Attached I have a short case to read and the corresponding 2 questions. Read the case then answer the following 2 questions.

I am happy to announce that the Indian vaccine industry will dedicate half of its COVID-19 vaccine production capacity 7 of billions of doses 7 to low- and middle-income countries, served by GAVI,2 at an affordable and accessible price for all. Because your survival should not be determined by where you live in the world. Adar Poonawala, chief executive officer of the Serum Institute of India, June 20203 It was 80 degrees Fahrenheit in the shade typical for early August in the city of Pune, India and a ne bead of sweat trickled down the brow of Adar Poonawala, chief executive ofcer (CEO) of the Serum Institute of India (311). However, Poonawala was in one of the 311's temperature-controlled production facilities; the heat he felt was the result of concern about the pricing decision he needed to make. It was August 6, 2020, and the pricing strategy for the 811's pipeline COVID19 vaccine had to be revisited. The SII was the world's largest manufacturer of vaccines. Indeed, it had produced over 1.5 billion doses in 2019.4 Following the characterization of the COVID19 outbreak as a deadly global pandemic on March 11, 2020, the SH had entered the race to produce a vaccine. Just two weeks earlier, Poonawala had made a public announcement that thanks to a licensing agreement with AstraZeneca, the British-Swiss pharmaceutical giant, the SI] would begin the manufacturing of the Oxford vaccine (one of the world's most promising vaccine candidates) in August 2020.5 If approved, the vaccine would be released for distribution in India as early as December 2020. It would be available at a price of US$136 per dose under the brand name \"Covishield.\"7 Two doses of the vaccine would be required, resulting in a total cost of $26 per person. The price of $13 per dose was much higher than the price of the SII's typical vaccine. Poonawala's father, Cyrus, the founder president of the 311, had boasted that for a dose of the measles8 vaccine, the 811 price was just 50 cents, while Western big-pharma charged $15.9 In the announcement about the agreement with AstraZeneca, Poonawala had explained the rationale behind the $13 price: the 811 had invested $100 million in a new facility capable of producing one billion doses of COVID-19 vaccines annually.10 Additionally, the 811 had committed to producing 200 million doses of Covishield ahead of its regulatory approval, at the comp any's own risk, to ensure the timely delivery of the vaccine. '1 The operating expenses associated with the production of this early batch of vaccines amounted to more than $100 million. Moreover, the prices charged by United States (US) vaccine makers were higher; for example, Pzer had recently announced a $19.50 per dose supply deal with the US government.12 The cost of treatment with the antiviral drug Remdesvir was estimated to be more than $3,000 per patient. 13 Even the cost of a COVID-19 test was more Page 2 932 OAOBQ than $20. M Yet, less than 24 hours earlier, Johnson & Johnson (J&J), a US-based pharmaceutical and consumer healthcare giant, had announced an agreement to supply a COVID-19 vaccine to the US government for a \"not-for-prot\" price of $10 per dose. '5 In another surprising development, ve days previously, Russian authorities had declared that they would be ready to mass-distribute a vaccine by early October 2020.[6 Poonawala needed to rethink the 811's pricing strategy for Covishield, and quickly. CO\\.|'ID-19I COVID-19 was caused by a virus named SARS-CoV-2, which was highly infectious, had no known cure, and had increasingly serious effects with age.\" The World Health Organization (WHO) first became aware of the new disease through Chinese media reports in December 2019.18 By March of 2020, it was clear that the new virus was both deadly and widespread leading to it being declared a global pandemic.\" In the absence of a cure or vaccine, the only protections available for public health authorities to recommend were the tried-and-tested guidelines of social distancing, mask wearing (as the virus was transmitted through airborne droplets), and practicing good hand hygiene.2D The political and public responses to these guidelines varied by country, state, and even city.\" Several large countries, including Brazil, India, and the US, continued to struggle with steady increases in their COVlD-19 infection rates.22 While some countries were reported to have successfully contained the spread of the virus by June 2020, later surges led to restrictions on public movement even in countries like Australia, Switzerland, Germany, and South Korea. 23 A surge in cases could quickly overwhelm a country's health infrastructure. It was estimated that 1 per cent of infected people in their twenties, 8 per cent of people in their fties, and 19 per cent of infected people over 80 years of age needed to be hospitalized.24 These problems were exacerbated by the insufficient capacity of testing centres.25 The public health crisis also had economic consequences worldwide. In fact, the International Monetary Fund (IMF) predicted a global economic contraction of 4.9 per cent in 2020, with an uncertain recovery in 2021.25 The economic contraction fostered pressure to reopen commercial and public spaces, although each relaxation of restrictions resulted in surging infections, hospitalizations, and deaths. While new therapies reduced death rates, a cure for the disease remained elusive}? Thus, hopes of returning to normalcy depended on the access to safe and effective vaccines that could protect against the severe effects of the disease. Vaccine development accelerated to an unprecedented extent, driven by innovations in research and development and cooperation across the public-private ecosystem of vaccine development.\" Some experts expressed concern that a vaccine development process that usually took several years had been shortened to a matter of months.29 Experts also warned that the first vaccines might not confer long-term protection for the population.30 However, the increased speed of vaccine development was accepted as necessary, driven by advances in technology and fast-tracking by public health ofcials.\" VACCINE BUYERS Countries worldwide wanted to acquire a sufcient stock of vaccines for widespread distribution at no cost or little cost to consumers. However, the ability to purchase vaccines depended on their price as well as on the countries' purchasing power. A commonly used proxy for purchasing power was a country's per capita gross national income (GNI), which formed the basis of the World Bank's classication of countries into four categoriesnamely high income, upper-middle income, lower-middle income, and low income. The high-income countries had an average per capita GNI of $46,000, and they were home to 1.2 billion of the world's population in 2019 (see Exhibit 1). The US, the most populous high-income country, did not regulate vaccine pricing, and early reports 'om the US speculated that a COVID-19 vaccine could cost hundreds of dollars or more.\" By the end of June 2020, signals from vaccine makers indicated a much Page 3 QBZOAOBQ lower price. For instance, Moderna reassured the public that the company's prices would be in line with existing vaccine prices in the US.33 On July 22, Pzer announced a deal to supply the US government with its COVID-19 vaccine (if approved) at a price of $19.50 per dose.34 This was at the lower end of vaccine prices in the US (see Exhibit 2A). Further, 1&1 and the UK-based AstraZeneca had promised the US a not-for-prot supply of vaccines during the pandemic.35 However, none of these new vaccines had yet passed the clinical trial stage. Research indicated that the probability of success for vaccines at each step of a clinical trial was 76 per cent (for phase one), 57 per cent (for phase two), and 85 per cent (for phase three).3'5 To improve its chances of acquiring an effective and approved vaccine, the US had signed contracts with several companies that were leading the race to produce a vaccine.\" These contracts were contingent on the vaccine clearing phase- three clinical trials. If multiple vaccines achieved regulatory approval, the nal bill for taxpayers could exceed several hundred dollars per person. Similar arrangements were in place in other high-income countries. For example, the UK, which had an estimated population of 66 million, had contracted with AstraZeneca for 100 million doses, with the French company Valneva for 60 million doses, and with Pzer for 30 million doses.\" The upper-middle-income countries, which were home to 2.9 billion people, had an average per capita GNI of $9,000 in 2019. In China, the most populous country in that category, the discretionary39 part of the national budget was estimated to be $2,200 per capita (see Exhibit 1). As China's population exceeded 1.4 billion, the issue of mass supply was critical. The production capacity of China's vaccine industry was estimated to be one billion doses per year, and it had achieved a production volume of 0.7 billion doses in 2019.40 Three Chinese candidate vaccines had entered or were soon to enter phase-three clinical trials as of early August.\" Most of China's routine vaccines were produced by Chinese companies, distributed through public vaccination programs, and priced between $0.10 and $6, which was similar to UNICEF's42 pricing (see Exhibit 2B).43 However, the prices for private-market vaccines in China could be as high as $100, which was a higher amount than prices for comparable US, European, and UNICEF vaccines.4'4 In the lower-middle- and low-income countries, vaccine prices were typically 10 per cent of the price in the US and Europe.45 The lower-middle-income nations, where 2.7 billion people resided, had an average per capita GNI of $2,200 in 2019. India, which had a population of 1.3 billion, was the most populous of those countries, and its discretionary budget outlay was $200 per capita. Thus, a two-shot course of the Sll's Covishield vaccine for India's population could represent a signicant budgetary allocation. In 2019, India's per capita budget for healthcare was less than $10.46 However, India was also the world's fth largest economy, with an investment- grade national debt rating, which meant it could likely nance a mass vaccination program.47 India's vaccine production capacity was the largest in the world, standing at three billion doses in 2019, of which an estimated two billion doses were exported.48 Aside from the SH, two other Indian vaccine makers Bharat Biotech and Zydus Cadila were developing COVID-19 vaccines, which entered early-stage human trials in August 2020.49 If approved, they would each produce approximately 100 million doses per year, beginning in the rst quarter of 2021.50 The prices were expected to be low. The low-income countries were home to 0.6 billion people in 2019, and the discretionary budget per person for a representative country, such as Ethiopia, was $70 (see Exhibit 1). In June 2020, a deal to supply several hundred million doses of affordable vaccines to low- and lower-middle-income countries was announcedl The deal included multiple partners, such as the Gates Foundation; the Coalition for Epidemic Preparedness Innovations (CEPI); GAVI, the Vaccine Alliance; AstraZeneca; and the SH.52 Page 4 QBZOAOBQ THE COMPETITIVE DYNAMIC By early August 2020, six vaccines had entered nal-phase clinical trials, with candidates having been developed by Pzer-BioNTech, AstraZeneca-Oxford University, Moderna, Sinopharm, and Sinovac.53 A few other vaccines, such as those developed by J &J and Russia's Gamaleya Institute, were expected to enter phase-three trials by the end of September 2020.54 US-based Pzer, one of the world's largest pharmaceutical companies, had announced a deal to supply the US government with 100 million doses of the vaccine developed by its German partner, BioNTech, for $1.95 billion.55 According to the arrangement, the US government would receive the rst batch of doses by the end of 2020, and it would have the right to acquire up to 1.3 billion more doses by the end of 2021. Pzer had also announced similar deals with the UK (30 million doses) and Japan (120 million doses).56 During an earnings-related conference call, the senior management of Pzer had explained the logic behind the vaccine's pricing?\" during the pandemic, the vaccine would be priced to allow for \"broad access\" and supplied to multiple governments around the world. Pzer believed that the true value of the vaccine was far greater than the initial price of $19.50. After the pandemic, Pzer expected the demand for vaccines to \"become more standard or seasonal," leading to normal channels of supply and a more \"value-based" pricing approach, depending on both the competition and the demand at the time. Pzer also expected that due to the huge demand given that the world's population stood at 7.5 billion competition would not erode price levels in the near lture. Pzer expected its vaccine to be one of the earliest to reach the market in late 2020, partly because it had declined US government lnding, thereby avoiding lengthy negotiations regarding pricing.58 Moreover, Pzer had received approval from the US regulator (the Food and Drug Administration) to fast track its clinical trials by combining phases two and three.59 In contrast with the other key vaccine manufacturers, Moderna was a new biotechnology venture. It was established in the US in 2010, and it was only listed as a publicly traded company in 2018.60 While Moderna had developed a range of medicines and vaccines, all of its products were based on mRNA'51 technology.62 The principal advantage of this technology was that it allowed products to have a much smaller footprint than conventional pharmaceutical and vaccine products.63 The risk was that no mRN A vaccine had previously been approved anywhere in the world.64 The Pzer-BioNTech vaccine was also based on mRNA technology. Unlike Pzer, however, Moderna had received $955 million in US government funding to develop its vaccine. ['5 Yet, despite accepting the funding, Moderna had insisted that it could not price the vaccine at cost, as it needed the vaccine sales to return prots for its investors.\" During an earnings-related conference call on August 5, 2020, Moderna's CEO had also announced that the company had forged deals to supply vaccines to a number of European Union (EU) countries at a cost of $32$37 per dose}r Attempting to strike a more reassuring note, he suggested that for deals involving a higher volume, the price would be lower. Moderna had entered into three agreements concerning the production, packaging, and storage of its vaccines. First, it had contracted with Lonza, a Switzerland-based multinational biotechnology corporation, to manufacture vaccine material equivalent to one billion doses per yearf'8 Second, it had contracted with US-based Catalent to package and store 100 million doses of its vaccine in the US.69 Third, it had contracted with Spain's ROVI to package and store hundreds of millions of vaccine doses in pan-European locations.To AstraZeneca was a vaccine frontrunner 'om Europe. In March 2020, AstraZeneca had signed a licensing agreement with Oxford University's Jenner Institute for the experimental COVID-19 vaccine developed at the institute. 7' According to the agreement, both partners agreed to operate on a not-for-prot basis for the duration of the coronavirus pandemic; however, after the pandemic, both would receive royalties based on commercial pricing. 72 The Oxford vaccine, as it was commonly known, stimulated the human body's production of antibodies and high levels of T-cellsT3 specic to the COVlD-19 virus. The head of the Jenner Institute had characterized this immune response as \"clearly better\" than Moderna' s vaccine. 74 In May, the company announced that a US government agency had pledged funding support of up to $1.2 billion for Page 5 QBZOAOBS the development, production, and delivery of the vaccine toward the end of 2020.75 The development program included phase-three clinical trials involving 30,000 participants as well as a pediatric trial.T6 If the vaccine received approval, AstraZeneca would supply 300 million doses to the US and 100 million doses to the UK on a not-for-profit basis.\" AstraZeneca had also announced an expanded deal with the EU to supply member states with 400 million doses.TS After committing to expanding its global production to over one billion doses by the end of 2021, AstraZeneca signed licensing agreements across the world, including with the SH in India, Shenzhen Kangtai in China, and others in South Korea and Brazil. 79 On August 5, 2020, J 8:] announced a deal to supply the US government with 100 million doses of its vaccine in exchange for $1 billion.\"50 The arrangement also allowed the US government to order an additional 200 million doses from 185181 The agreed $10 per dose price was lower than the price of most existing vaccines in the US,82 which aligned with J 81.] 's pledge to provide a supply of its vaccine on a not-for-profit basis during the pandemic.83 Unlike Pzer, J&J had accepted $450 million in US government aid to help accelerate the development of its COVlD-19 vaccine.S4 Once the pandemic was over, J&J would be expected to shift to for- prot pricings'5 J &J 's vaccine was expected to enter phase-three clinical trials in late September 2020.86 The two Chinese vaccine manufacturers that were in nal-phase trials on August 5, 2020, namely Sinopharm and Sinovac, had based their vaccines on the older, tried-and-tested approach of inactivating the disease-causing virus.\" Another Chinese vaccine manufacturer, CanSino, was expected to enter phase- three trials soon, and its candidate vaccine was based on more advanced genetic technology, similar to the Oxford and J &J vaccines.88 All of the Chinese vaccine manufacturers faced one key issue: the difficulty of recruiting suitable human subjects for phase-three trials due to the absence of a COVlD-l9 epidemics9 in China in August 2020. Thus, China had entered into agreements with countries that were facing epidemic conditions, such as Russia, Brazil, and Pakistan, to test its vaccines there.90 Another issue concerned perceptions, as top US health officials doubted the quality of Chinese vaccines due to prior mishaps involving defective vaccines. 9' The Russian vaccine was developed by the state-backed Gamaleya Institute. The Russian health minister had declared that mass vaccinations would begin, starting with medical workers and teachers, in early October 2020, which would make it the rst mass vaccination for COVlD-19. 92 By August 5, it had become clear that the early phase human trial data were promising, and the Russian vaccine entered phase-three clinical trials.93 The Russian health minister had also announced that three other vaccines were then under development, with one of the candidates having entered early-stage human trials.94 A leading Russian virologist involved in the project claimed that the motive was neither prot nor politics, but instead purely humanistic. He also hinted that after Russian citizens had been vaccinated, other countries would be considered.95 Early vaccine production in Russia was expected to reach 1.5 million doses per month, progressing to six million per month by the end of 2021.96 Global vaccine production capacity was an overarching concern. The WHO had estimated the world's production capacity for all vaccines to be about 3.5 billion doses per year.\" Reports 'om across the globe had indicated plans to more than double the vaccine production capacity so that more than four billion doses of COVLD-19 vaccines could be produced by 2021.98 However, even doubling the capacity would imply a global shortfall in supply in 2021, given that most vaccines required two doses. SERUM INSTITUTE OF INDIA The $11 was founded by Cyrus Poonawala in 1966, a time when his home country of India had to import most of its vaccines at high prices. Based on domestic market requirements, the $11 developed the know- how and technology necessary to manufacture several vaccines and related immunological products, such Page 6 QBZOAOBQ as tetanus anti-toxins, at an affordable price.99 Over time, the SH began to export its vaccines to many low- and middle-income countries, and eventually, to high-income countries. In 2019, the SH produced and sold more than 1.5 billion doses of vaccines and related biopharmaceutical products used in over 170 countries. 100 It was estimated that about two-thirds of the world's children had received at least one vaccine manufactured by the SH. 1'" These vaccines were accredited by the WHO, and they were favoured due to their quality and affordability. \"'2 Despite its policy of keeping vaccine prices low, the SH enjoyed profit margins of over 40 per cent, which were higher than the prot margins of its larger and more diversified, global competitors (see Exhibit 3). The top management of the SH attributed the high margins to the company's ability to keep overhead costs low, a motivated workforce, as well as advanced automation and production equipment. 103 Cyrus also believed that as the SH was privately held, it could take a long-term view regarding investments, which was harder to do in publicly traded firms. An example of this thinking could be seen in the 811's large, temperature-controlled warehouse, which maintained a considerable stock of a variety of vaccines. While the warehouse increased operating expenses, the ready inventory enabled the $11 to respond rapidly to an outbreak. 104 A source of reduced expenses was the lack of investment in research concerning new vaccines. Instead, the 811 focused its development efforts on improving production yields and increasing the stability of its vaccines across a range of temperatures. '05 As the 811 did not develop its own vaccines, it worked with off-patent products, while for newer products, it entered into licensing agreements. \"'5 Thus, the SH had entered into agreements regarding COVID-19 vaccines with AstraZeneca and Novovax, another leading vaccine developer. [07 However, in a departure from this strategy, the SH had also invested in developing its own COVE-19 vaccine through modifying one of its existing, off-patent vaccines. ms THE PRICING DECISION Poonawala had announced that the 811 would introduce the Covishield vaccine at an initial price of $13 per dose, with a price reduction occurring over time as the SH realized economies of scale. '09 The initial $13 price had seemed fair, given the higher prices of the Pzer and Moderna vaccines, the Remdesvir drug, and even COVE-19 testing kits. Yet, the price point was under attack, given the information released by J &J and the Russians. Still, the investment in the new plant and the risk and operating expenses incurred through pre-approval productionamounting to more than $200 millionhad to be recovered. \"0 Should the SH continue to follow Pzer's two-part pricing model of \"broad access" during the pandemic followed by \"value-based\" access during the endemic phase (after the pandemic)? But what if the next generation of vaccines entered the market during the pandemic? How should the launch price take such uncertainty into account? Should the SH continue with the $13 price after all? Page 7 9B20A089 EXHIBIT 1: KEY CHARACTERISTICS OF COUNTRY SEGMENTS BY INCOME Segmenta High-income Upper-middle- Lower-middle- Low-income economies income income economies Characteristics economies economies Gross national income > $12,356 $4,046 to $1,036 to