Nadro S.A. de C.V.

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Nadro S.A. de C.V.

Vasco de Quiroga 3100
Mexico City, D.F. 01210
Mexico
Telephone: (52 55) 5292-4343
Fax: (52 55) 5292-4193
Web site: http://www.nadro.com.mx

Private Company
Incorporated: 1943 as Nacional de Drogas S.A. de C.V.
Employees: 5,090
Sales: MXN 22 billion ($2.02 billion) (2005 est.)
NAIC: 424210 Drugs and Druggists’ Sundries Merchant Wholesalers

Nadro S.A. de C.V. is one of two companies that dominate the distribution of pharmaceutical products in Mexico. It functions as a wholesaler whose principal activity is the purchase, storage, distribution, and sale of pharmaceutical products and personal care, health, and beauty products to pharmacies and large-scale retail chains. Nadro also provides specialized services to pharmacies to help them manage their operations and their inventories.

A HALF-CENTURY SELLING PHARMACEUTICAL PRODUCTS: 1943–93

The company was founded in Mexico City in 1943 as Nacional de Drogas S.A. de C.V. by Eustaquio Escandón Galindo and a group of businesspeople. They had the idea of creating a specialized center for storing and distributing pharmaceutical products so that these products would reach consumers efficiently and conveniently. Later, by means of the combined work of the employees and the desire to carry the company’s services to the entire country, branches were established to distribute products to all of Mexico. There were 27 distribution centers (many of them later consolidated) in 1967, when the founder’s son Pablo Escandón Cusi joined the company. Eustaquio Escandón Cusi, his brother, joined Nadro in 1969.

Pablo Escandón Cusi assumed, in 1977, the leading role in Nacional de Drogas as director general (the equivalent of chief executive officer). This was a trying time for the firm. The devaluation of the peso against the dollar in 1976—the first since 1954—raised company debt to $6 million and resulted in a commitment by management to avoid taking out loans. The company paid what it owed and did not assume new debt, except for occasional short terms in amounts that were clearly manageable. Instead, in 1985, Nacional de Drogas chose to raise money by means of an initial public offering of shares on the Mexican stock exchange. A year earlier, the company had created Controladora de Farmacias, S.A. (Farmax) as the operating subsidiary for its own pharmacies. Nacional de Drogas, which became Nadro in 1990, spun off this subsidiary and exited retail operations in 1993.

Also in 1993, Nadro established a strategic association with McKesson Corporation, the leading wholesale distributor of pharmaceutical products in the United States and, through subsidiaries, a company with a significant presence in Canada as well. The alliance was a response to the signing of the North American Free Trade Agreement (NAFTA), which promised to further the economic integration of the three countries. McKesson purchased a 23 percent interest in Nadro for about $50 million. It also secured an option to buy another 9 percent of Nadro’s common stock. McKesson was henceforth represented on Nadro’s board in proportion to its holding and contributed systems to help Nadro monitor its inventories.

By this time Nadro’s net sales had reached almost $700 million a year. It held about one-quarter of the Mexican wholesale pharmaceutical market and was operating 14 fully computerized distribution centers throughout Mexico, receiving orders electronically from retail pharmacies. McKesson’s chairman and chief executive officer noted that, with 63 percent of Mexico’s 85 million people below the age of 25, there was a growing potential market not only for prescription drugs but also for the health and beauty products that Nadro carried.

THE TORTOISE OUTPERFORMS THE HARE: 1994–99

At this time Nadro’s chief competitor was Grupo Casa Autrey, S.A. de C.V., a pharmaceuticals wholesaler roughly Nadro’s size and with about an equal one-quarter share of the market. “The two companies have complete different strategies,” a sales analyst based in California told the Monterrey daily newspaper El Norte in 1996. “Autrey, in terms of pharmaceuticals, can supply all the products a pharmacy needs. Nadro concentrates itself on essential articles, things that everyone needs and wants.” The article also quoted a Mexican sales analyst describing Nadro’s strategy as “super conservative … for the investor who doesn’t like to take risks.” Nadro’s strategy eventually paid off. Its net sales had reached almost $1 billion by 1997, when it began offering American Depositary Receipts, the equivalent of shares of stock, in the United States and opened its 15th distribution center, which was also its second within Mexico City. About 18 percent of the company’s shares were in public hands in 1999.

In 1999 Nadro, with sales exceeding $1.5 billion, had about 30 percent of the Mexican wholesale pharmaceutical market, a point or two more than Autrey. Its 400 or so vehicles covered 98,000 kilometers (60,000 miles) a day, delivering products to about 15,000 pharmacies. Orders were generally collected during the afternoon, but some as late as 10 P.M., then transmitted to the distribution centers for fulfillment the next morning. Nadro was investing heavily in automating its distribution centers—even installing robots. Its operating costs had been reduced in the previous years by 6 percent.

In the Mexico City news daily Reforma, Alberto Aguilar contended that the distribution of medications in Mexico was even superior to that in the United States, where the 35 or so wholesale distributors made deliveries only once or twice a week. He conceded that the domination of the market by Nadro and Autrey allowed them to obtain a 20 percent profit margin (compared to 8 to 10 percent in the United States, according to a Mexican government document), but pointed out that they offered, in many cases, a discount of as much as 10 to 12 percent for prompt payment. He also noted that the big wholesalers gave the pharmacies a 30-day period to make payment. Aguilar wrote that the average price of a medication was only $4, compared to $7 or $8 in Argentina, $10 to $12 in the United States, and $20 in Japan. This reflected government price controls on pharmaceutical products, which according to Nadro kept the price of medications to the retail customer about 70 percent lower than in first world countries.

COMPANY PERSPECTIVES

The company’s mission is to supply pharmaceutical products and health and beauty articles to all points of sale in the national territory, with the commitment to satisfy the requirements of our customers and to contribute to the well-being of Mexican families.

NEW CENTURY, NEW CHALLENGES

In 2003, Nadro’s last full year as a public company, it was selling about 9,800 products, of which medications accounted for 92 percent of its net sales. These products came from more than 300 suppliers. Nadro’s fleet of vehicles reached more than 500, carrying its goods to about 8,000 localities in all parts of Mexico. The company offered, at no cost, many services to pharmacies for which it served as principal supplier. These services, which Nadro’s annual report described as possibly Nadro’s most important advantage in competing for business, included a system of administration and inventory control, with scanners; a computerized system that allowed the users to submit orders electronically; and offers and promotions extended to important customers. Other services offered included specialized courses, in Nadro’s Mexico City corporate offices, covering pharmacy operations, control, administration, design, and sales; access to a Nadro telephone center; and advice on such matters as self-service, traffic control, layout, display, and illumination. Yet another service was Farma-Red, which helped pharmacies to deal with medical plans, insurers, banks, and the Mexican social security system. Nadro continued to offer customers such as small- and medium-sized pharmacies 30 days’ credit, with an average of about MXN 2.4 billion (about $222 million) out on loan in any given month.

In 2003 the delivery system was almost equally split between serving customers in the urban zones where the 15 distribution centers were located, and serving those outside these zones. The objective in determining routes was to make deliveries between 8 A.M. and noon and to serve customers in any part of Mexico in less than 24 hours and in most cases less than 16 hours. A team of company executives, located both at corporate headquarters and at the various distribution centers, made route decisions based on mileage, fuel consumption, and productivity per route, as determined from shared information transmitted by modem.

Nadro was participating exclusively in the private sector, which accounted for only 40 percent of the volume of pharmaceutical products in Mexico but represented more than 80 percent of the total market in terms of value. (The public sector consisted of government hospitals and clinics.) Nadro held an estimated 29 percent of this market, compared to 25 percent for Grupo Casa Saba, S.A. de C.V. (which bought Autrey in 2000), and 11 percent for another competitor, Casa Marzam, S.A. For the year, Nadro reported net profit of MXN 394 million ($36.5 million) on net sales of MXN 19.55 billion ($1.81 billion). Its total debt at the end of 2003 was MXN 4.53 billion (about $403 million).

The balance of power was beginning to shift from the wholesalers to the retailers, because they were forming chains better able to extract favorable terms from their suppliers. This applied not only to strictly drugstore chains but also to huge general retailers like Cifra, S.A. de C.V.; Grupo Gigante, S.A. de C.V.; and Controladora Comercial Mexicana, S.A. de C.V. The pharmacy chains and giant general retailers represented 40 percent of retail sales for medications, while the other 60 percent belonged to small- and medium-sized independent firms.

Grupo Casa Saba remained Nadro’s great rival at the end of 2004, when the two giants held a little more than 60 percent of the private market for the wholesale distribution of medications, which in turn constituted almost 80 percent of the total market. And, according to Aguilar, the two were trying to extract a larger share of the proceeds at the expense of the nation’s 20,000 to 25,000 pharmacies and also of the 300 or so laboratories producing medications in Mexico. This struggle was occurring in the context of declining sales, partly attributed to the growth of contraband and over-the-counter products. In October 2004 Grupo Roche Syntex de México, S.A. de C.V., complained before a Mexican government commission that Nadro and Saba had colluded to demand a 4 percent price discount for buying its pharmaceutical products. Prior to the complaint, Saba had stopped distributing Roche’s medications. The commission took no action, however, concluding that there was no evidence that the two distributors had asked for the same discount.

Nadro and Saba had a defender in José Carlos Ferreyra, director general de Consultura Innofarma. As quoted in El Norte, he noted: “If the Mexican scheme is eliminated, the pharmacies wouldn’t have an inventory, the sale of expired medications would send thousands to the hospital, theft of supplies would double the illegal market, and if the laboratories had to establish their own supply network, the price of the product would reach the same level.”

KEY DATES

1943:: Founding of Nacional de Drogas, S.A. de C.V., in Mexico City.
1976:: Devaluation of the peso against the dollar leaves Nadro $6 million in debt.
1985:: The company makes its initial public offering on the Mexico City exchange.
1993:: Nadro ends its retail operations by selling its own pharmacies; McKesson, a U.S. company, buys a minority stake in Nadro.
1999:: The company holds 30 percent of the private Mexican wholesale pharmaceuticals market.
2004:: Nadro becomes a private company 49 percent held by McKesson.

Pablo Escandón Cusi and Eustaquio Escandón Cusi owned almost 51 percent of Nadro’s shares of common stock at the end of 2003. McKesson owned 21.8 percent. Pahema S.A. de C.V., a private company representing the interests of Pablo and Alejandra Escandón Cusi, was created in March 2004. Nine months later, Pahema purchased almost all the Nadro shares in public hands, for which it had offered MXN 1.91 billion (about $171 million). Most of the money for the purchase came from a loan extended by Grupo Financiero Banamex, S.A., one of Mexico’s two largest banks, but McKesson contributed MXN 428.5 million (about $40 million), and Pablo and Alejandra Escandón Cusi, smaller amounts. Under the new structure, McKesson emerged with 49 percent of Nadro, which was delisted from the Mexican stock exchange in 2005. A Nadro executive said that the action would have no effect on the company’s operations.