Issue Date: June 1, 2009
On The Map
IN 2002, executives from a small drug company in South Africa flew to Paris on what they feared was a futile mission. The Aspen Pharmacare team arrived at the doorstep of Bristol-Myers Squibb (BMS), the maker of several HIV drugs, with their caps in one hand and a videocassette of an HIV clinic in the Eastern Cape, near the birthplace of Nelson Mandela, in the other. Their message was simple: Your drugs are unaffordable to Africans; please grant us permission to use your patents to make cheaper versions.
The video was a not-so-subtle form of arm-twisting, but it illustrated the magnitude of the AIDS epidemic unfolding in Africa at the time. Sub-Saharan Africa represented 11% of the world's population but had 65% of its HIV victims. For Aspen, selling generic antiretrovirals at a small profit would serve the dual purpose of addressing the AIDS crisis and advancing its business.
The Aspen execs assured BMS they would handle its patents with care. "We're not going to diverge your products elsewhere, we merely want to help these people because, if we don't, we're all going to have a catastrophe on our hands," Stavros Nicolaou, senior executive for strategic trade at Aspen, recounts telling BMS.
To the surprise of the Aspen team, BMS said yes. A year later, Aspen debuted Africa's first generic antiretroviral, stavudine. Along with an expansive collaboration that Aspen formed with GlaxoSmithKline (GSK) last summer, the launch was one of a handful of transformative moments in the company's short history.
Thanks to such agreements, Aspen's sales have grown from $3 million in 1998 to close to $1 billion in the fiscal year that ends this month. Sales in the second half of 2008 were nearly double the year-earlier period. In just more than a decade, the company has grown from a small fish in a small South African pond, to the biggest fish in that pond, to a medium-sized swimmer in the ocean that is the global drug market.
In part, Aspen is benefiting from big pharma's new infatuation with "emerging markets" such as South Africa, China, and India, where rapidly growing economies translate into potential new customers for its products.
Back in 1998, Aspen's managers couldn't have predicted the dramatic changes ahead for the drug industry. At the time, big pharma was reveling in profit margins of the kind that make stock analysts salivate, and industry focus was squarely on blockbuster drugs. Today, with productivity lagging, many firms are struggling to offer even single-digit growth.
As a result, major drug companies have changed their approach. They want to decrease their reliance on patented pills and are looking at biologics, generics, and—importantly for Aspen—developing markets, to drive growth. With the Aspen deal, GSK was the first to make a big move into emerging markets, but Merck & Co., Pfizer, and Sanofi-Aventis have since then announced similar strategies.
Drug companies have two goals in entering emerging markets, says Gautam Jaggi, an analyst with Ernst & Young's Global Biotechnology Center. Initially, they see an opportunity for cost efficiencies. For example, they can launch clinical trials more quickly in places where the population hasn't been exposed to existing treatments, and they will likely pay less to conduct those trials. In the longer term, Jaggi notes, companies see potential to sell their drugs in places where a middle class is emerging and incomes are rising.
Nicolaou points to several critical moments in Aspen's short history that have made it an attractive partner for big pharma.
The first came a year into its existence, when it acquired South African Druggists, the second-largest drug company in the country. The size difference was so great that the media at the time called the deal "the mouse swallowing the elephant," Nicolaou recalls. In addition to a line of generic products, the purchase included a number of poorly performing drug formulation facilities.
According to Nicolaou, most observers thought Aspen should shut down the plants and instead work with contract manufacturers in Asia. Instead, the company decided to keep the facilities and upgrade them. They "thought we were crazy," Nicolaou says. "They said, 'You should be taking your antipsychotics, not selling them.' "
But several years later, the investment in manufacturing was what positioned Aspen to produce BMS's antiretrovirals. After the BMS pact, Aspen added other partners to its licensing list. While the company matured, so did the deals it made. The agreement with BMS simply gave Aspen immunity from legal action if it infringed on the big pharma firm's HIV patents; subsequent arrangements included technology transfer clauses as well as distribution and manufacturing rights.
Suddenly, Aspen was manufacturing major volumes of drugs for markets that weren't necessarily of interest to big pharma, Nicolaou notes. Aspen was also learning new skills that could attract other customers. For example, a 2004 partnership with Eli Lilly & Co. related to the tuberculosis drug capreomycin included freeze-dried lyophilization technology, which required Aspen to add sterile manufacturing to a plant. "That facility soon had eye-drop capability, small-volume parenteral capability, and could make injectable hormones," Nicolaou notes.
Those niche technologies enabled the company to start expanding beyond Africa. Aspen eventually sealed a deal with Prestige Brands to make a leading U.S. eye-drop brand. The technologies also enabled Aspen to diversify its product mix beyond high-volume, low-value drugs for infectious diseases, Nicolaou adds.
Aspen's next move was a 2007 joint venture with Bangalore, India-based Strides Arcolab, which brought a formulation and development partner in India. More important, the Strides deal paved the way for Aspen's 2008 agreement with GSK.
In that arrangement, GSK won a license to any Strides-developed product, which Aspen would then manufacture in South Africa and sell under the GSK name in 95 emerging markets. At the same time, Aspen acquired four GSK products that, although old, still had brand equity. The companies further solidified their relationship last month, when GSK took a 16% stake in Aspen and sold it eight more products and a manufacturing site in Bad Oldesloe, Germany.
FOR ASPEN, the GSK deals have been game changing. "If you're walking in to see a physician in Sri Lanka and tell him you're from Aspen, he'll say, 'Aspen what? Aspen, Colo.?' " Nicolaou says. But being able to offer a brand doctors recognize, such as GSK's thyroid replacement drug Eltroxin, "makes a big difference," he adds. The idea is to build trust with the GSK products so Aspen can sell more of its own drugs.
Since GSK hooked up with Aspen, other drug companies have jumped on the emerging market bandwagon. Pfizer has formed an "established products unit" and has made some targeted acquisitions in developing countries. Most recently, Pfizer announced licensing pacts with two Indian generic drug firms, Aurobindo Pharma and Claris Lifesciences.
Not everyone is so sure the emerging market strategy will pan out in the way big pharma hopes. Cost efficiencies are generally viewed "as a five-year thing" without near-term benefits, Ernst & Young's Jaggi says. And he points out that plenty of companies in those emerging markets are positioning themselves to compete for customers both at home and abroad.
"Emerging markets will take some time to play out," Jaggi says. "Even though there's a huge opportunity, it's not clear what the time frame will be and whether countries can access Western drugs at Western prices immediately."
Still, for the companies that get swept up in big pharma's zeal for new markets, the relationship can open a lot of doors. "When the CEO of GlaxoSmithKline includes a significant chunk of his commentary on emerging markets on Aspen, it puts you in a different league," Nicolaou says.
Aspen Pharmacare At A Glance
Headquarters: Johannesburg, South Africa
Sales: $620 million
Operating profit: $160 million
Supplies branded and generic health care and nutritional products to southern African and some international markets.
Operates 15 manufacturing facilities on 11 sites on three continents. Four of the sites are located in South Africa, two in India, two in Eastern Africa, and three in Latin America.
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