over the year is also indicated the poor
management practices (Shi and et.al., 2020).
Net Profit Margin or Return on Sales:

Interpretation:
The above mentioned net profit margin which is also known as return on sales indicate
that Novartis company unable to maximize its profit earning as compared to previous year. The
NP margin of the company in the year 2019 is 49.20% while in the next two years is i.e., 2020 is
43.90% and 2021 (Oct) is 36.20%. This indicates that the overall performance of the company
after the pandemic situation is decreasing and the sales of the company are highly affected. It
may be because of the high functional cost and the prices of the medicines and treatments they
charge from the patients. Basically, Novartis company have no control of the government of
South Africa over the price setting. Thus, the company charge huge cost from the customers for
the same medicines and treatments which the customer of South Africa able to receive from its
local pharmaceutical companies.
The high functional cost is also one of the reason behind the poor financial performance
of the company in South Africa. That's why it is advisable to the company to reduce its cost and
selling price to increase the sales revenue and profits. The free medicines such as Vaccinations
provided by government is also one of the reason behind low net profit margin (Lee and Son,
2020).
Total Functional cost margin:

Interpretation:
The functional cost margin is also one of the metrics of profitability ratio of the company
which indicate that functional cost percentage to sales. On the basis of above data and its
graphical presentation, it can be stated that the total cost incur by the company in the year 2021
(Oct) is quite higher than the total functional cost incur by the Novartis South Africa company in
the yeat 2020. It may be because poor production management of the business during or after the
period Covid. It might be because of the high wastage of resources during the production of
medicines by the employees of the company. The employees are highly demotivated after the
Covid-19 as their salary is reduced by the company. Such demotivation within the business leads
to the failure of target completion on time etc. Thus, it is advisable to the company that they have
to engage their employees in the decision-making process so that they can understand what is
really going in the company. Further, it is also advisable to the company that they have to use the
training and development sessions for the employees for increasing their job satisfaction level
(Carroll and et.al., 2017).
Uses of Short-term and Long-term decision-making and the value they add to
Navrotis South Africa PTY Ltd:
Short-term Decisions:

The short-term decisions are the decisions which need to be achieved by the business in a
short span of time thus required short-term analysis. The various short-term decisions need to be
taken by Navrotis company and the value it added to the company are as follows:
 Decision regarding the relationship between fixed and variable cost: The pharmacy
company need to make the decision that whether they distinguish the total cost into fixed
and variable on the basis of time or its nature. For example, Navrotis South Africa
pharmacy company identify its fixed and variable cost on the basis of time horizon. The
impact of which they can manage its cost and earn more profits over the year.
 Decision regarding costing method: The two available costing methods to the company
is marginal and absorption costing. Both have their own advantage and disadvantage and
the company need to make decision accordingly. For example, Novartis company need to
use the absorption costing method to identify the cost of sales because it shows real profit
and accurate profit as compared to marginal costing (Işıklar and Büyüközkan, 2017).
 Drop or continue decision: This is a decision which state that the company need to
make the decision about whether to drop or continue with the particular product. This
short-term decision plays important role within the company for achieving the profit
maximization objective of company. For example, Navortis company in the South Africa
can use the break-even point analysis techniques to make the decision dropping and
continuation of about medicines and drugs. The break-even point will state that the
company's sales point where they neither earn profit, nor they will incur loss.
 Accepting a special production order: The short term decision also involve the decision
about whether company need to accept the special production of the medicines or not.
For example, in order to make the decision about the production order to vaccine in
Covid-19 situation, Novartis company need to identify and analyse the profitability
attached with the vaccine order. It is important for the company to property analyse this
before making any decision because government of South Africa also provide the vaccine
to people at free of cost (Andreeva, 2019).
Long-term Decision:
The long-term decision is useful for making the decision regarding the achievement of
long-term objectives of the Navortis pharma company. The various decision are as follows:

 Buying or remodelling equipment: This is a decision which need to be addressed by the
company in order to identify whether the existing equipment is profitable to the business
or not. If not, then they need to replace it with new equipment. For example, Navortis
company need to use the asset's management technique to analyse the working condition
of company's assets and equipment. After analysis, buying and remodelling of that
equipment decision is easily taken by the pharma company (Kowalewski and Zamielska,
2020).
 Selection of Products for manufacturing: The production of goods and services such as
medicines and drugs in case of pharmaceutical company require lots of research and
development. So, before making any decision it is important for the Novartis company
that they must analyse its cash flow statement and identify whether they have sufficient
cash and funds or not for R&D.
 Expansion decision: The expansion of business to new area is a long term decision
which require lots of research and funds. For example, currently Navortis South Africa
company have around 774 branches in different location of South Africa. This is only
possible because of making proper decision regarding funds availability from the sources
such as debt, equity etc. It has help the company in increasing its brand image and value
in the eye of local community (Giurge and et.al., 2021).
 Diversifying by buying another business: This involves the decision regarding the
purchasing of another business. For example, in order to buy its competitor name Sandoz,
Novartis has uses the decision-making strategies after the analysis of its performance
using ratios. In order to acquire the pharmacy company in further, the company need to
make proper decision using the firm valuation techniques. This will help the company in
improving their customer base, market shares and sales which will further increase its
profitability.
For example, on the basis of ratio analysis and finding its performance trend, Navortis
company has forecast and estimate its 2021 (after Oct) its gross, net margin along with total
foreign cost margin. The estimated and forecasted margins of Novartis are 68.6%, 36.2% and -
32.4% respectively (Wampler and Touchton, 2017).

PART C
Benefits and Limitations of Budgeting to Novartis South Africa PTY Ltd
Benefits of Budgeting:
The various benefits available to the Novartis organization related to the experience faced
or enjoyed by the company are as follows:
 Planning orientations: The budgeting means preparation of budgets which helps them in
knowing their long-term target for growth also including the short-term targets. For
example, Novartis company has experienced low customer base because of its main
objective of high revenue earnings. Now, preparing budgets will help the company in
setting their short-term goals of customer’s satisfaction beside long-term goals of sales
and revenue increment (Snow and Burke, 2019).
 Manage cash flow more efficiently: The budgeting helps the company in knowing the
sources from where the company receiving money and sources where the money is going.
This will help them in managing the cash flows within the business. For example, with
the implication of budgeting Novartis company can openly communicate with the
production and purchase department to know the actual cost of production along with
marketing department about the actual cost of R&D. This will further help them in
managing R&D cost and reducing the price of drugs.
 Profitability review: This is also one of the benefits which can helps the Norvatis
company in achieving its main objective. The application of budgeting technique within
the business helps the Novartis company to know which line of its products and services
are offering profit and which are incurring losses. The impact of which the managers can
make decision about whether to continue with the loss making business units and
products or dissolve it.
 Fund Planning: The budgeting also helps in the fund planning of the company. For
example, Novartis company is always in the requirement of money which they use for the
development and research of the drugs and medicines. Thus, the company also need to
identify that whether for such development the company have enough cash balance or
not. If not, then how much money they need to acquire from the market is easily possible
with the preparation of budgets.

 Assumption review: The budgeting also helps the company to identify why they are in
this pharmaceutical business and what assumption that need to be taken by them
regarding the external business environment. For example, Novartis company has
experience that high prices of prescribed medicines keep themselves under government
scrutiny. In order to deal with this external environment factors, impact the company
need to apply budgeting technique (Weigel and Hiebl, 2018).
Limitations of Budgeting:
The limitations of budgeting experiences by the Navortis company are as follows:
 Time consuming and costly: The budgeting technique is basically time-consuming and
costly which require lots of time over the budget preparation along with its analysis. For
example, Novartis company have faces that its half of the time goes in the budget's
preparation only. Then providing attention to other factors get hardly affected by this.
They also require large manpower for the budget's preparation because they use zero-
based budgeting technique (Rozei and et.al., 2019).
 Inaccuracy: As the budgeting is based on lots of assumptions related to revenue and
expenses, so making the exact prediction is not at all possible. Any wrong prediction and
decision will result into the heavy financial loss to the company. Thus, it is important for
the Navrotis company that they have to analyse each and every aspect of the budgeting
very clearly before making any assumption and predictions. It is important for the
company to understand that any change and shift in the macroeconomics factors will
affects the company also such as change in currency exchange, interest rates, inflation
rates etc.
 Rigidly: The rigid budgets sometime create difficulty for the company's management to
make drastic change as per the shift in market. For example, Novartis South Africa
company basically prepare rigid budgets describing the revenue and cost. The impact of
which they face drastic decrement in their sales and net income because of the Covid-19
situation. That's why it is advisable to the company to make flexible budgets in order to
shift as per the market.
 Excessive funding: Sometime preparing budgets create wastage of fund within the
business. For example, R&D department of the Novartis South Africa is beliefs that the

funds allocated to them need to be used in the particular year only and if they fail it will
reduce their next year budget funds. The impact of which the wastage of funds leads to
low profit to the business in the year 2021. The company have to make sure that budgets
are the estimated figures, and they can reduce the expenses with their own financial
strategies (Stallmann and et.al., 2017).
CONCLUSION
The report has concluded the potential aspects of the Novartis South Africa PTY Ltd.
along with its resources, financial position and role i.e., finance mangers. This report further has
also concluded the impact of pricing issues over the Navortis company. The pricing issues in an
economic issue where the pharmaceutical companies usually keep their medicines and special
treatment services prices high. This is an issue within the economy which puts negative impact
over the Navortis company. Further, the report has also concluded the uses of ratio analysis and
decision-making both short-term and long-term within the pharmacy company. Beside this, how
this decision can add value to the company has also been discussed in this report. In this context,
the report has calculated the ratio of Novartis South Africa on the basis of information of P&L
and after that the report has also interpreted that to identify business performance. The financial
performance of the Novartis company in the year 2020 and 2021 is really poor. Lastly, the report
has concluded the benefits and limitations of budgeting on the basis of experience of the
organization.

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