Ratiopharm Group

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ratiopharm Group

Graf-Arco-Strasse 3
Ulm, D-89079
Germany
Telephone: (49 731) 402-02
Fax: (49 731) 402-78 32
Web site: http://www.ratiopharm.com

Private Company
Incorporated: 1974 as ratiopharm GmbH
Employees: 5,290
Sales: EUR 1.6 billion ($2 billion) (2005 est.)
NAIC: 325412 Pharmaceutical Preparation Manufacturing; 325414 Biological Product (Except Diagnostic) Manufacturing

Ratiopharm Group is Germany's number one generic drug manufacturer. The company's product range includes about 750 prescription and nonprescription medicines, which are sold exclusively through pharmacies. "ratiopharm" is Germany's top-selling and most commonly prescribed generic drug brand. The group's pharmaceutical products cover most areas of medicine and are available in 38 countries. Headquartered in Ulm, Germany, ratiopharm Group includes manufacturing and sales subsidiaries in 24 countries around the world, from Western and Eastern Europe to North and South America. Roughly half of the group's revenues are generated in Germany, the market with the highest drug prices in Europe. Over-the-counter (OTC) drugs make up about one-fifth of ratiopharm's total sales. Through the acquisition of research-based pharmaceutical companies, ratiopharm follows an expansion strategy into new promising markets such as oncology, asthma, and biotechnology. Ratiopharm Group is privately owned by family members of German multi-billionaire Adolf Merckle.

ESTABLISHING A PIONEER OF GENERIC DRUGS IN EUROPE IN 1974

When Adolf Merckle took over the pharmaceutical company Merckle GmbH from his father in 1967, it was already a midsized enterprise with 80 employees. The company's origins went back as far as 1881. In that year his grandfather, Adolf Merckle, set up a wholesale business for chemical and pharmaceutical raw materials in Aussig, Bohemia. His son, Ludwig Merckle, took over the family business and added two drug manufacturing factories. He and his family lost everything, however, when his company was expropriated at the end of World War II. Instead of giving up, Merckle started the business from the ground up in Blaubeuren, his wife's hometown near Ulm in the state of Baden-Württemberg. In 1950 Merckle decided to venture into pharmaceutical research and manufacturing. The generation change at Merckle in 1967 coincided with the launch of the company's first bestseller, rheumatism remedy Ambene. Ambene's commercial success catapulted Merckle GmbH into the league of midsized pharmaceutical companies.

In the early 1970s the Merckle family made an important business decision that helped pave the way to big-time success. The development of new medicines had become an expensive undertaking, due to increasing regulation and lengthy approval procedures. It was easy to foresee that the capital needed to stay competitive would sooner or later reach the financial limits of a midsized family firm. The solution came from the other side of the Atlantic. In the United States, where many midsized drug companies faced the same problem, a number of them began to focus solely on manufacturing medicines whose patent protection had expired. This strategy eliminated the high cost for pharmaceutical research and made it possible to offer drugs that had been successfully established in the market—at considerably lower cost. Convinced that this concept could work in Germany just as well as in the United States, the Merckle family established a new subsidiary, ratiopharm GmbH, Germany's—and also Europe's—first generic drug company, in 1974.

In the first year of ratiopharm's existence the company's product range consisted of 18 products. One of them was ASS, a generic version of Bayer's painkiller Aspirin. Following a simple branding strategy, each of ratiopharm's medicines was named after the active ingredient and included the suffix "ratiopharm." For example, if the main active ingredient was "ASS," the company's generic product was named "ASS-ratiopharm." Starting out with a sales force of four, ratiopharm set out to conquer Germany's pharmacies and doctor's offices. In the first years, however, the company's pharmaceutical missionaries were confronted with massive doubt and fierce resistance. Many German pharmacists and doctors had not yet heard of such a thing as generic drugs and suspected some kind of scam. During the first years it was not exceptional for ratiopharm's salesmen to be thrown rudely out of their prospects' offices. From the other end of the market ratiopharm encountered the hostility of its major competitors—Germany's research-based drug companies.

Ratiopharm's big breakthrough came in 1979 when the company introduced "Doxycyclin-ratiopharm," the generic version of a well-known antibiotic. The manufacturer of the original drug initiated a lawsuit, claiming that the remedy was not as effective as the original. Ratiopharm successfully defended its product with a thorough study conducted in three countries, which proved the drug's efficacy. The case received a great deal of publicity, which helped raise public awareness for the advantages of generic medicines in Germany and gave ratiopharm a huge credibility boost. In 1982 the Merckles acquired a large commercial site in Ulm, a city on the river Danube, about 90 miles northwest of Munich, and moved ratiopharm headquarters to the new location. In 1986 ratiopharm extended its product range to include OTC drugs. In the same year the company ranked among Germany's top ten drug manufacturers. Three years later ratiopharm topped the list of the country's producers of generic medicines.

INTERNATIONAL EXPANSION BEGINNING IN 1988

The year 1988 marked the beginning of ratiopharm's international expansion. The company's first foreign subsidiaries were set up in Portugal, Spain, and Luxembourg. In other Western European countries, for example, in Finland and Austria, ratiopharm distributed its products through independent importers or through joint ventures with local drug manufacturers, such as in France. After the communist countries of Eastern Europe were freed from Soviet rule in the early 1990s, ratiopharm expanded its network of distributors to Czechoslovakia and Hungary. In 1996 the company opened a sales office in China. Later in the decade, more and more sales offices were transformed into subsidiaries. In 1998 ratiopharm acquired its Finnish distributor and entered the remaining countries in Northern Europe as well as Italy and the United Kingdom. Finally, ratiopharm's joint venture in France was turned into a subsidiary in 2000.

After the company's strategic goal to be present in most of Europe had been accomplished, ratiopharm set its sights on the rest of the world, especially North and South America. In 2000 the company acquired a majority stake in Canada's third largest generic drug manufacturer, Technilab Pharma Inc., with 350 employees. Two years later ratiopharm established a subsidiary in Brazil, the largest market for pharmaceutical products in South America. In the United States, a mature generic drug market with intense competition, ratiopharm focused on the niche market of more expensive sustained-release drugs.

COMPANY PERSPECTIVES

ratiopharm specializes in the development, manufacture and sale of its own, patent-free pharmaceutical products (generics). ratiopharm offers a wide range of highest quality medicines at favorable prices in order to make a substantial contribution to the reduction of costs in the public health system.

TARGETING CONSUMERS WITH INTENSIFIED MARKETING

In the middle of the 1990s ratiopharm intensified its marketing efforts in Germany and shifted its main focus from product-related advertising to image campaigns. The company invested millions in prime-time TV commercials and ads in Germany's most popular consumer magazines to establish the ratiopharm brand as an umbrella brand name for effective drugs that were less expensive than those made by other companies. Because Germany's stringent regulations did not allow advertising for prescription drugs, the campaigns addressed only the company's OTC drugs.

The company's decision to distribute its products exclusively through pharmacies implied the cooperation of Germany's pharmacists. This could not, however, be taken for granted. If a pharmacist was asked by a customer about the best remedy for a certain condition, he or she would not automatically recommend a less expensive generic product—for the simple reason that there was less money to be made on cheaper pills. The trend toward increasing self-medication combined with an ever-expanding variety of OTC drugs in drugstores and supermarkets, however, turned many pharmacists into allies. Often pharmacies played a major role in ratiopharm's TV spots, which, of course, were also watched by doctors and pharmacists. In addition to addressing its main target group—consumers beyond the age of 30—ratiopharm engaged in marketing activities geared at its future customers. In order to raise brand awareness among the young generation, the company sponsored a professional snowboarding team.

FIGHTING UNFAVORABLE MARKET TRENDS IN THE EARLY 21ST CENTURY

When Claudio Albrecht, a trained lawyer, became ratiopharm's new CEO in 2000, the German market for pharmaceutical products began undergoing fundamental changes. Increasing competition on one hand and massive political pressure on drug prices on the other hand resulted in stagnating growth rates and shrinking profit margins. Albrecht, who formerly headed the American generics division of Swiss pharmaceutical giant Novartis, took on the difficult task to steer the company into new strategic directions. So far, ratiopharm had positioned itself as an all-around supplier of generic drugs. Under the new market conditions this turned into a disadvantage, compared with smaller competitors that concentrated on only a few best-selling products. Through the establishment of a new subsidiary and the acquisition of two research-based pharmaceutical companies, ratiopharm followed an expansion strategy into new promising markets such as oncology, asthma, and biotechnology.

In 2000 ratiopharm set up BioGeneriX AG, a new subsidiary for the development of generic biotechnological pharmaceuticals. Two years later the company acquired the German technology firm Pulmotec GmbH, followed by oncology drug producer ribosepharm in 2003. Pulmotec had developed innovative powder inhalation devices that had proved successful in administering asthma medicines. Compared with the conventional asthma sprays the new technology eliminated the use of chlorofluorocarbons (CFCs), which are known to have a damaging effect on the atmosphere. Moreover, inhaling certain drugs in powder form was also a promising technology to replace injections, which meant that they could be administered by patients themselves rather than by specially trained medical staff. The acquisition of Munich-based ribosepharm, one of the leading suppliers of original drugs for cancer therapy, including Ribofolin, Ribocarbo-L, and Ribomustin, was supposed to become ratiopharm's basis for pushing into the European oncology market. In addition, ratiopharm offered a "one-stop oncology-shop" service to hospitals and specialty doctors in Germany by combining its own sales force and products with ribosepharm's.

KEY DATES

1974:: Germany's first generic drug manufacturer, ratiopharm, is founded.
1979:: The antibiotic "Doxyxyclin-ratiopharm" is launched.
1986:: The company starts making over-the-counter (OTC) drugs.
1988:: Foreign subsidiaries are established in Luxembourg, Portugal, and Spain.
2000:: The company acquires Canadian generic drug company Technilab; the biotech subsidiary BioGeneriX AG is founded.
2002:: ratiopharm takes over German technology firm Pulmotec and oncology drug producer ribosepharm.
2004:: The company acquires Dutch generic drug manufacturer Magnafarma; Merckle Biotech GmbH is established.
2005:: The Merckle family operations are reorganized under the ratiopharm Group umbrella; Philipp Daniel Merckle becomes CEO.

In the new millennium ratiopharm encountered increasing competition from generics manufacturers as well as from research-based pharmaceutical companies, which were fighting for a larger share of a shrinking pie. One pattern ratiopharm observed was that many manufacturers of original prescription drugs modified their products minimally just before their patents expired and launched them under a new brand name, for which they applied for patent protection, and sold them for much higher prices. At the same time, many pharmaceutical companies fought more fiercely in court against generic drug manufacturers. One example was AstraZeneca, the London-based pharmaceutical company that held the patent for the best-selling stomach acid blocker Prilosec. In this case, ratiopharm successfully defended its generic version of the drug in court against AstraZeneca in 2003.

Because of skyrocketing costs in the healthcare sector, the German government continuously increased its pressure on pharmaceutical companies to reduce prices for drugs. In 2004, the year of ratiopharm's 30th anniversary, a new law designed to drastically cut health-care cost in Germany came into effect. It limited the number of drugs covered by the public health insurance system, imposed a quarterly fee on patients who visited a doctor's office, and put a price cap on many prescription drugs. The prescription of major price reductions cut significantly into the profits of many drug manufacturers. Ratiopharm was no exception, but the company's management had hoped that the new legislation would give a boost to the use of generic drugs. This, however, did not happen to the degree expected, in part due to the fact that people reduced the number of their doctor visits because of the new fee, resulting in less drug prescriptions.

It came as no surprise that ratiopharm's top management decided to intensify its activities abroad to make up for the unfavorable developments in its home market. In spring 2004 the company announced the acquisition of Dutch generic drug manufacturer Magnafarma. With an annual turnover of more than $100 million the company was the third largest generic drug company in the Netherlands. The acquisition gave ratiopharm a strong foothold in Europe's third largest generic drug market behind Germany and the United Kingdom. With the help of ratiopharm's licensing and research capabilities Magnafarma was going to enhance its market position by introducing new products more rapidly. A second market ratiopharm turned to was the United States—the biggest market for generic drugs in the world. There, however, the company found it more difficult than expected to gain acceptance.

Another factor that seemed to hinder the more intense use of generic drugs in Germany was the heavy lobbying of large brand-name drug companies. To establish a counterweight, ratiopharm together with its two main German competitors, Stada and Hexal, founded a lobbying organization of their own. Named Pro Generika, the new association was installed to brush up the image of generic medicines in Germany and to gather critical information from leading politicians about future plans for the industry.

REORGANIZATION, REORIENTATION, AND STRATEGIES FOR THE FUTURE

In the summer of 2005, 71-year-old Adolf Merckle reorganized his enterprises and divided them among his children. His 39-year-old-son Philipp Daniel Merckle, a pharmacist with a PhD and head of ratiopharm's research and development (R&D) division since 1999, took over the responsibility for his father's generic drug companies. All pharmaceutical operations of the Merckle family were reorganized under the umbrella of ratiopharm Group. These included all drug production facilities of Merckle GmbH, its logistics subsidiary Transpharm Logistik GmbH, and Berlin-based generic drug manufacturer CT Arzneimittel GmbH. This move united the whole value chain, from production to sales to distribution, in one group. It was around the same time that ratiopharm's closest German competitor Hexal AG changed hands. The new owner, Swiss pharmaceutical giant Novartis, made the company part of its spun-off generics division Sandoz. Together Sandoz and Hexal had a share of the German market similar to that of ratiopharm. The era of ratiopharm's unquestioned market leadership seemed to come to an end.

In late fall of 2005 an investigative report by the popular news magazine Stern about ratiopharm's aggressive marketing methods, including cash bonuses for doctors and loads of free product for pharmacists who prescribed ratiopharm's medicines, stirred up a storm of public protest and resulted in legal investigations. Only three months after Philipp Merckle had filled his new position, he fired CEO Albrecht and took his place. Within a few months he also dismissed a handful of other top managers who were involved in the case. At the same time Merckle defended his company as a victim of a dysfunctional healthcare system with many players in which all major drug companies practiced these kinds of marketing methods. Investigations into the possibility of criminal charges against ratiopharm were dropped only a few weeks after Stern broke the news, but the case was rolled out again six months later after a citizen's complaint.

In May 2006 another new law came into effect that once more cut the reimbursements for most prescription drugs to patients covered by the public health insurance system. It meant that they had to pay more out of their own pockets for their medicines. If the price for selected drugs was below 30 percent of the price covered by the health plan, however, patients did not have to make any copayments. Designed to encourage the use of less expensive drugs, the law had a surprising instant effect. Only a few weeks after the new law took effect, Hexal announced its intention to lower prices for all of the company's drugs by 25 percent. Ratiopharm followed suit and significantly reduced prices for about 700 drugs.

With Germany being a mature market, ratiopharm set its sights on markets abroad with a much higher growth potential, including the United Kingdom, the Netherlands, Italy, and Poland. To be prepared for the coming shift from chemical to biotech medicines, the company invested more than $100 million in the development of new generic versions of biotech products. Since biotech medicines were made from living organisms, they could not be copied as easily, resulting in much higher costs for R&D, approval, and production. Ratiopharm provided significant seed capital to BioGeneriX and American Neose Technologies for a joint research project on the development of a new generation of long-acting therapeutic proteins and invested in six fermentation facilities for ratiopharm's new biotech production subsidiary, Merckle Biotech GmbH.

In November 2006 the Office of the District Attorney searched ratiopharm's offices at Ulm headquarters to gather documents that possibly proved evidence of fraud. It was clear, however, that it would take a long time for the case to enter the courts. Philipp Merckle announced that his company would abandon the—in his eyes unethical—marketing methods common in his industry. Under his leadership, growth and profit should not be achieved at any price. Determined to preserve ratiopharm as a family-owned business he envisioned his enterprise as a playing field for individual growth in a community of people. Whether Adolf Merckle's successor would be able to preserve and enhance ratiopharm's position in the coming years of global competition and rapid consolidation remained to be seen.

Evelyn Hauser

PRINCIPAL SUBSIDIARIES

ratiopharm GmbH; Merckle GmbH; Transpharm Logistik GmbH; CT Arzneimittel GmbH; Magnafarma B.V. (Netherlands); ratiopharm UK (United Kingdom); Ratiopharm España, S.A. (Spain); ratiopharm Arzneimittel Vertriebs GmbH (Austria); ratiopharm Belgium S.A./N.V.; ratiopharm A/S (Denmark); ratiopharm AS (Norway); ratiopharm AB (Sweden); ratiopharm Oy (Finland); Laboratoire ratiopharm S.A. (France); Technilab Pharma Inc. (Canada); Martec Pharmaceuticals Inc. (United States); Mepha Investigacao (Brazil); Pulmotec GmbH; ribosepharm GmbH; ratiopharm CZ S.R.O. (Czech Republic); ratiopharm Hungaria Kft. (Hungary); ratiopharm Polska Sp. z.o.o. (Poland); ratiopharm Italia S.R.L. (Italy); ratiopharm Ida. (Portugal); ratiopharm Slovakia S.R.O.; BioGeneriX AG; Merckle Biotech GmbH.