A Business Research Proposal in

Establishing a Private Local Owned

Pharmaceutical Company

Southwestern UniversityDepartment of Graduate School

Research and Statistics (REST)

Submitted by:Wayne Chavit and Karl QuipanesMBA-Ex Batch 11

BUSINESS OPPORTUNITIES INTHE PHILIPPINE

PHARMACEUTICALS MARKET

A Business Research Proposal in Establishing a Private Local Owned Pharmaceutical Company

3

Manila

Region Population % Market %

LUZON 36.3 M 42 32,912B 31

M.MANILA 11.4 M 14 43,912B 41

VISAYAS 17.4 M 20 15,620B 15

MINDANAO 20.7 M 24 13,595B 13

TOTAL 85.8 M 100 106,039B 100

I.PHILIPPINE DEMOGRAPHIC

AND SOCIO-ECONOMIC PROFILE

REGIONALGROUP

TOTALPOPULATION

% SHARE TOTOTAL

NCR 11,394,158 13.30

REST OF 36,311,284 42.30

VISAYAS 17,404,060 20.30

MINDANAO 20,713,352 24.10

TOTAL 85,822,854 100.00

ESTIMATED POPULATION BY REGIONAL GROUP

Field Health Service Information System 2006

AGE GROUP % SHARE TO TOTAL

Young Dependents (0-14 yrs) 37.00

Economically Active (15-64 yrs) 59.20

Old Dependents (65 yrs and above)

3.80

TOTAL 100.00

AGE STRUCTURE OF POPULATION

NSO, 2000 Census of Population and Housing

GENDER AVERAGE LIFE EXPECTANCY

MALE 70.00

FEMALE 75.50

AVERAGE 72.75

AVERAGE LIFE EXPECTANCY BY GENDER

2005 Estimate, National Statistics Office (NSO)

CATEGORY % SHARE TOTOTAL

Young old (60-69 yrs) 60.37

Old old (70-79) 29.29

Oldest old ( 80 yrs above) 10.34

TOTAL 100.00

POPULATION AGED 60 AND ABOVE2005 Estimate, National Statistics Office (NSO)

Number of Senior Citizens estimated at 6.3%of total projected population in 2005

(Expected to be more than 10% by 2020)

Annual Population Growth Rate(1995-2005)

2.0 %

Population Residing in Urban Areas (2005) Population Residing in Rural Areas (2005)

63.0 %37.0 %

Population Living on less than US$1/day (2000)

15.5 %

SELECTED POPULATION STATISTICSWorld Health Report 2007, National Statistics Office (NSO)

THE GOOD NEWS….

GNP Growth Rates Region

7.3 %5.9 %

Gross International Reserves (GIR) US$ 36.6 Billion

Inflation Rates Average 2007 March 2008

2.8 %6.4 %

Interest Rates Savings Deposit (ave. 2007) Time Deposit (short-term) Bank Lending Average (2007)

2.2 %3.4 %

8.68 %

Selected Economic Data (March 2008)

THE NOT-SO-GOOD-NEWS….NSO Poverty Statistics

Annual Per Capita Poverty Threshold (2006) PhP 15,057.00

Poverty Incidence (2006) Families Population

26.9 %32.9 %

Magnitude of Poor, in Millions (2006) Families Population

4.727.6

Poverty Threshold for Family of 5 (2006) Monthly Daily Per Capita

PhP 6,274.00PhP 209.00PhP 41.80

Selected Economic Data (March 2008)(Contd)

Poverty Threshold for Family of 5 (2006) National Capital Region

PhP 6,274.00PhP 8,569.00

Food Threshold for Family of 5 (2006) Monthly Daily

PhP 4,177.00PhP 139.00

Poor Filipinos Residing In Rural Areas (2003)Poor Filipinos in the Agricultural Sector (2003)

77 %68 %

POVERTY STATISTICSNational Statistical Coordination Board

(NSCB)

Expenditure Item All Groups Lower 30 % Upper 70 %

Food 41.4 59.1 39.3

Rent 12.7 9.0 13.2

Fuel/Light/Water 7.6 7.3 7.7

Transpo/Communication 8.2 3.8 8.7

Education 4.4 1.3 4.7

Medical Care 2.9 1.7 3.0

Personal Care/Effects 3.7 3.7 3.7

Alcoholic Beverages 0.7 1.2 .06

Tobacco 0.9 1.7 0.8

DISTRIBUTION OF FAMILY EXPENDITURES (2006)

Selected Expenditures, % Share to Total

II.THE PHILIPPINE

PHARMACEUTICALS MARKET

SALES BY MAJOR CHANNELTOTAL SALES (2007) = PhP 105.9 Billion

DRUGSTORES 89%

HOSPITALS 11%

* HOSPITAL 11% - 90% private, 10% government

Source: IMS, Dec 2007

SALES BY REGIONAL GROUP

MINDANAO: 12.8%

VISAYAS: 14.7%

LUZON: 31.1%

METRO MANILA: 41.5%

Source: IMS, Dec 2007

ETHICAL AND PROPRIETARY MARKET

PROPRIETARY: 28.4%

ETHICAL: 71.6%

Source: IMS, Dec 2007

BRANDED AND UNBRANDED MARKET

UNBRANDED: 4%

BRANDED: 96%

Source: IMS, Dec 2007

SALES BY SOURCE (VALUE)

MULTINATIONAL COS: 69%

LOCAL: 31%

Source: IMS, Dec 2006

SALES SOURCE (VOLUME)

MULTINATIONAL COS: 55%

LOCAL: 45%

Source: IMS, Dec 2006

PRODUCT SOURCING (2006)MARKET

90B

LOCAL54B (75%)

IMPORTED36B (25%)

COMPANY-OWNEDFACTORIES (31B)

THIRD PARTYMANUF (23B)

UNILAB30% (20B)

OTHERS(3B)

GLAXO-SMITHKLINE

5% (8B)

INTERPHIL25% (18B)

OTHERS3% (5B)

IMPORTED BULK /LOCALLY PACKED

(8B)

IMPORTED FINISHED

GOODS (28B)

COMPANY-OWNEDFACTORIES (1B)

THIRD PARTYMANUF (7B)

INTERPHIL3% (6B)

OTHERS(1B)

PRODUCT COMPOSITION (2006)

MARKET90B

PRESCRIPTION MEDS(63B)

OTC/VIT SUPLMNTS / HOME REMEDIES

(27B)

HERBALS /ALTRNTVE MEDS (1B)

BRANDED / PATENTED

(10B)

GENERICSOFF-PATENT (53B)

LOCAL BRANDS(16B)

MULTINATIONAL COBRANDS (11B)

UNBRANDED GENERICS

(3B)

BRANDED GENERICS(50B)

ORIGINATOR BRANDS(40B)

MEE-TO BRANDS(10B)

DISTRIBUTION CHANNELS (2006)BRAND/PRODUCT

OWNERS

DISTRIBUTION(90B)

WHOLESALERS(10B)

RETAIL CHAINS(60B)

HOSPITALS/INSTITUTIONS

(10B)

GOVERNMENT(10B)

MERCURY DRUG(40B)

INDEPENDENT STORES (20B)

DEMAND CREATION

MARKET

PRESCRIPTION

OTC / HERBALS

DOCTORS /PRESCRIPTION

S

DETAILING

TECH TRAINING /

SEMINARS

DOCTORS ADS / PROMOSCOMPANY-

OWNEDOUTLETS

DETAILING / MED REPS / SAMPLES

PHILIPPINE PHARMACEUTICAL MARKET

•60% of toll manufacturing for Multinational Companies by IINTERPHIL LABORATORIES•80% of wholesale distribution through ZUELLIG and METRO DRUG• 60% of retails sale through MERCURY DRUG chain with over 670 outlets• Philippines medicine prices are one of the

highest in the world in relation to per capita income

THERAPEUTIC CLASS SALES (PhP Billion)

% SHARE

Cardiovascular and Hematopeic 17.8 22.3Antibiotics/Other Chemoterepeutics 11.7 14.6Neuro-muscular 11.4 14.3Respiratory 10.5 13.2Vitamins & Minerals / Nutrition 10.2 12.7Gastro Intestinal System 5.4 6.8Dermatologicals / Topicals 3.2 4.0Endocrine & Metabolism 2.9 3.7Chemotherapy 1.8 2.3Genito-Urinary 1.7 2.1Hormones 1.2 1.5Eye and Ear 1.0 1.2Immunosuppressive Agents 0.5 0.6Vaccines & Gamma Globulins 0.3 0.4Anesthetics 0.1 0.2 TOTAL 79.8 100.0

TOP THERAPEUTIC CLASSES (IMS, 2007)

Sales and Market Share

THERAPEUTIC CLASS SALES (PhP Billion)

% GROWTH

Chemotherapy 1.8 89.1Anaesthetics 0.1 69.3Vaccines & Gamma Globulins 0.3 65.3Cardiovascular & Hematopeic 17.8 55.8Endocrine & Metabolism 2.9 49.1Immunosuppressive Agents 0.5 47.5Gastro-Intestinal System 5.4 38.6Vitamins & Minerals / Nutrition 10.2 28.5Dermatologicals 3.2 27.9Neuro – Muscular 11.4 27.7Genito – Urinary 1.7 25.6Eye and Ear 1.0 25.0Respiratory 10.5 23.8Hormones 1.2 22.7Antibiotics 11.7 16.9 TOTAL 79.8 100.0

TOP THERAPEUTIC CLASSES (IMS, 2007)

Growth Rates 2004-2007

BRAND CO SALES SHARE GROWTH

1 NORVASC PFZ 1.768 1.67 28.662 VENTOLIN GSK 1.324 1.25 2.20

3 CEELIN PED 1.176 1.11 1.66

4 BIOGESIC BIM 1.017 0.96 7.65

5 SOLMUX WMT 0.983 0.93 -0.526 NEOZEP MY 0.969 0.91 11.61

7 ENERVON C UNA 0.952 0.90 9.01

8 ALAXAN TPM 0.851 0.80 0.81

9 PLAVIX S.A 0.795 0.75 5.56

10 AUGMENTIN GSK 0.743 0.70 -3.52

TOP 20 PRODUCTS (IMS, 2007)Value (P Billion), Market Share (%), Growth Rate ’06 (%)

BRAND CO SALES SHARE

GROWTH

11 NEOBLOC GXI 0.673 0.64 11.2512 MYRA E MY 0.660 0.62 23.3213 LIPITOR PFZ 0.637 0.60 11.7114 ENSURE ABT 0.601 0.57 49.1715 XENICAL ROC 0.590 0.56 25.3416 SERETIDE GSK 0.577 0.54 29.4217 ZEGEN UNA 0.573 0.54 27.5018 CENTRUM WYC 0.562 0.53 20.3719 TAZOCIN WYE 0.527 0.50 -7.8020 FLANAX ROC 0.516 0.49 41.80

TOP 20 PRODUCTS (IMS, 2007)Value (P Billion), Market Share (%), Growth Rate ’06 (%)

CORPORATIONSALES

P Billion%

SHARE%

GROWTHRANK% GR

1 UNITED LAB * 22.689 21.50 17.9 6

2 GLAXO SMITHKLINE 8.654 8.20 1.8 16

3 PFIZER INC. 7.148 6.77 16.8 7

4 WYETH 6.566 6.22 8.5 8

5 SANOFI-AVENTIS 4.417 4.19 2.1 15

6 ABBOTT LAB 4.064 3.85 26.7 2

7 ASTRAZENECA 3.741 3.54 -5.8 19

8 ROCHE 3.407 3.23 22.7 3

9 NOVARTIS 3.288 3.12 -2.4 18

10 JOHNSON 3.158 2.99 2.22 14

TOP 20 CORPORATIONS (Based on sales)MAT (Figures as of Nov 2007)

CORPORATION SALESP

Billion

% SHARE

% GROWT

H

RANK% GR

11 BOIE INGELHEIM 3.007 2.85 4.2 13

12 MYERS SQB 2.794 2.65 -7.6 20

13 BAYER PHARMA 2.373 2.25 6.4 10

14 PASCUAL LABS * 2.314 2.19 19.6 4

15 SCHERING PLOUGH 2.203 2.09 5.8 11

16 NATRAPHARM * 1.755 1.66 45.9 1

17 MERCK SHARP & DOHME 1.608 1.52 4.2 12

18 SERVIER PHILS 1.565 1.48 8.2 9

19 MERCK INC. 1.153 1.09 0.6 17

20 GX INTERNATIONAL * 1.099 1.04 19.5 5

TOP 20 CORPORATIONS (Based on sales)

MAT (Figures as of Nov 2007)

* Filipino owned companies

CORPORATION SALESP Billion

%SHARE

%GROWT

H TOTAL PHARMA MARKET 105.529 100.0 11.0 TOP GENERICS COMPANIES 30.374 28.8 18.3 TOP COS. LESS UNILAB 7.685 7.3 19.5

1 UNITED LABORATORIES 22.689 21.5 17.92 PASCUAL LABS 2.314 2.2 19.53 GX INTERNATIONAL 1.099 1.0 19.54 INTERMED MARKETING 0.888 0.8 -3.55 NATRAPHARM 1.755 1.7 45.86 OEP 469 0.4 43.47 CATHAY DRUG CO. 405 0.4 38.28 BIOLAB CO. LTD. 251 0.2 13.69 SANDOZ 502 0.5 -18.0

TOP GENERICS COMPANIES (Based on sales)MAT (Figures as of Nov 2007)

PROFILE OF THE HOSPITAL SECTOR

•Accounts for 11% of total market sales•1,928 hospitals, of which 1,146 are private•Private hospitals continue to be the most important market for multinational companies•Listing in Essential Drugs List (EDL) required only for procurement by government hospitals•Tenders required mainly in government hospitals•Hospital pharmacies cater mostly to in-patients•Mark-ups between 20-30%

PROFILE OF THE DRUGSTORE SECTOR

• Accounts for 89% of total market sales• Approximately 10,000 licensed retail drugstores, less than half of which are active•Mercury Drug, the major pharmacy chain, has 670 stores nationwide and more than 60% share of retail •Mark-ups average from 8-10% (20-50% on generics)•Agrees to sell medicines by the blister•Plays an important role in influencing buying brand •(But) patient-prompted switching is growing

DOCTOR BEHAVIOR

•Among factors which influence brand choice, personal relationship is said to be the most important•Scientific attributes of the drug and reputation of brand owner/manufacturer also influences prescription behavior•Growing acceptance of generics in the informed market sector•Average call duration on a medical specialist is from 1-2 minutes•Specialist able to see up to 40 Medical Representatives per day•Average cost of a Med Rep call on a GP is said to be PhP 500.00 (approximately US$12)

PATIENT BEHAVIOR

•Very strongly influenced by doctors’ recommendation or prescription•Majority, if not all, of healthcare expenditures still out-of-pocket•Usually purchases out of the hospital•Average purchase is a weekly dose•Poor compliance due to high cost of treatment•Greater awareness of generics as a choice, especially among the informed patient sector

III.Market Dynamics

MARKET DYNAMICSSome Insights

PUBLIC HEALTCARE REMAINS LARGELY UNDER-FUNDED AND INEFFICIENT:

•Less than 2% of Filipinos have sufficient Insurance Coverage•Budget Allocation for health is only US$31 per capita, approximately 3% of GDP•Less-than-efficient reimbursement scheme•No price regulation or control•70% of the population has no regular access to essential medicinces (2000 WHO survey)

MARKET DYNAMICSSome Insights

ACCESS TO HEALTHCARE AND MEDICINE HAS BECOME A MAJOR POLITICAL AND SOCIAL ISSUE:

•Greater consumer awareness of high drug prices•Government parallel importation program•On-going efforts to develop an alternative retail distribution network run by the private sector•Universal Accessible Cheaper and Quality Medicines Act of 2008, among other reforms

MARKET DYNAMICSSome Insights

PATENTS ON 80-90% OF ESSENTIAL DRUGS HAVE EXPIRED, BUT KNOWLEDGE REGARDING STATUS VERY LIMITED

LOCAL INDUSTRY HAS CAPABILITIES TO MANUFACTURE ONLY AROUND 200 MEDICINES OF THE MORE THAN 600 IN THE ESSENTIAL DRUGS LIST

PRIMARILY A BRAND-CONSCIOUS PRESCRIPTION MARKET(BUT) BRANDED GENERICS SECTOR GAINING GROUND

o29% market share w/c is growing around 20% annuallyoGrowth fueled by increased acceptance by drs/patients

oAggressive entry of Indian and other foreign suppliers

oDownward shift in prices observed

IV.STATEMENT OF OBJECTIVESAFFORDABLE, AVAILABLE, ACCESSIBLE

KEY OBJECTIVES•MARKET ECONOMICAL MEDICINES THAT HAVE A DIFFERENCE; PROVE BIO-ASSAYS/BIO-EQUIVALENCE, EFFICACY AND SAFETY

•WIN OPINION LEADERS, KEY MEDICAL SOCIETIES, TRAINING HOSPITALS, GOVERNMENT HEALTH AGENCIES AND POLICYMAKERS•BUNDLE BRANDS AND UNIQUE SERVICES FOR DISEASE MANAGEMENT

•FOCUS ON BEING THE PROVIDER OF QUALITY MEDICINES AND AN AFFORDABLE PRICE

•STARTING WITH THE MOST IN-DEMAND PRODUCTS, COMPANY WILL GRADUALLY ADD MORE PRODUCTS, STARTING ON THE SECOND YEAR AND SO ON AS THE COMPANY PROGRESSES

Specific Objectives

1. AFFORDABILITY•Offer most competitive prices without sacrificing quality•PRICE POINTS:

BRANDED: position 30% lowerBRANDED-GENERIC: position 50% lowerGENERIC: position 60% lower

•Highly-Inflated mark-ups in the local pharmaceutical industry will allow reasonable reduction in margins, achieving the target prices and getting recognition as the price leader

2. AVAILABILITY•Aggressive promotional and sales/marketing campaign to create awareness:

Print and Media Direct-mail to buying groupsAds in trade publicationsPoint-of-sale materials on retail outletsMedical Representative

•The application of an effective and efficient Inventory Control system will ensure product availability at all times

3. ACCESSIBILITY•Products will be offered at all drugstores•Assistance in creating cooperatives to encourage the establishment of more drugstores; a network of privately owned and operated accredited pharmacies that offer affordable medicines•Direct sales and distribution strategy to target areas where accessibility is inadequate•Multi-level Network Marketing (on permitted products) can be applied to create livelihood, and further enhance accessibility

V.SALES PROJECTIONS

YR% PROJECTED TO BE ACQUIRED FROM THE

INDUSTRY (PhP100B/yr)AMOUNT

(PhP)HALF OF PROJECTED

SALES

1 .025 % 250,000,000 125,000,000

2 .050 % 500,000,000 250,000,000

3 1.00 % 1,000,000,000 500,000,000

4 1.20 % 1,200,000,000 600,000,000

5 1.50 % 1,500,000,000 750,000,000

An investment of PhP50M is needed to successfully launch the start-up company. Allocation of the 50M funds is as follows:

40% = PhP20M – operations60% = PhP30M – inventory•Company will do an average mark-up of 300-400%, which still

gives us prices 30-60% lower than competition•the 30M inventory marked-up will equal PhP125M•for the first year, company projects a 2x inventory turn-around,

making the annual sales at PhP250M

5 YEAR SALES PROJECTION:

YR 1 YR 2 YR 3 YR 4 YR 5

INVENTORY TURN-AROUND/YR2x 3x 4x 4x 4x

PROJECTED INVENTORY TURN-AROUND:

SOURCES OF SALES YR 1 YR 2 YR 3 YR 4 YR 5

DOCTORS 30% 50% 50% 50% 50% DRUGSTORES 50% 40% 45% 45% 45% INSTITUTIONAL 20% 10% 5% 5% 5%

SALES BREAKDOWN:

CURRENT ENTRY OF COMPANY

Multinational Companies

70 % 50 %

Unilab

20 % 25%

Local Manufacturers

10 % 10 %

New Players 15 %

INDUSTRY MARKET SHARE: MANUFACTURERS:

* FORECAST BASED ON LONG –TERM EFFECT OF COMPANY’S ENTRY IN THE MARKET

PROFIT AND LOSS STATEMENT In PhP Millions

YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5

GROSS SALES 100%

250 500 1,000 1,200 1,500

COG (62.5) (125) (250) (300) (375)GROSS PROFIT 187.5 375 750 900 1,125LESS EXPENSESMKTG EXPENSESSamples 5% (12.5) 3% (15) 2% (20) 2% (24) 2% (30)Ads 20% (50) 15

%(75) 10% (100) 8.4

%(100.8) 6.7

%(100.5)

POP/Giveaways 7.5% (18.75) 5% (25) 3% (30) 3% (36) 3% (45)Scientific Lectures .2% (0.5) .1% (0.5) .1% (0.5) 0.1

%(0.5) .1% (0.5)

Key Opinion LeaderDevelopments

.2% (0.5) .1% (0.5) .1% (0.5) 0.1%

(0.5) .1% (0.5)

Sponsorships/Special Projects

10% (25) 10%

(50) 7.5%

(75) 6.3%

(75) 5% (75)

ADMIN EXPENSESSales & Incentives 10% (25) 10

%(50) 7.5

%(75) 6.2

%(75) 5% (75)

Wages & Salaries 3% (7.5) 3% (15) 2% (20) 2% (24) 2% (30)Misc: Mgmt , equip, Rental, licenses, etc.

2% (5) 3% (15) 2% (20) 2% (24) 2% (30)

NET PROFIT 42.75 129.1 409 540.2 738.5

BIBLIOGRAPH: • With the permission of Hon. Teddie Elson E. Rivera, Former UnderSecretary of Department of Agrarian Reform (DAR) and Vice President of Philippine International Trading Corporation(PITC)• National Statistics Office, 2000, 2005, 2008• National Statistical Coordination Board(NSCB), 2003, 2006, 2008 • International Market Survey(IMS), 2006, 2007