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EF: What are the biggest lessons you learned during the pandemic?
OV: At the beginning of the pandemic the only ‘constant’ was change, and adapting to that required a change of mindset. The impact was the same for everyone, so it was interesting to see how each stakeholder adapted. It affected businesses, markets, industries, and countries. People became more health conscious. The healthcare sector was at the forefront of the pandemic. The pharmaceutical industry helped control and end the pandemic through vaccines. The partnerships between our industry and governments sped up vaccine production.
The pharmaceutical industry in Brazil responded and adjusted incredibly well to the pandemic. All plants and factories were working full-time. Just like most businesses around the world, we had supply chain challenges. Raw materials were hard to find, lead times were challenging, and product regulation difficult. It is important to highlight that we are part of a bigger ecosystem, and innovation is at the heart of everything we do. For example, there are more innovative ways to introduce physicians to drugs and treatments than the sales representative approach. This direct method has a few downsides, including increased expenses and a flooded product market. The Brazilian market operates differently compared to other regulated markets. Most of the products in the market are branded generic products promoted through physicians. There are 600,000 doctors in Brazil. The biggest sales force group for neural pharma is in contact with 200,000 doctors. The remaining 400,000 are the target audience. This means businesses must be innovative in their approach to increase their market share.
Many corporates had to adapt to digitalization to navigate the pandemic. At one point, it became very interesting to see how the implementation was taking place because the correct systems and processes were not in place. The Brazilian market takes on a more conservative approach. Businesses can invest in digital solutions instead of direct sales. It is precisely for this reason that we have to invest in digitalization a lot more.
It is important to have multiple innovative approaches to the market and physicians. There will be healthy margins if we invest in digital transformation. Between the legislation and the patent system, most products in the future will be generic, OTC, or referential products. Branded generic products, can take on two systems within the market. The first is to market them through physicians, and the second is to market them through the normal process like the other non-branded generics. The most successful companies in Brazil take the branded generic approach. Branded generic products are like trade products. Some companies discount their products in the distribution channels, while others invest in sales promotions. This hybrid market model allows for good margins and markups. However, it is not a long-term solution because it comes with risks. In the long run, it will become costly because of either inflation or competitors. The price structure in Brazil today is a way of maintaining stable pricing for the pharma sector. If there was no regulation, the price of many medicines in the therapeutic areas would go down.
Cellera Pharma began five years ago and adapted different business and marketing strategies focusing on two key factors. The first is prescriptive medicines. The product pipeline will come from acquisitions and agreements. Being a competitive manufacturer in this segment is risky because six other big pharma corporations are within the same space. This is why acquisitions and partnerships are more strategic and beneficial for us.
The pharmaceutical industry is changing rapidly. The focus is shifting from primary care to highly complex disease treatments. Still, many businesses struggle to adjust because managing complex therapies is a different ball game. It is unfortunate because many products are being underutilized. The investment in the supply chain, APIs, or registering a product takes time. Investing in the pharma industry is complex and long-term.
Since most companies are transitioning from primary care, Cellera is looking for opportunities in primary care. Most international big pharma companies conduct business with the private sector and directly with the government. Our strategy is to see and improve these companies' systems and processes in our primary care business. We are in an agreement with Johnson & Johnson for their primary care business. We will be entering a licensing agreement with two companies looking to enter the local Brazilian markets. They have interesting developments in niche markets. Our strategy is to engage with other companies through licensing agreements, core development products, and purchasing primary care products from Multinationals.
In this segment, we work with CNS drugs, especially gastroenterology drugs. We made some acquisitions with Novartis and Bayer and created a licensing agreement with J&J, an American company that produces probiotics. In the future, we want to build our products. First, we must plan and choose the outcomes we want to create. We cannot take on the production of 40 products as a mid-sized company, which is why we have to pick and consider the drugs we want to produce carefully. As a result, we look for opportunities within the market, and we work on maximizing those opportunities. If products are not found, or there is a shortage of supply, we can do smart development. This is our understanding of how we can move and widen our footprint in the market as a fairly new company.
EF: What opportunity did you see in the market five years ago, and how did you structure your portfolio and the different therapeutic areas?
OV: My track record in the Brazilian pharmaceutical market is quite long. I am acquainted with private equity investors and for the past twenty years, we have been thinking about how to make a difference in the pharmaceutical sector. Pharma has always been an expensive industry, and it still is. The price of running a pharmaceutical company is very high.
From 2009 to 2013, the industry had big capital investments, with some investors paying 20-25 times the regulatory amount because Brazil was at the top of investment lists. Several multinational businesses decided to increase their market share in Brazil then. We made our move when a multinational was restructuring its footprint in the market and we bought their plant and product line. Instead of entering the branded generic medicines flooded market, we decided to go with prescription drugs and services.
It is important to have a local production plant. Importing goods is tougher and more capital-intensive than producing locally. We managed to transfer the plant to our name, which increased all the margins, which was an achievement for us. Once we got the plant, we reduced costs on things like raw materials because the previous company paid three times the amount they were importing. This is an upside to acquisitions. The different perspectives and processes make it easier to increase business margins when there is a switch. We are now focusing on a niche market within the pharma segment, which makes it easier to get a significantly larger market share and make an impact. Our main focus is gastrointestinal, CNS, and some orthopaedic technology and products.
Our model of business needs different capabilities, like compliance. From the beginning, our company has been highly compliant, especially against a competitor with international funding. We have a board of directors with two independent directors from listed companies in Brazil. We intend to do an IPO in the next three years. Management is another characteristic of our company. We strategically channel all our investments into the right area. Right now, we are directing the company's resources to promotions. We receive a high supply volume with reduced profit margins in agreements. Balancing the contracts and the other resources is fundamental to the business's success.
Our management is resilient. They deal with several challenges daily, and yet they always find solutions or ways to overcome the challenge. The management team also knows how to extract the best value from all the companies and products we partner with or receive. We do not wait for things like bids to happen; we make things happen.
EF: Is your strategy more push where you make an offer or pull where you wait for the offer?
OV: We are not in the “Waiting business”. If we wait, the price of bids goes up, which is not advantageous for us.
EF: How did you manage all the agreements and partnerships during the pandemic, and how do you think things will change in the future?
OV: It was a matter of adjusting, resilience, and management. We signed a contract with J&J in December 2019, just before the pandemic's beginning. We had to work hard to find the right agreements and partnerships. We continued on this track. It is a working model with its challenges and risks, but we will continue using the same model.
When we change the raw material of a product, even if it is the same process, it has to be taken to R&D for regulation. It may be our company, but we are still investors. We believe there will be opportunities for us to merge with companies that are not based in Brazil but need to enter the market.
An example of this is our collaboration with Ferring, a co-development for a patent product in Brazil with clinical trials being done in the country for local registration and using our plant to manufacture for Brazil and potentially Latam.
EF: Where would you like to do the IPO?
OV: It would be IBOVESPA because to do an IPO internationally, the company has to be highly focused and based on research and new products. The view of the pharmaceutical industry is more related to innovation supported by good commercial and marketing operations.
EF: Where do you want to take Cellera Farma in the next three to five years?
OV: We are in the process of closing two important deals. The Brazilian pharma industry passed through several big transformations, which has made it stronger. Brazil is a great market, but you must push and fight for those opportunities. All the big regulatory changes, price control, and effects did not impact the industry. All the companies are still operating, and new companies have joined the market.
