Generoso Pharmaceuticals and Chemicals, Inc.

David Generoso could feel his “five-year itch” once more. He already had behind him 15 years of experience in the pharmaceutical industry and was managing an interesting portfolio of business revolving around pharmaceutical and chemical products. Still, he felt he had not exhausted the opportunities, which the industry had to offer.

David considered himself handicapped with a short patience. He wished he had pursued a more stable career path like his brother who had been happily working with the same rural bank for the past 25 years, until he ran in 1987 for a seat in Congress representing their region and won. His reputation a benevolent rural banker easily got him the votes. Never mind that he had not sponsored any piece of legislation, two years into office. David thought, his brother might actually be doing his country a greater service by at least not adding to the list of pending legislation generally bordering on the inane. David had political ambitions of his own. He had not found, though, his vehicle to launch his political career.

David was a philosophy graduate of sectarian university in the Philippines. A full scholar in 1972 of the same university, David gave up further studies on canon law after a year and decided to pursue more secular activities. Indeed, the early 1970s was a tough time to be a student. It was made even tougher for students of canon law who felt imperatives arising from the experiences of Filipinos then required that faith in God relate seriously with the vicious and widespread suffering which resulted from man’s inhumanity to fellowman. Besides, for David, writing his classmates’ term paper and other reports was taking up most his study time anyway, and his classmates naturally did not have much to offer in addition to lasting friendships – to supplement his meager allowance as a full scholar.

David began his career in the Philippine pharmaceutical industry as salesman in Central Luzon region for a number of multinational pharmaceutical firms. Until now, he feels he is, first and foremost, a salesman. He thus, has this constant urge to be on the go, doing fieldwork rather than being confined in his posh air-conditioned Makati office with his feet on his table, trying to develop a vision for his company, his country, and himself. The sight of his feet, however, precludes David from looking too far, i.e., both literally and figuratively. His feet, well protected now by smart men’s shoes of the most expensive brands all over the world, bring back all the memories of his days as salesman. David invests heavily in his shoes which he considers as the most abused component of his wardrobe, having to carry his entire frame wherever he goes. He now owns over 30 pair of shoes – all top of the line from Italy and Switzerland – each pair a tribute to all the steps he made he made peddling pharmaceutical products.

With his humble earnings as salesman, David was finally able to make a giant step into marriage. He married Elizabeth Reyes, a strong woman, even if only having successfully hurdled two national professional licensure examinations. Elizabeth was a nurse. She was, likewise, a certified public accountant. She was, likewise, a certified public accountant. She was also probably the ultimate test for David to confirm his vocation for priesthood! They have been blessed with five children, three girls and two boys.

After five years of combing the Central Luzon region, in 1978, David established a company called Generoso Pharmaceuticals & Chemicals (“GPC”) with Elizabeth and a business associate, Rafael Buenaventura who was a salesman like David. The team set up shop at the Generoso residence in Tarlac.

An initial capitalization of P300 started the business with a dozen bottles from the pharmaceutical firms, which they had been connected before. They put their own labels on the product they had purchased, registered the products with the Bureau of Food and Drug (“BFAD”), and started selling.

GPC’s initial market, of course, was composed of the personal contacts of David and Rafael had made with doctors, pharmacists, and hospital administrators during their stint as sales representatives in the Central Luzon region. Already on their own, the two realized that they had embarked on a herculian task, colliding head-on with other salesmen representing the big pharmaceutical firms. Still, they persisted. David felt that the most difficult part was getting their target market to at least try their product. He was confident of the quality of their products and that customers would patronize them afterwards.

GPC was able to establish a good track record fast and its customer base expanded beyond the Central Luzon region. David and Rafael had to hire extra hands, rather, feet, to peddle their goods. They were methodical, however, in planning their sales force, carefully taking into consideration the geographic and demographic features of the market. GPC’s sales force grew almost geometrically: 2 sales representative in 1978, 5 in 1979, 12 in 1980, 25 in 1981, 53 in 1982, and 75 in 1983 covering the entire Philippines. This was still nothing of course to the 14 teams of the biggest Filipino pharmaceutical firm which had 130 sales representatives in each team.

GPC was incorporated in 1982 as the increased volume of operations needed a broader-based management. The Generoso family still practically owned GPC, however. David, Elizabeth, and Rafael moved their operating base from the Generoso residence in Tarlac to a modest office in Quezon City. David and Elizabeth, likewise, got themselves an apartment near the office although they still maintained their Tarlac residence, which they visited on weekends. From its initial capital of P300 in 1978, GPC had total assets of P12 Million in 1983, which consisted of a dozen vehicles, a few piece of real estate in the Central Luzon region, an office, a modest amount of inventory, and cash. GPC was very liquid.

Elizabeth assisted David and Rafael in the management of GPC. She was responsible for all the controllership and treasury functions of GPC. Her conservative cash management policies ensured the company’s continued healthy financial state through strict financial control and sound funds management.

David assumed the position of President, while Rafael was the General Manager. In 1983, GPC, likewise, had a sales manager.

As the sales force grew, David was spared being the front liner for the sales force and had time for studying more about pharmaceuticals. A voracious reader, David immersed himself in all literature he could get on the production of pharmaceutical and chemical products. On weekends, he would retreat to his house in Tarlac and experiment on chemicals to produce pharmaceutical products. As David put it, “It’s very simple, really. It’s just like following a recipe in a cookbook!”

David’s first attempt in manufacturing with chemicals was for veterinary medicine as he is a lover of dogs (he has a mighty force of Doberman Pinschers, a regal Great Dane, and a pair of cuddly Pekingese puppies). He would send his “inventions” to the Philippine Analytical Laboratory for testing. Upon approval, he marketed his products to big companies and this hobby had provided an additional source of income for him of about P20,000 weekly. The pharmaceutical industry had offered a lot of opportunities for David to make “big bucks” quickly - but David is firm in his resolve never to do bad business.

David’s other interest includes shooting (which sport he shares with his employees by sponsoring an annual air-gun competition in the company), bonsai culture, and cars. David is also a patron of the arts and assists young talents to carve a name for themselves.

David’s initial success with veterinary medicine encouraged him to start GPC’s own line of pharmaceutical in 1983. GPC’s product line started with pressed tablets, capsules and some syrups. Aside from purchasing finished products from the big pharmaceutical firms, GPC also brought raw materials and subcontracted its production to pharmaceutical products to local manufacturers. GPC, likewise, subcontracted the production of bottles, labels, bottle caps, packages, etc.

Still, GPC remained more of a trading firm than a manufacturing concern.

In thus, became, David’s dream to put up laboratory for GPC’s research and development. Since the company did not have the money for thus, he began purchasing pieces of laboratory equipment and storing them temporarily in his Tarlac residence. With the equipment he bought, he continued with his experiments and ventured into the manufacture of cosmetics, which he later sold to large cosmetics firms which carried world known brands of cosmetics products.

In 1983, David was restless again. He wanted something new. (Luckily, and surprisingly, his business interest have evolved around chemicals and pharmaceuticals.) He went to United States and made a side trip to some European countries and learned more about pharmaceuticals. In the United States, he established several contacts who could supply raw materials for him to sell to the leading pharmaceutical firms in the Philippines. He, likewise, invented raw materials, which he sold to the leading manufacturers in the Philippines. It was a good start and GPC eventually became a leading indentor of raw materials in the Philippines.

An American principal came into GPC in 1984 as a supplier of raw materials. The principal was a member of the prestigious American Club. In deciding to do business with GPC, he simply banked on David’s personality and especially in his values such as loyalty, honesty, and adherence to quality. GPC was able to establish a good track record starting with principal. Today, GPC represents in the Philippines 16 manufacturers of raw materials. With GPC’s wide supply base of raw materials, it has become very competitive in the market because it can afford to offer lower prices for quality goods. (David can even quote prices lower thank cost just to beat competitor and block off potential entrants in the raw materials field.)

In the meantime, while David was establishing GPC’s source network for raw materials, the management of the company was handed over to his buddy and business partner Rafael. David was gone for almost a year, and, under Rafael’s management, things did not go well for GPC. The company’s revenue dropped and it’s receivable increased, albeit to still manageable levels. Nevertheless, David felt he had to be at the helm of the company again.

David attributes GPC’s poor performance under Rafael’s leadership to what he calls Rafael’s “fanatical belief on the goodness of man.”

While David shared Rafael’s principle of being client oriented, he felt that Rafael cuddled the clients too much. For David, being client oriented meant good quality both in products and related services (including answering the telephone where he says you should give the caller the impression that there is a smile on your face). Thus, David believes in improving on all other aspects first before compromising on price. David will fight for two hours over 10 centavos. “Everything counts in large amounts,” he says.

David recalled the incident when the Department of Health (“DOH”) was soliciting bids for a purchase of medicines. Contrary to GPC’s policy of not placing orders with suppliers without purchase orders and letters of credit opened by the customers, Rafael placed an order with their suppliers who sourced raw materials from all over the world. David considered what Rafael did too risky: With government red tape and all, it would take such a long time before the contract was awarded to anybody. In the meantime, the inventory would be incurring huge carrying cost. What if the contract was not awarded to anyone of GPC’s customer for raw materials? What if the Department of Health decided to call off the purchase all together? If the contract is awarded to one of their customers, who should bear the carrying cost already incurred? The customer or GPC? David thought it should be the customer; Rafael felt GPC should shoulder the costs as it was management’s error.

With David back in GPC, the company was able to recover quickly from the reversal in trend of its financial performance and managed to stay on in the pharmaceutical industry.

GPC had grown through internally generated funds; the company had no substantial financial obligations – it settled its accounts with suppliers on a C.O.D. basis – with an ultra conservative cash management system, which evolved around the character of Elizabeth. GPC offered credit to customers, though – an indication of the company’s client orientation.

David is, likewise, “sigurista”: No to speculation (e.g., futures); erso, conservative cash management.

All throughout, GPC adhered to their principle of quality products; David will uphold quality – price, presentation, solution, service, etc. to the grave. He is a firm believer of quality products, especially in the pharmaceutical industry. “Medicine is a repeat business; it’s not like selling encyclopedias. You always have to do a little bit more than others.” David says. David will never cost cut on production cost.

Elizabeth had the foresight to segregate control over GPC’s different product lines and, thus, initiated the reorganization of GPC, which by 1988 was composed of several divisions: Pharmaceutical Distribution Division, Agrovet Division, Cosmetics Decision, Raw Materials Indenting Division, and the Contract Manufacturing Division.

The shift from big pharmaceutical firms to GPC was difficult. For GPC, everything was anchored on personal relationships. Very few are able to transcend this level.

From David’s experience, in the pharmaceutical industry, one either starts very small or very big (i.e., tie-up with a multi-national corporation) – you don’t usually start as a medium sized firm, which is what GPC, is now.

Thus, David considers as the potential entrants to the industry those groups of people with the same background as Rafael and himself, i.e., sales representative from big pharmaceutical companies who start with their own niche comprised of their clients in their former geographic responsibilities, selling the products they used to sell.

There is a fast turnover of participants in the industry. It is very difficult to expand. For every two hundred entrants equally the same number of participants usually drops out.

The advantage of remaining small, according to David, is that while your niche is small and your turnover of sales is small, your cash flow is high because you do not have much overhead costs to meet (profit is easily 50 percent; 30 percent goes to cost of the products, while 20 percent is for administrative expenses.) But he believes that pharmaceutical is a very high-risk business, and that one always has to be a step ahead of the others to avoid being trampled on. One must protect his niche very well and expand from there. To grow is to survive.

Small companies, however, always have to put up with the stigma of being a local company, i.e., of inferior quality - a stigma among buyers which David think is not exactly baseless. Small manufacturers tend to cost cut in production cost in the absence of economies of scale. Buyers for GPC include doctors, large pharmaceutical firms, and hospitals. David groans at their “promotions expense” which can sometimes be very costly.

Another force in the pharmaceutical industry that GPC has to deal with are suppliers, be it of raw materials, or finished products, or of packaging supplies (bottles, bottle caps, boxes, labels). Suppliers usually require a volume order, which puts small firms at a disadvantage. GPC has remedied this by pooling together with other small firms to achieve economies of scale. In one instance, for example, David personally assisted a printing press in arranging the printing plates such that several small orders of different labels could be processed at the same time. This David was able to do, quite proudly, using the little background he had as layout editor of his yearbook in college.

As of 1988, there were 32 large-scale pharmaceutical laboratories in the Philippines, most of which manufacture only their own brands and/ or brands licensed by foreign drug manufacturers. Of these, about six were engaged primarily in contract manufacturing.

In addition, there were an estimated 150 distributors of imported pharmaceutical products in the country, among them GPC. Together, they serviced an estimated market of at least P5.7 billion , based on retail sales statistics from the National Census and Statistics Office.

Apart from the importation and distribution of finished products, many of the existing pharmaceutical distributors also undertook the local manufacture of licensed foreign brands through the use of contract manufacturers. With the growing demand for pharmaceuticals, the major contract manufacturers in the country now find themselves with a huge backlog of orders, in many instances, as much as the equivalent of six months worth of production.

While there are many firms serving the local pharmaceutical market, the industry is far from self-sufficient. Most of the local manufacturers are engaged primarily in the compounding and packaging of formulations that have been previously prepared. No one is engaged in the extraction of active ingredients from locally available raw materials nor in the formulation of new products from known active ingredients. As a result, the country continues to rely heavily on imported pharmaceutical products and raw materials, which have averaged at U.S $67.853 million annually from 1982 to 1986 according to the foreign Trade Statistics of the Philippines.

In 1988, almost 5 years after GPC had embarked on raw materials indenting, David faced another challenge: the American principal in GPC proposed that b engage in the contract manufacturing of pharmaceutical products for both the domestic and export markets. However, unlike most of the domestic pharmaceutical firms, the proposed project was to compound locally all products that it will manufacture and sell, importing only the active ingredients and bulk materials that is unable to produce locally, heavy emphasis would be placed on applied research to extract and develop active ingredients from locally available raw materials, health foods, fibres, food supplements and other over-the-counter products.

The products will be manufactured using strictly controlled, highly-mechanized processes comparable with the international standards employed in the United States. Technology transfer shall be facilitated from American consultants to Filipino technicians and scientists.

The project was envisioned to initially manufacture pharmaceuticals as a subcontractor for the large firms both in the local market and in the export market. Through its extensive research and development capability, the project intends to eventually develop its own product lines focusing on products that make use of locally available raw materials, both as active ingredients and as excipients.

In the local market, the project will position itself as a specialty pharmaceutical manufacturer, which can manufacture products not currently available from the industry’s contract manufacturer. Due to its technical superiority, the firm will have the added advantage of lower prices and faster turnaround time. The project will be capable of meeting most orders within a month, as compared to other contract manufacturers who require up to about six months to process an order using outdated equipment.

The project’s technological superiority, however, will be derived not so much from its use of the most modern manufacturing equipment as its emphasis on basic research, specifically extraction of active ingredients from locally available materials and access to the production of pharmaceuticals using new delivery forms. Compared to other manufacturers, therefore, it will be less dependent on costly and time-consuming imports for its raw materials needs.

As a matter of strategy, the project will at the outset focus on those foreign pharmaceutical firms whose products are imported and distributed in the country by GPC. At the same time, the company will target local drug manufacturers who likewise carry products, which are imported, finished or semi finished form.

For the export market, the firm will capitalize on its location as a potential manufacturer or pharmaceuticals for the Asian markets of multi-national firms. As a supply source for the region, the project will have the advantage of lower production and transportation cost. Again, the project will tap the principals of GPC and former clients of the American partner who are currently supplying the Asian region out of Europe and who are thus likely to be interested in an Asian subcontractor.

The American principal dropped his plans to David like a bomb: David was dumbfounded. Everything seemed to be failing into place for GPC. After 15 years, David was to have his own laboratory!

Moreover, the development from the American principal came in time with the Generics Bill (Annex A). David, with the flame of nationalism burning in his heart, was in full support of the bill. Was this finally his vehicle to the political arena?

The following are David’s view on the Generics Bill:

“The use of generics for pharmaceutical products will definitely benefit the end user. The major opponents of the bill are the multinational companies and the medical practitioners who normally prescribed medicine; the smaller companies are more adaptable to the situation.

“Medical practitioners oppose the bill because the corruption is shifted to the pharmacists and drugstores.

“Multinational opposes the bill because they will lose the huge profits from the transfer price which used to be born by the local subsidiary. This profit to the parent companies had caused the prices of pharmaceutical products in the Philippines to be the highest in Asia.

“Multinationals don’t have unique selling points anymore. While it is true that raw materials may vary in quality, the differences are usually not enough to justify such big price differentials among brands.

“The problem with big companies is that because of their size, they either act too fast or too slow. Either way, they lose. For example, one company, even before the generics bill passes, studied the proposed bill thoroughly and came to the conclusion that they should do away with 50 percent of its sales force, immediately!”

The Generics Bill spurred an overall feeling of uncertainty in the drugs industry. (Annex B presents different views on the Generics Bill.) of an industry that had long been considered recession-proof and one of the most stable, the reaction was expected. Nevertheless, some sectors of the industry realized that the pharmaceutical industry will always be there. It is a matter of who are going to be the key players and who will be around, say, 10 years from now.

David had the foresight to register the pharmaceutical products he was introduced to during his travels in the States when he came back to the Philippines. Even now, when a new development occurs abroad, he pursues the lead immediately and registers the product with the BFAD (much to the frustration of his wife who does not appreciate the costly registration of the products with no foreseeable benefits yet.) When the Generics Bill came along. David’s foresight paid off. With the National Drug List being prepared, more and more pharmaceutical products will be struck from the list as the essentials remain. In addition, new products will come in to replace inferior drugs. GPC now has over 100 registrations with the BFAD and is currently only manufacturing 60 the registered products. GPC, thus, stopped accepting product registrations and is not expected to entertain such application until 5 years with the glut of brands per generic drug. For David, GPC’s strength lies not so much on its past performance but in its registration files (the best is yet to come!)

The was one thought, though, that made David sad. GPC will have to hire a German expatriate to oversee the project. No Filipino could qualify for such responsibilities yet for GPC to remain competitive. Not even David, with his 15 years of experience, was qualified. The lack of qualified chemist is an industry problem of which GPC has not been spared.

David gathered GPC’s Executive Committee composed of Rafael, Elizabeth, the Sales Manager, the Production Manager and himself to explore and evaluate the opportunities provided by the latest development. He wanted them to thresh out the issues they should address and develop a vision for GPC. The company was now a going concern valued at P40 million. The proposed project would cost approximately P135 million.

While David encouraged participative planning, for quick decisions, David puts his foot down when he thinks he has to. His expensive shoes take the floor once more.

Philippine School of Business Administration
1029 Aurora Blvd., Quezon City

Case Study: Generoso Pharmaceutical and Chemicals Inc.

By: Lyra L. Venturanza

September 2015
1st semester A.Y 2015-2016

I. Theoretical framework