Novartis succeeding in Latin America but market place changes, competition heat up

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Novartis Pharmaceuticals’ Carlos Garcia led the discussion at WorldCity’s CEO Club.

Imagine competitors nipping at your heels every day and a constant battle to defend your company’s intellectual property, with consumers as well as regulators. Then you have an idea what it’s like to be a major pharmaceutical company doing business in Latin America.

Latin America is a significant market for Novartis Pharmaceuticals, with 6-8 percent of the company’s annual revenues coming from the region, said Carlos Garcia, president for Latin America. He shared tales of his adventures south of the border during WorldCity’s CEO Club gathering at the Hyatt Regency Hotel in Coral Gables Friday, Dec. 11.

The CEO Club is sponsored by Telefonica and the law firm Diaz Reus and is an invitation-only event exclusively for heads of the 1,100 multinational companies with an office in South Florida in WorldCity’s Who’s Here database. Each event features one “CEO” as the discussion leader.

Latin America, Garcia said, is “one of the main growth engines for the company. We have about 4,000 employees there and we have been fully deployed in Latin America for many years.”

But it’s a market that requires attention and innovation. For instance, the company markets the No. 1 medication in the region — Diovan. It’s a generic used to treat high blood pressure. It faces more than 300 competitors who make the same product and sell it at prices 30-90 percent lower than Novartis.

The market for pharmaceutical products has changed in the last decade. In several major Latin countries, pharmaceutical chains now control the retail side of the market, having diminished the strength of the “mom-and-pop” neighborhood drug stores. The multitude of local and regional drug manufacturers that have popped up — a number of which are supplied with raw materials from China and India — compete on price. The chains may offer their own brand of popular or wide-used generic drugs. Concerns about product quality and counterfeit drugs are on the rise.

Novartis won’t just drop prices because “we can’t be cost-competitive because of our standards of quality,” Garcia said.

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Chevon’s Nicholls asked about protecting “brand.”

How does Novartis market its brand and expand its market share in such a fiercely competitive environment, wondered Mauricio Nicholls, who oversees Chevron’s “down stream” or fuel-side business in the Caribbean.

Novartis, which is the second-largest producer of generic drugs worldwide through its Sandoz division, focuses its marketing efforts on larger chains, offering them “enough margin so they don’t substitute their brand for ours. It’s a significant departure from our previous marketing strategy,” Garcia said.

Protecting intellectual properties is a big challenge for most companies, said Michael Diaz, managing partner at Diaz Reus, who has worked with various clients on this task. How does Novartis do it?

Garcia said it’s critical to remember that generics don’t exist unless a patented drug came first. “It’s the other side of the same coin.”

That’s what Garcia called one of the myths about pharmaceutical companies. It costs a drug manufacturer about $1 billion and takes close to a decade in research and development to bring a new drug to market. If the lifespan of a patent is usually 20 years, drug makers are left with about 10 years to market it and potentially recover their investment — hence, the desire to guard their patents.

Until now, many Latin countries have respected patents on medications. However, Garcia worries that some Latin American countries, especially Brazil, might consider breaking patent protections in order to get more new drugs into the hands of people who need them. Brazil has been positioning itself on an international stage, especially among the Latin nations, as a leader on this front.

What happens in Brazil is key for Novartis’ operation since the company maintains three manufacturing plants. “We export a lot of product from there,” Garcia said.

Even so, Brazil does have a patent protection law — which has been honored so far on a national and local level. Garcia expects most current protections would be grandfathered if patent regulation changes down the road.

“The government may care more about your product than another cell phone,” Diaz added.

The need to protect intellectual property was well understood by several of the companies represented at the CEO Club, including Telefonica, Clorox Latin America, Olympus and AECOM, an architectural firm.

Symantec, the maker of computer and network security software, is no stranger to the demands of guarding intellectual property and trying to rid the market of counterfeit copies its products. Wilson Grava, vice president of sales for Symantec Latin America, says the piracy rate in Latin countries is about 70 percent for software and various technology products.

On those fronts, Symantec works with the Business Software Alliance, which investigates intellectual property compliance and tries to eliminate counterfeiters. The firm also works with the regulators in each country.

Garcia said Novartis, too, is working with governments on this issue. “We’re not going to try to educate the public about the worth of a patent with a PR campaign. That isn’t going to happen.”

 Patented drugs are often expensive and pharmaceutical companies often perceived as being too profitable. Garcia said that was another myth. During a recession, many consumers, and even patients under treatment, stop taking their medications because they just can’t afford them.

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Club Med’s Mufraggi asked about perceptions of excessive profitibility.

Yet, profiting at the expense of others is a criticism that’s often lobbed at the pharmaceutical industry, especially because many drug companies work to maintain their patent protections on medications desperately needed in Third World countries. Xavier Mufraggi, Club Med’s president and CEO for North America, asked Garcia how Novartis deals with the kind of negative perception.

“That’s the question we have been struggling with for the last 40 years in the pharmaceutical industry, despite all the things we do. Yes, we have been profitable. That’s what our investors demand of us. But the ticket to the dance has to be our social conscience,” Garcia said.

Garcia noted that 98 percent of the drugs used to treat HIV in Africa aren’t under patent protection. Patents aren’t the problem. It’s an ineffective distribution system that can’t get the medicines to the people who need them.

Executives from several of the multinationals at the table recognized the importance of negotiating wisely with the governments in each country where they operate. It can pay off in the long run, especially with hostile governments.

Case in point: Chevron in Venezuela. Nicholls said the company has good relations with the Venezuelan government. It has a significant presence there already and Chevron is seeking a partnership with an outside company to help the Venezuelans develop other national resources.

“Venezuela can’t be successful being solely dependent on oil and gas. It needs to develop its other natural resources,” Nicholls said.

Companies that can’t maintain good government relations in Venezuela risk being taken by the government, added Roberto Pazola, a vice president for Telefonica USA.

But hostile governments aren’t good for business.

“As bankers, we follow the business. There is business to be done in Venezuela,” said Dario Fuentes Alvarez, senior vice president and general manager for Caja Mediterraneo, a Spanish bank. But it has left Venezuela because of the government’s stance toward foreign banks.

Given Venezuela’s political turmoil, rising inflation and economic decline, most of the executives at the CEO Club agreed Venezuela is what keeps them up at night if they have operations there. Then, comes Mexico. Most of them are optimistic about 2010, even though 2009 didn’t turn out as badly as initially anticipated.

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