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Monday, October 23, 2017 | MANILA, PHILIPPINES
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Date posted: Thursday, March 30, 2017 | Manila, Philippines

Going up against pharmaceutical Goliaths

IT WAS IN 2000 when patients of some Philippine General Hospital doctors trooped to the Quezon City office of Benjamin I. Liuson -- up until then a wholesaler of generic medicines -- that the idea for going retail cropped up.

Twelve years after the passage of a law requiring doctors to give patients the option of taking generics medicine, the Philippines still had one of the most expensive drug markets at the turn of the 21st century. Drugs cost as much as 184 times international reference prices, with only 11% of essential medicines available in the public sector, according to a report of the World Health Organization and Health Action International.

Foreigners who long dominated the Philippine pharmaceutical market had become accustomed to high margins and a stable demand for expensive branded medicines. Sixteen of the top 20 drug companies in the country by value were owned by foreigners, according to the Philippine Pharmaceutical Industry Factbook 2008.

Despite the Generics Act of 1988, retail mark-ups remained high and the cost of importing pharmaceutical ingredients were exorbitant. While drug stores were required to stock up on generics, their share of retailers’ inventories stayed low at only one for every 10 branded products.

Add to that so much misinformation about generics, which pharmaceutical manufacturers demonized as inferior in quality, even as they showered physicians with incentives to promote branded drugs.

It was against this backdrop that Mr. Liuson, founder of The Generics Pharmacy (TGP), became the trailblazing David that took on pharmaceutical Goliaths.

Having distributed generics drugs since the 1980s, Mr. Liuson knew that the steep price of medicine in the country owed much to expenses such as hiring sales reps, handing out “promotional” inventory to pharmacies and hospitals, and giving away incentives to doctors.

Even after putting up the country’s first purely generics drugstore at the ground floor of his family’s distribution office in 2001, customers -- some taking four- to five-hour drives from outside Metro Manila -- egged on the businessman to open more outlets.

“Because of word of mouth and actual trial of the patient, lumaki nang lumaki ang benta. Others are discrediting generic drugs, saying they are not of good quality, but the most important thing is the people who took the actual medicine, gumaling,” Mr. Liuson said.

TGP attracted regular customers from as far Bulacan, Laguna and Cavite, who traveled for three to four hours just to get their hands on the cheaper alternatives. Armed with his knowledge of the local pharmaceutical market and with help from franchising consultants, Mr. Liuson in 2007 embarked on a dizzying expansion of TGP.

To date, TGP has only two company-owned outlets located at its old headquarters in Quezon City and the second one in its new office in Parañaque.

“As early as 2007, we told interested parties that we will not open more company-owned stores. What does that mean? All you Juan de la Cruz, bahala kayong magpatayang maghanap ng lugar. I do not compete with you,” Mr. Liuson said.

A franchise of TGP went as low as P700,000, including the franchise fee, operating capital and initial operating expenses. Confident of his business model, Mr. Liuson gave stocks on consignment and boldly advised franchisees to open outlets near rival Mercury Drug, then the country’s leading drugstore chain with roughly 700 branches.

“When we started, people were asking us in the seminars: ‘Where do we open?’ We don’t know anything about retail because we are in wholesale. But business is very simple: use common sense. You open beside Mercury, the nearer the better. Tabing-tabi is the best,” Mr. Liuson said.

The shortage of licensed pharmacists to man the drugstores turned out to be one of the major issues in its rapid expansion. To resolve this, TGP pirated pharmacists working in rival drugstores.

“What is the solution? You give a higher salary. ‘Magkano sweldo mo? I give you 20%-30% more.’ They eventually transfer. Again, common sense,” Mr. Liuson said.

The move to franchise TGP happened a year before the passage of the Universally Accessible Cheaper and Quality Medicines Act in 2008 that imposed price ceilings on prescription drugs and heftier fines on doctors endorsing branded medicines instead of generics.

EXPLOSION IN GROWTH
Franchising and a shift in government regulation set the stage for an explosion in the drugstore’s growth. Three years since opening up the business to franchising, TGP opened about 900 stores to become the country’s top drugstore chain.



Those who franchised the business early on recovered their investment in just three months to a year, encouraging them to open multiple stores. Today, only about 500 individuals own TGP’s network of more than 1,800 outlets. Newer franchisees can recoup their investment in 2-3 years.

The rapid expansion brought TGP to far-flung areas in the Philippines, taking it to conflict-stricken provinces such as Maguindanao and Cotabato, as well as to upscale places such as Boracay and Bohol. To date, only two provinces -- Batanes and Sulu -- have yet to have a TGP store.

Based on Mr. Liuson’s calculations, TGP’s store count can reach up to 4,000 in 10-20 years if it sustains its target of rolling out 100-200 stores a year. His goal is to have a TGP store in every public market.

“TGP, in itself, is a CSR business. It is providing effective medicine at an affordable price anywhere in the Philippines. We are making money as a wholesaler. All our franchisees are making money. What is better than this?” Mr. Liuson said.

TGP started tapping endorsers only in 2012 so it could keep up with multinational pharmaceutical firms, which were stepping up their advertising initiatives at that time. Award-winning actress Vilma Santos-Recto, former Miss Universe First Runner-Up Janine Tugonon, television host Kim Atienza and newscaster Vicky Morales added star power to TGP’s campaign to boost acceptance of generic medicines.

Mr. Liuson’s gamble paid off: In 2013, TGP debuted in the Top 1000 Corporations in the Philippines.

By 2014, generics medicines accounted for 65% of the market compared to 40% in 2009, according to the Pharmaceutical and Healthcare Association of the Philippines.

“Without TGP, the poor people cannot afford to buy medicines. We changed the whole pharmacy system na all of the drugstore chains are forced to carry low-priced generics because they have to compete with us,” Mr. Liuson said.

In the last two years, TGP had been searching for a partner to address concerns expressed by franchisees on succession and how they can participate in the growth of his wholesale operations.

Mr. Liuson, who has three daughters involved in the business, was approached by equity funds and the largest pharmaceutical companies, but the search ended in May when Robinsons Retail Holdings, Inc. (RRHI), the Gokongwei-led retail company that owns South Star Drug, announced it secured a 51% interest in TGP.

For Mr. Liuson, it all boils down to “good vibes.” “The first time I met [RRHI President] Robina [Gokongwei] was in December last year. We had 6-7 meetings, all very good. Looking for a partner is like getting married. You should first be happy with each other. You should be comfortable with each other.”

Conglomerates are seeing the value of generics drugstores, as the Philippines -- a nation of more than 100 million people -- is projected to sustain its high economic growth trajectory, translating to increased spending on health care. Only last year, Ayala Corp., the country’s oldest conglomerate, acquired 50% of another generic drugstore chain.

Mr. Liuson said he has more time now to think of new ventures that will “help majority of the Filipino people,” while applying the same strategy that made TGP one of the biggest retailers in the country.

“No one is happy to make 1% interest from the bank so you have to think of something else. Just use common sense,” he said.

Ms. Montealegre is the National Correspondent of BusinessWorld.

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