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Portugal: Riding the Wave of Economic Reform

01.04.2007 / Pharmaboardroom

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Ask any senior executive to outline the Portuguese pharmaceutical industry’s current set of rules, and you’ll hear a tale of disorientation, even overwhelming confusion. The government represents around two-thirds of total pharmaceutical sales in the country – to the tune of 2.8 billion (US$3.7 billion) – accounting for more than 2% of Portugal‘s gross domestic product. And although the pharmaceutical industry doesn’t seem to overlook its role in assisting its biggest client in a critical moment of health budget constraints, it is certainly not happy about the way things have turned out. “The situation in Portugal is not unique; it is normal that governments with budget constraints seek to restructure the health system. Portugal has been relatively calm for several years, and now the government is trying to do everything in a couple of years,” says J. Miguel Noriega, general manager of Organon Portuguesa, a company under the Akzo Nobel organization that is well known for contributing to the initial steps toward family planning in Portugal 35 years ago.

 

Emerging from the Dark

Having taken office in 2005, the current Socialist “center left” government is facing a daunting array of issues and spending all of its political capital on promoting the country’s long-delayed economic reforms. To begin with, by 2005, Portugal was facing a 6.1% budget deficit increase in terms of its GDP, far beyond the 3% recommended by the European Union’s Stability and Growth Pact. As a result, the Portuguese government has agreed to embark on an aggressive three-year budget deficit-reduction program that includes a range of severe measures. As the drama unfolds, the rising healthcare costs are being identified as a natural target of the state cost-containment initiatives.

Naval combat Off the coasts of Lisbon, by Theodore de Bry The financial recovery, combined with the job of increasing the population’s access to medication, is under the strict hand of the Portuguese Minister of Health, Antonio Correia de Campos. “It is not easy. There is a lot of pressure from pharmaceutical companies, pharmacies, diagnostic tests, efforts in hospital management, extra time for doctors and nurses and so on, but I am very optimistic,” says the minister, who is returning to the job five years after his first assignment as Minister of Health. “The 2007 budget for the health sector can only be controlled under certain conditions. One of them is the reduction of pharmaceutical prices by 6%; another one is the reduction of co-payments by the national health system on different levels, depending on the classes of reimbursement,” he adds.

The first set of price cuts, introduced in September 2005, targeted all prescription medicines. “Price reduction has been fair in comparison with other European countries. France has decreased prices by 20%, and Spain by 12%; it is always a very difficult situation for the industry, but both sides are trying to be reasonable,” continues Correia de Campos, justifying the country’s second price reduction of 6% on pharmaceutical products. This price reduction, enforced in February of 2007, is a burden also shared by the pharmaceutical distributors for the first time. The efforts don’t stop there; the Ministry of Health has decided to collect a daily fee of US$6 per intern patient and US$13 for each ambulatory surgery and has frozen its investments in diagnostic tests. By reducing pharmaceutical purchases in hospitals by 6% in 2006, followed by another 6% in 2007, the government expects to save up to US$65 million. This is in addition to efforts to reorganize the health system’s workforce, such as cracking down on extra hours worked by doctors and nurses, which should save the country about US$26 million.

On top of that, the country’s remarkable efforts to introduce generic drugs – which achieved a 16% market share in a four-year period – are now expected to be transferred to the non-prescription segment, as Portugal authorizes the sale of over-the-counter drugs in non-pharmacy outlets. The move should boost the OTC market share by 4% or 5% in the next couple of years and increase the sales of medication outside the government’s reimbursement scheme.

As a result, in 2006, for the first time in many years, the Portuguese health budget was respected. Nevertheless, the European Union expects the Portuguese public deficit to sink below 3% of its GDP by 2008. Given the complex nature of the task, that seems very unlikely.

 

Hospitals: Take a Number, Get in Line

While Correia de Campos has been trying to work his magic with the country’s health system budget, public hospitals have accumulated a critical debt with the pharmaceutical manufacturers. At the end of 2004, it reached an estimated 977.6 million (US$1.3 billion), a 51.1% increase compared with 2003.

However, reports from October 2006 show that the debt has decreased to 712 million (US$935 million), of which “over 100 million (US$131 million) belongs to Roche,” notes Adriano Treve, Roche‘s general director for Portugal. Since his return to the country in 2000, the company has managed to consolidate its leading position in the hospital market. “We know that the government will pay one day; the question is just when,” he says. “It is a continuous negotiation effort to ensure we get paid. On the other hand, Roche is committed to provide a service to public health, and the current portfolio that we have, particularly in the area of oncology, is very important to the country.”

The government is remodelling the business structure of its public hospitals to create a system of private management and is building new hospitals within the Public-Private Partnership (PPP) scheme. Treve, who previously worked in Portugal as a marketing manager, acknowledges the positive changes but also points out some limitations. “The hospitals’ environments have definitely changed and are becoming more dynamic. I see more flexibility from the various stakeholders in the hospitals. However, there is one thing to bear in mind: Since 2001, Portugal has had four different governments, and every new government means changes to the health sector. A new prime minister usually will nominate a new health minister, who may change people in the important functions of the health administration.”

Such concerns are also shared by James Hassard, general director of Amgen Portugal, the second-biggest hospital player in the country. “Amgen Portugal is almost 100% focused on the hospital sector; consequently, we are under a lot of pressure. In terms of invoice sales, Amgen Portugal is close to the US$50 million mark and is primarily focused in two areas: supportive care in oncology, and nephrology,” he says.

 

Hospitals Take 300 Days to Settle Their Accounts

J. Miguel Noriega Further complicating matters, hospitals are taking, on average, 300 days to settle their accounts; this situation led the Portuguese Pharmaceutical Association (Apifarma) to create a company just to take care of these debts, a “guarantee that especially the small companies would get their money. After strong negotiations with different ministers, health, economy and finance, we were able to collect 0.5 billion (US$657 million),” says Joao Gomes Esteves, chairman of the board of Apifarma. He continues, “Today, Apifarma is studying a mechanism which gives to the pharmaceutical industry at least the same rights which other suppliers have.”

Although hospital reforms are underway, forging a commercial mind-set out of a civil servant culture is very challenging, particularly in Portugal, where the state employs 15% of the country’s entire workforce.

 

Gearing Up for the Fight

For every action there is a reaction. Instability, according to Gomes Esteves, is the fundamental reason behind the lack of foreign direct investment in the pharmaceutical industry in Portugal, a country where 95% of pharmaceutical activities are commercial. Esteves, who has been the man behind the Portuguese Pharmaceutical Association for almost 15 years, has the tough challenge of representing all classes of companies – from manufacturers to distributors, generics to innovators. “A country that changes the rules every day can forget about FDI,” he says. Indeed, the lack of competitiveness often haunts the Portuguese pharmaceutical industry. “The Portuguese pharmaceutical market is a small market which represents around 4 billion (US$5.3 billion), including hospitals,” he continues. “It is clear that in the future, all the European Union member States will try to squeeze the pharmaceutical industry more and more. The country needs to understand that it is losing competitiveness; some centers of excellence are moving to the United States or even India.”

The performance of the companies operating in the Portuguese pharmaceutical market is a true reflection of the current governmental policies. “The two consecutive 6% price cuts in less than 18 months are a serious threat to any serious corporate planning and profitability levels. For the second year in a row, due to the restructuring of the Portuguese health system, we will be offering all the extra profits generated by our growth rates to the government,” says J. Miguel Noriega. In spite of that, his company, Organon Portuguesa, is seeking to further develop its position in the areas of neuroscience and anaesthesia and consolidate the strong image it has achieved in Portugal in the areas of gynecology, contraceptives and fertility.

For companies that aren’t selling generics or OTC medicines, bringing new products to the market has been the only way to increase sales in such an unwelcoming environment. There is no one better than the market leader to illustrate such a trend. In 2006, MSD Portugal boasted a 4.5% sales increase compared with 2005. “The current growth is based on the positive performance of the company’s new products launched over the last two years, particularly in the Inegy franchise and also in the osteoporosis franchise. Nevertheless, the last years suffered a major impact from patent expirations; the company lost the exclusivity of important products such as Zocor and Proscar to generic producers. The year of 2006 was a time of recovery that allowed MSD Portugal to consolidate its number-one position in the market,” says Jose Almeida Bastos, who is about to complete his 10th anniversary as general manager of MSD Portugal. For 2007, he places his bets on the areas of diabetes, cardiovascular, oncology and CNS therapies (the latter more in the medium term), but he isn’t leaving out “pain, respiratory, rheumatology, HIV and hospital products, segments in which MSD is already very strong in Portugal,” he concludes.

Antonio Araujo As general director of Novo Nordisk Portugal, Antonio Araujo works for an important player in the fight against diabetes in the country. He finds it very difficult to explain the Portuguese government’s numerous policy changes to his company’s Danish headquarters. But despite all the setbacks and “a portfolio which still does not contain all of the company’s most modern insulin,” notes Araujo, “Novo Nordisk has managed to remain a market leader in Portugal.”

As he expects to introduce the company’s leading European growth drivers, the products Levemir and NovoMix, to Portugal in 2007, his company has a good outlook for the next year. “We all know that the prevalence of diabetes is increasing dramatically – in Portugal as in other parts of the world,” he says. “Novo Nordisk is committed to changing diabetes. We have the broadest portfolio of modern insulin, and our objective for 2007 is to make these products available in Portugal in order to offer people with diabetes the best treatment options.”

Make no mistake – despite what many regard as good prospects for the coming years, general managers of multinationals doing business in Portugal are very concerned. Over the 10 years prior to the beginning of 2006, inflation in Portugal climbed 35% and the prices of pharmaceuticals grew by only 7%. Drug prices have been frozen since 2002, and the industry has experienced two consecutive 6% price decreases since September 2005. In addition to that, the Portuguese pharmaceutical market is a very competitive one. Among the country’s roughly 200 players, the market leader, MSD, holds a market share of 6.4%.

MSD‘s building in Portugal: MSD Portugal consolidated its market leading position in 2006 According to data provided by the consulting firm IMS Health Iberia, the Portuguese market struggled to reach a 4.7% sales increase during 2006. This growth was largely driven by the evolution of generics (which reached a 16% market penetration by the beginning of 2007), the boost in OTC products since they were cleared for sale in non-pharmacy outlets, and new products brought to the market.

The good news is that, according to the IMS Health prognosis, the next four years should be better than the last two. The Portuguese pharmaceutical industry should expect a growth rate of approximately 6% in the retail business and 9% in the hospital business until 2010 – that is, unless the government decides to follow the path of further price reductions.

 

So, Why Invest in Portugal?

Gilda Parreira Ironically one of Portugal’s major weaknesses is also one of its major attractions. The country’s pharmaceutical purchases represent a large proportion of its public health expenditure – around 28%, which is among the highest in Europe. It is, in fact, as Minister of Health Antonio Correia de Campos points out, “a world reference. Spreading the figures,” he says, ” 1.5 billion (US$2 billion) is spent on ambulatory care plus 0.8 billion (US$1 billion) in hospitals.” The 2.3 billion (US$3 billion) spent on pharmaceuticals out of 8.7 billion (US$ 11.5 billion) “is a considerable amount,” he concludes.

 

A Competitive Advantage for Portuguese Producers

Antonio Barros Ferreira, executive director of the 100% Portuguese company Lusomedicamenta, has a positive perspective on the local pharmaceutical players. “The fear often channelled by the companies operating in Portugal is related to the future of the Portuguese market, not the Portuguese industry,” he says. “Obviously, we are also affected by these constraints in the Portuguese market, but not on the same scale. I believe that, although it is a difficult process, more and more Portuguese companies will shift their capabilities to exports, and that will guarantee the sustainability of the Portuguese pharmaceutical industry.”

Make no mistake – despite what many regard as good prospects for the coming years, general managers of multinationals doing business in Portugal are very concerned. Over the 10 years prior to the beginning of 2006, inflation in Portugal climbed 35% and the prices of pharmaceuticals grew by only 7%. Drug prices have been frozen since 2002, and the industry has experienced two consecutive 6% price decreases since September 2005. In addition to that, the Portuguese pharmaceutical market is a very competitive one. Among the country’s roughly 200 players, the market leader, MSD, holds a market share of 6.4%.

MSD‘s building in Portugal: MSD Portugal consolidated its market leading position in 2006 According to data provided by the consulting firm IMS Health Iberia, the Portuguese market struggled to reach a 4.7% sales increase during 2006. This growth was largely driven by the evolution of generics (which reached a 16% market penetration by the beginning of 2007), the boost in OTC products since they were cleared for sale in non-pharmacy outlets, and new products brought to the market.

The good news is that, according to the IMS Health prognosis, the next four years should be better than the last two. The Portuguese pharmaceutical industry should expect a growth rate of approximately 6% in the retail business and 9% in the hospital business until 2010 – that is, unless the government decides to follow the path of further price reductions.

 

LUSOMEDICAMENTA : A RISING STAR

Laboratorio J. Neves is very attuned to the market changes. The company’s acquisition by the Soquifa Medicamentos group nine years ago transformed a family company with little investment behind it into a very successful player. The efforts to rebuild the company’s image, rearrange its workforce and introduce new products to the market have certainly paid off. “As a result, from 1 million (US$1.3 million) in turnover in 1997, J. Neves achieved 18 million US$23.6 million in 2006, and the objectives for 2007 are very ambitious: to reach 25 million (US$33 million),” says J.Neves’ general manager, Rui Ribas. The company’s strategy of consolidating its position in markets bigger than US$13 million annually has guaranteed a performance increase of 25% to 30% every year. In addition to that, J. Neves recently announced the acquisition of a new production unit, which, according to its director, aims more to increase the company’s production independence than enhance its turnover.

 

“J. Neves has its production line distributed in 13 different countries, and the company’s volumes are usually low considering its supplier capacities,” explains Ribas. “Portugal is a very small country; sometimes the company needs 1,000 boxes, but we have to produce 200,000, an amount for three or four years, which is obviously a big investment added by the warehousing costs. Therefore, in terms of logistics, it is very different to manage a company in such a situation,” he concludes. This is a common problem for local companies, but at the end of the day it could be twisted into a competitive advantage. Small markets and volumes demand flexibility, and flexibility is currently Portugal’s trademark when it comes to pharmaceutical production.

 

Still an Attractive Destination for FDI

Although Portugal has been increasingly overshadowed by lower-cost producers in Central Europe and Asia as a target for foreign direct investment FDI, Pierre Fabre, a French company that has been in the country since 1985, mostly in the areas of ambulatory care and oncology, is a clear example of how Portugal can succeed as a destination for pharmaceutical industry investment. Following its strategy of seeking out opportunities in emerging pharmaceutical markets (such as Morocco, Poland, Turkey, Tunisia and Mexico), as opposed to the traditional European countries (such as the United Kingdom or Germany), the company recently announced that it would be targeting Portugal for new investment. “Portugal, competing with other countries such as Germany, Poland and Italy, was able to take the European production of a respiratory products line, which will be done by a third party in the country. The choice of Portugal has shown the commitment and efforts of the Portuguese operations to create and add value to the country’s industry,” says Gilda Parreira, general director of Pierre Fabre Medicament Portugal.

Despite its success in attracting new production to Portugal, Parreira points out, “the pharmaceutical sector is the easiest target to counter-balance the budget deficit, and this is no different in other European countries. There are bigger and more attractive markets than Portugal, and the Portuguese government has to understand the impact of these measures on the country’s ability to attract investors.” Noting Pierre Fabre Medicament’s ability to foster international partnerships and share development costs, Parreira seems to be very optimistic about the company’s prospects in Portugal: “The company will have two very important launches in 2008 driven by the urology market, and in 2010 a very innovative project involving fibromyalgia.”

 

Pick a Partner, Please

IMS Health, a longstanding source of information analysis for the pharmaceutical business, has found an immense opportunity to develop its consulting skills. Carlos Mocho, general director for Spain and Portugal, explains: “Following an aggressive strategy of establishing partnerships and hiring skilled talents from established companies such as Deloitte, KPMG and Boston Consulting Group, IMS Health has consolidated its consulting division.” The impact of the shift has been immediate. “IMS Health Iberia is growing above 20% per year,” continues Mocho. “The traditional areas of information analysis are following the global IMS trend of 12% increase; on the other hand, the new areas have a major contribution in these successes, reaching 40% increases in some cases.”

 

The new structure of IMS Health Iberia divides the company into two parts, one focused on information management and the other on health economics. “Recently, IMS Health has acquired a company in Barcelona called HRO Group that enlarged our competencies in such fields,” Mocho says of the expansion of the company’s consulting business. “At the moment, there are 10 people in Portugal and 30 in Spain involved in the consulting business.” Furthermore, IMS Health has decided to take a strategic approach combining its Iberian operations in Lisbon. “We are discussing two very close regions. The Portuguese market, compared to some regions in Spain, is very similar in terms of size and trends. As an example, the trend is taking companies such as Pfizer or Merck Sharp & Dohme to introduce products and approach clients in both markets at the same time. In such a way, IMS Health can provide better services to its clients.”

ITF Farma, part of the Italian Italfarmaco Group, is one of IMS Health’s clients. When separating from its Portuguese partner in 2003, ITF took into account the particular nuances of the Portuguese market to design a tailor-made approach. “The size of the Portuguese market demands a very particular strategy. In addition to having the traditional portfolio of the group, Portugal has some generic products that no other facility in the group has, considering that it is a very good financial opportunity,” says Ana Girbal, general director of the company in Portugal. “In terms of results, if you have to break even by the fourth year as an independent company in the country and increase investments, you have to be very pragmatic,” she continues. “The group’s traditional core business is represented by the cardiovascular and immuno-oncological areas; nevertheless, ITF Farma Portugal does not have products related to such areas, with the exception of generic products.” The strategy has proven to be very effective as the company moves toward a US$12 million turnover in 2007, representing an increase of 13% compared with 2006.

 

Generics at a Crossroads

The generic market was a latecomer to Portugal, having been legally authorized in 2002. Nevertheless, the favorable conditions created by the government have turned the category into a remarkable success story, allowing it to flourish beyond almost anyone’s expectations. “Nobody believed, me included, that the generic market would represent 16% of the market in only four years. That was the projection for a 10-year period,” says Apifarma’s Gomes Esteves. As generic products are, on average, 35% cheaper than innovative products, the government has identified the segment as a tool to reduce its reimbursement bill. As a result, the government has decided to invest heavily in educational campaigns targeting doctors, pharmacists and consumers, and approvals for product introduction have been easily obtained. The additional 10% subvention on the reimbursement scheme has also been a critical factor in the successful implementation.

 

Very Profitable Generic Companies

Such an astonishing growth rate has naturally caused some side effects and a very unique profile for generics in the Portuguese market. The speed of the development left behind several Portuguese companies that were unfamiliar with the generic business model. “In other countries, the local players are the main generic players, which did not happen in Portugal because they did not have time to prepare themselves. In three months, the market was open. At the same time, as the generic market is a market of volume and the Portuguese market is a very small one, several companies decided not to enter it and compete with international players,” states Gomes Esteves. Of the 1,300 possible INNs (International Nonproprietary Names), only 10% are in the Portuguese market – naturally the most expensive ones. That explains why generic companies in Portugal are so profitable. But the situation is about to change. “We cannot underestimate that multinationals have decreased their prices considerably to compete with generic products. It is a normal market reaction. Consequently the generics growth in the future will be mostly related to the expired patents released in the market,” stresses IMS Health’s Carlos Mocho. Furthermore, the government’s tendency to focus on price controls rather than directly encouraging generic usage might be a hurdle for the sector’s development.

Another very particular feature of the Portuguese generic market is the large number of companies involved. The number of generic companies in Portugal (a country of 10 million people) has risen from nine in 2002 to more than 50 in 2004. The trend toward more INNs, combined with downward pricing pressure from the government and increasing foreign competition, should promote a strong movement toward market consolidation, concentrating 80% to 85% of the market among five or six players.

 

Generic Usage Still Lagging Behind

“I still foresee the growth of generics outpacing the general market,” says Antonio Alonso Aventin, director of Alter. “However, it will not be the same as the growth shown over the past three years.” Based on Alter’s previous experience in the Spanish market, where it launched its generic line in 1997, this family company’s success in Portugal has encouraged its owners to seek additional opportunities in France and Italy. “Alter has exactly the same ambitions for these two countries as when we designed the strategy for generics in Spain in 1997 and in Portugal in 2001,” says Alonso Aventin. “In addition to that, Alter is also very well regarded in Panama and Guatemala, with the Nutribem brand, and we have started to commercialize generic drugs. I am very confident that the new expansion phase will be very successful.” Although Alter has been in Portugal for 55 years, it was really the last five that brought outstanding results. “In regards to Alter Portugal, practically 95% of the company’s growth was due to the generics market,” he continues. “We are one of the business groups which took a leading role in developing this market in the country. In 2001, Portugal was responsible for 10% of the group’s revenues; today, the figure represents 30% of the group’s US$273 million turnover.” Such achievements led the Spanish Business Club to name Alter the best Spanish company in Portugal for three years in a row, from 2004 to 2006.

Generic usage in Portugal is, however, still lagging considerably behind that of Germany, the United Kingdom, Italy and France. As the 10% subvention was withdrawn before generics represented 20% of the market many are questioning whether the Portuguese generic market will continue developing with such intensity without the governmental support. On top of that, the market still needs some time before it sees a generic company rank among the pharmaceutical top five. The truth is, there is major room for development before generics reach the 30% market penetration mark. Portugal is headed in the right direction, but the road is long and accidents can happen, so watch for signs.

Another very particular feature of the Portuguese generic market is the large number of companies involved. The number of generic companies in Portugal (a country of 10 million people) has risen from nine in 2002 to more than 50 in 2004. The trend toward more INNs, combined with downward pricing pressure from the government and increasing foreign competition, should promote a strong movement toward market consolidation, concentrating 80% to 85% of the market among five or six players.

 

OTCs: Off and Running

Within the Portuguese pharmaceutical industry, the generic market is said to be the protégé of the former Portuguese government, and the OTC market the son of the current one. When Prime Minister Jose Socrates took office in 2005, his first official speech sowed the seeds of what would grow into a pharmaceutical sector revolution in Portugal. At that time, Socrates announced the enlargement of the distribution channels for over-the-counter products and the potential to sell them in non-pharmacy outlets.

Given the social forces in the country, it was a courageous decision and a difficult one to implement.

“In Portugal, retail pharmacies are very well organized, concentrated and extremely powerful. Needless to say that the class has been totally hostile to this initiative; in fact, there are even rumors that the National Association of Pharmacies was pressuring intermediary sellers not to supply non-pharmacies,” says Minister of Health Antonio Correia de Campos. “Moreover, the association owns 49% of one of the biggest local distributors, Alliance Unichem, and with the shares of sister companies it controls up to 60% of the country’s pharmaceutical distribution.” At the moment, there are 250 stores already commercializing OTC products. “I would say that only when we reach 1,000 there would be significant volume to compete with the traditional commercial circuits,” Correia de Campos concludes.

The expected time frame for achieving such results is around four years. The non-pharmacy outlets must adhere to strict selling conditions, which makes the National Institute of Pharmacy and Medicines (INFARMED) a big part of this process. “As INFARMED had to create all the support structure and organization of a new area, we were not very sure how the industry would react,” says Vasco de Jesus Maria, president of INFARMED. “Fortunately, there was a very good reception, which made the entire implementation possible in a shorter period of time. As a result, sales in the new outlets are increasing, reaching about 1.3 million (US$1.7 million) since the adoption of this measure in 2005.”

The recent interventions should bring the Portuguese OTC market share closer to that of other European countries; however, the market is still relatively undeveloped. “It will take time; the current OTC market share in Portugal is below 10%. The richer the country, the more OTC products; the poorer the country, the more people try to access the reimbursement system,” says Apifarma’s Gomes Esteves. He is, however, very optimistic. “The market will grow up to 50% over the present figures. In other words, from the current 8% it would reach a 12% market penetration.” Bear in mind that the average for the European Union member states is around 15%. To foster an increase in market share, INFARMED is very aware of its responsibility to review the product list and give companies the ability to move products from non-reimbursed (but still under prescription) status to OTC status.

“Currently, there are many more active substances classified as non-prescription medicines, and in the forthcoming months the number of OTCs will increase considerably,” says Vasco de Jesus Maria, president of INFARMED. “From our most recent assessment, 44 new active ingredients will get OTC status, corresponding to 400 new presentations. Currently, it is a small market, but I am sure it will grow very much in the near future.” In addition to that, the promotion of OTC products is very much in line with the governmental reality of budget constraints. A study conducted by the European Association of Auto-medication in 2004 concluded that if OTC sales rose 5%, the Portuguese state would save approximately US$200 million.

The industry has certainly identified the potential of the OTC market and does not want to miss the party. One good example is NeoFarmaceutica, which is part of the German Madaus Group and has been a presence in the Portuguese market since the 1950s. Says Jose Verissimo, NeoFarmaceutica’s general manager, “After the OTC market liberalization, the market is experiencing an amazing growth. NeoFarmaceutica is the second company in the OTC market after Novartis, enjoying a leading position in several therapeutic classes.”

The major driver of the company’s growth has been Ben-u-ron, the highest-selling product in the Portuguese pharmaceutical market, at more than 10 million units. In 2005, the product moved to prescription status, and yet the company remained the market leader in OTCs. “Ben-u-ron is a case study. It is not a very easy success story,” says Verissimo. “The product has been promoted for a long period of time, and to remain at the top demands a continuous marketing effort. The secret, I would say, would be the combination of heavy exposure in different fields, such as pediatrics, orthopedic and rheumatology. Consequently, such a mix created the success that the product has been experiencing for a while.”

The company’s successes in the OTC market have spurred its management to enter new fields of business this year. “The strategy involves entering new areas such as the psychiatric and asthma business, in addition to capitalizing on our core areas of pain and cardiovascular,” concludes Verissimo.

The 100% Portuguese company KTB SA is following the same track. The company has invested in OTC products that have performed very well in the US or UK markets but are completely unknown to Portugal.

 

Importing Success Stories

Importing the success stories was not exactly easy at first. “The product that really positioned KTB on the market was a vitamin supplement for children in a form of a gum. I remember the first meeting I had with the pharmaceutical wholesaler – he said I was mad and I would never get the product off the ground. Fortunately he was wrong,” says owner and manager Paula Soares, a native of South Africa. The efforts are paying off; KTB is expecting a sales increase of close to 30% in 2007, building on the momentum created by the OTC business. “Every month there are two or three new OTC sales points. This is just the beginning. The aim is to sell OTCs in every supermarket of the country. Furthermore, the new stores sell more types of products that a traditional pharmacy would not sell, because people go in, they look at the product, the box, they can read it and decide for themselves. In a traditional pharmacy, most of the products are behind the counter and the pharmacist would only recommend what he knows,” she notes. High levels of growth have allowed Soares to think bigger. “Within the next two years, KTB will be consolidating its portfolio. We are expanding into the medical devices market.”

 

The Race for R&D

One of the weaknesses of the Portuguese pharmaceutical industry is the difficulty of applying innovation; while the world’s top research and development countries’ international investment ratios are around 14%, Portugal rarely reaches 3%. The country’s R&D expenditure in terms of its GDP is one-third of the OECD’s (Organisation for Economic Co-operation and Development) average. Nevertheless, 8% of the country’s R&D is funded by the pharmaceutical industry. Moreover, Portugal has eight well-established research units and thousands of PhDs in biomedics, molecular research and similar fields.

The Massachusetts Institute of Technology (MIT) and the Portuguese Ministry of Science, Technology and Higher Education have recently announced a long-term collaboration to significantly expand research and education in engineering and management in many of Portugal’s leading universities. The focus on health mostly involves the areas of biomedical devices and technologies, along with strategic decision-making in biomedical business.

A few companies with a nose for opportunity have decided to take advantage of the country’s existing capabilities. As James Hassard, general manager of Amgen in Portugal, explains, “Portugal is not a traditional receiver of R&D projects, so we tried to understand the reason behind it. There are barriers even at the individual investigator level to engaging in clinical trials. In a lot of ways, there is a tremendous appetite and motivation to be engaged, so we tried to leverage that. As an example, we have exposed a few Portuguese investigators to the University of California – Los Angeles, where there is a very strong investigator network in terms of doing clinical trials within the United States. As a matter of fact,” continues Hassard, “a few physicians from IPO Porto in Portugal have implemented some of the best practices in 2006. Amgen needs not only commercial markets but also markets for clinical development. This is an initial investment opportunity that we see here in Portugal. The country has a very good social healthcare system, which is very concentrated in the hospital setting, similar to Canada, my country of origin. These types of medical systems can be very efficient for doing clinical development in challenging diseases, such as cancer.”

Hassard’s main objective in his Portuguese assignment is to maximize this type of investment in Portugal and raise the country’s prospects within the Amgen development community. “Annually, 25% of Amgen‘s revenues are reinvested in research and development. It is probably the company’s highest source of investment worldwide,” he continues. “Nevertheless, that is not an easy job. The Portuguese model is not very well-defined, in my opinion; when you choose a model, you need to create the infrastructure, education and incentives to support it and attract the investment,” he says, explaining the company’s choice of Ireland for a recent global US$1 billion investment in new manufacturing facility.

Hassard is not alone in his concerns and expectations. “I am not very sure in which direction this government is leading us; there is not a clear strategy to the innovation road. The right hand has to understand what the left one is doing. In other words, the pharmaceutical industry needs a stable environment,” says MSD Portugal’s Jose Almeida Bastos. “The hospitals in five or six years are expected to be in very good shape, from a managerial standpoint. Therefore, I am very optimistic that Portugal presents good opportunities, particularly in clinical trials.”

Another player trying to enhance its activities in clinical trials is Roche Portugal, explains Adriano Treve, the general manger, “we are currently involved in more than 20 local clinical trials, mostly concentrated in oncology and new indications. There are over 200 people working on such activities, including patients. To invest in clinical trials is always a fight for space; you have to constantly prove that you can recruit patients and scientists. Therefore, it is not a very easy process to follow. Nevertheless,” he continues, “to have big clinical trials in Portugal is major goal for Roche. The strategy includes involving key opinion leaders in Roche‘s global studies. It is very important that such professionals are exposed to the new molecules in the hospital sector.”

 

Pushing the Biotech Envelope

 

Miguel Noriega, who has worked in several other countries for Organon, outlines the general advantages that could help Portugal attract research investments. “I see bigger opportunities in development activities than in manufacturing. If Portugal wants to be in the race for research and development, it has an opportunity. The Portuguese people are historically natural entrepreneurs. The spirit of risk is here. The Portuguese are highly educated and speak other languages.”

Over the past five years, Portugal has experienced the emergence of more than 40 start-up biotechnology companies distributed among its three main centers, Lisbon, Braga/Porto and Coimbra. The Portuguese biotechnology industry is awakening, but there is still much room for development, particularly in comparison with Europe. The country has an unusual concentration of agriculture-oriented biotechnology: Only 30% of biotech companies do work related to the health sector, as opposed to 53% in Europe and 64% in North America. Most of the Portuguese companies are still recent spin-offs of local universities. Their average annual turnover is US$600,000, and they are struggling to find the necessary investments to grow. In the country’s first national biotechnology meeting held last November by the National Biotech Association (Apbio), Johan Vanhemelrijck, EuropaBio’s secretary general, spoke emphatically about the source of this problem: “In the US, innovation means progress; in Europe, it means risk.”

 

The Spirit of Risk

The lack of venture capital and the cultural resistance are two of the major barriers also encountered by Hassard. A manager at the North American company Amgen who worked nine years in California’s Silicon Valley, he states, “I do understand that there is a tremendous aversion to risk, and several factors don’t encourage people to follow the path of a ‘start-up’ operation. If the economy were to better reward risk, we could see more success stories.” The company is playing a leading role in challenging the existing environment and fostering the Portuguese biotech sector. “Amgen has the organizational history of knowing what it was like to be a small biotech company with little resources as well as the pitfalls in becoming larger and moving forward. Furthermore, now that the company has resources, there is strong global management that understands how and where to help, and where and when to invest”, says Hassard.

The current situation in Portugal has piqued the interest of many companies like Organon Portuguesa and Lusomedicamenta in starting to prospect for biotech opportunities in the country. Perhaps biotech could be the sector to revive the industry’s morale and drive its innovation engine forward, yet there is a long way to go. The one thing we can be certain of when it comes to Portugal, as Novo Nordisk‘s Araujo points out: “The country simply can no longer afford to see Europe from behind.”

 

Exports: To Sail Is Necessary

The words of the famous Portuguese poem “To Sail Is Necessary,” published by Fernando Pessoa in the beginning of the 20th century, capture the country’s natural inclination to look overseas. Nevertheless, this has not necessarily been reflected in the pharmaceutical business. Portuguese companies, as happened with Fernando Pessoa throughout his lifetime, are often not appreciated according to their true value. “The world market is not very aware of the capabilities of the Portuguese pharmaceutical industry, and initiatives as such are important to enhance the international exposure of Portuguese companies. Although the pharmaceutical sector in Portugal is not as developed as it is in some other European countries, taking into account the country’s size, we have a relatively strong pharmaceutical industry,” says Lusomedicamenta’s Barros Ferreira, who speaks with the authority of someone whose company exports 55% of its production to more than 47 markets.

Although Portuguese exports are the third most important sector to the country’s economy, the Portuguese pharmaceutical industry’s total exports closed around a modest 300 million (US$397 million) in 2005, a 10% increase over the past two years.

Recognizing the industry’s underperformance, a three-party institutional collaboration – involving the National Institute of Pharmacy and Medicines, the National Foreign Trade Organization (ICEP) and Apifarma – created the PharmaPortugal project to raise the world’s awareness of the Portuguese pharmaceutical industry.

It was about time. The export numbers of the companies involved in the PharmaPortugal project, which are mostly national producers, reveal that export numbers had been decreasing.

 

The PharmaPortugal project aims to increase exports by 10% by the end of 2007. All the pharmaceutical companies involved in the project have a combined market share of 15%, representing 27% of the industry’s workforce. This is the starting point of the government’s ambitious goal to double the industry’s exports in less than four years. The strategy behind the industry’s internationalization is to build on the existing export capability of the 15 companies involved in the project and develop a common brand to capitalize on the markets where Portugal is traditionally strong, such as Brazil, Spain and the United States.

The so-called “PALOP” countries (African Countries of Portuguese Official Language) are a major target of this strategy. On top of that, the interesting positioning of the Maghreb markets (Morocco, Algeria and Tunisia) led PharmaPortugal to promote road shows in the region in 2006. Emerging markets such as Poland and the Czech Republic are also on the agenda.

Laboratório Edol is a perfect example of what companies are trying to achieve by joining the PharmaPortugal project. This Portuguese company, which has been in the market for 54 years, is a market leader in ophthalmology and dermatology and now wants to showcase some of its expertise abroad. “Laboratório Edol was extremely benefited to associate its image with the PharmaPortugal brand. The company’s small structure needs institutional support, which enables us to have a much greater visibility in external markets,” explains Carlos Setra, general director of the company. “At the moment, the company is regularly exporting to the PALOP countries and to the Morroccan market. Furthermore, there is a partnership with a Brazilian company, Europhama, which manufactures generic products designated to the Brazilian and European markets.”

In a time when price reductions and cost-containment efforts set the tone of the domestic market, for Portuguese companies such as Edol, to sail is indeed necessary.

 

Next Stop Luanda

Portugal had a colonial presence in Angola for nearly 500 years. The African country gained  independence in late 1975, and in the following 17 years it endured periods of intense civil war. However, since its peacemaking efforts in 2002, Angola has shown remarkably high GDP growth rates – 14% in 2006 – and Portugal is certainly taking advantage of that. Exports to the country have been skyrocketing since 2000. From January to October 2006, they have shown a 54% increase over the same period last year, making the country Portugal’s ninth largest business partner. As a result, in April 2006, Portuguese Prime Minister Jose Socrates took 79 businessmen, five ministersand five state secretaries to assess future opportunities in Angola. Riding the wave of its successful collaboration efforts, the PharmaPortugal project made Angola the last stop in its series of road shows, and the results are starting to show.

 

 

 

Portugal has also celebrated agreements with Luanda’s Pediatric Hospital to assist in the promotion of children’s health and the management of hospital pharmacies. In addition, INFARMED is assisting its Angolan counterpart in restructuring its regulatory affairs. That kind of relationship is clearing the way for business opportunities, even for companies outside the PharmaPortugal project such as KTB SA. Angola has shown a huge demand recently, and in such a situation, people tend to buy products in KTB’s line.

 

 

 

KTB’s initial aim is to explore only the region surrounding Luanda, a market of approximately 8 million people. The company will start with two or three products in a pilot pharmacy to evaluate the market response. “I would say that in terms of Portuguese-speaking countries in Africa, a strong market for the Portuguese pharmaceutical industry, this is the only one which has the financial structure to take on products such as KTB’s,” says Paula Soares, owner and manager of KTB SA.

 

 

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