Read the Conversation
EF: How did you navigate establishing a new company and assuming a new role during a global pandemic?
DP: One could say those two things were a match made in heaven. Initially, Esteve was looking to divest their business, and they did not consider generics to be a strategic part of what they wanted to do. Towa was looking to expand its footprint and establish its international headquarters. The strategic investment by Towa was well-managed and characterized by transparent communication with management and the establishment of clear expectations.
Towa, a pharmaceutical enterprise listed on the Tokyo stock market since 2004 and the second-leading company in generics in Japan, is led by Mr. Itsuro Yoshida. Contrary to the American approach, which often prioritizes short-term gains and rapid turnover in private equity, the Japanese ethos leans heavily towards long-term investment management. This ultra-long-term perspective underscores Towa’s commitment to sustainable growth. Shortly after I arrived at Towa, discussions turned towards crafting a visionary 100-year plan, showing Japan's enduring focus on future prosperity.
In Japan, the landscape is distinct: while the generics industry is relatively young compared to other developed markets, it has swiftly achieved impressive market penetration in the US and Northern Europe, at around 85%. Once patents expire, the market seamlessly transitions to generics. Consequently, growth opportunities from a volume standpoint are limited, mirroring the situation in Spain, where penetration remains at 40%. There is still a huge opportunity to grow the generic business in the future if the political will to do so exists.
Towa established its international headquarters in Spain, where we have a manufacturing and R&D center. This is where most of the business takes place. The industry used to receive generous tax deductions to invest in R&D, but the deductions are disappearing, and the budget is very tight. The tax initiative is something that we would like to see return in the future. A lot of R&D investment was done in Spain during the tax incentive era. This is the reason why Spain has a unique niche industry with a lot of local companies that cover a large segment of the local domestic market. They are also able to export to the rest of Europe, the US, and South America.
Towa established the international company in Spain allowing us to become a stand-alone company because the systems were very different. However, our shareholders tried to implement the Japanese way of doing business for sustainability in the long term. All the initiatives and plans they have in Japan are sustained by the pricing system which allows them to do that.
The merger was good for us because we found a partner that was willing to reinvest all the proceeds that we have in future growth for the international market. Towa allowed us to reinvest 100% of our profits into future growth. This is another reflection of the Japanese mentality. They are not looking for the repatriation of dividends. They are looking for a long-term investment.
We have an interesting budget situation for R&D investment. We have full control of the decision on where to put the money and where not to put the money. This situation is working well. We had to adjust to the cultural differences. The Japanese executive is highly educated, has a solid understanding of the business, and makes all decisions with very profound reasoning. Presenting to a highly educated audience is more seamless, as they tend to grasp concepts effectively and follow presentations with ease.
The only significant difference between the Europeans and the Japanese is that their decision-making processes are different from ours. We are focused on making decisions based on an output or a result; they make decisions based on the result and how they are going to achieve it. The result is just as important as the process of reaching the result. Decisions in the European and US cultures are hierarchical. It is clear who is making the decisions. Decisions are made by consensus in Japanese organizations. A group of people make the decisions. This requires much more time in the decision-making process. The Japanese decision-making process requires nemawashi and much more consensus. Everybody has to express their opinion before making a decision. I have since learned to anticipate things and plan in advance.
EF: What needs to happen to improve the market penetration of generics and how can we get different stakeholders on the same page to shape the policy to improve this?
DP: Spain has a huge opportunity to lead the pharma industry and the sustainability of the pharma sector in Europe. Spanish companies are sustaining the system in the patent protocols segment. Everybody needs to play a role in the system. Innovators need to bring new and safe initiatives to the industry that can bring value. We need to ensure that once a generic product is patented, we can sustain the system while offering the same level of efficacy and quality at a very affordable price. One cannot live without the other.
If pharma and generics organize themselves, it can be a huge opportunity to create a value-added industry that is an essential good. All of us will be patients at some point in life, and healthcare is a basic good and service that needs to be sustained, like education and freedom of religion.
Spain boasts a highly skilled talent pool and excellent universities. Salary costs in Spain are notably competitive compared to other parts of Europe, making it an attractive location for manufacturing sites. There are a lot of manufacturing sites based in Spain that have a very good capacity for all kinds of technologies. If we have all the ingredients and we agree that this is a recipe that we want for success, why is it not happening? This is not happening because we need a more harmonized generic system that allows us to be competitive and sustainable. Alignment with the political agenda is crucial. Europe is starting to create a pharma plan, as it did with the Green Deal. They are moving on working on a deal for the health system because, after COVID, they realized that we cannot guarantee sustainability. We are too reliant on external imports. Unfortunately, the COVID momentum has been lost. During the pandemic, the pharma industry never stopped supplying products to the market that were essential to treating patients. It was a demonstration that it was a resilient sector.
At the Spanish level, the first step is to prioritize putting it on the agenda. The management of Spain’s health system is decentralized in 17 different communities. Sustainability cannot be ensured if policies are decentralized. f healthcare is an essential good and we want to create a sustainable system, we need to consider whether this is the right way to manage it. In other regions of Spain, certain medications are reimbursed by the community, while others require out-of-pocket payment.
The prices for generics and innovators are the same in Spain, so there is no interest in promoting the generics. To reiterate, generics have a 40% penetration in the market. However, molecules that were launched before 2015, where there was a price difference, achieved a penetration of 60 to 70% in the generic market. After the law had put the same price on generics and other medicines, the penetration for generics was only 20%. Fostering and developing an off-patent resilient industry becomes challenging when market penetration is only 20%, as it becomes difficult to recover investments and sustain operations with such low volumes. While the aggregate figure may show a 40% penetration, it is important to recognize the limitations of this figure in sustaining the industry effectively.
New molecules have a very small penetration, and the pharma industry is focusing on other kinds of mononuclear antibodies and biosimilars. They are not focused on the small molecules. Who is going to cover most of the indications that are going to be prescribed if there is no generic industry? We need to start thinking about the ideal model. Pricing differentiation is an issue. The pricing issue has not been revised since 2014. This is an industry that is constantly losing margins if you take aggregate inflation into account. We need to react quickly to resolve this situation.
Clarity is essential, especially when making investment decisions and allocating resources to expand manufacturing capacity. We need to be certain about the selling price. If your selling price is a moving target, some of the investments that you are making may not bring back the return that you are expecting.
Clarity is also essential in establishing the reference system pricing. We cannot afford to operate relying on chance and uncertainty. Transparency, harmonization, and certainty are imperative for the industry to confidently invest in the significant opportunities available.
Pharma is an equally important sector in this country. We have 40,000 direct and indirect employees in Spain. This sector boasts a highly skilled workforce, contributing significantly to employment, particularly for women, whose unemployment rate is notably lower compared to other industries. We have a strong focus on diversity and inclusion and are committed to empowering women in the workforce, fostering a culture of equality and opportunity. Additionally, substantial investments in manufacturing sites, research and development, and industrialization underscore our commitment to innovation and growth. As a result, approximately 30% of our production is exported, highlighting our global reach and competitiveness.
We are sitting on a huge opportunity, but there is no alignment between the policymakers and the industry. This is what is missing in Spain compared to other regions, where you can see much more alignment and willingness to create something sustainable between companies and governments.
EF: What trends do you see for the future and do you see the collaboration between yourselves and government happening in the near future?
DP: Currently, we have competent individuals in the government who understand the intricacies of our sector. Despite the government’s desire to implement certain initiatives, they face obstacles due to the economic department's reluctance to approve them. This situation has led to a lack of optimism regarding our outlook. Moreover, Spain faces a unique challenge regarding regulated prices, where any cost increase cannot be passed on to consumers. Consequently, absorbing these rising costs erodes our margins and limits our capacity for crucial activities like research and development of new products. The recent increases in energy prices, coupled with labor inflation, have further exacerbated this issue, as we are unable to offset these costs by adjusting prices.
We urgently need to address this issue because selling products for less than 1.6 euros while maintaining rigorous quality and compliance standards and offering 24-hour delivery is unsustainable. Our current pricing structure is untenable, and we are reaching a critical point where we can no longer sustain these margins. My outlook on the Spanish situation hinges on whether there is political will to address these issues.
The market is currently experiencing shortages, with little action being taken to address the issue. This scarcity is primarily due to a lack of systems, capacity, and productivity to sustain operations at current prices. Consequently, the industry struggles to respond to changes in demand or seasonal peaks, as there is insufficient excess capacity to accommodate fluctuations.
Looking ahead, I foresee an impending inflection point within the next two or three years, where these systemic challenges will likely come to a head. We will get there because we all want the same thing. I think that due to the lack of anticipation, we will get there in a much more painful. The industry is still pushing and bringing the value.
When we examine innovation within the healthcare system, it's evident that only a handful of companies are truly driving disruptive innovation, while others focus on incremental improvements. The emergence of highly tailored and technically complex medicines presents significant barriers to entry, particularly in terms of technology. A key concern arises regarding the affordability of these groundbreaking treatments—who will bear the cost? The high expense associated with these new medicines raises questions about accessibility and affordability, highlighting the need for careful consideration and strategic planning to ensure equitable access to innovative healthcare solutions. The people who have the means can access this type of medicine, but the people who have no means will not be able to access it.
The latest technological advancements in the pharmaceutical industry are pushing toward innovations that may only be accessible to a select few who can afford them. However, once these products go off-patent, the generic industry faces uncertainty about investing in such complex technologies. There is a looming question about whether this path leads to a dead end. Will only the affluent have access to cutting-edge medicines while the rest of the population relies on more traditional treatments? The ethical implications of this scenario are profound. Furthermore, the uncertainty surrounding biosimilars adds to the complexity. With development costs reaching millions, the dilemma intensifies.
Without clarity on whether these biosimilars can effectively substitute the original product, promotion becomes challenging. This situation raises critical questions about accessibility, affordability, and the moral compass guiding the future direction of the pharmaceutical industry. The prospect of new medicines with development costs reaching 200 million dollars raises questions about accessibility and investment certainty. As a parent, I find myself contemplating the future and who will ultimately have access to these groundbreaking treatments. It is a pressing issue that warrants careful consideration within our community and society as a whole.
EF: Do you have a final message for our readers?
DP: Spain possesses immense potential to emerge as a major player in sustaining healthcare systems, not only within our borders but also across Europe. With our abundance of talent, resources, and unwavering commitment, we have the capacity to make significant strides in this endeavor. The only thing that we need to do is find a little bit more alignment between the policymakers and the risk-takers.
I am confident that we will find a solution, but to mitigate the challenges ahead, we must engage in open and transparent dialogue. We need to shift our focus from short-term, electoral perspectives to more holistic, mid-to-long-term strategies. This requires bringing all stakeholders to the table for constructive discussions and alignment. The opportunity to address these issues is apparent, and the need is urgent. After all, we will all be patients at some point in the future, and quality medicines must be accessible when we need them most. It is crucial that all parties actively listen and collaborate to ensure a sustainable healthcare future for all.
It is becoming increasingly clear that our current hospital system is ill-equipped to handle the healthcare challenges of the future. With the rise of complex diseases like immunotherapies and oncology, our infrastructure simply cannot keep pace. We need to explore innovative approaches to treatment delivery, possibly moving beyond traditional hospital settings. For instance, medications currently administered in hospitals might be suitable for pharmacy-level prescriptions, requiring a more flexible mindset. We must be open to new ways of thinking about healthcare delivery to ensure we can meet the growing demand for cancer treatments and other critical medical needs in the coming decades.
And, we need to introduce flexibility measures into the system because the current constraints are unsustainable. With the impending surge in medical demands, especially in areas like genetics, our hospital capacity won't suffice. We must explore new models of healthcare delivery. Additionally, we need to support innovators in the field by facilitating product approvals and fair pricing. Ultimately, our goal should be to prioritize the well-being of people over profit margin.
