Novartis, the Swiss drug giant announced Tuesday that it will unite its 14 brands of generic drugs under the Sandoz name, harking back to its origins as a manufacturer of affordable, off-patent, medication and raw materials ("active ingredients"). The rebranding will engulf the company's central and east European units, including Biochemie in Austria and Azupharma in Germany - but not Lek in Slovenia.
This exclusion signifies the strength of the pharmaceuticals sector in the formerly communist countries in transition. Even in economically abysmal Macedonia, Alkaloid, a local drug manufacturer, is thriving. It employs almost 1400 workers and dabbles in chemicals, coatings and cosmetics. It is locally renowned for its research and development, heavy investment in quality control and high wages.
Alkaloid is a veritable multinational with operations in Switzerland, Russia, Slovenia, Croatia, Bosnia & Herzegovina, Yugoslavia, Bulgaria and Albania. It is partly owned by the European Bank for Reconstruction and Development (EBRD) and the World Bank's International Finance Corporation (IFC).
Still, with annual sales of c. $50 million, it is a minion compared to the likes of Lek Slovenia and the Croatian Pliva.
Lek Slovenia has subsidiaries in twenty countries, including Nigeria, Pakistan and virtually all of central and east Europe. Besides drugs, the group manufactures - usually through autonomous companies - animal care products as well as medical devices.
The group employs 4000 people worldwide. Production is distributed. Last July, Lek laid the foundation stone for a factory in Romania, for instance. This was followed in September by a cornerstone for a new logistics and production center in Poland. It maintains representative offices from Bulgaria to China.
Lek is an aggressive mid-sized player. It just started marketing, in the lucrative US market, Augmentin, the generic form of GalxoSmithKline's (GSK) off-patent blockbuster. GSK promptly sued Lek and three other firms in Switzerland, India and Israel. But Lek is undeterred. It expected to sell $100 million of Amoxiclav, its version of the drug annually - but booked $27 million of orders on the first day.
Lek's sales will exceed $420 million in 2002 and are slated to grow by a whopping 42 percent this year, according to its management. Most of this phenomenal growth is attributable to Amoxiclav.
Pliva is by far the region's pharmaceutical behemoth. With its $750 million in consolidated revenues and 30 percent income growth rate it combines a mid-tech business with hi-tech growth. Pliva's net income in 2002 is projected to exceed $140 million and earnings before interest and taxes - excluding extraordinary items - is at a respectable, though uninspiring, 8 percent.
The expiry, two years hence, of the US patent of Azithromycin, the company's flagship product, is a serious dent in its portfolio. It is feverishly developing in-house generic and specialty products to weather the anticipated blow to revenues and operating profits. Pliva has R&D collaboration agreements with leading global pharmaceutical firms, such as GlaxoSmithKline.
Pliva's total assets are close to $1.5 billion with $750 million in shareholders' equity. Its current cash flow is much sounder than last year's though the picture is marred by a precipitously declining net working capital and hefty increases in liabilities. Pliva's leverage surged by almost half to 57 percent by end-September 2002.
The company is expanding aggressively throughout the world, even in in rich markets such as the United States, where it purchased Sidmak Laboratories last year and Denmark, where it took over 2K Pharmaceuticals (renamed Pliva Pharma Nordic). Other target countries included Germany, France, the United Kingdom and the Czech Republic. Last year, the first drug developed in-house by Pliva was registered in the European Union.
Pliva's cosmetics, food and agrochemicals production units were divested and spun off as stand alone companies. Some of these, in turn, were sold to erstwhile competitors. Like many European drug companies, Pliva subcontracts the manufacture of many of its formulas to cheaper developing countries, such as India, where, earlier this month, it inked an agreement with a production and marketing outfit called Kopran.
Pliva also doubles as a distributor. Last October, for instance, it became the exclusive distributor in central and east Europe, NIS and Turkey of the British firm, Allergy Therapeutics. These regional markets - even the most advanced ones in the EU candidates - are considered so idiosyncratic and risky that western manufacturers opt to work through indigenous venues rather than establish their own presence.
Consider one of the most promising - and hitherto, disappointing - markets: the Czech Republic and Slovakia. It is teeming with activity. This week, for instance, Warburg Pincus, an American investment fund, acquired Slovakofarma by merging it with Leciva, another Slovak manufacturer double its size. This yielded the largest pharmaceutical firm in central Europe with intentions to expand in Poland, Russia and the countries of the former USSR.
Yet, underneath the veneer of civility and financial froth lurk serious faults.
Producers are forced by Czech healthcare providers, health authorities and domestic insurance companies to trim their prices. Even so, the entire health care system in the Czech republic - especially public hospitals - is close to insolvency. The Prague Tribune reported how AVEL - the Association of Drug Distributors - decided to sue debtor hospitals. Among the litigants, pharmaceutical distributors Aliance Unichem, Phoenix, Purus, and Gehe, which account for 70% of the market, and are owed c. $25 million. This illiquidity and coercive differential pricing encourage the use of cheap generics.
The Prague Tribune quotes Pavol Mazan, the executive director of the International Association of Pharmaceutical Companies (MAFS):
"The Ministry of Health boasts that in this country there is a fully paid drug for every disease. But the problem is that a drug paid for (by the insurer) is the least expensive, and in many cases it is less effective. The result is that of the six most important therapeutic groups, there are no new, imported drugs in five of them."
The paper notes that, in the Czech Republic, generic drugs account for 45 percent of all medications sold, compared to 15 percent in the EU. Next year's accession is supposed to improve market conditions considerably, though.
The stories of drug companies in central and east Europe revolve around the same axes: international diversification, poaching the off-patent portfolios of other pharmaceuticals, mixing generic and specialty drugs, in-house research and development heavily titled towards generics, expanding through mergers and acquisitions, subcontracting production to cheaper locales, divesting non-core activities and catering to the marketing and distribution needs in central and east Europe of American and west European drug multinationals.
Consolidation is inevitable. Global giants, such as Novartis (Europe's third largest) are already gobbling up mid-sized manufacturers in the countries in transition. These, in turn, look to purchase and assimilate small to puny producers, such as Alkaloid in Macedonia. Those who survive the onslaught will be either huge (by regional standards) or specialty niche players (boutiques). Such polarity will make for a much healthier industry, able to invest in the spiraling R&D costs of new product development.