PHARMA - Reports -

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Chapter 1

Norway: A Pioneering Hydrocarbon Producer

As a country of under 5 million inhabitants, Norway can only make so much global impact. However, not since two of of the modern week’s days were named in homage to Norse gods has an arguably broader force been felt as in the oil and gas service industry, where subsea and deepwater innovations are displacing conventional wisdom as Archimedes would never have predicted.

Many of these innovations are piggybacking on StatoilHydro, Norway’s partially privatized, totally dynamic NOC. Like Atlas carrying the innovations abroad on its shoulders, StatoilHydro has also shouldered part of the burden on building them up, through direct funding and indirectly taking advantage of the State's tax subsidies for technology to foster overall NCS development. As Minister of Petroleum and Energy Terje Riis-Johansen succinctly puts it, “The merger of Statoil and Hydro in 2007 has given us a new company that will make its mark on the Norwegian economy and the activity on the Norwegian shelf. The State’s role as owner in the company and manager for the Norwegian shelf will be an important perspective in the years to come.”

Of course, despite a single entity controlling the majority of Norway’s activity, there are other important players driving the industry. With recent amendments to tax laws designed to attract independent players from around the world, and a continuing drive towards internationalizing their supplier base, there is a more shared responsibility than ever in realizing Riis-Johansen’s vision of “a large energy producer with a pioneering position that is – and will remain – a long-term, reliable and predictable energy supplier and energy partner.”

Indeed, this pioneering position has been questioned in the run-up to September´s elections, which put a left-centrist coalition government to the task of justifying a murky view on, among other hot topics, opening up the country’s northern frontier areas to development. Head of the re-elected Arbeiderpartiet (Labour Party) Prime Minister Jens Stoltenberg will be working hard to maintain the fact that, as he says, “The Norwegian supply industry is a truly globalised industry. And it reminds us that through international competition, new technology is born.” But there is much work to be done.

This work to be done is emphasized by Pål Engebretsen, CEO of conglomerate Bergen Group, who speaks to the importance of state institutions to his company’s biggest division. “For shipbuilding, the most important tools are GIEK and Eksportfinans,” Engebretsen says. “The authorities have to give them a framework and capacity to finance more of the shipbuilding than actually seems to be the case these days. For example, we have customers today with approximately 20% equity in their shipbuildings, and GIEK and Eksportfinans are not too willing to take the 80% financing for the rest. Two or three years ago, this would have been no problem at all. When the financial situation gets worse, such institutions must take more risk to compensate for the lack of capacity in the private banks. That’s the most important thing for Bergen Group,” he adds.

Helge Lund CEO of StatoilHydro As Helge Lund, CEO of StatoilHydro, emphasized during September’s Pareto Securities conference in Oslo, Norway’s oil and gas prospects are divided into three distinct provinces, with unique challenges and opportunities for each: the North Sea, Norwegian Sea, and Northern areas. The latter will require the expertise of Norway’s largest company, controlling some 80% of domestic production, which will be leveraging its position as the world’s biggest deepwater operator and looking to boost international production ratios, currently around one quarter. Manifesting this globalized industry on a local scale is the city of Stavanger, which has been one of the most obvious beneficiaries of Norway’s oil wealth. Bjørn Vidar Lerøen, 20-year veteran of StatoilHydro and now Political Adviser to the Mayor of Stavanger, gives a brief history lesson: “The city of Stavanger was in a bad position in the mid-1960s, with a lot of unemployment and pessimism, until the first oil explorers knocked on the door. When they came here primarily from America, it was a revolution, from recession to boom. The first oil exploration rig came into the Stavanger harbour in 1966, the Ocean Traveler, all the way from New Orleans, traveling 45 days across the Atlantic and turning Stavanger upside down.”

Since oil happened, organizations like Greater Stavanger Economic Development have been hard at work ensuring it remains not just an episode, but an epoch, attracting the people and the companies who employ them to the region. Managing Director Elin Schanche elaborates on how her organization makes Stavanger the preferred location in Norway for petroleum companies and their offshoots, saying that “currently, although petroleum is the real industry at the moment, the transition into more renewable energy for the supply industry will be of vital importance; some energy companies believe they will be a part of this as license holders but really it’s going to be largely up to supplying companies to drive this diversification.”

Despite alluding to the future importance of renewable energy, Schanche is clear about the dominance of the hydrocarbon economy in the short term. “In the petroleum industry, Greater Stavanger Economic Development is monitoring the marketplace, because while looking to improve other sectors, petroleum will be the most important industry in our economy for many more years to come, so we do not want to lose focus here,” she says. In doing so, the organization will hopefully attract the companies that have made Stavanger the home to some 50% of the country’s oil and gas workforce.

Super Stavanger Service

Zvonimir Djerfi - Vice President of Baker Hughes One such company Schanche can gladly chalk up as a success is Baker Hughes. Recently reorganized into 23 geomarkets, one being Norway, the local division is headed by Zvonimir Djerfi, who recently returned to Stavanger after a decade abroad. Comparing the difference 10 years make, he notes “the biggest change is that there are many more operators in Norway now than when I left. Ten years ago, there was a handful of operators in the NCS, and now, there are many more of various sizes and needs in terms of support in technology, services, or management. In a sense, as the NCS has become more mature, it has also become very similar to the UK situation of five or 10 years ago.” As a consequence, Djerfi remarks “this new state of affairs is quite exciting, because with more operators, there are more ideas coming in, many different views on resource development, and added flexibility and efficiency” for operators in aspects like rig-sharing.

And sharing they may have to, especially in Norwegian waters, where activities earlier this year were at all-time highs, compared to the UK side, where drilling was down 57%. Paul Horne, CEO of the North Sea’s leading platform drilling contractor KCA Deutag, comments on the situation: “The political involvement and pressure in Norway’s energy market shows why there is a difference in activity level here compared to the rest of the world; the financial support is sustained by long-term contracts which are not immediately affected by downturns. There has been political pressure to increase the production rate here as well, which means both activity and efficiency have to increase in order to keep the same production level for the next five years that we have today.”

Ulf Pettersen - Managing Director, Aanestad Engineering Of course, this pressure may result in a necessity to diversify service offerings, as evidenced by Aanestad Engineering. Managing Director Ulf Pettersen, whose company’s three main divisions comprise baggage and bulk handling in addition to oil and gas, speaks to the impact of changing times on his business. Pettersen explains, “The drop in oil price has affected the decision making process of our customers, projects have been postponed and it takes longer to decide on future investments. This has affected Aanestad as any other business in the oil industry. It is difficult to assess our market shares, but we want sustainable growth while taking care of customers all the way from the design phase to the end result.” The diversification has also meant an increased focus on the industry’s newcomers, and applying ‘out of the box’ reasoning gleaned from this wide cross-section of clients.

Some companies, however, have kept to a narrower focus, such as Sverdrup Hanssen, a company ranking among Europe's top stockers of high-nickel alloys, whose remarkable efficiency has resulted in turnover exceeding NOK 20m for each one of its 22 employees. The company's Managing Director Torstein Erevik remarks that, "Sverdrup Hanssen has a very slim organization and that makes us less vulnerable in these times. We can have the same people employed, and I would say we have very competent people. That’s very important, because we don’t want and don’t have to let them go – we can wait out the market until it turns." This slimness, however, is at risk, because financial strength has led to recent acquisitions, namely of Laholm Stål AS, to add to a majority ownership in Cronisteel. Erevik is quick to point out that with risk comes reward: "I feel that in all businesses one of the main factors is streamlining the organization . What we have obtained now are three interesting companies with a platform for growth with the goal to expand up to 1 billion NOK within the next six years. I think we have all the possibilities in the world," Erevik concludes, implying a large reward indeed.

An out of the box strategy applies to CAN AS, despite the fact that, as Managing Director Rolf Olavesen says, "Our business is focused on the long term, (modification and maintenance,) and is therefore not significantly affected by ups and downs in the market." Going further in depth, Olavesen notes "The nature of CAN’s business is to use rope access, instead of scaffoldings which can be time consuming and costly. Clients reduce the time on platforms by 300% to 400% by using our methods instead of spending two weeks building a complex of scaffolding structures." This reduction means that some companies, at least, will have help in weathering the storm. And if not, Pettersen offers some calming words. “Don’t panic when the price goes down for 6 months. It will reduce the costs in the long term and we have to adapt,” he says.

Harder, Deeper, Faster, Stronger

Adaptation has required not only moving into different industry sectors, but different sectors of the country as well. As head of one of the first integrated solutions providers to open an office in the northern Norwegian outpost of Hammerfest, Aibel AS’s CEO & President Jan Skogseth explains that such frontiers represent a big and important opportunity, and that the company has “had an operation in Hammerfest since 2006 with 300-1000 personnel onsite annually.” However, despite these relatively large numbers for a city numbering under 10,000 permanent residents, he notes that “It is difficult to get permanent employees locally as there is a lack of oil and gas background in the region, so we are moving some people as well as hiring and training in the vicinity. The facility is a strategic move to broaden our marketplace and we take the same systematic execution methods as in other locations.”

Speaking of the greater significance of internationalization, he considers it “an important but broad issue, and we are more at a micro level at the moment. Looking at regions like Russia, I don’t think we would enter unless on the back of an international company like StatoilHydro, and we are not there yet. We’re comfortable with our growth strategy but if you look in the longer term, then yes it is important to pay attention to the development of such regions over time,” Skogseth states.

Ketil Lenning - President and CEO Odfjell Drilling Developing regions implies declining ones, and the wisdom to tell between the two. As one of the few privately-owned drilling contractors which have resisted Transocean’s economic gravitation, Odfjell Drilling has been on a path of rejuvenation, divesting interests in older rigs, focusing on management activities and operating its own assets, increasingly the most advanced rigs capable of the harshest environments and deepest waters. Moving away from the shallow water and land rig markets, the company’s CEO Ketil Lenning talks about the feasibility of such a ‘deep’ shift, saying “The interesting thing is that it’s already a reality, because the first unit acquired a contract with StatoilHydro, and it’s going into contract in the harsh environment segment in the midwater sector initially, and is also capable of going into the northern areas. This is part of the flexibility Odfjell Drilling has had in properly addressing that market segment, while the second, third, and fourth unit will probably go into the world’s ultra deepwater markets.” Lenning continues, noting “You must keep in mind that although we are not opening up the new acreage in the short term in Norway – and we are very disappointed about that – the harsh environment, northern areas of the Barents Sea still need a lot of exploration and drilling work to be done in the time to come. The fleet is now getting to an age where some replacement will have to take place, and that’s where we see openings for rigs like the Deepsea Atlantic and Deepsea Stavanger.”

Twenty thousand leagues under the North Sea

Tor Ole Olsen, Managing Director of Dr. techn. Olav Olsen Deep waters call for deep structures, and so enters Dr. techn. Olav Olsen, bearing the name of current Managing Director Tor Ole Olsen’s father. The company joined the offshore world by combining their specialty in shell structures – light, efficient, and traditionally found in airplanes, rockets, and roofs – with the solution of gravity-based structures. With 100 times as many steel platforms as concrete, the niche nature of the business naturally exposes it to ups and downs.

Olsen, who also acts as Chairman of the Norwegian Concrete Association and the Nordic Concrete Federation, stresses that despite any personal ambitions, a rising tide will lift all boats: “My dream is not that Olav Olsen – and this is important for the way we think – it's not to have our stamp on every concrete structure, because the oil companies are hesitant towards monopoly. I would much rather increase market volume, and welcome participation from other competitors.”

The welcome competition might put a dent in an incredible market share, with the company participating in some two thirds of all global concrete projects. Still, opening an office in Houston was a recent development to get its name “down the road” for those locally-based clients, bringing the robustness of concrete to the less-anticipated harsh environment of the United States’ fourth biggest city.

The fluctuation Olsen feels in the concrete market is seemingly extended to the authorities’ enthusiasm about innovations. This summer, the Norwegian Petroleum Directorate, charged with awarding the Increased Oil Recovery Prize for 2008, didn't award it because no company had lived up to expectations. According to Zvonimir Djerfi, “there is no secret that in mature oil fields, you want to see further ahead of where you’re going, to determine the pockets of reservoir which are there and can’t really be seen through seismic interpretation. The end result is using various methods while drilling to foresee and investigate to better access those pockets of reservoir,” alluding to his record-setting exploits Troll brought to Asia, where recovery rates are often less than half of their Norwegian counterparts.

One must not pass too far off the shores of Stavanger to see industry action up close. Johan Pfeiffer, FMC Technologies’ General Manager based in Norway with responsibility for what the company calls the Eastern Region – Africa, Russia, and Europe – notes that as a global company, “we apply internationally, technology developed here. It’s important to note that oil companies are also global, and many are partners in the fields where our technology is being developed, so they’re often very well aware of the technology as it’s in progress. One example is the first all-electric subsea system, which we’re developing for StatoilHydro on the Tyrihans field, in which Total is also a partner.”

Pointing to technologies that may be winning plaudits abroad, Pfeiffer notes “There was a lot of excitement around the Tordis separation project as the world’s first subsea commercial separator, and FMC Technologies had many foreign operators come to look at what the company did. Although perhaps not a direct result, both Sonangol and Total visited that project during its completion, and FMC Technologies was subsequently awarded the Pazflor contract in Angola, the world’s largest subsea development,” counting the involvement of fellow Norwegians StatoilHydro, Grenland, and Bergen Group.

Already doing business in over 20 countries, COSL is a foreigner coming to look at what many of its partners are doing. Qi Meisheng, President & CEO of COSL Drilling Europe AS, mentions among them “StatoilHydro, BP, ConocoPhillips, and many others. COSL counts close cooperation with all of these companies in China for the past two decades, and has already provided many services to them in China. Therefore, COSL already knows its clients’ technical service requirements. In Norway, the biggest challenge for COSL is the working environment, but this is a challenge to all the service companies in the country – not just COSL.”

Integrating in that culture will help with COSL's acquisition of Awilco Offshore in October 2008 for $2.36 billion, adding the zest of youth into the rig fleet, with average age of less than two years. This move toward the future is evidenced in Qi’s enthusiasm for important technologies COSL is adopting in deepwater exploration. “COSL has recently finished a project called ASDD (Artificial Seabed Deepwater Drilling), a joint venture with Kristiansand-based Atlantis Deepwater Technology Holding AS representing almost four years of collaboration,” he says, having come to Norway to kickstart the project at its inception. After four years, a successful trial well in the South China Sea has meant the technology will be rolled out more broadly, in order to “get more out of deepwater operations for third and fourth generation rigs which can only reach 400m of water depths – this will help reach water depths of up to 1200m,” Qi concludes.

Chapter 1

Thailand might already have become a medical tourism destination but the country still needs to sort out serious issues on its local market as the country healthcare system is largely underfunded, the country depends on imported drugs and APIs, local companies are lagging behind in terms of manufacturing practices and international pharma companies have delocalized their production to neighboring countries.

Universal Health Coverage scheme

The challenge for the self-proclaimed "Land of Smiles" is to manage the sensitive combination of international competitiveness and social justice.

"The quality of healthcare is very satisfactory," says Dr. Prat. "Today, 47 million people are covered by the new 30-Baht Scheme, the Social Security Scheme covers another 10 million and the rest of the population is covered by a civil servant scheme. In our Kingdom, everybody is guaranteed access to healthcare."

Dr. Prat Boonyawongvirort The pioneering 30-Baht Scheme (also known as Universal Healthcare Coverage) Dr. Prat refers to was launched in 2001, covering six provinces and all MOH hospitals. The idea of offering cost-subsidized healthcare at the point of delivery wooed millions of low-income people. Eligible patients registered with hospitals closest to their homes and needed only to pay 30 baht (about 71 cents in US currency) for a hospital visit for treatment of all illnesses. Apart from guaranteeing healthcare to the lower income group, the 30-Baht Scheme has enabled people who were not covered under any program to access necessary medical treatments. Previously, a visit to the hospital required a fee of 200 baht (around $4.50) or more.

The new government, appointed last fall following a bloodless military coup, has already declared that the 30-Baht Scheme will be replaced by free medical treatment throughout the country. "Hospitals won't be richer or poorer whether or not they receive 30 baht," said the new public health minister Mongkol Na Songkhla.

But there is across-the-industry fear that this could harm the already insufficiently funded healthcare programs, and together with the price erosion put increasing cash flow pressure for the stakeholders.

GPO fulfilling the need of the Thai people

Lt. Gal. Mongkol Jivasantikarn The first company to be hit could be the state owned Government Pharmaceutical Organization (GPO). GPO enjoys the benefits of the government's former pharmaceutical market regulation and holds a near monopoly over the supply to the public sector. (Under the old regulation, public hospitals were legally obliged to purchase 80 percent of their drugs from the GPO and only 20 percent from private organizations.) GPO plays a prominent role for locals as the producer of the simplest drugs like penicillin and paracetamol and as the manufacturer of complex cocktails for the treatment of HIV and AIDS.

Today, the state-owned company produces more than 200 items, most of them medicines included in Thailand's essential drug list. GPO also manufactures herbal medicines, biological products, and vaccines for diseases including Japanese encephalitis (JE) and diphtheria-poliotetanus (DPT).

"GPO fulfilling the need of all Thai people. Therefore, we have to focus on producing generics by volume and we have to be able to constantly increase capacity while maintaining quality. Our goal is to become the leading generic pharmaceutical manufacturer in Thailand and the near region in producing medicines of standard quality at reasonable prices," claimed Lieutenant General Mongkol Jivasantikarn, GPO's managing director.

"We have a primordial role to serve the needs of our population in case of emergencies like the bird flu and other diseases of the developing world that Multinational Corporations (MNCs) or indigenous manufacturers are not able to supply," he summed up.

"We would like to have good new products that can be exported. We also plan on maintaining our leadership position in the country. Ten years from now, all our facilities will be brand new, even our headquarters. We will be the leaders in South East Asia", he promises. New facilities are a way for GPO to significantly increase its export activities.

Currently, GPO continues its R&D on the second line ARV drugs which are no longer under patent protection. "We are applying for WHO-GMP Prequalification Inspection and expect to get the approval and be certified by April of 2007" says Lt. Gal. Mongkol.

Reducing dependency on imports

Like most key players of the pharmaceutical sector, Lt. Gal. Mongkol stressed the importance of annihilating the endemic dependency of the Kingdom. "We have to save our budget to reduce the number of imported drugs. We must develop our own products and be a self-sufficient economy (...) We can't do this by ourselves. That is why we are constantly looking for partners."

Participants across the board are fighting Thailand's dependency on imported pharmaceutical and raw materials. The Thai government hopes that promotional privileges and incentives through the Board of Investment in Thailand (BOI) will enhance the national industry. To do so, the BOI has come out with an investment promotion policy specifically related to the pharmaceutical industry.

"The pharmaceutical industry is one of the key sectors for our economy, especially when we are talking about the wellbeing of our people. Therefore, we would like to enhance investment with the thought of manufacturing more drugs in the Kingdom," says Satit Chanjanavakul, Secretary General of the BOI.

Meeting higher standards

"In the past, we only promoted the API manufacturers, but in August last year we saw an urgent need to upgrade the manufacturing standards of our indigenous manufacturers," recalled Satit. We agreed then that we would work together to help them upgrade and reach international standards." In order to be competitive on the manufacturing side, it was decided local manufactures should comply with the international Pharmaceutical Inspection Convention and Pharmaceutical Inspection Cooperation Scheme (jointly known as PIC/S) by 2008.

The pharmaceutical projects that BOI chose to promote will receive import duty exemptions on machinery and exemptions of five to eight years on corporate income tax, depending on the project's location. These incentives were designed with the purpose of encouraging existing drug manufacturers in the country to improve their operations and invest in new factories.

It will also be required that all BOI promoted pharmaceutical companies achieve Good Manufacturing Practices (GMP) standards that correspond with PIC/S within two years of beginning operations. To Satit, the upgrading of the standards should definitely position Thailand as a prominent pharmaceutical player.

Production at GPO's plant

"The upgrading of the companies' standards would certainly not have been possible without our seven years of lobbying," said Chernporn Tengamnuay, president of the Thai Pharmaceutical Manufacturers Association (TPMA). TPMA represents local pharmaceutical companies and helped the BOI and Thailand's FDA, the regulatory body that controls drug registration, meet and discuss these matters.

"Thailand joining PIC/S is a big breakthrough for the local industry because it guarantees all the drugs produced in Thailand will be manufactured with the highest standards. This will protect the consumer while helping to develop Thailand as the future generic hub for the region. We couldn't keep out of the world trends, so sooner or later Thailand had to adopt the harmonization center based in international standards in order to be competitive both in the region and the world," explained Chernporn.

GMP pioneers

Among the 171 privately owned Thai companies, only a handful already comply with GMP standards and chose, from scratch, to focus on quality. Biolab for example has been present in the country for more than 25 years and was the first company to meet GMP standards. For the last eight years, the company has invested non-stop in order to enhance its competitiveness, aiming to become a regional player. Last year, Biolab invested $10 million in a facility for injectables, becoming the only company in the country manufacturing these products.

Another GMP pioneer was Siam Pharmaceutical, which modestly started up in 1966 as a pharmaceutical trading company with first-year revenues of just 2 million baht ($56,200). Forty years later, it has grown to become Thailand's leading private pharmaceutical group with an annual turnover of 1.5 billion baht ($47 million).

GMP is no novelty for Thawan Cheukarndee, chairman of Siam: "GMPs were implemented in our plant years before they were first introduced in Thailand and later enforced by the authorities. To further assure the effectiveness of our products, we started doing our bioequivalence studies 30 years ago," he remembered.

Regional integration

Satit Chanjavanakul The Association of Southeast Asian Nations (ASEAN) harmonized standards could be seen as one of the factors influencing cross-border business opportunities but also a more standardized quality platform in the region which would force companies to comply.

ASEAN integration and harmonization is seen by Prof. Pakdee Pothisiri, former secretary general of the FDA as a great opportunity for the local industry: "We will take the regional harmonization into consideration. We have already adopted the common technical dossier and a common technical requirement. Once this is all put into place, I don't see why we couldn't become one of the pharmaceutical hubs in this region," he explained.

The FDA has in the past been a great contributor to the modernization of the industry. Prof. Pakdee mentioned the creation of the one-stop center that, besides accelerating the process of registration helped strengthen the links between the administration and the industry. "The work environment is completely different, so is the way in which we offer our services. It is actually similar to the private sector. By showing the way, we are trying to get the local industries to change their behavior and to become more service-oriented," he said.

Multinational Corporations Wanted

Satit Chanjanavakul, secretary general of the Thai Board of Investment (BOI) is confident that Thailand will gain a regional position: "Our geographical location makes us the gateway to the ASEAN region. We also have great infrastructures, which makes it very easy to reach all the countries in the region," he concluded.

Nevertheless if it is to claim the status of regional hub, Thailand will first have to attract Multinational Companies (MNC) back. Although MNCs outperform their local counterparts by 39 percent versus only percent in local gross margins, even if most MNCs still have incorporated local subsidiaries, they have already gradually shut down all their Thai production facilities.

Global trends to centralize manufacturing, lower import tariffs in Thailand, rising local labor costs, and access to low-cost outsourced manufacturing may explain the situation.

"In the past years a bunch of multinationals have moved manufacturing facilities from Thailand to other countries in the region. It is true that with the globalization trend and the US-Thailand Free Trade Agreement [FTA], MNCs will look to establish their manufacturing facilities in other ASEAN or Asian countries that give better incentives than the Kingdom. As local manufacturers, we are not content with this situation. We hope that the new BOI privilege can encourage MNCs to come back and invest in Thailand," said Chernporn Tengamnuay, president of the Thai Manufacturers Association.

The BOI has grasped the question and sent great incentives towards multinationals. "We have recently widened our policies to include the promotion of finished products," said Satit. "Since we have informed people of our new polices, we have received a number of requests from MNCs to discuss them. We will be eager to see them coming back," he claimed.

But not everyone shares his optimism. For Peter Jager, head of Novartis Thailand, it's the legal framework that needs improvement, as he thoughtfully summarized this relative disaffection of MNCs: "we recently did a survey of Swiss pharmaceutical companies and found that the research and development spends in Thailand are less than two percent of sales," he said.

In manufacturing, no investments at all are seen today. The reason why this investment level is so low is that Thailand still does not offer a proper protection of Intellectual Property [IP] Rights for innovative pharmaceuticals. Also, the process of obtaining patents is lengthy, cumbersome, and exposes the innovator as a result. I strongly believe that investments in research and development in Thailand can be a multiple of what they are today-that is, if the Thai government addresses this issue and sets a clear IP protection environment that is effectively enforced as it is in some other countries in the Asia Pacific Region, such as Singapore."

Greater IP enforcement needed

What is needed to re-attract MNCs is a better and less complicated regulatory system as well as IP enforcement.

"Thailand's pharmaceutical patent laws are generally seen as being up to the standards of many of the world's developed nations, but in one or two areas are clearly deficient. It is in these areas that the competitiveness of Thailand is undermined when compared with its neighbors," said Edward Madden, director of the IP department of Tilleke & Gibbins, a Bangkokbased law firm that serves as external legal council for the Pharmaceutical Research and Manufacturers Association (PReMA). "A lot of the reform that is actually needed relates almost directly to matters of interpretation and implementation of laws which already exist," he added.

Among the principal areas of deficiency are unreasonable delays in obtaining a patent, and the inability to effectively enforce patent rights. While the US-Thai FTA provided the opportunity to create a viable and attractive system of IP laws, which would have made Thailand more attractive to industry, it appears the opportunity may have been lost.

"History has shown that IP laws have only been enacted in the Kingdom as a result of international pressure rather than any sound economic analysis, and this stance is not reassuring for those involved with leading-or cutting-edge technologies," said Madden. Two issues have arisen in favor of enforcement. The first is enforcement against counterfeits, which are endemic in Southeast Asia, fake medicines made out of inert materials like glue and chalk. "WHO has estimated more than 10 percent of medicines worldwide are counterfeit. That's a frightening statistic, like Russian roulette," warned Edward Kelly, a senior partner at Tilleke & Gibbins. The other is enforcement against unfair competition by copy products that are granted market approval by the FDA despite being covered by a patent that would otherwise preclude the drug from being on the market. "In Thailand, this phenomenon occurs because we have no formal patent linkage system," said Kelly. "This is a reform that is urgently needed."

A bright future ahead

But to Somgiat Mahapun, Janssen-Cilag's managing director for Thailand and Indonesia, these legal loopholes will gradually disappear: "Thailand has had product patents since 1992, so the threat of generics is fortunately decreasing. This is a good thing for multinational companies. The challenge remains for the local ones, since they have to raise the image of the local product in the eyes of doctors and patients. Furthermore, they have to develop alliances with the research companies for marketing new products as well."

Oncology is a priority field for Janssen-Cilag, a subsidiary of Johnson & Johnson, along with hematology, pain, and central nervous system (CNS). "One of our main fields of development is currently anti-psychotic drugs. Marketing these types of drugs in a country like Thailand was a major challenge. The market was previously very small and I believe Janssen has expanded the market tremendously together with Eli Lilly and AstraZeneca by introducing all these atypical antipsychotic drugs," said Mahapun. "A major challenge would be to broaden this market in CNS since the business comes mainly from the governmental sector, where the money allocated to mental health problems is minimal."

In the coming year, Janssen-Cilag will also be looking into biotechnology with its flagship product, Eprex. "Our challenge now is to maintain our market share as we are faced with many biosimilars for this product. Actually, our company is the second-largest biopharmaceutical company worldwide. Unfortunately, we don't have access to those products for Thailand," said Mahapun. These constraints don't prevent him from considering a bright future, especially since Thailand is on the verge of becoming a clinical research hub.

Becoming a clinical trial hub

Janssen-Cilag already has a separate Global Clinical Research Organization (GCRO), which deals with early-stage trials and reports directly to regional headquarters. "As the country manager, I am trying to lobby with corporate so we can perform more early stage-clinical trials locally," explained Mahapun. "When we look at the market, we see that it is growing exponentially. We have good researchers who will help in conducting clinical research in the early stages. Also, Thai doctors are getting the opportunity to gain international exposure. Therefore, they are paving the way to acquire credibility for this kind of thing. This is a very good experience for the country in order to develop our own research."

Most MNCs predict a bright future for Thailand as a clinical research hub. In their view, it could be a win-win situation for the industry as well as the medical profession in Thailand. "What we are trying to do is maximize the number of clinical trials, so that we can leverage our presence in Thailand and do cutting-edge clinical research with interesting compounds, said Novartis' Jager. "This will also aid Thailand in becoming a medical healthcare hub. We can do some technology transfer, we can do a lot of training, and I think that many Thai doctors are very appreciative of these kinds of activities."

Novartis Thailand is the most dynamic and best-performing subsidiary within Novartis in the region, ranking the fifth-largest MNC in Thailand in overall operations. Today, the group has taken a step forward, complying with the parent company's highest standards to conduct clinical research.

The Biotechnology Fever

"We don't want to be perceived as a low-cost country as we are on our way to building a knowledge-based economy." According to Prof. Dr. Pornchai Matangkasombut, chairman of the Thailand Center of Excellence for Life Sciences (TCELS), smart collaborations and partnerships among government, universities, entrepreneurial companies, and investors, both within and across national boundaries, will contribute substantially to Thailand's ability to capture the value being created.

TCELS is a non-profit, government organization established in 2004 by royal decree from the King of Thailand. Its establishment followed the development and execution of a strategic and innovation-based private public partnership (PPP) between the US-ASEAN Business Council and 12 of its member companies. Today, TCELS mostly plays the role of a one-stop service center helping investors to do overseas outsourcing. 25 years ago, Thailand already had sufficient research and development infrastructure to qualify as an international center for genetic engineering and biotechnology.

Biotechnology leads the drive toward a knowledge-based economy

Prof. Pornchai Public-private sector cooperation is adding strength to the industry. New incentives in drug discovery, stem cell, DNA, and genomics research all underscore the potential being realized and the investment value in Thailand's biotechnology sector. "Since we assessed the potential of this field, we have created some bio-investment incentives," explained Satit Chanjvavnakul, secretary general of the Thai Board of Investment (BOI).

Incentives to invest in Thailand are offered in two forms: tax and non-tax. The BOI also offers new corporate income tax exemptions for the pharmaceutical industry ranging from five to eight years. "BOI is really committed to enhancing biotech and building a knowledge-based economy in the Kingdom," said Satit.

The BIOTEC breakthrough

Biotechnology is definitely a priority sector for the country. Thailand has set a target to become a center of biotechnology research and development in Asia with the goal of investing more than $125 million and establishing more than 100 new companies in the field. Operating under the oversight of the National Science and Technology Development Agency (NSTDA), Thailand's National Center for Genetic Engineering and Biotechnology (BIOTEC) supports development in biotechnology through conducting research and development projects, facilitating the transfer of technologies from overseas, and promoting public understanding of the benefits of biotechnology.

The Biotec building

"When we started the National Center 23 years ago, we focused on building the infrastructure and developing human resources," noted Dr. Morakot Tanticharoen, director of BIOTEC. "We started out by setting up a medically specialized laboratory in collaboration with Mahidol University. That was where we started our activities in medical biotechnology. Since then, we have given 700 scholarships for our academics to go abroad and gain expertise."

Reinforcing biotechnological development, Thailand has formulated the National Biotechnology Policy Framework in line with the government's policy of promoting self-sufficiency and enhancing the country's competitiveness. Two years into the program, the results are, to Dr. Morakot, entirely fulfilling. "With the top guys in the committee, we can really push to make things happen. We have the full support of the most important bodies in the government and we can get agreements on the things we consider essential to boost biotechnology in the country. For example, when we suggested to the government that we needed to set up a biopark to foster Foreign Direct Investment [FDI] and research and development, the government approved the budget so that the Thai Biopark attracts more MNCs."

The Thai Biopark

The Thailand Science Park is the major physical manifestation of Thailand's commitment to research and development in science and technology. Today, out of 60 companies in the park, 17 are involved in biotech. "Our park is divided into two parts. One we call 'the incubator' where companies can rent space in the building, or at our pilot plant, to set up their lab using their own people. The second one is where they build their own research center," explained Dr. Morakot.

Dr. Morakot , Director of Biotec Within the policy, BIOTEC also has a plan to develop research for tropical diseases. "We think we have a lot of opportunity in this field because a niche for Thailand is biodiversity," Dr. Morakot pointed out. "One of our biotech focuses is to add value to biodiversity; therefore we are combining the biodiversity program with the tropical diseases research. With this combination, we can create a genomic outcome. This triangle put us in a good position."

If Dr. Morakot is conscious that, for the moment, multinationals are keener to inject capital into countries like Singapore, she refuses to see this situation as a curse. "In terms of investment, we are not as good as Singapore, but money is not the only thing, and we do have something that Singapore is lacking in: HR. In Thailand we have highly qualified people who have been trained abroad constantly bringing innovative ideas into the Kingdom."

"BIOTEC would really like to work as a partner, not as a recipient. We believe in partnerships and we guarantee that we can provide our future partners with good facilities and excellent HR power," insisted Dr. Morakot. For example, the Drug Discovery Partnership aims to find potential use of microorganisms and natural compounds as sources of innovative medicines.

As one of the first MNCs to take a chance on Thailand, Novartis won't be the one to contradict. "We see a growing biotechnology sector with a growing focus on healthcare. Thailand offers a unique biodiversity that may prove an excellent source to discover new drugs. We at Novartis have started a joint research project with the BIOTEC institute to do exactly that: help discover new drugs out of natural resources found in Thailand. The project focuses on technology transfer, training, and pharmacological assays on substances found. It's a long shot but we are hopeful of finding one or more interesting active substances in the next few years," said Peter Jager, country head for Novartis Thailand.

A Dispensary Market

Cyrille Buhrman "If you work for MNCs, changes are natural, you will always be facing new openings and different challenges in different markets and you have to be ready to take them." According to Patrick Bruhlmann, CEO of the Hong Kong-based distribution company Zuellig Pharma, the Kingdom is very much driven by customized customer demands and high expectations from blue-chip pharmaceutical companies. Like many countries in the area, Thailand is a dispensary market where 66 percent of medications are directly distributed to hospitals. Distribution is under two main players (DKSH/Diethelem and Zuellig) sharing 95 percent of the market. Another important variation is the mechanism of prescription and dispensing of pharmaceutical products. In Asia, medicines are prescribed and dispensed at the same place. Hospitals give prescriptions and then dispense, as do doctors. Therefore there is very little release of prescriptions across pharmacy channels.

Delivery within 24 hours

As an exclusive distributor, Zuellig acts on service agreements and charges a percentage fee for services. "In Europe, USA, and Japan you have typical wholesaler markets. For example, they will buy X or Y product at $100 and sell it for $105, hopefully keeping the $5 profit. We operate differently, because we buy for 100 sell at 100 and earn a small service fee on the transaction," explained Bruhlmann.

With more than 300 salespeople servicing MNC customers, Zuellig makes sure its products are going into the right channels. It also performs a lot of secondary repacking and labeling in order to customize imported products to local market needs. Zuellig usually operates as a central distribution system. "We have a large, fully temperature-controlled facility where everything is stored. We take orders and invoice about 5,000 to 10,000 orders every day and make sure that everything is delivered within 24 hours. The 24-hour delivery is almost always possible unless we face very adverse climatic conditions," explained Bruhlmann.

A real focus on niche markets

Because of the toughness of the distribution business in the country, an opportunistic company like Pacific Health Care (PHC) has thoughtfully chosen to follow another path. This marketing and distribution company has been present in Thailand for more than 40 years. Today it has more than 300 employees, the majority of whom are in marketing-related roles, and it has a turnover of $25 million. PHC provides marketing and sales services to the medical community (hospitals and clinics) and over-the-counter (OTC) channels, including direct-to-consumer marketing and sales services to the modern trade retail channel. "We have been able to develop a one-stop solution for high-quality healthcare and related products," explained Cyrille Frederik Buhrman, Pacific Healthcare's managing director. "Another key ingredient for our success has been our ability to concentrate on specialized niche imported consumer health, medical devices, and pharmaceuticals markets and become dominant in such areas."

HR is another competitive advantage that allowed PHC to enjoy such a dominant position. "We excel at bridging the gap between East and West thanks to a workforce consisting of several key Thais who have either been Western educated or heavily exposed to the West," said Buhrman. "They are capable of successfully applying Western knowledge to the local market."

In the future, PHC intends to remain a niche player, focusing on specialized and value-added products. Furthermore, the company is expanding into the ASEAN region. "We see that many companies want to be present in these markets, but they do not identify them as strategic markets," said Buhrman. "This is why they chose to outsource us to be their distributors here and take care of their businesses. PHC is determined to keep on bringing innovative products into the region, strengthening collaboration with leading companies and help improving the quality of life."

The Medical Tourism Boom

Medical tourism could give a boost to the pharmaceutical industry in Thailand. The Kingdom enjoys top-quality hospitals that profit from an increasing number of international tourists attracted by world-class medicine at developing-world prices. Hospitals such as Bumrungrad, Samitivej, or Bangkok General are considered magnets for medical tourists. The others are big private hospitals that are starting to do some similar things. "Just going in to some of these hospitals, you'd think you would have walked into a hotel," said Robert Mitchell, general manager of Roche Thailand. "People travel from the US to be cured for half of what it would cost in their country, and the physicians and surgeons doing the operations have often been trained in the US or the UK."

At present, Thailand has 40 private hospitals and is expected to have a total of 60 by 2008. Out of the $4 billion that the region is expecting in medical tourism, Thailand will attract 47 percent. The Bumrungrad hospital, located in the heart of Bangkok, will be at the lead.

Founded in 1980, Bumrungrad is the largest hospital in all Southeast Asia with 554 beds and the capacity to take care of 3,500 patients per day. It receives more foreign tourists than any other hospital in the world. Bumrungrad has benchmarked itself as the first hospital in the world to receive ISO 9001 certification, the first hospital in Thailand to receive the Thai hospital accreditation, which complies with Canadian standards, and the first in the region to receive specialty accreditations to treat complex heart diseases. It also has the largest clinical trial center in ASEAN, a strategic area for the future development of the business. Newsweek called Bumrungrad "Asia's first internationally accredited hospital and one of the most modern and efficient medical facilities in the world." It listed Thailand's largest private hospital first amongst 10 "worldclass destinations" including hospitals in Germany, France, the UK, and the US.

Surfing on the wave of medical tourism, Bumrungrad has already paired up with Thai Airways International to offer foreign patients package tours combining medical treatment with sightseeing.

Chapter 1

Egypt: Potentially the Best Place to Invest in theMiddle East

His Excellency, Professor Dr. Hatem El Gabaly, the minister of health and population of Egypt, shows no doubt that the strong and necessary reform his government is currently undertaking will prove to be fruitful. Although the country is considered one of the most advanced and mature pharmaceutical industries in the region, it is still mainly a domestically oriented industry focused on drug formulation with very limited research capabilities.

The country also faces its regulatory framework, an arguable and controversial pricing policy, as well as its limited export capacity. On the other hand, its long tradition in medicine, as well as the dynamism and goodwill of its businessmen, will certainly help the country get back on the right track. Dr. Osama El-Saady, at the head of the Federation of Pharmaceuticals, Cosmetics and Medical Appliances Industries, as well as chairman and managing director of Sanofi-Aventis, is quite optimistic about the ability of the Minister to find a balance between economic urges and social dimension. “I invite the foreign community to keep an eye on Egypt since it is the best place to invest in the Middle East. You can trust Egyptian manufacturers because all has been put in place to manufacture high-quality medicines in the country,” he promised. According to Dr. El-Saady, the sector's situation will definitely improve within two to five years' time.

The second market in the area

It would be an understatement to say the country's potential is great. With over 74 million inhabitants, and growing at a rate of 2%, Egypt has become the most dynamic and attractive market in the MENA region. The country also has the second largest pharmaceutical market in the area after Turkey. There are currently 74 pharmaceutical factories producing over 7,600 different types of drugs for domestic sale and export. Today, the Egyptian drug manufacturers can be lumped into three basic categories: the public sector represented by the Holding Company for Pharmaceuticals, Chemicals and Medical Appliances whose 12 subsidiaries control a total of 23% of the market share; the Egyptian private sector companies; and finally a group of eight multinationals. All are fighting for market share, changing their positions and alliances.

Of the 8,000 drugs registered with the Ministry of Health and Population, almost 7,600 are manufactured locally, enough to cover 93% of domestic demand. Drug makers say one of their biggest challenges is that the government’s pricing policy has failed to keep up with the rising costs of imported raw materials. Unable to raise the price of their products, pharmaceutical firms have been forced to absorb skyrocketing input costs.

Providing affordable medicine

Dr. Hatem Mostafa El-Gabaly, Minister of Health Although there is no doubt that modernization of the sector is underway, the tight regulatory environment still represents a hurdle for foreign companies. Many of the policies that govern the pharmaceuticals sector date back to the 1960s, when the government established public companies in order to manufacture cheap substitutes for imported drugs as part of the country’s policy of self-sufficiency. By the 1980s, the focus had shifted to a free market on the back of Sadat’s “open-door” economic policy, in which international companies were permitted to export their products to Egypt or establish their own factories domestically. “There is definitely an urge of modifying the pricing system,” says Dr. El- Saady. “A more transparent system should also be implemented in order to attract more FDI.” The chamber has, thus, addressed the government to base its pricing system on one of the successful neighbors.

Therefore, the major changes going on at the head of the country are thoroughly followed by the differing actors of the sector. The new healthcare program was designed in alignment with President Mubarak's political agenda, which is focussed on providing healthcare insurance to every Egyptian by 2010. “Today, around 35 to 37 million of the 70 million people are covered by healthcare insurance, but by 2010 we are expecting to cover 100% of the population,” said Dr. El Gabaly.

“Pricing is the hottest issue and this is a social constraint,” added Dr. Zakaria Gad, chairman of the Egyptian Pharmacist Syndicate. “We are always trying to get the price of medicines to come down. The national policy is to provide affordable medicines to all of the people in this country. Most of our people have a very low income. This is a continuous headache for everyone.”

The 100% governmental Drug Holding Company has also been a pivotal topic for the Egyptian economy as it manages to keep the pricing down and provides affordable medicines while remaining very profitable. “There is a need for governmental companies in Egypt and we will be very active since the government wants to cover all Egyptians by 2010,” ensured Dr. Magdi Hassan, chairman of Drug Holding Company.

A company like Vacsera has been in the country for more than 105 years and is still a key actor in the nation, providing vaccines to the people, such as for polio, which has since been eradicated. The company, however, is at a critical point in trying to regain its credibility. It was wrongly said to have sold spoiled vaccines and resulting in the deaths of several children. It is also overcoming a corruption scandal involving the previous CEO. Vacsera’s chairman, Dr Mohamed Rabie, prefers to stress the importance today in having successful governmental companies and showing how his expertise in the private sector could help build a more transparent and less bureaucratic system.

The government's firm grip on pricing policies helps keep the price of medicine in Egypt among the lowest in the region. This moderation is also the result of a robust local pharmaceutical industry, which is able to produce generic drugs at a fraction of the cost of imported brands.

The necessity of reform

“I am less pessimistic today than during the last ten years,” noted Dr. Wafik El- Bardissi, executive vice-president of Minapharm Pharmaceuticals. “During the past ten years, health policies have led to a chaotic environment.”

As a result of a lenient compliance system, the compliance cost was significantly reduced and the very professional complex industry became attractive for non-professional entrepreneurs with absolutely no expertise or knowledge of the industry. According to Dr. El-Bardissi, the new cabinet is focusing on health reforms and the pharmaceutical industry is dealing with this as part of the reform.

“This is liable to align the future of the industry with the health reform plans. This is in contrast to the past ten years, where health policies have dealt with neither independently. Spontaneous resolution of chronic problems like pricing could be a consequence of this approach,” he summed up.

Osama El Saadi However, two major challenges are facing the new cabinet, warranting specific attention. First, there is a need to control the chaotic environment of the industry primarily through toughening up compliance standards. Second, there needs to be serious reconsideration of emerging obstacles. On one, hand health authorities are getting more flexible with medicine importation, thereby repelling global players from granting manufacturing rights for new products and technologies in favor of importation; and on the other hand, restrictions imposed by the implementation of the TRIPS agreement as of 2005, means generic manufacturers are suffering a significant shortage of pipeline products.

“If not seriously addressed, both challenges are liable to put the future of the Egyptian pharmaceutical industry in jeopardy,” Dr. El- Bardissi warned.

Breaking Through out of the Export Desert

Dr. Sarwat S Bassily Unfortunately, the pricing issue has kept many companies out of the export market. If Egyptian pharmaceutical firms currently export to 45 countries, mostly in the Middle East and Africa, the total value of exports of all 74 pharmaceutical factories in Egypt is estimated at just $41 million - a drop in the bucket even by regional standards. Jordan, for instance, exports $226 million in drugs per year, with only 16 pharmaceutical factories. These figures are not surprising though, for the Jordan market is very small and its industry was originally thought of for the export market.

The influence of Egyptian medicine

The AstraZeneca experience is very relevant to the export issue. Sweden's AstraAB and Britain's Zeneca Group had a presence in Egypt for decades, but the limited range of products did not justify the expense of setting up factories there. Following the merger in 1999, to form AstraZeneca, the group began to survey the market. In 2002, the company announced it would invest $40 million to build a factory in Sixth of October City to produce its specialty line of ethical drugs.

“We studied the market and the project was finally given the greenlight in 2002,” explained Dr. Ahmed Zaghloul, marketing company president of AstraZeneca Egypt. “The plans were then put on hold during 2003 because of the pricing problems that were causing turbulence in the market.”

Dr. Zaghloul said he found it intriguing that during AstraZeneca's negotiations to open the new factory, the government requested that it considered exporting its medicine. The company would like to export, but as many countries set prices on imported medicine based on its price in the country of origin, exporting could be a loss-making venture. “How can I export if there are products here losing money?” he argued. “If I try to export them, the local price will make me lose even more money.”

Despite this prominently local focus, to Dr. Zaghloul, Egypt is meant to reinforce its position in the sector. “We are 70 million and growing at a fast rate, and nearly one-third of all Arabs are Egyptians. The influence of Egypt on the pharmaceutical sector in the region is very clear. One must not forget that the Egyptian school of medicine has been a big influence on the entire continent,” he said.

Being ahead of others

Dr. Sarwat Bassily, chairman and CEO of Amoun Pharmaceuticals, one of Egypt's oldest private drugmakers, shares the same vision. To him, the major obstacle the country faces regarding exports is that Egypt is a big country and it is growing very fast. “The population here is increasing by 1.4 million per year, which is a very challenging figure to satisfy with new drugs every year. The amount of pharmaceuticals which I could sell here in a week's time can take us a year to sell in the export market,” he said. Amoun is currently concentrating on the local market, and just started looking to the export market a few years ago.

“When I sold my first company to GSK, I sold it with 523 registrations outside Egypt,” recalled Bassily. “When we started the second company, we had to start making the registrations of the new products from scratch. Today, we have 211 products registered and 281 under registration outside Egypt.” Despite these drawbacks, Amoun is still a key actor in the Egyptian pharmaceutical sector. Dr. Bassily is particularly proud to have sold its companies to GSK and contributed to the success of this MNC in Egypt.

“If we take into consideration all our activities, the company ranks number two as per the IMS ranking, and we have approximately 6% of the total Egyptian market. Moreover, we manufacture 23 of the top 160 products in the country. I am proud to say that we were the first company to do this in the private sector,” insisted Bassily.

Amoun is also the only company to have seven different international certifications. It was, for instance, the first pharmaceutical company in the world to get the certification BS-7799 for information safety and security, and the only pharmaceutical company in the region with OHSAS-18001 certification for Occupational Health and Safety. It was also given a prize by UNIDO as one of 50 Innovative Enterprises in Africa, and by the end of 2004 Amoun achieved the EU certification to export to the European market.

“The key to success is being ahead of others. In the pharmaceutical business, a person has to have a good reputation, and in Amoun we are keen to build it year after year. We are very well known for our credibility, effective products and straight-forward reactions,” he concluded.

Chapter 1

Unifying Germany with innovation

In the new nation, however, East Germans quickly learned "there's no such thing as a free lunch," and Germany as a whole has realized that harmony comes with a price. After years of subsidizing the poorer former communist neighbors, the Federal Republic is still pondering how to continue financing social equilibrium, without compromising its generous welfare state as both the German society and its economy continue to mature. The question is not whether but rather how this remarkable society, used to transcend colossal challenges, will deal wisely with more mundane ones.

Out of a big list of “ordinary issues,” one of the most relevant – and a hot issue in Germany’s 2009 September elections – is how to finance a universal health care system. Germany’s answers to such pressing issues in the last two decades have had an impact on the world’s third largest pharmaceutical market and how the industry is responding to them.

Henning Fahrenkamp (BPI) Henning Fahrenkamp, CEO of the German Pharmaceutical Industry Association (BPI) explains: “In the last 20 years, Germany has undergone almost 20 health care reforms and law changes, averaging one reform per year.” But the results have not always been to the taste of the industry, he complains. For instance, he says, in 2004 all non-prescription drugs were excluded from reimbursement, resulting in a massive decrease of investments in the OTC segment.

Cornelia Yzer (VFA) Some outsiders may perceive the German pharmaceutical market – not long ago known as the Pharmacy of the World – as a sad testimony of the negative effects of over-regulation, cost-containment policies and high labor costs in a mature and saturated market. Even though the room for critics and improvement is considerable, skeptics couldn’t be more mistaken.

Peter Schmidt (ProGenerika) The numbers of the German pharmaceutical industry speak for themselves: Germany is the number one pharmaceutical market in Europe; it is by far the biggest generic market in the continent with the highest penetration of generic drugs among OECD nations; it is currently the European leader for commercial clinical studies; it is the second biggest biotech hub worldwide; it is one of the world’s top five pharmaceutical manufacturers; and more.

Germany’s excellence in medical science has rendered the country the fame of the “land of innovators,” with 77 Nobel Prize winners in the fields of medicine, chemistry and physics in the 20th century. Companies such as Bayer Schering Pharma, Boehringer Ingelheim and Merck KgaA have long benefited from German scientists’ bright ingenuity - which have produced classics like morphine and aspirin.

The main strengths that justify such a durable predominance in the international pharmaceutical scene are Germany’s long standing know-how in manufacturing and logistics; its great expertise in areas ranging from basic research up to high-tech research and production; and the immediate market access given to drugs after approval. The German competitiveness is translated in its export-oriented tradition that benefits from a privileged location at the center of Europe and at the doors of fast growing emerging Eastern European markets.

Still, in the last twenty years, Germany has only barely been able to maintain its position as a production centre. It responded for 8% of the overall pharmaceutical yield from Europe, Japan and the USA in 2007, down from 9% in 1990 – and if we considered the appreciation of the Mark and Euro in the period the figures would be even worse.

The struggle of the German federal government to deal with the increased budgetary constraints and rising health care costs is enormous, especially in a country that for decades has provided universal health care coverage to its citizens. The ageing of the population; the continuous reduction in the numbers of young taxpayers; the rise of unemployment and decrease in wages; plus the dramatic increases in some chronic diseases such as diabetes are all good reasons for concern.

Unfortunately, finding the right balance between rising costs and shrinking revenues is not a “privilege” of Germans. However, what is unique about Germany is how it has stopped the rise of health care expenditures. From 1996 to 2006, the share of the GDP spent on health care services went from 10.4% up to 10.6%, much less than other OECD countries such as France, which scaled its out goings from 9.8% to 11.1%.

Generics are the key, as the strategy heavily rests on the German government and industry’s capacity to increase their penetration in the market. According to Peter Schmidt, CEO of ProGenerika, the German association of generic producers: “Generic drugs are responsible for more than 63% of the market from the statutory health insurance system (SHI) – which covers 90% of all Germans – and in the off-patent market generics hold 79% of the market share.” This is especially relevant for public coffers since, once a drug goes off-patent, generic producers take up to eight weeks to enter the market and drop average prices by more than 75%.

Cornelia Yzer, General Director of the German Association of Research-Based Pharmaceutical Companies (VFA), recognizes that the German government imposes a high level of regulation. However, according to her, German politicians are aware that further restrictive rules will have a negative effect on R&D in the country. As Ms. Yzer highlights: “the federal government has done a lot in the last two years to promote R&D in the pharmaceutical industry; they have understood that the only way to create a clean and knowledge-intensive economy is to constantly promote long-term R&D in Germany and cooperate closely with innovative sectors such as the pharmaceutical industry.”

Balancing all the pros and cons, if in terms of production the country has lost positions in international ranks, it is undeniable that Germany is at the forefront in biotechnology and other highly innovative-intensive areas such as genetically manufactured pharmaceuticals.

On the one hand, the German federal government is trying to cut costs in the health care sector and, on the other, it is firmly incentivizing innovation through support to research, foreign direct investments (FDI) and German start-ups. This paradox explains why even though the German pharmaceutical market has grown below the OECD average in the last 20 years its pharmaceutical industry has done fairly well, mostly thanks to exports. The German market has become small for its pharmaceutical industry and now its export rate is up to 56% of the national production, 20% more than 15 years ago. As the German pharmaceutical industry moves forward by focusing on international markets, it is difficult to ascertain which role the German market will play for its own industry.

Germany – Land of ideas, Land of rules

Germany, under the leadership of Otto von Bismarck in the late nineteenth century, was one of the first countries to introduce a system of widespread health care insurance. Today, every person in employment has to pay the Krankenkassen – the statutory health insurance program (SHI) – or opt out and pay a private health insurer.

A system that survived more than a century and reached practical universal coverage decades ago is a masterpiece of sustainability and a showcase for countries like the USA, still debating over universal care while spending a much higher share of its GDP on health care – 10.6% in Germany versus 15.3% in the USA. However, the bill for the success of the German health care system is now starting to look scary for some.

The way the German government has dealt with the sharp increase in health care costs and relative decline in revenues has been unevenly two-fold: it has strictly tackled costs while being loose on the increase of contributions. Needless to say, a tax increase or a raise on health care contributions would be much more unpopular than cutting revenues from heath care providers and pharmaceutical producers.

According to Ms. Dorothea Bronner, CEO of the G-BA (Federal Joint Committee), – an institution created by the health care reform of 2004 and that unites health insurers, physicians associations and hospitals deciding on the cost effectiveness of new therapies: “The combination of a highly profitable industry with a universal health care system represents an unsustainable burden that has to be rebalanced in order to guarantee future generations a decent and affordable health care system.” However, according to the VFA, in 2008 medicines and medical devices accounted for only 6% of SHI expenditures and the German prices were in the middle range among European countries – even though its income per-capita is one of the highest.

With the Health Care Reform Act that went into force on the 1st of April of 2007, the German Ministry of Heath intended to provide a new base for the general financing of the health care sector, as well as to modify part of the legal framework for the pharmaceutical industry.

It established a cost-benefit assessment performed by the IQWIG (Institute for Quality and Economy in Health Care) – a government agency whose main objective is to give technical recommendations to the G-BA. From then on, new drugs underwent an assessment on whether they had a real therapeutical improvement compared to existing substances, which would justify reimbursement.

Another big change brought by the Health Care Reform Act of 2007 was the directive that allowed health care insurance companies to rebate directly with pharmaceutical companies. Before this reform, price competition between generic companies was fierce; nowadays, with the additional power given to health care insurers, many in the industry say it is unbearable.

Sven Dethlefs, CEO of Teva Germany, agrees that this reform will generate further consolidation in the generic market. He believes that only those companies that manage to increase their efficiency, lower their costs and expand their scale will be able to survive. To do so and achieve the 5% market share Teva aims to have in the German generic market by 2012, he has two main directives.

Primarily, Mr. Dethlefs is focusing his attention on creating a sole Teva entity in the German market, which today is divided between different units such as GRY Pharma, IVAX, AWD and Teva Pharma. They were a result of Teva’s past acquisitions in search of greater scale and efficiency, especially in the case of IVAX in 2006 and AWD Pharma in 2008. “The integration of Teva’s different legal entities is our biggest challenge in the German market; so many different identities and brands weakens Teva’s recognition among costumers,” he says. The complete integration of the group should be finished in the next two years.

Secondly – and more related to the increased competition created by the last health care reform act – Teva is aggressively bidding within the rebate system in order to automatically gain market share. Winning a rebate with a big SHI provider can jump start the market share of any company in the German market, since some health care insurers hold a considerable share of the market (AOK, the biggest one, covers 35% of all Germans). Only companies with an extremely efficient cost-structure like Teva will be able to take advantage of that.

Cegedim Dendrite gives another good example of how companies can turn challenges into promising opportunities in the world’s third biggest pharmaceutical market. Before the health care reform act of 2007, health insurance companies simply had to pay what physicians prescribed. With the new system, they can bargain and auction big purchases of drugs that will be later reimbursed.

As Arnim Jost, the General Manager of Cegedim Dendrite Germany says: “Since the 1st of April 2007, Cegedim Dendride has seen an increased search for commercial key management and political account management from the pharmaceutical industry.” Before, the industry could introduce small changes in their products without any assessment on whether these advances really benefited patients proportionally to the price increases, but now the situation has changed.

Time To Pay Attention Attention

Deficit and Hyperactivity Disorder (ADHD) has long been part of the human condition, but it has only gained notoriety in the last 30 years, as sufferers and physicians become more aware of the disorder. Today, (ADHD) is a niche therapeutic specialty that has grown at a rapid pace in Germany over the last five years. The market for treatment increased in value from USD 23 million in 2004 to USD 145 million today, due among other factors to increased diagnosis rates.

Mr Terp, General Manager of Shire’s Deutschland’s Specialty Pharma Business Unit, predicts that the ADHD market will continue to grow in Germany just as it did in the US. In Germany, there is currently no indication for ADHD in adults. This was historically the case in the US, but this has now changed, with the result of dramatically increasing the demand for effective ADHD treatment. Shire Deutschland is excellently positioned to capitalize on this growth, as Mr Terp explains. “Shire is a leading company in ADHD, because the company has innovative franchise of products for this disease, and one of the key advantages of this is that physicians need to tailor the ADHD treatment for every patient. At the end of September 2009, Shire launched Intuniv in the US, and two years ago we launched Vyvanse, and now in Europe the company has acquired Equasym from UCB.”

It is this success in tackling ADHD in the US that has propelled Shire’s sales in the country over the last few years, and today the US market accounts for 70% of the company’s global sales. However, Shire is launching an ambitious internationalization strategy, which the company hopes will mean that by 2015, 50% of sales will come from the US, with 25% from Europe, and the remaining 25% from emerging markets.

Over the 20 years of its existence, Shire has traditionally grown through mergers and acquisitions. One of the most important of these recent acquisitions took place in Germany, where the company acquired the renowned German biotech company Jerini. Jerini’s main product is Firazyr, which will complement the Human Genetic Therapies (HGT) division of Shire, and its products to tackle serious but rare maladies such as Gaucher disease, Hunter syndrome and Fabry disease.

Get up, stand up

Unfortunately, not every company is in the position of taking advantage or adapting quickly to the constant changes in the German pharmaceutical environment. However, instead of joining the lines of those who simply complain about the system or threaten to downgrade their investments in the country, a few well-established companies are using their influence and proved commitment to Germany to build a constructive dialogue with policy makers.

Cameron Marshall (GSK) As Cameron G. Marshall, General Manager of GSK Germany, the fifth biggest pharmaceutical company in the German market, puts it: “GSK believes very strongly in building a constructive and respectful partnership with governments, doctors and sickness funds. The company wants to build productive mutual relationships where it attempts to stand in the shoes of its costumers and partners and not only see the world from its own point of view.” According to Mr. Marshall, “Value” is the language that companies should speak. By saying so, he means that companies should fully accept their responsibility to prove the value of their products with supporting evidence to their peers, physicians and government. “The pharmaceutical industry must be prepared to engage with authorities that set the standards. In return, we expect a system that is consistent, harmonious, clear and transparent. GSK is very determined to make it happen.”

Martin Siewert (Sanofi -Aventis) Sanofi-Aventis is another player supporting this position. With revenues of more than USD 5.8 billion, Martin Siewert, the German General Manager, recognizes that the burden of the current over-regulated system for investments in innovation is big. However, he qualifies, the immediate market access and incomparable human resources that Germany offers make companies like Sanofi-Aventis eager to further invest in the country, and to convince politicians of the importance of their investments to keep Germany as a powerhouse of knowledge and innovation. “My main desire is to work closely with the German industry and government in order to rebuild some of the features that made Germany once known as the Pharmacy of the World,” he states.

The recently elected centre-right coalition, still presided by Chancellor Merkel – from the Christian Democratic Coalition (CDU), – in its new alliance with the liberal Free Democratic Party (FTP) has already signalled what future reforms will aim at. The main proposals on the table are to freeze employer’s contributions to the SHI system as a share of worker’s pay and set worker’s contribution at a fixed premium, instead of the current fixed share of their wages. Now, the government target seems to be health insurers.

In charge of passing such reforms is the liberal Mr Philipp Rösler, who will try to both stop future rises in health care costs from being transferred to employers and to promote a competitive market in health care. This seems in line with the desires of the pharmaceutical industry, which for too long has been complaining about being the only target of the German government in its quest to make health care cheaper.

Changing Diabetes, Changing Germany

Martin Soeters (Novo Nordisk) “The costs involved in treating diabetes in Germany are USD 23 billion annually,” says Martin Soeters, President of Novo Nordisk Europe, “whilst the amount spent on diabetes drugs is USD 1.74 billion, or 7% of the total figure. 75% of this figure is spent on the treatment of late complications. If diabetes treatment is optimized, this figure can be dramatically reduced.” Novo Nordisk, world leader in diabetes care, has decided to make reversing this figure a major priority. Stepping out of the realms of the lab, Novo Nordisk has jumped into the world of political lobbying. The company recently opened a European Changing Diabetes Advocacy Office in Brussels, whose sole priority is to get diabetes on the EU political agenda. This culture permeates through all levels of the company. After over 30 years with Novo Nordisk, Mr Soeters has one clear altruistic aim. “In five years from now, I hope I will be able to tell my future grandchildren that I did not just sell three million insulin vials to patients, but that I have done something significant for their wellbeing.”

Building on Germany’s scientific muscle

The pharmaceutical industry, like few others, benefits greatly from the strengths and competitive advantages offered by Germany. Being the first pharmaceutical market in Europe and at the heart of the continent – served by an extremely efficient and world-class infrastructure – Germany enjoys a scale and market access no other country can dream of. The European pharmaceutical market alone represented 32% of the global pharmaceutical market in 2008, according to IMS numbers, and its privileged market access to important Eastern countries such as Russia, Ukraine and Middle Eastern nations make Germany an even more strategic hub for global pharmaceutical players.

Gaëlle Waltinger (Bausch&Lomb) On top of its geographic and commercial attributes, the most valuable asset Germany offers pharmaceutical companies is its highly skilled workforce. With little more than 80 million people, the country pumps every year around 70,000 new graduates in biology, chemistry and engineering and some 12,000 in the field of pharmaceuticals. Besides, more than 343 German universities and over 330 research institutes are increasingly active in partnering with the private sector in translational research.

Ulrich Eggert (Astellas) This sounds like music for the pharmaceutical industry. The sector accounts for more than 10% of the overall industrial investments in R&D. The 50 members of the VFA alone were responsible for investments of USD 7 billion in R&D in 2008 and responded for more than 90,000 jobs with 17,000 of them in R&D related areas. Bausch&Lomb is one of the foreign companies taking advantage of the German expertise in research and manufacturing. According to Gäelle Walinger, CEO of Bausch&Lomb Germany, after the acquisition of Bausch&Lomb by the Warburg Pincus group, the integration of the German activities with the rest of the group has increased considerably.

“Bausch&Lomb has taken advantage of our well-educated specialists in R&D and manufacturing and sent them to other parts of the world for a determinate amount of time – China, for instance – to train our counterparts and help them build new facilities.”

The group is now trying to harmonize their international operations and use the assets of their different international bases – Germany being their lighthouse in Europe– to rationalize and specialize their production lines, unifying their brands in the main markets. This had a special impact on Bausch&Lomb Germany's operations since their brand and product portfolio is linked to Dr. Mann Pharma, an important local player acquired in 1986.

“With the current harmonization and specialization put in place, Bausch&Lomb Germany closed its plant for three months to completely optimize the production site and further investments will be done in the same direction in order to continually optimize and integrate the German operations with the rest of the group, making the best out of our unique human resources and market access,” says Ms Walinger.

The German pharmaceutical attractiveness for foreign direct investment (FDI) reaches beyond the Atlantic. Astellas is prime example of a Japanese company that chose Germany as an important base for their international operations not only due to its great market potential but also thanks to its competitive advantages. Long established in the German market through its predecessors Yamanouchi and Fujisawa, the company has nowadays around 400 employees covering a wide range of activities from clinical development to distribution. With a turnover of more than USD 290 million only in the German market, Astellas is a leader in transplant medicine and urology.

In the words of Ulrich Eggert, Astellas Germany Managing Director, “Besides transplant and urology, Astellas Germany has a very comprehensive portfolio including OTC, dermatology and pneumology products, and the company is working in the clinical development of several products yet to enter the market.” When asked about the importance of the German market for the group as a whole Mr. Eggert is categorical: “Germany is the biggest European market for Astellas, being our main contributor in sales and profits. Therefore, whatever happens to our German operations will invariably affect Astellas’ activities in the continent.

Keep it in the family

Germany has a great tradition of successful family businesses. For instance, Merck KGaA, founded in 1668 is one of the oldest existing pharmaceutical companies worldwide, and still majority owned by the Merck family.

Centuries on, what are the odds for small German family owned pharmaceutical companies in such a competitive market? Dr. Franz Köhler Chemie might have a good answer. This second generation pharmaceutical company that carry the name of its founder, was created in 1959 and handed over to Gernot Köhler, Franz Köhler’s son, 25 years ago. Nowadays, Dr. Franz. Köhler Chemie is a leader in organ protection solutions, being the first company to launch this type of product already in 1964 with Cardioplegin. Since the launch of this cardioplegic solution, Dr. Franz Köhler has developed other products such as antidotes, contrast media, electrolyte solutions, zinc and other therapeutics, e.g. for anesthesia, which have been developed in very close cooperation with a wide variety of experts ranging from surgeons to pharmacologists not only from Germany but also from the USA, China and India.

According to Gernot Köhler, the future of the company relies on its internationalization: “Dr. Franz Köhler Chemie aims to extend its export share from the present 35% up to 67% in the coming years, remaining the leading provider of organ protection in the German and international markets alike,” he says. Being an independent company free from short-term pressures from shareholders will clearly help Köhler pass on the heritage of a fast growing company to future generations.

It’s better if it’s “Made in Germany”

Andreas Fibig (Bayer Schering Pharma) Nowadays, Germany concentrates a considerable international share of highly sophisticated activities throughout the entire pharmaceutical value-chain even without hosting the headquarters of any top ten pharmaceutical multinational.

Pharma giants from neighboring countries, especially Switzerland – with its top three players, Novartis, Roche and Nycomed heading the list – take special advantage of their proximity to Germany and have made the country home to some of their biggest – if not the biggest – R&D and production operations worldwide.

Hagen Pfunder, CEO of Roche Germany, makes it clear: “Germany has always been regarded as a strategic country for Roche not only because of its market size but also due to its leadership in cutting-edge technologies – it is the second biggest biotech hub in the world and offers great opportunities that meet perfectly Roche’s present and future ambitions.”

Mr. Pfunder summarizes the reasons behind Germany’s protagonist role within the Roche group: “It’s thanks to Germany’s unique technological expertise; highly skilled personnel; well established and cutting-edge research institutes and biotechs; and stable market environment that Roche has placed the country at the heart of its present and future strategies and invested more than USD 2.6 billion on expanding its R&D and production capacity.”

Nycomed, another Swiss giant, has also successfully bridged the integration between the German and Swiss pharmaceutical industries. Germany is by far its main international market and its German headquarters are in Constance, a city in the shores of an idyllic Alpine lake that carries the same name – the similarities with Switzerland are not a mere coincidence.

In the words of Mr Stefan Brinkmann, Nycomed Germany Managing Director: “Germany, being the biggest international market of Nycomed, influences greatly Nycomed’s global corporate strategy.” Being so close to its headquarters, surely makes the necessary coordination between the market, research and production activities of the subsidiary and its main office much easier.

Sanofi-Aventis, France’s biggest pharmaceutical group, also chose its neighbouring country as home to one of its largest research and development facilities, at the Frankfurt-Höchst industrial park. This strategic production, manufacturing and development center has approximately 7,800 employees out of the 10,000 members of the Sanofi-Aventis group in Germany – one in every ten employees of Sanofi-Aventis is based in the country.

Of the USD 6.7 billion invested in R&D worldwide in 2008, Sanofi-Aventis directed USD 870 million towards Germany. Since Sanofi-Aventis’ revenues in the country reached USD 5.8 billion in the same year, the group invests 15% of its German revenues in R&D.

Even with the challenges previously highlighted by Martin Siewert, the German General Manager of Sanofi-Aventis, he recognizes the importance of the German operations to the group as a whole. For instance, two years ago Sanofi-Aventis inaugurated a new medical device site in Frankfurt, a turning point in the creation of a competence center for medical devices for the whole group. “Besides, the German operations received important investments in R&D into cell culture manufacturing of clinical materials; which highlights the key contribution of Sanofi-Aventis Germany to the groups’ global development programs in all monoclonal antibody areas – one of the most important bets of Sanofi-Aventis for the future” he says.

Sanofi-Aventis Germany is especially relevant in the field of diabetes. The German affiliate was responsible for the entire research, development, clinical production, pharmaceutical formulation and packaging of Lantus, Sanofi-Aventis’ insulin drug star. This product contributed decisively for the USD 5.8 billion revenues in 2008, especially its exports.

The German competitiveness is also reflected in Germany’s prominence in clinical research. According to Cameron Marshall, the General Manager of GSK Germany, the country is the second biggest clinical market after the USA. “The clinical quality found in Germany is as high as the one found in the USA, but internal and external costs can be twice as cheaper in Germany than in the USA,” he says. The high quality of German doctors and the ethical guidance in which the German federal authorities carry the process of clinical approval are Germany’s main advantages. GSK has partnerships with more than 1,200 test centers for clinical studies of 30 innovative substances involving more than 8,000 patients in the country from phase I to III.

As Johannes Löwer, president of the German Federal Institute for Drugs and Medical Devices (BfArM), points out the number of clinical trials’ applications in Germany has increased almost threefold in the last two years. Even though this adds pressure to the system, it is a good sign of the advantages that Germany has to offer in the clinical research field.

Chapter 1

Europe’s know-how & China's might: towards wind energy communion

A power shift for a green revolution

Following the “economic miracle”, which saw average annual GDP growth exceeding 9% for some 30 years, China’s leadership has positioned the country on a trajectory to become a frontrunner in renewable energy initiatives, and an important global hub for low carbon industries in the coming decades. But China cannot afford to venture alone in this journey. The Chinese government has identified cooperation with Europe as crucial to accelerate technology development and advance the installation of renewable energy capacity in China. Europe will be China’s travel companion.

Moving air to plug up China’s energy needs

The Chinese economic miracle has been powered mainly by coal-generated electricity, with ominous consequences for the environment. As the country’s growth continues to demand more energy, and conventional sources are not just polluting but scarce, costly and volatile, China’s has dictated that renewable energy must account for 15% of the country’s energy sources by 2020. In 2008, the National Energy Administration highlighted wind energy as a priority for diversifying China’s energy mix, which combines the advantages of comparatively low cost and existing conditions for large-scale exploration. In sum, wind energy is considered the best option for China’s energy strategy.

He Dexin, Chairman of the Chinese Wind Energy Association, explained to GreentechFocus.com in an exclusive interview that “Although coal power still represents the bulk of our electricity (around 70%) in the long term its share should gradually decrease for two reasons: coal resources are decreasing gradually and the priority of the government has shifted towards clean and renewable solutions. The central government is now shutting down small thermal power plants and focusing on wind power and renewable energies. Also with rising coal prices, coal plants are not as attractive as they used to be.”

Even though there has been substantial growth in electricity generation from hydroelectricity and solar, wind power has emerged as the fastest growing segment of renewable energies. “Wind power now is one of the most promising sources of renewable energy. In China, the potential for wind power resource is huge and has already attracted much investment. The government also releases the policies to support it” adds Dexin.

As Arthouros Zervos, Chairman of the Global Wind Energy Council (GWEC), and President of the European Wind Energy Association (EWEA) told GreenTechFocus.com “Today, China has a great need for power, which is mainly supplied by coal, but this has to change. My belief is that the Chinese government has realised that. [As a result] the country is annually installing the same wind power capacity that we have installed in Europe over the last 7 years.”

As a result China has become the world’s fastest growing wind-energy market with an average growth rate of 56% for the past 7 years. At the end of 2008 China’s yearly new installed capacity totalled 6.3 GW, doubling for the fourth year in a row and bringing the country’s cumulative wind power capacity to 12.2 GW, making China the fourth largest wind market in the world in that year. In 2009 China installed 10 additional GW of wind power becoming the third largest wind energy provider worldwide only behind USA and Germany and overtaking Spain, with the current total installed wind power capacity to 22 GW.

The expectations are high. According to the Chinese Renewable Energy Industries Association (CREIA),China’s wind energy capacity is expected to reach 100 GW by 2020. The National Energy Administration selected six locations from the provinces with the best wind resources: Xinjiang, Inner Mongolia, Gansu, Hebei and Jiangsu. Each site will have more than 10 GW of installed capacity by 2020. This large-scale wind energy deployment is called the 10 GW Size Wind Base Programme (Wind Base). Wind Base will ensure more than 100 GW of installed capacity producing 200 TWh per year by 2020. This is crucial to reach the Chinese government’s National Mid and Long-Term Development Plan of 3% non-hydro renewable electricity production by 2020.

High tech, high risk, high yield ... is there room for more turbine manufacturers?

Such figures and projections have resulted in a ´China Wind Rush´. Over the past years several wind turbine manufacturers, both foreign and domestic newcomers, entered the market bringing the current total number over 70, together with 50 companies in turbine blade manufacturing and over 100 wind-power tower manufacturers. Since no more that 10 to 13GW is expected to be installed annually in the coming years due to restrictions in the pace of the development of the electric grid, intensive competition in the market will result in consolidation.

The top three manufacturers in China, Goldwind, Sinovel and DEC (Dongfang Electric) have an annual manufacturing capacity of 4 GW, and the international brands manufacturing in China (Vestas, Suzlon, GE, Gamesa, Nordex and Repower) have a similar capacity. This means that there will be little market share left for the rest of the more than 60 manufacturers, unless the market expands further or they begin, as expected in the medium term, to export turbines in large numbers.

He Dexin confirms the trend: “Wind power is a high tech, high risk and high yield sector. According to the international experience, the wind power manufacturing sector will face concentration after it reaches a certain size and maturity. The companies lacking competitive strength will be eliminated by the market or merged into bigger entities.” It is said that fewer than 10 out of more than 100 manufacturers are likely to survive.

Qi Hescheng, Secretary General of the Chinese Wind Energy Equipment Association explains the winning formula: “The companies that will lead the Chinese wind industry in the future will be those with proprietary intellectual property rights and the ability to conduct in-house research and development. During the past years, Chinese wind power companies have experience quality problems. They have not paid attention to quality since the beginning, but they realized the importance of quality once they experienced the first problems that influenced their profit. Now Chinese companies are trying improving the quality of their products gradually. At the same time, they are learning about the market standards, rules and policies overseas, which help them to better understand the competitive situation in the European market.”

Global providers of state-of-the-art wind power technology and know-how, the vast majority of which are European, will be key in their endeavour.

In the Shadow of the Wind

With the fourth longest coastline in the world, some 18,000 kilometres, China is one of the richest countries in offshore wind resources. Counting 40% of the nation’s population, coastal provinces are also the most developed in China, and the largest consuming market for electricity.

According to China’s official estimates the country possesses 1,000 GW reserve of exploitable wind energy, of which 250 GW on land and 750 GW offshore, indicating the long term strategic importance of the China’s offshore wind potential.

However, matching this potential will require improving the sound development of the industry by means of importing advanced technology products and services. The National Energy Administration has even considered removing the restriction of 70% domestic-built wind turbines for China’s market. It is high time for well-qualified foreign enterprises to step into this boosting market, and international key players such as Siemens Wind Power are expanding their investment in the Chinese market.

Headquartered in Denmark and part of the German industrial giant, Siemens Wind Power is rapidly developing its international presence by opening manufacturing facilities in the US and China, particularly in the offshore sub sector with higher development potential.

Andreas Nauen, CEO of Siemens Wind Power explained the strategy in detail during an exclusive interview with GreenTechFocus.com: “China has always been part of our global strategy. Three years ago, when we first began the expansion of our activities beyond Denmark by establishing a blade factory in the US, we already said that the next step would be entering the Chinese market. We simply put our plan into action and we are progressing with our Chinese blades and nacelle factories. I am very confident that we will be very successful because Siemens is probably the only company in the world that is able to offer a portfolio ranging from [wind] power generation to transmission solutions in one shop.”

Siemens strategy for China is equally focused on the domestic market and on exports. With one-third of the world’s wind power capacity already installed in Asia, there is plenty of opportunity. “We see big sourcing potential in China and are already sourcing quite a number of towers from a Chinese supplier that we ship to the US for installation. The delivery was on time and the relationship has been continued, which is a sign that we are happy with the quality,” Nauen adds.

One of the purposes of this blades and nacelles factory is to enter the Chinese domestic market. “We had some very interesting discussions about the Chinese offshore market and I believe that we have to offer something in China that is different from what forty or fifty other companies can offer at the moment,” explains Nauen. Siemens Wind power wants to establish a clear leadership position in the offshore market in China, by applying its 19 years of experience in the offshore wind market for the benefit of China’s projects. “It is important to, have the right turbine, a reliable, high quality turbine that is large enough in size […] because offshore is a business that very much depends on reliability. To give you an example, a ship to replace a part costs US$ 100,000 a day, so you better install a turbine that does not need maintenance or repair too often otherwise all your profit is gone. [At Siemens] we have the knowledge, experience and the right product,” Nauen sentences.

In the race for supremacy, the company will not settle for a citation. “In all businesses Siemens wants to be among the top three in the world. When you are in the number six position in the world then it is pretty simple to discover the direction, and the question is how to get into the top three. Technology, quality, solidity and reliability have always been the trademarks of Siemens. I think that there is a chance to be as good and as big as some of the Chinese suppliers if we do it right. We have seen it in the fossil business where we have a very successful joint venture with Shanghai Electric, and if we can repeat that success in wind power I will be very proud,” Nauen concludes.

EUROPE

The wind industry to hit Europe with a sweeping blow

The European Union has 3.5% of the world’s proven coal reserves, less than 2% of the natural gas, less than 2% of its uranium and no more than 1% of the world’s oil, according to the European Commission. With such scarcity of mineral resources and such an energy-intensive society, it won’t come as a surprise to anybody that the Old Continent has turned its attention towards an intangible yet powerful source of energy blasting across its geography. Europeans have many names for them depending on whether they originate: Sciroccos, Tramontanas, Mistrals or Helms, but all of Europe’s winds are equally relentless, powerful and cheap.

“Today, wind energy is a mainstream option, and probably the cheapest way to produce electricity,” boasted Professor Arthouros Zervos, who serves both as Chairman of the Global Wind Energy Council (GWEC) and President of the European Wind Energy Association (EWEA). In March 2009, at the European Wind Energy Conference, he announced that EWEA had increased its 2020 target for installed wind energy capacity in the EU from 180 GW to 230 GW, including 40 GW offshore. Currently, wind power accounts for about 4.2% of the EU’s electricity demand, but the 2020 projection will enable wind power to meet 14-18% of EU electricity demand, which equals the electricity needs of about 135 million average EU households.

“EU companies hold 66% of the €35 billion global market for wind power technology, and we should urgently develop, promote and export it to the best of our ability,” emphasises Professor Zervos. “The European wind industry should aim to be present in as many markets as possible, and it should continue to drive the industry’s innovation process. The wind industry has globalised rapidly over the past five years, and the European wind turbine manufacturers will have to follow this trend.”

Denmark: The gift of experience

Of all European nations, Denmark is undeniably the cradle of the modern wind turbine industry, but in 1975 there was no indication that the country was heading for decades of industry dominance. The main reason for this was that the Danish Government stimulated the creation of a market when it passed a law that gave direct subsidies to investment in wind energy in 1979, which was also the year when Vestas, the global wind energy leader, started manufacturing wind turbines.

Even though similar activities were taking place in European countries such as the UK, The Netherlands, and Germany, the difference lied on the role of the state. The Danish government created market stimulation and established public R&D projects to develop prototypes of wind turbines.

As a result, today Denmark is the only country in the world to have achieved a penetration of wind energy of 20%, which will be the 2020 renewable energy target for the whole of Europe. Some say, however, that domestic support has been fainting forcing Danish wind energy companies to expand globally. Henrik Stiesdal, Siemens Wind Power’s Chief Technology Officer puts it like this: “The Danish Government has not sufficiently supported the wind power market in recent years. Today, the Danish wind industry is facing a challenging situation since its home market has disappeared.” As a result, Danes are venturing again beyond their borders and aggressively expanding operations overseas.

The presence of Danish companies in the globalised wind energy industry is palpable. In October 2009, the entire sector showed up in force at China Wind Power, the largest Chinese wind energy exhibition in Beijing, with many companies vigorously looking at entering the Chinese market or at consolidating and expanding their presence.

According to the Danish Wind Energy Group, part of the Danish Export Association and created by the leading Danish wind turbine manufacturers and subcontractors, the 70 windmill manufacturers in China exceeds the amount of windmill manufacturers in the rest of the world, paving the way for Danish sub-suppliers into the Chinese market. For these market possibilities to materialise, however, Danish companies have to remain a step ahead of their Chinese peers in technology and innovation, as the Chinese have proved adept at reproducing western products at a cheaper price. “Many of the sub-components they have copied are almost as good as the originals. However, they lack experience and don’t know what is going to happen when 100 different components are put together. This is where the Danish companies are a step ahead”, boasts confidently Ulrik Dahl, Managing Director of Danish Export Association.

Henning Gammelgaard Jensen, Chairman of the Danish Wind Energy Group adds; “Our turbine manufactures are facing the challenge of finding new customers; therefore they provide a lot of assistance to their suppliers as they follow them into international markets. We all have the mindset to grow both rapidly and internationally. We have invested a lot of hours, turbines and money in these last 30 years. It’s not just about putting few components together and then getting a turbine. This know-how is our competitive advantage to enter the Chinese market”.

This does not mean that Danish companies looks at China simply as a market to supply. On the contrary, as Ditlev Engel, CEO of Vestas the Danish N.1 wind turbine manufacturer in the world explained in an exclusive interview to GreenTechFocus.com, “As we expand our presence in China through building more factories, we also intend to become more engaged in China through increasing our activities on a variety of industry issues, such as building a China-based innovation capacity and establishing a larger technology and R&D presence here. We already have a great technology team working in China on our new kilowatt turbine and we hope that that team will be just the beginning of an increased R&D and technology presence in China. The team will contribute to the ongoing development of the Chinese wind energy industry and the localization of Vestas China. We are actually working also with various partners in China [for] a true win-win situation. The ongoing development of our suppliers in China and the partnerships we build with them brings a lot of benefit to overall wind energy development in China.”

Undoubtedly the “Danish wind case” and unique know-how is of great interest for the Chinese government and companies as showed in December 2009 when Wind Power Works, an initiative by the Global Wind Energy Council, received a Chinese delegation including Mr. Li Ganjie, the vice Minister of Chinese Environment Protection, to have a closer look at the off shore wind turbines at the Middelgrunden farm in Øresund outside Copenhagen. When it was built in 2000, it was the world's largest offshore farm, with 20 turbines and a capacity of 40 MW. The farm delivers more than 3% of the power to the Danish capital. According to Wind Power Works the delegation was very interested in the Danish model for integrating considerable amounts of wind energy into the power system, thus ensuring that wind energy is always used where most needed. Denmark has had success in integrating the otherwise tough-to-control wind energy into the power system, and this makes the Danish wind case very attractive.

With Denmark’s leading turbine manufacturers, Vestas and Siemens Wind Power, internationalising their operations, the highly developed Danish sub-supplier base are faced with the challenge of chasing their long time customers in the international marketplace. Having been a first-mover for three decades, the Danish wind industry is again well positioned to break new ground.

As Jan Hylleberg CEO of the Danish Wind Industry Association concludes “The Danish wind industry is ready to enter into a debate about how wind can be the solution in different parts of the world. We have the technology, the competence, and we are an integral part of the industry's R&D activities, so we can be a partner for countries like China to establish energy systems around the world where wind energy is integrated to reduce the amount of fossil-based energy production. Energy system planning and grid development are crucial for the future development of the wind industry, and we have the skills and knowledge to take this decision forward.”

Chapter 1

German leadership for a green future

“Environmental questions figure prominently on the agenda of politicians and the business community, and are also on the priority list of German voters,” explained Dr Arend Oetker, a fourth generation family businessman who serves both as President of the German Council on Foreign Relations and the Vice-Chairman of the Federation of German Industries. After having seen the ice cap of Greenland melting firsthand as part of a delegation of Swedish, German and American politicians, businesspeople and scientists, Dr Oetker started working daily on the subject of climate change and expects his companies to come up with energy saving ideas. “This is not being idealistic, this is a real issue of survival; companies that are the best in energy saving and climate consciousness will be more profitable down the line,” he emphasized.

Even though the U.N. climate conference in Copenhagen fell short of expectations, Germany’s political leadership reinforced its commitment to the country’s ambitious climate protection strategy, which has been raised from 30% to 40% CO2 emission reduction by 2020 compared to 1990. Currently, Germany is not only the world's sixth largest greenhouse gas emitter but is also a leader in renewable energy and energy efficiency technology, which are destined to be a pillar of Germany’s future economic competitiveness and a key driver of new job creation. While unions and heavy industry are concerned that ambitious unilateral climate policies could make them less competitive and therefore jeopardise jobs, advocates of green development highlight that Germany has created hundreds of thousands of green tech jobs in the last decade.

“At times, the Federation of German Industries is sometimes perceived to be preventing the establishment of ambitious targets, while sometimes it is not very easy for politicians to see both sides of the coin. Politicians have to create the framework for Germany’s transfer into new energy sources but these must be digestible by the applicable industries. This is a heavy debate in Germany, since politicians like to push ahead but sometimes we have to ask how that is realistic,” Dr. Oetker stressed. In June 2009, the Federation of German Industries stated that a 30% reduction of greenhouse gas emissions in Germany by 2020 over the 1990 level was ambitious but possible and economically justifiable with significant investment efforts and the participation of all sectors. Today, the German business community faces a government that pursues an even more ambitious climate strategy and a 40% emission reduction target.

“Germany will have the chance to make its economy more fit for the future," stated Prof. Schellnhuber, Director of the Potsdam Institute for Climate Impact Research and climate change adviser to Chancellor Merkel. “I can understand that companies have to defend their position, but from the point of view of a national economy it is a very short-sighted stance. There are many more opportunities in transforming our society towards sustainability than there are risks; that is absolutely clear. By the end of the 19th century, many new industries sprang up with pioneers such as Siemens and Bosch deploying their ideas. It was a co-evolution of technology, industry and culture, and was probably the golden age of Germany. Something like this could happen again if we renewed our energy systems, which are still very inefficient. However, the people who fear they have the most to lose, often the non competitive industries, generally exaggerate the costs.” More than ever, Germany’s business community and political leadership will have to consider both sides of the coin to find a path towards sustainable economic development, international competitiveness and environmental protection.

Navigating between climate policy and economic policy

As a result of the failure of the climate negotiations in Copenhagen to introduce immediate binding emissions limits, climate policy and trade policy are destined to become increasingly intertwined. In the past, the United States refused to ratify the Kyoto Protocol since it provides manufacturers in nations like China and India, which do not face emission caps under the treaty, with an unfair competitive advantage. Following that line of thought, business and opinion leaders in Europe and the United States have launched the idea of imposing border adjustments, which are essentially import taxes imposed by carbon-taxing countries on goods manufactured in non-carbon-taxing countries. While border adjustments could serve as a quick fix to protect heavy industries such as cement and steel, they would effectively blur the boundaries between climate policy, economic protection and WTO rules and regulations. Both importers and multinational corporations are sceptical that border adjustments could be implemented without violating WTO, while China and India already indicated that they would categorically oppose the actions by any country to utilize environmental and climate protection measures as a pretext to conduct trade protectionism.

Dawn of a new economic reality

The world is destined to remember 2009 as the year of the worst financial and economic crisis in decades. More importantly, it also emphasized the shift of economic gravity to the world’s largest emerging economies – Brazil, Russia, India and of course China – which emerged as frontrunners on the global path towards recovery while the world’s developed economies suffered the greatest slowdown in trade volume and value accompanied by negative GDP growth.

For Germany, Europe’s economic powerhouse, 2009 was not only the year in which its GDP contracted by 4.8%, but also marked the end of the country’s reign as the world’s leading exporter. Although this will not be confirmed until both country’s full-year data are published, preliminary figures suggest that China has surpassed Germany as the biggest exporter of manufactured goods last year. Having dominated the global trade arena since 2003, exports generate around 40% of German GDP and have been driven by both globalisation and the country’s world-class engineering sector, which also includes strategically important environmental technology areas including solar energy, wind power, water and waste management, material science, energy infrastructure and energy efficiency. While the international success of “Made in Germany” technology not only increasingly decoupled the success of Germany’s leading corporations from the development of their domestic market, it also raised their dependency on stable economic growth in the world markets. While Germany’s mechanical engineering firms are in a strong position to maintain their technological leadership, new challenges are emerging as globalization continues to level the international economic playing field while proposed CO2 emission limits to combat climate change could potentially transform the competitiveness across a range of industries.

When Germans became “efficient” at the cycle of life

Germany´s success in renewable energy was due to its interpretation of the “demand” for energy rather than the “supply” of energy, according to Prof. Klaus Töpfer, who introduced groundbreaking environmental policies during his tenure as Federal Minister for the Environment, Nature Protection and Nuclear Safety between 1987 and 1994. “The challenge is to reduce demand for energy without decreasing the economic potential by focusing on energy efficiency. The push for efficiency started in Germany with what we call the life-cycle economy, which has also become one of China’s main targets to avoid developing a waste society. Our waste philosophy is typical for a simple capitalistic market economy; creating a life cycle economy is a precondition for better market chances. Right now this has become an international export article of the highest importance”, he notes. The European Union has established the 20/20/20 agenda for 2020, and one of the ‘twenties’ is energy efficiency. At the moment, Prof. Töpfer explains, even very modern coal power plants have efficiency rates of just about 50%, with cars being even less efficient, and light bulbs having an efficiency rate of less than 5%. “Phasing out inefficient technologies brings us a step closer to the cycle economy, and it is essential to make producers responsible for their products from start to finish so that the producers of waste are also responsible for handling their waste. This change in philosophy will have direct effects on demand. Industry leaders such as Siemens and General Electric have been reorganising and are increasingly focused on the green economy, and are beginning to concentrate primarily on the demand side, since they recognise that this drives business. We, therefore, must do our utmost not to reduce the discussion of the green economy to an analysis of the supply side alone. Evidently there is a growing understanding among industry leaders that you can truly make gold by going green,” elaborated Prof. Töpfer, who was succeeded by Angela Merkel as Federal Minister for the Environment, Nature Protection and Nuclear Safety, and subsequently served as Federal Minister for Regional Planning, Building and Urban Development and Executive Director for the UN Environmental Program.

Prof. Töpfer recognizes that the recovery of German industry following the economic crisis is not driven by the development of industry and economy in China rather by consumer expenses in Germany. “The main question facing us today is how can we avoid repetition of this economic crisis? And most importantly, how can we regain economic stability without overloading the environment? The solution has to be something like a New Green Deal which can simultaneously handle both the economic and environmental crisis. Countries can learn from Korea which is putting much effort into ‘greening’ its economy. Although Germany seems to be doing a lot in this field, I don’t feel like we are doing enough.”

The German mindset: swinging between “China hype” and “China angst”

The German-China debate is swinging like a pendulum from extremely optimistic to extremely pessimistic, and sometimes it’s very small events which make a change,” stated Prof. Eberhard Sandschneider, the China expert at the German Council on Foreign Relations. “Most people do not look at China in an objective way, they see what they want to see, which is very simple since China is such a big and multifaceted country. People are almost automatically afraid that when a German company is moving to China we are losing jobs, and losing jobs is a killer argument in this country. So it’s a very complicated irritating debate that is driven by psychology rather than reality.”

At the same time, Prof. Sandschneider pointed out that the problem of how to approach China is a challenge for German businesses and politicians alike, but there is increasing recognition that whatever the problem is there is no solution without China. “We need a cooperative and constructive basis to work with China,” he emphasized. “The China angst debate is part of it, but one should never forget that in the United States the China debate is still split between those who favour engagement and those who favour containment. If you chose China as an opponent you will get China as an opponent. Managing strategic cooperation between a rising power and a former dominant part of the world is a major challenge which reaches beyond China’s border to include the Southeast Asian region. Of course people in Europe still believe that we will be part of one pole in a multi-polar world, but my impression is that some Chinese don’t really expect Europe to be able to become a pole.” Europe has prepared strategy papers on China ever since 1993 and its relationship with China has evolved from partnership into strategic partnership and today is described as an enhanced strategic partnership. “I’m waiting for the next step. What could the possible term be? Super enhanced, super strategic partnership? My argument would be that China is not a strategic partnership, believe it or not. The Chinese have there interests, we have ours, but there is no automatic common strategic base. They just are different,” explained Prof. Sandschneider.

Germany already is China’s most important European trading partner – with Sino-German trade roughly equaling to China's trade with Britain, France and Italy combined – in an environment where every EU member country has its own China policy. “You wouldn’t expect the German Chancellor to invite business leaders from France to join her as part of a German delegation to China and vice versa. At the very moment Chancellor Merkel makes a mistake and meets the Dalai Lama, President Sarkozy is offering France as the new strategic partner of China in Europe,” Prof. Sandschneider noted. “Germany should engage with China right away because waiting for Europe to get its act together would mean to postpone any China policy until the second half of the 21st century. I know that Germany sometimes is a difficult partner in the Chinese perspective but it’s true the other way around as well. Taking a more relaxed attitude towards each other would certainly help, starting with the Dali Lama and ending with Intellectual Property Rights.”

The basis of Sino-German relations is still China’s interest in German technology and German companies’ interest in the Chinese market. “It is not discouraging German entrepreneurs, but I would never advise them to give their technology to their Chinese partners, and expect market share in return. They will have to fight for market share in China where the competition is growing. German companies might end up competing with local companies, using their technology and fighting them for their market share in China. That’s not the ideal deal from a German perspective; but sharing technology is an important part of business. My advise would be: yes, go to China, but be careful in choosing your business partners. Secondly, don’t expect them to shovel gold at you in China. It is a very hard, competitive and very discrete market,” Prof. Sandschneider concluded.

From coal capital to solar city

Science Park Gelsenklrchen, Schmitz-Borchert It started very early in the 1960s when Willy Brandt, campaigning for the Chancellery, said "Make the sky blue again over the Ruhr". Back then, Germany was in a similar situation to many Chinese regions nowadays with old industries in decline. In 1966, the first coal mines were closed down, and by the 1980s everyone in the Ruhr region knew that hard coal mining would very soon be finished. “The principles of economic development dictate that you must start with the skills that you already have and build upon that knowledge; we needed to replace old industries by capitalising on our existing competences. The new idea was to focus on the growing renewable energy industry,” started Dr Schmitz-Borchert. As Director of Science Park Gelsenkirchen, he takes great pride in the fact that the 3,500 steel workers who used to work on the current site of Science Park Gelsenkirchen have been replaced by 500 white collar workers, which is perfectly in line with his objective of creating new jobs providing great potential for the future.

The idea to develop Science Park Gelsenkirchen came in the 1990s, at a time when projects focussed on green energy were developed on a very small scale. Since the Ruhr region had skilled glass industry workers, and this industry was looking for new opportunities at the time, solar power seemed like the logical choice. This early entry into the solar industry provided Gelsenkirchen with the opportunity to be ahead of other cities and regions, and the idea of clean air and new perspectives fit very well with Gelsenkirchen’s new hopes and ideas.

In 1996, the facilities of the Science Park Gelsenkirchen were built with the largest solar power plant in the world on its roof. This was not just a visual reminder but a bold statement on its position as the launchpad for future energies. Whereas its solar energy ambitions were clear from the outset, Science Park Gelsenkirchen’s impact as a catalyst for the structural change in the Ruhr region, Europe's largest industrial agglomeration, is becoming apparent at a slower pace. “We are still very much at the beginning of the road of transforming this region successfully,” recognized Dr Schmitz-Borchert. “Now, fourteen years later, the people of Gelsenkirchen have accepted that they are part of a solar city, and that solar power can be synonymous with a better life.””

“After the reunification of Germany, investment in the solar industry shifted towards the East where industrial initiatives such as Solar Valley were launched. Nevertheless we have achieved a lot in this field. For example, Scheuten Solar, has established a solar module factory and the Canadian PV-company Arise Technologies will set up an R&D centre to develop the next generation of solar cells,” explained Dr Schmitz-Borchert. “One important factor in their decision to come to Gelsenkirchen, and the Ruhr region, was our fantastic investment climate that is strengthened by the number of universities located in proximity and the very strong R&D support from the Fraunhofer Institute for Solar Energy Systems, which strongly supports technology development in the solar industry, as well as from state organisations through a number of funding programmes. All things considered, it makes a very good story for all the potential investors.”

While the intention was to create a new industry cluster in the Ruhr focussed on photovoltaics, this initiative quickly opened up to include the whole renewable energy sector. “Many Chinese companies have already chosen NRW as their investment location, there is a great deal of potential here in areas ranging from production facilities to R&D, from large modern power plant technologies to CCS. If you want clean coal, this is the place to come. Investors cannot see Gelsenkirchen simply as a city with 250,000 people, they need to consider what the area has to offer within a 100 km radius. If you want to be involved in renewable energies, you will find everything you need here in proximity,” boasted Dr Schmitz-Borchert. “There is a long term cooperation at state level between NRW and the Shanxi province, which also has a traditionally coal mining based economy, and we have our history to offer. The Chinese can learn from us how to build a future on old coal-mining sites once they close them down.”

SMS: A Chinese roll...

SMS Group, President & CEO, Heinrich Welss A Chinese delegation, sent to Germany by the Ministry of Metallurgy in January 1971 to search for someone who could build models of continuous casting of machinery and cold rolling, ignited a long relationship between Dr Heinrich Weiss and China. Dr Weiss had just about replaced his father as Chairman of the managing board of Siemag, which was one of only five sizeable builders of rolling mills for the steel industry in Germany. Together with Demag, a competitor that was later absorbed by Siemag, Dr Weiss made an offer to supply continuous casting and cold rolling machinery, and at the end of 1973 the Demag and Siemag consortium received its first Chinese order.

“During this period when political relations began opening up between China and the West it was very rare for business delegations to visit China, even members of foreign governments rarely travelled there, but following this order a delegation of the top management of Demag and Siemag visited China in early 1974,” Dr Weiss recalls. “Since the contract was already signed and there was nothing to negotiate anymore we intended to stay in Beijing for only two days, but the Chinese insisted that we needed at least two weeks to visit historical sites such as the Great Wall and the Ming Graves. As businessmen it was impossible for us to take two weeks off, and negotiated our visit down to one week during which we enjoyed Chinese culture and hospitality. It was a wonderful occasion.”

Since Dr Weiss’ first visit to China a lot has changed for both the Chinese steel industry and his company. “From early on, my ambition was to gain a leading market share,” explained Dr Weiss, who managed to safeguard the character of a family owned company throughout various mergers, joint ventures and acquisitions. “My strategy was based on pursuing market leadership in niche areas while running the company in a non-bureaucratic style, driven by high motivation of the people, and leaving approximately all of the profits in the company to have equity to grow. Since we were also good sales people we started our Chinese and Soviet Union businesses early on and received very large orders from both countries. In the mid-1980s we reached our first objective by becoming the largest builder of rolling mills in the world.” Dr Weiss is still running the business his father left him, but after almost four decades on continuous development his company is known as SMS Group and emerged as the world leader in rolling mills, pipe mills, and general plant equipment for the processing of steel, aluminium and other metals.

Dr Weiss steered his company through five or six recessions and is used to business cycles. “The pattern is always the same: there are four or five strong years followed by three or four weak years,” he explained. “This financial crisis was not such a big change; in fact, a recession was due as of early 2008. In 2007 and 2008 we received more than €5 billion in orders, but for this year I expect about €2 billion. Our company is structured in a way that allows it to breathe with these differences and retain our experts during the recession phase.”

While forecasting the next boom in the global steel industry not to begin before 2014-2015, SMS Group sees big opportunities in China when the three year moratorium for investment in the steel industry ends. “The money is there and the government wants to close the old, dirty steel plants, which brings us to the ecological and pollution question,” Dr. Weiss continues. China’s steel industry challenges the country’s efforts to enhance the energy efficiency of its economy and reduce its greenhouse gas emissions. Steel production in China consumes at least 8% of the country’s own energy, according to the Organization for Economic Cooperation and Development, and the country is destined to remain the world’s largest steel producer in the foreseable future. Investing in energy efficiency presents a great opportunity for China, and many technologies are available in the global market to improve the industry’s energy efficiency.

“There are two main drivers for environmental technologies: one is the rising price of resources or energy and the other is stricter environmental laws,” adds Christian Fröhling, General Manager for Energy and Environmental Technology at SMS Siemag. Currently, Western steel producers invest €25 in environmental technologies for each ton of steel produced. We assume that environmental standards as well as energy prices worldwide will continue to rise and we can already recognize a rising demand for environmental technologies, especially in China and other emerging countries like India and Brazil.”

“This is a big chance for us,” emphasises Dr. Weiss. “The Chinese are rapidly catching up on the engineering of metallurgical equipment, but they are still behind on all the ecological sides while we have a good market position both domestically and internationally in pollution-avoiding equipment. Due to the very strict regulations in Europe we are used to building cleaner plants and should be able to keep our market share in China for a while because we can offer this equipment. However I am quite sure that Chinese engineers will be able to do the same thing sooner or later.”

Germany´s Trade Fairs Make Trade Fair

Germany likes to present itself not only as Europe’s largest economy and an export success story, but also as the "land of ideas". One of the country’s most successful ones has been to make the “Made in Germany” a brand in itself, recognised as a guarantee of quality, through the use of the German trade fair industry as a global trade promotion platform.

“Without the marketing instrument of the trade fair, in particular, small and medium-sized German companies would have fewer opportunities to open up international customer potential. The participation at trade fairs is one of the key reasons for the export success of the medium-sized and smaller companies, which form the backbone of German industry,” explained Dr Peter Neven, Managing Director of the Association of the German Trade Fair Industry. Not only have the trade fairs supported the entry of German companies into the world market, the country’s rise as an export leader also facilitated the successful internationalization of leading trade fair organizers such as Deutsche Messe and Messe Düsseldorf.

Germany’s trade fair history started 845 years ago in Leipzig, which is home to the oldest exhibition ground in the world. Leipzig was officially founded at the crossroads of major trade routes from north to south and east to west after the first trade fairs were established on this location. In 1949, two years after Messe Düsseldorf was founded, the Managing Director from Messe Leipzig came to Messe Düsseldorf and started creating specialised trade fairs. Today, Messe Düsseldorf organises no less than 24 number one exhibitions in the world. “It is fundamental to have the most valuable exhibitions and a continuously good programme which fills the centre all year round nearly every year,” Werner Dornscheidt emphasized. As President and CEO of Messe Düsseldorf he takes great pride in the fact that his organization has achieved the highest turnover in the industry in spite of lacking the largest exhibition grounds.

Deutsche Messe faces a rather different situation since its venue in Hannover is by far the largest in the world, with nearly 500,000 square meters of indoor exhibition space. “Our venue has always been larger than most others since we organize the Hannover Messe, the mother of all fairs, which produced successful spin-offs such as CeBIT, Ligna and Biotechnica. In addition, considerable changes were made in terms of size and infrastructure for the EXPO 2000 that we hosted. Our challenge is now to fill this huge venue,” stated Dr. Andreas Gruchow. He was appointed to a newly created board-level position with responsibility for international activities at Deutsche Messe in 2008, 27 years after the company launched its international activities. On the contrary, Messe Düsseldorf was never a truly German operation and organized an exhibition in New York on behalf of the Ministry of Economics in 1947 in New York even before it began operations in Düsseldorf, which of course soon became its main business.

After joining Messe Düsseldorf in 1975, Werner Dornscheidt was placed in Moscow and the Middle East before moving to Messe Düsseldorf International Trade Fair Marketing, a very small company through which new trade fairs abroad were created. “The idea was to install product families of trade fairs in order to take our world leading exhibitions abroad as regional exhibitions because our customers needed to go to numerous countries around the world to exhibit their products,” he recalled. Many years later, he was also involved when Messe Düsseldorf took a defining step in its internationalization process: participation in the Shanghai New International Expo Center. As Deputy for International Business, Dornscheidt was in charge of the discussions with Messe Munich and Deutsche Messe, which resulted in the creation of the German Exhibition Corporation. The CEOs and their Vice-Presidents of the three participating German trade fairs then entered into negotiations with the Lujiazui Exhibition Development Corporation, which is owned by the Shanghai Municipal Government, and concluded a 50-50 ownership agreement that provided the framework for the development of the Shanghai New International Exhibition Centre, whose master plan envisaged 17 halls and 200,000m2.

“The Chinese recognised that the cooperation between these three big German players guaranteed that we could bring the knowledge, experience and capability to use our different networks to fill this centre. SNIEC has become a tremendous success story: exhibition space has been sold 31 times in one year and even the halls which we have no yet finished are sold out until 2014,” Dornscheidt underlined. Within the centre the three German trade fair organisers have become competitors again and are organizing their own shows. As soon as it became clear that the SNIEC would begin its operations in 2001, the Board of Management of Deutsche Messe called for a strategic move: all relevant shows in Hannover were to be exported to other regions of the world. This meant that HANNOVER MESSE, CeBIT, DOMOTEX, LIGNA and BIOTECHNICA would all be exported to China, too. While Deutsche Messe chose to build on the brand awareness of its leading exhibitions to drive its internationalisation process, Messe Düsseldorf decided to take its exhibitions abroad under different names. For example, its flagship exhibition for the plastic industry organized in Germany under the name K is called Interplastica in Moscow, ASIAPLAS in Asia, CHINAPLAS in China, and BRAZILPLAS in Brazil. “As opposed to other trade fair organizers, we never use the same names but create product families,” Dornscheidt confirmed. “The name K is a registered trademark for Messe Düsseldorf, and an exhibition with the size and quality of K is impossible to organise anywhere but Germany. We not only show our customers that we have the knowledge and experience to organize an exhibition on plastic machinery, but also that we are serious and realistic because we are not promising a world number one exhibition in every location. The product family approach has been our policy and we believe that we were right.”

Unlikely centre of the global solar industry

Schmid Group, President & CEO, Christian Schmid Although Germany receives fewer hours of sunshine each year than many other places, the country has become the epicenter of the global solar industry. The core of the remarkable rise of the German solar industry is the country’s favourable framework created by the Renewable Energy Sources Act, which came into effect in 2000 and has been adopted in various forms by many countries around the world. Germany’s feed-in tariff law, which requires grid operators to pay producers of solar electricity a fixed rate for solar generated electricity that is fed into the utility grid, triggered an unprecedented boom that created an industry with turnover of €9.5 billion in 2008, employing around 54,000 people, and exporting approximately 50% of its production, according to the German Solar Industry Association. Undeniably, this success story is due to the creation of conditions and Germany’s engineering prowess rather than the country’s variable weather.

Southern Germany is not only sunnier than the North – in summertime on a cloudless day in Munich the sun delivers approximately 1100 Watts per square meter – it has also emerged as one of the countries leading solar clusters outside former Eastern Germany and is home to companies such as Centrotherm Photovoltaics, Gebr. Schmid, Solar Fabrik, Applied Materials, M+W Group and Teamtechnik. While Germany’s photovoltaic panel manufacturers include both longstanding industry pioneers and newcomers eager to participate in the industry’s rapid growth, the vast majority of suppliers and service providers entered the industry based on core competences developed in hi-tech industries such as semiconductors and flat panels.

Gebr. Schmid decided to enter the photovoltaic industry in 2001 based on a benchmark study of the key knowhow available in the company at the time. “We found that the photovoltaic industry presented a great opportunity to use a lot of our technology and experience in printed circuit boards and flat panel displays to support the development of photovoltaic industry from typical niche products and laboratory-like factories to mass production,” explained Christian Schmid, who serves as CEO of the family owned group. Founded in 1864 in Freudenstadt as an iron foundry and mechanical workshop, Gebr. Schmid manufactured machines for the woodworking industry for almost 100 years and added brushing machines for the printed circuit board industry and systems for the flat panel display sector to the portfolio in 1965. Since its entry into the photovoltaic industry Gebr. Schmid has emerged as a world leader in production equipment for wafers, cells and modules by relying on transferrable expertise and technologies in combination with large R&D investment. Over the past 3 years, the company has invested around €80 million in R&D only, ranging from basic research for new cell concepts for customers worldwide to bringing this new cell technology into mass production.

Christian Schmid foresees a development of the photovoltaic industry in two different directions: technological advancement towards grid parity and vertical integration. “Everybody in the photovoltaic industry is moving towards grid parity. To achieve this one can reduce manufacturing costs by lowering capital expenditure; reducing the amount of consumables used in the final product or using different materials, upgrading the yield by minimizing breakage, or going in the direction of higher efficiency. On the other hand there is the vertical integration concept. This means that companies are involved in activities ranging from silicon production and cooler-wafer production to cell and module production with the objective of taking advantage of the synergy effects between these different activities. That means that companies could produce high efficiency cells by already influencing the silicon produced at the beginning,” he explained.

Centrotherm Photovoltaics, CEO, Robert Hartung Robert Hartung, CEO of Centrotherm Photovoltaics which provides process and manufacturing technology for turnkey production lines for both crystalline solar cells and thin film modules, adds the importance of tackling industry bottleneck to the vision presented by Christian Schmid. Having more than 30 years of experience in the photovoltaic industry, a long time in this relatively new sector, his company closely monitors the cost of the ownership model of solar cell producers and recognizes that 80% of the costs come from materials alone. Hartung takes the silicon price as an example. “In 2000 it was possible to buy silicon for below 30 euro/kilo, but by 2006 the spot market price had risen to above 300 euro/kilo. This bottleneck gave us two problems. Technological progress in solar cell production would not be sufficient to bring down the cost per kWh of solar power as long as we had this bottleneck. We analyzed how the existing silicon producers addressed this situation and the result was very disappointing. The majority did not consider photovoltaics as a viable market and as a result investment was minimal. In the background there was something else going on. For the managers of huge Chinese electronic companies that we supplied with semiconductor equipment the price of silicon had become a huge problem that drove these companies to develop a strategy to produce silicon in-house. Their decision to become silicon independent was a clear signal for us that the whole industry was in a very dangerous situation.” In 2005, Centrotherm started to cooperate with a provider of engineering and process technology for polysilicon plants, facilities which cover over 60,000 square meters requiring an investment of around €250-300 million. To drive costs down and solve the bottleneck problem, Centrotherm expanded its vertical integration by acquiring the company and became a provider of technology and equipment to produce silicon, a hugely growing market in Europe, South Korea, and mainly China. “In summary, there are the two things that we always do: invest in technological development and identification of bottlenecks. Companies who want to be future leaders must be technology leaders, and we solve bottlenecks for two reasons. First, we want to support cost reductions. Second, where there is a bottleneck there is a market,” Robert Hartung underlined.

In order to raise the cost competitiveness of solar power, suppliers and service providers strive to provide integrated solutions from silicon down to module. At each step there is significant cost reduction potential through higher efficiency, better technology, and reduced operational costs. “In the end, as an equipment manufacturer you have to optimize everything to minimize production costs,” noted Mr Schmid. “Nobody believed how fast costs of photovoltaic could go down, and we learnt in the past years that what seemed to be impossible is possible; the entire industry is learning how to adjust to these new parameters,” Explained Christian Schmid. “We are looking at a nearly unlimited market for the future. By looking at the role that photovoltaics can play in the global energy market, we can reasonably assume that capacities will grow by 40% to 50% in the next two years.” From a production perspective China has already become a major hub for Schmid, who draws parallels between the rise of China as a photovoltaic panel manufacturer and the shift of production from USA and Europe to China that the electronics industry experience in 2000 and 2001.

More than 60% of its employees are located in Asia, and Gebr. Schmid even considers China as a home market. Christian Schmid recognizes that Chinese photovoltaic panel manufacturers are already following the right track to become global players. “We can help them in setting up a high quality manufacturing environment, support them on the development of new technology, and upgrade their facilities, but of course they do not need our help to establish their name in the world,” he recognized. “As turnkey suppliers, we can provide our customers with up to 90% performance and the last 10% will come from the fine tuning of the production lines, qualification of the employees, and will be related to their management style and business strategy.“

Chapter 1

NETHERLANDS: THE ENERGY HUB OF EUROPE

Up until the 1950s, the Dutch considered themselves one of the most prosperous nations in the world despite an apparent lack of natural resources, land and population. The belief that their wealth relied entirely on an indomitable character, a Calvinist ethic, and an adventurous spirit was deeply rooted in the national psyche. But the 20th century gave the Dutch a concrete asset. In 1959, the massive Groningen gas field was discovered, which up until today is Europe’s biggest gas field and the tenth largest in the world.

Groningen marked the beginning of the natural gas era for Europe. By 1963, the Dutch had the biggest public-private partnership to date, the N.V. Nederlandse Gasunie, between Esso (now ExxonMobil), Royal Dutch Shell and the Dutch government, which since 2005 is 100% state owned. Since then, Holland’s destiny has been inextricably linked to the oil and gas industry.

From then on the world’s oil and gas industry would not only perceive the Netherlands as home to the number one oil company – Royal Dutch Shell – but also as the foundation stone of the European gas industry. This was helped by the Port of Rotterdam’s new role as a refining and trade hub for the region.

For almost fifteen years Dutch gas production (oil production was insignificant in relative terms) was almost entirely dependent upon the Groningen gas field. Nevertheless, following the first oil crisis in 1973-1974 the Dutch government designed a new energy policy, which saved Groningen as a strategic reserve to be used over a longer period, and promoted the exploitation of marginal fields via the Small Fields Policy (SFP).

According to Mr. Bram van Mannekes, Secretary General of NOGEPA, the Netherlands Oil and Gas Exploration and Production Association, the SFP has been very successful, and until now the Netherlands has recovered approximately 800 bcm from the small deposits. “Since its implementation, Groningen’s proven reserves have increased in size, but the fact remains that the field, which in total contained around 2,800 bm3, is down to 1,000 bm3 left” highlights Mr. van Mannekes.

However, the Netherlands’s luck in the gas business came at a price for the national economy. The revenues generated from the gas business were used by successive governments as current income, flooding public finances, overvaluing the national currency, and making exports in guilders far too expensive up until the emergence of the Euro in 2000. This vicious circle came to be known as the "Dutch Disease". Many national manufacturing industries struggled to export while public investments and resources were lost in bureaucracy.

Things have changed for the better in the past decade, says the Minister of Economic Affairs, Maria Van der Hoeven, with revenues being used wisely for future prosperity. “In the last twenty years a considerable proportion of the oil and gas revenues have been used for investments to strengthen our economic position in the long term. Infrastructure projects were for a long time a top priority, but the last cabinet placed innovation and education as a national priority,” she explains. Van Mannekes is even more specific: “Today, about 5% of the Dutch GDP comes from the revenues of the gas industry and the state profit share goes into funds partially for infrastructure development, roads, rails, and major R&D activities”.

On the 50th anniversary of the Groningen gas field the Netherlands has a lot to celebrate. Their expertise in the oil and gas business combined with the country’s strategic location at the door to Europe’s main markets have made the Netherlands a leader in oil and chemical refinery, as well as cutting-edge areas such as underground gas storage and seismic studies.

True to their merchant nature, the Dutch have been very good at selling not just their gas, oil and derivatives, but also their technology. According to Mr. Hans de Boer, Managing Director of IRO, the Association of Dutch Suppliers in the Oil and Gas Industry, the Dutch industry is successfully exporting equipment as well as their skill in designing, constructing and operating offshore equipment for the wider natural gas value chain. “This is why IRO has a strong focus on exporting our members’ expertise to other markets worldwide. The upstream supply industry in the Netherlands had an estimated annual turnover of US$ 7 billion for 2009, of which 70% is export-related”, he says.

All of this would not have been possible without the Port of Rotterdam. Known as the “Energy port of Europe”, it serves as a safe harbor for Western Europe’s refinery and maritime industries as they struggle to keep costs to a minimum. As Mr. Rob Nijst, Managing Director of VTTI, puts it, “Refineries in the hinterland are struggling with the increased competition from new refineries being built in the Middle East, India and China. Thus, they have concentrated even more their regional activities around the Port of Rotterdam to gain in scale and international competitiveness”.

The Netherlands’ gas revolution since Groningen has not changed just the balance of its energy basket but also its relationship with its European neighbors. According to Mr. van de Leemput, the Managing Director of NAM (the joint venture between Royal Dutch Shell and ExxonMobil, which explores the Groningen gas field and holds 54% of the Dutch gas assets), in only one generation almost 100% of the Dutch households have switched to gas for heating and 45% of them use gas for electricity. The Netherlands also produces and exports 15% of the gas consumed in the European Union.

To meet such high demands the Dutch hurried to build the world’s densest pipeline grid onshore and offshore, and its links to the rest of the European gas grid continue to grow. As the Dutch fields get depleted, their regional connectivity is more important than ever, especially as Russian gas finds its way to Europe via new pipeline projects such as Nord Stream. The Dutch government and companies like NAM, Gasunie, TAQA, VOPAK, GDF-Suez and many others are investing in new pipelines, LNG terminals, and gas storage projects. They want to secure the supply of gas both to the country and continent, and place the Netherlands at the heart of Europe’s energy strategy for years to come.

BIG PLANS FOR SMALL FIELDS

The 21st century brought a radical change in the Dutch fiscal policies towards field exploration. With many major companies leaving the country in search of bigger and more profitable fields elsewhere, the government is trying to encourage newcomers not only by improving the legal framework but also by providing an attractive institutional set-up.

Until the end of 2002, the Netherlands had a Depreciation At Will (DAW) policy that encouraged the fast exploration of existing fields by offering companies tax breaks. But, as reserves decreased, the authorities decided there was no need to hurry up exploration and dropped the DAW. Pressure from the industry managed to partly reinstate it and, in September 2009, the Dutch parliament approved new tax incentives to small fields with marginal economics.

Besides that, for every new development and producing field in the country, EBN – a 100% state-owned non-operator – participates with 40% of the project, assisting companies with the financing as well as the Exploration & Production (E&P) expertise which has built up more than five decades of experience in the area.

To Mr. Jan Treffers, Managing Director of GDF-Suez E&P Nederland BV, EBN plays a crucial part in the operation’s success. “On the one hand E&P companies are competitors, but in a small area with limited infrastructure like the Netherlands you have to cooperate in order to be able to achieve ultimate recovery of the remaining reserves. Thus, the role of EBN is central to stimulate this cooperation”.

The advantages of exploring for natural gas in the Netherlands are obvious. Most of the necessary E&P infrastructure is already in place; companies have a safe buyer in GasTerra, thanks to the Small Field Policy; the country has stable and market-friendly laws; the final market is extremely close and it has total integration with the European gas grid. The only problem is: how do you find gas at competitive costs?

GDF-Suez E&P Nederland BV has found a suitable answer. The company has grown to become the number one offshore operator in the Dutch continental shelf by acquiring assets close to its main energy markets. The company bought important assets from NAM in 2003 and sealed deals along the NOGAT pipeline in 2008 that included both fields and pipelines. “Both acquisitions fit very well in our portfolio since we had many years of experience with operating the Noordgastransport B.V. (NGT) offshore pipeline system”, says Mr. Treffers. According to him, the reason GDF-Suez can operate fields in an area with higher production costs is due to the fact that they are a smaller E&P organization able to reduce operating costs and increase efficiency.

But buying already depleted assets would not be a lasting solution for companies searching for long-term supply. Hence, most of the newcomers have invested heavily in new explorations. “We have been drilling three to four exploration wells per year – which is a considerable number for a mature area such as the Netherlands. This tactic has brought us important new reserves which we have developed in the past 10 years”, says Mr Treffers. Even so, these advances wouldn’t be possible without the latest generation 3D seismic data as well as data-processing and interpretation techniques that were neither available nor economically viable a few years ago.

These technological developments and their economic viability were brought about by the fact that the Dutch continental shelf is served by a myriad of world-league service providers. Some of the most successful built their technological expertise in these waters, Fugro being the best known example of the acclaimed Dutch expertise.

According to Mr. Klaas Wester, President and CEO of Fugro, their client base is made up of big and small oil companies. “The first thing they need is data on the locations before they can decide what type of design or what structure they want to build, hence Fugro assists them in the very early stages of exploration.¨ The company provides the industry with all the relevant information needed to locate oil and gas and to build the suitable structures for extraction.

Mr. Wester attributes Fugro’s success to its focus on cutting-edge technologies developed in-house and on it being a neutral player able to service all oil companies and all contractors, not competing with their clients in any way. Some 20% of the company’s activities are concentrated in seismic studies to find new oil and gas fields and a growing part of its business comes from the abandonment of fields, which is also of special relevance for depleted areas such as the North Sea.

FMC Technologies gives another good example of how technology advances provide further viability to Dutch assets. They recently developed a unique integral tubing rotator for the NAM Schoonebeek redevelopment project, allowing this historical field to operate once again. Mr. Graham Horn, General Manager for Europe, Africa & CIS of FMC Technologies Surface Wellhead explains its significance. “This was a piece of equipment which didn’t exist in the market, so FMC agreed to develop it in the Netherlands as part of the project, helping NAM meet their safety criteria and redevelop Schoonebeek properly.”

According to Mr. Horn, this is a fairly large project with approximately 80 wellheads. “Roughly half of those are steam injectors and the other half are producers. It is exciting for us because our facilities sit right in the middle, so we always laugh and joke that we can go and service the job on a bicycle, which is perfect for the Netherlands.”

Despite the fact that some major companies are leaving the country, Mr. Horn has reasons for optimism. “It’s safe to say that we will have good E&P activities in the Netherlands for at least another 20 years. I don’t believe it will go away any time soon,” he says. “You also have to be aware that when FMC installs a wellhead, our expectation is that it will be there for another 20 years as well. We cannot abandon it, it will be supported by FMC throughout its lifetime.” For Mr. Horn, FMC´s long-term commitment and knowledge of the local business culture are the reasons for the company’s deep penetration in the Dutch market.

Like GDF Suez, Wintershall Nederland BV, a company which does exploration, development and production until abandonment, has acquired a number of assets in the Dutch continental shelf. Mr. Gilbert van den Brink, the managing director, points out that Wintershall Nederland BV developed a unique offshore expertise that is currently being exported to their overseas activities, especially in other North Sea operations in Norway. “The Netherlands is recognized inside the Wintershall Holding AG for its expertise in the development of offshore prospects, small and large platform or subsea projects that are now being exported elsewhere”.

An especially interesting project developed by Wintershall was the P9, constituted by two subsea wells tied together like a daisy chain. Attached to each other, together they sent the gas to the main station. This was the first time that this technology had been applied in the Netherlands. “That has opened quite a large perspective for Wintershall because in the Netherlands there are a number of restricted areas due to the military zones, water ways, offshore wind farms and so on”, says Mr. van den Brink. Even though these regions present good opportunities, companies are normally restricted from installing platforms; hence, the subsea wells daisy-chain concept is something Wintershall is looking at, and other companies are following suit.

Furthermore, companies such as Workfox, a growing Dutch service provider specialized in the offshore accommodation and construction-support units, saw the potential created by the increasingly relevant decommissioning market in the North Sea. ”In 2008, Workfox was awarded an important contract with Shell for their first big Southern North Sea decommissioning project. Irrespective of oil and gas prices, the market inexorably moves forward and at some point decommissioning will become unavoidable,” forecasts Mr. Keesjan Cordia, Managing Director of Workfox. As a result, in recent years Workfox has considerably increased its number of support vessels, acquiring some units of the Seafox family. Cordia´s strategy is to position Workfox as a front-runner in this market and take advantage of its pioneering role.

Decommissioning apart, the Netherlands still holds some treasures to be discovered and developed. Of course, it will be more difficult to find new assets, but with a success rate of up to 60% or 70% the prospects are far from scarce.

The challenge will be to make these ever decreasing fields economical. Companies such as Wintershall, GDF-Suez, Vermillion and Cirrus found a way, but in order for others to enjoy the same success, some believe the government will need to change its stiff tax system and in the long term provide a greater incentive. By doing this, and by investing heavily in new frontier areas maybe the country will still be producing 30 bcm by 2030 and NAM will keep its promise and celebrate the 100th anniversary of the Groningen gas field.

CANADIAN SCOUTS

The E&P spectrum in the Netherlands is rather limited in terms of operators – for now not more than thirteen. But what makes it unique is the increasing number of Canadian players entering this market. Juniors such as Vermilion and Cirrus Energy Nederland have invested considerable sums of their limited financial portfolio in Dutch resources. With majors leaving their assets and betting on billion-dollar investments in frontier areas elsewhere, plenty of opportunities remain.

Mr. Scott Ferguson, Managing Director of Vermilion, acknowledges it is no coincidence that Canadians are taking the lead in the process. “Just as in Western Canada, the Dutch fields are mostly mature and large E&P companies have left the country because they didn’t see opportunities for further growth on a large scale. Hence, there are many opportunities in the Netherlands for smaller Canadian companies such as Vermilion that grew up in Calgary doing exactly the same thing when majors left Western Canada.”

What’s more, the financial industry in Canada is familiar with marginal field investments and provides the necessary funding for this kind of opportunity elsewhere.

Mr. Ruud Zoon, the Managing Director of Cirrus, couldn’t agree more even though his company’s activities are in contrast to those of Cirrus which are mostly onshore. According to him, offshore exploration in the Netherlands offers significant processing and pipeline infrastructure, which helps companies like his to bring on new developments quickly and efficiently.

“Cirrus has a strong preference to be the designated operator of its licenses. That means we can then control the pace of development and the capital expenditures, important for a small company with limited access to financial markets”, he highlights. As a result, with just one exception Cirrus operates all their assets in the Netherlands. Just like scouts, they may be small players, but they are brave ones.

Part 1

The Real Face of Russia

It is clear that Russia’s key oil and gas decision makers, although focused in different areas and on different challenges and opportunities, are all working towards one common goal: making Russia a strong energy player for the sake of the economy, for business and for its citizens.

Different Focuses – One Aim

Igor Sechin, Deputy Prime Minister “Russia is currently the number one oil producer in the world. And of course expanding oil exports is of fundamental importance to us, since this is where our core budget revenues come from.” Deputy Prime Minister Igor Sechin recently stated. By keeping production levels at the end of 2009 above 10 million barrels, the country overtook Saudi Arabia to become the world’s biggest producer of oil.

As well holding this enviable position, Russia also holds 32% of the globe’s proven gas reserves and is the largest exporter of gas. The global gas market in 2010 looks very different to a few years ago, due to the rising importance of shale gas in the US market and predicted slumps in global demand. Gas has always been indexed to oil prices, but gas prices stood at around U$ 4.6 per British thermal Unit (BTU) at the end of June 2010, twenty times less than the current oil price. Historically, it has always been closer to ten times less. Despite this situation, at the most recent meeting of the Gas Exporting Countries Forum, Russian Energy Minister Sergey Shmatko stood against putting quotas on production, an alternative to indexation. “All ministers agreed and supported that we continue our efforts to achieve indexing gas to oil,” he said after the forum.

AlexeY Kudrin, First Deputy Prime Minister and Minister of Finance New pipeline projects to extend and diversify Russia’s export reach are positioning the country in a new light: as a major supplier to Europe and the CIS through projects such as the Caspian Pipeline Consortium (CPC) Baltic Pipeline System (BPS), as well as gas through Nord Stream and South Stream. Valery Yazev, vice chairman of the State Duma, Russia’s equivalent of the United States House of Representatives, explains the need to develop such projects when there is already pipeline capacity to Europe. “By 2020 Russia will need to transport an additional 100bcm of gas per year to Europe and that is what North Stream and South Stream are meant for. They are additional transport routes, which will diversify the transit system and reduce the dependence of Russia and European countries on countries such as the Ukraine, which have caused transport problems in the past.”

Oil and gas are clearly hugely important for the Russian state budget. Although Finance Minister Alexei Kudrin has been pushing for some time for “ending dependence on oil”, Russia’s 2009 budget was contingent on oil prices reaching U$ 95 per barrel. When this did not happen the country’s reserve fund built up during the boom years had to be used, which meant that oil and gas revenues accounted for 11% of GDP and half of the country’s spending for the year.

Valery Yazev, Vice Chairman of State Duma The Russian government is also looking at reshaping its oil and gas taxation system. The current system taxes upstream production but allows companies to make their money in refining and downstream activities, essentially fostering an environment where only Russia’s largest integrated players stand to benefit. A new taxation model would look to stimulate growth across the energy value chain and encourage the development of smaller oil and gas companies more suited to exploiting mature deposits in Western Siberia. Encouraging the development of junior companies in Russia has been in issue for the last few years, as Yuri Shafranik, former Minister of Fuel and Energy (1993-1996) and today chairman of the Union of Oil & Gas Producers of Russia explains. “In 1996, 16% of Russia’s total production volume belonged to small and medium companies. Today, that percentage hardly reaches 2%. Small business today is burdened with tax. We realize this problem and our mission is to analyze the issue and try and persuade the Government and the State Duma that it is very important and that resolving it is in the national interest.”

As well as addressing this issue and making sure that Russia capitalizes on fields that are not of strategic importance to the major players, any new taxation system must also encourage Russian companies to exploit promising new regions such as East Siberia. The new taxation model must also acknowledge the current issue in convincing investors that moving to these new regions is worth the investment. This may take the form of a revenue-based tax system, or continued tax holidays for specific fields, but will have to take pains to maintain a balance between incentives for upstream and downstream operations.

The energy sector as a whole has undergone some major changes over the last decade from commodity producers to consumer facing power generation companies. Yuri Lipatov, chairman of the State Duma Committee for Energy has overseen many of these changes, including the liberalisation of the power generation industry. He explains that in the end these changes should always be concerned with improving the experience of the end-user. “We hope that the philosophy of the law will, at the end of the day, form competitive pricing, which in turn will allow reducing costs and introducing lower prices. We, as state representatives, should use our power to ensure smooth improving of the legislative machine in case of problems.”

Marching on Moscow

Despite the challenges of the market, Russia is a major recipient of investments from the world’s biggest IOCs: ExxonMobil, Total, BP, ENI and the world’s biggest service and equipment providers such as Siemens and GE. It seems that for some the Russian market is not as cold, unattractive and impenetrable as many perceive it to be.

Companies like BP, for whom Russia accounts for 25% of its production, just over 10% of its profit and around one fourth of the reserves bookings leave no doubt that with all its risks Russian shores can still be much safer than elsewhere.

David Peattie, head of BP business in Russia, describes the commitment that his company has made to the Russian market through TNK-BP, their joint venture with AAR (Alfa-Access-Renova Consortium) as well as the company’s current attitude towards its Russian investments: “TNK-BP has paid over $110 billion in taxes and duties in Russia, and has paid a significant amount of dividends to its shareholders. It has had its challenges, but we think the industrial logic behind the original conception, which was bringing BP’s leading technology in oil and gas field developments and exploration together with our partners’ ability to get things done in a Russian context through their relationships and their knowledge of Russian infrastructure and politics is a winning combination. It has been very successful by any measure.”

As well as committing to its JV through some difficult times, BP has strengthened its links to Russia through its aviation fuels, trading and lubricants business, and also by purchasing a 1% stake in Rosneft. This strategic investment will undoubtedly help BP in Russia in the years to come in terms of working with Rosneft in some of the country’s most crucial future projects.

Looking East to the Land of Opportunity

For the Russian oil and gas industry, the east of the country is a region that holds vast reserves of oil and gas and the potential to drive Russia’s energy industry for many years to come across the whole value chain. And yet the east represents so much more than this. It is here that Russia shares a border with China, a country developing so quickly that even its own vast natural resources are not enough to fuel its growth.

Nikolay Tokarev, President of Transneft As the president of Transneft, Russia’s national oil transit company, Nikolay Tokarev is optimistic about the potential for Russia in the East. The company is currently engaged in one of the largest projects since Perestroika to link Russian oil to the Asian market. The ESPO pipeline opened its first stage in December 2009 and at the time Prime Minister Putin called the project “a great New Year gift to Russia.” Tokarev agrees. “We’re already witnessing the booming development of the regions adjacent to the pipeline: construction of roads, electricity transmission lines, new settlements, and, most importantly, development of new oil fields.”

Togrul Bagirov, executive vice president of the Moscow International Petroleum Club, a group that aims to encourage the participation of the key international players in Russia’s oil and gas sector, acknowledges the importance of Asia in developing Russia’s long term export strategy. Whilst many economies eye China warily, the Russian attitude seems to be that a market of China’s size can only bring opportunities, and that these will not be realised through confrontation, but through cooperation and engagement. “Oil and gas is also quite a strong and effective mechanism for a country’s foreign policy and developing relationships with other countries,” explains Bagirov. “Russia has became one of the biggest players in ensuring energy security in Europe and globally. China needs Russian energy if it plans to be the strongest economy in the world.”

Arctic Dreams

Meanwhile, in the chilly northern city of Murmansk, an industry holds its frosty breath, pinning its hopes on one of Russia’s key oil and gas regions – the Russian Arctic Shelf. The litmus test for the viability of projects in this offshore region is seen by many to be the development of the Shtokman gas field, which is still awaiting a final investment decision by Gazprom and its project partners Statoil and Total. Despite this decision still being some months away, a vast array of service providers and equipment producers have shown interest in the Murmansk region over the last months and years. There is much potential in the Russian Continental Shelf – covering 6.2 million square kilometres, it is estimated to hold 100 billion tons of oil equivalent.

Konstantin Dolgunov, General Director of SMNG However, Murmansk is also home to some very well established companies that have been faithfully serving the oil and gas sector for many years. Russia’s interest in the Arctic region is not as fresh as the lack of producing fields might suggest. As early as the 1970s, the Soviets began geological expeditions to survey the seas of the Russian North. Infrastructure for data processing was put in place in the city of Murmansk, and over 740 vessels were constructed within the USSR and neighbouring countries. By 1979, the Soviets had decided to split the task of mapping the Russian Shelf amongst different organisations in order that the work might be carried out more thoroughly. It was at this time that the Murmansk companies Sevmorneftegeofizika (SMNG) and Marine Arctic Geological Expedition (MAGE) were given their exploration mandates by the Soviet government.

It was during the following years that these companies mapped the entire Russian shelf, and Russia’s giant offshore fields such as Shtokmanovskoye and Pirazlomnoye in the Barents Sea and Rusanovskoye and Lenindgradskoye in the Kara Sea were discovered. Once this work was done, companies such as SMNG started to look elsewhere for markets where they might apply their expertise. Konstantin Dolgunov, general director of SMNG, explains. “In the late 1980s the management of Sevmorneftegeofizika realized what our situation of having the state as our only customer was fraught with, and that at some point the order book would dry up, and SMNG would be left with over 1,000 employees and no work to give to them. So as early as before the collapse of the Soviet Union, we started to look to international markets to source new business.” SMNG worked with NOPEC and CGG on the Norwegian shelf, applying the skills they had gained to a region with similar geographic conditions. Although at this time their fleet did not comply with international standards, it was upgraded in the 1990s and today SMNG works all over the world with some of the industry’s largest producers.

Despite the work that was done mapping the Russian Shelf at the end of the 20th century, Russia has yet to fully capitalize on its offshore reserves. As the Russian Shelf is considered one of the country’s strategic regions under current legislation, the only companies that can compete for tenders there are Gazprom and Rosneft, as the only Russian companies with more than five years offshore experience. Licenses have been awarded, but work has not yet begun on many of these fields beyond the basic exploration stage. Gennady Kazanin, general director of MAGE, another company with decades of experience of mapping the Arctic region, explains why development of these offshore assets is not currently a priority: “The current lack of infrastructure, pipelines and refineries close to the Russian shelf to facilitate the production for companies that want to operate there means that capitalizing on these assets will require very high levels of investment, in order to put the necessary amenities in place. This activity is already progressing on some projects, such as the Shtokman development.” He goes on to explain that this difficult situation means that Russia’s offshore region will not be a priority for Rosneft and Gazprom whilst they have assets onshore that are easier and cheaper to extract.

However, the Russian government seems keen to explore the possibility of opening the shelf to private companies. The most recent data shows that in order to develop the shelf until 2040, more than 6.3 trillion roubles of investment will be needed. Given these figures, the Ministry of Natural Resources estimates that at their pre-crisis investment levels, it would take Gazprom and Rosneft 165 years to develop the shelf alone.

Sergey Donskoy, Deputy Minister of Natural Resources and Ecology of Russia, explains the government’s current strategy for finding a solution to this issue: “We’re looking to expand the list of companies allowed to get licenses for development of the offshore fields. We also suggest the idea of creating consortia and the possibility of increasing the number of operators at the expense of the affiliates of Gazprom and Rosneft, as well as other ways to let the state control the management of developing the fields in order to maximize the public benefit and revenues, attract more Russian contractors and ensure transfer of innovative technologies in the frame of attracting the foreign contractors for offshore development.”

Alexander Dementiev, Head of PGS Representative office Russia Companies have realised how this change in mentality might be important for the development of the oil and gas industry in the Arctic. As Konstantin Dolgunov of SMNG explains, “If, as today, access to the Russian Shelf continues to be closed to Western companies, we’ll continue pursuing our current strategy of looking for customers both on the world oil market and on the Russian shelf and establishing the reputation of a reliable and qualified contractor.” Despite testing times for these companies that established their reputations and expertise on Russian Arctic waters, both SMNG and MAGE are still sourcing some of their work from the region. MAGE currently fills around 60% of its order book with Arctic survey work.

As the Russian government ponders whether to open the Arctic shelf to other oil and gas companies, foreign geophysics companies are also targeting this promising market.

PGS’ core international focus is deepwater geophysical surveys. However, in Russia PGS has been working for more than eleven years in mostly shallow locations in the Caspian and Far East regions. The reason for this is that, as Alexander Dementiev, the head of the representative office of PGS in Russia explains, “In terms of regulations, the Caspian region is more open towards foreign contractors since it has had to adapt to the fact that many countries share the shelf. Of course the shallow water services that we offer in the Caspian are not the core business of PGS on the global market. Our recently launched PGS vessels of Ramform S series can theoretically tow up to 22 seismic streamers. So it means such vessels can do high quality 3D acquisition over considerable areas in one go. This should be a very competitive advantage in such regions such as the Barents Sea and the Okhotsk Sea in Russia.” These vessels are able to work without refueling for up to five months, so it means they don’t have to call at a port during a typical survey. “The only reason we haven’t been able to use these vessels, or PGS’ other 3D vessels, and have been focused only in the shallow waters of the Caspian is because there are still some restrictions for use of vessels under foreign flags on the Russian shelf”, Dementiev complains.

According to him, the Russian Arctic shelf represents huge long-term potential for geophysical marine companies as it has not yet been properly explored. “There are some issues that we are trying to understand, but which are still unclear. Geological exploration is listed as a strategic activity; as such, foreign companies cannot efficiently compete on this market, posing a big problem to Russia itself. Russia’s shelf development plans are ambitious; however the geophysical fleet is rather outdated. This makes efficient exploration of the Russian shelf without the support of foreign technology quite challenging.”

Yes, the North Can

Since its discovery in 1988, the massive Shtokman field in the arctic Barents Sea has been presented as the future of the Russian oil and gas industry. The massive reserves found up north only add to those found further east in the Yamal Peninsula and reinforce the feeling that Russia should press ahead with oil and gas exploration in such a promising region.

Gazprom, the protagonist in both mega projects, has continuously defended their viability. Alexey Miller, chairman of the Gazprom Management Committee recently stated that “the immense resources of the Yamal fields will become one of the main factors contributing to steady development of the entire Russian gas industry for the decades to come. It is the comprehensive approach to the Yamal fields development, infrastructure sharing and time proven partnership that will allow implementing these projects with maximum efficiency.”

AlexeY Miller, Chairman of Gazprom Trygve Birkeli, head of Falck Nutec Russia, a Norwegian based world leader in the prevention training of accidents, diseases and emergency situations, acknowledges that “The ‘safety culture’ of the companies operating in the Arctic will have to be a number one priority, particularly in light of the media focus and scrutiny of operations given the environmentally sensitive nature of the area. Another important issue will be the lack of infrastructure in the Arctic region; in terms of HSE and emergency response management this can make our job quite a challenge.”

Companies like Trelleborg, the biggest non-tire rubber company in the world, see potential in the further development of the Russian Arctic Shelf. In the words of Julia Malafievskaja, general manager of Trelleborg Industry in Russia, “Trelleborg has a wide range of products that will be necessary in order to fulfill the Russian ambitions of developing its offshore fields. We are using international technology with no parallel in the local market, the reason why Russians are open to partnering with us and using our technology for key projects”.

The company is a market leading designer and manufacturer of marine and offshore solutions for topside, surface, subsea, sea floor and down-hole applications and their main products include surface and subsea buoyancy, thermal insulation, clamping and solutions to protect critical equipment against fire, over-bending, impact, corrosion, vibration and abrasion: all critical for the development of a climate challenging region such as the Arctic.

Part 1

Deep Water SAMBA

“Via radio and fax, when working offshore back in the 1980s”, Formigli recalled, “we knew we were doing something special and we also could identify how difficult it might be for the decision makers at the time to tell us what the best move would be to make.”

Brazil is the rising star of the Western Hemisphere for the oil & gas industry following the offshore finds in pre-salt. With a predicted production level of 2.7 million bpd and a domestic consumption level of 2.5 million bpd in 2010, the nation is only beginning to assert itself as a net exporter and has set a course to be the next big oil powerhouse.

Brazil’s goal to rank fifth among the world’s top oil powerhouses

Last June Petrobras CFO and investor relations director Almir Guilherme Barbassa announced the 2010-2014 Business Plan. Investments total $224 billion, representing an average of $44.8 billion per year.

The plan foresees $212.3 billion (95%) will be invested in Brazil and $11.7 billion (5%) abroad and includes significant utilization of the domestic supplier market, with local content forming 67% of total investment. The E&P segment will invest $118.8 billion to target production of 3.9 million barrels of oil equivalent per day (boe) in 2014 and 5.4 million boe in 2020.

The lower production target for 2020, when compared to the previous 2009-2013 plan (of 5.7 million boe) is a consequence of reducing international production goals due to lower future investments. “Because of our opportunities in Brazil, reduced emphasis will be placed on Petrobras’ international E&P activities,” said Barbassa.

As a first step for establishing a new regulatory framework regarding the exploitation of crude oil under Brazil’s pre-salt layer offshore, President Ignacio Lula da Silva signed a landmark bill last July governing the capitalization of Petrobras.

Jose Formigli, executive manager, E&P Pre-salt Petrobras In a favorable context, Petrobras expects to have the largest availability of drilling rigs for deep-water than any other oil company, with a total of 26 rigs by 2014 and 53 by 2020 and 504 support vessels by 2020 (254 in 2009). Projected investments in refining, transportation, and marketing are budgeted for $73.6 billion.

The feedstock processed in Brazil is expected to reach 2.3 million bpd in 2014 and 3.2 million barrels in 2020. Thus, Petrobras will be prepared for the increasing demand for derivatives in the domestic market, projected to reach 2.4 million bpd in 2014 and 2.8 million bpd by 2020, Barbassa concluded.

The Brazilian content is expected to represent approximately $28.4 billion per year of Petrobras´ capex and will help to create a supply hub in Brazil.

Entering a new phase

Due to uncertainties in the market caused by changing rules and cancelling bidding rounds and by reviewing the distribution of royalties, expectations for the acquisition of blocks in the pre-salt region did not materialize.

It’s not really a question of what share of the market a company conquers, but rather a question of understanding what Petrobras’s requirements are and where they would like to go in terms of developing a better understanding of the geology of their own blocks or preparing for blocks to be awarded by the ANP in a future round.

CGGVeritas’ country manager in Brazil, Patrick Postal, identifies at least 3 major periods wherein independent or international operators came to explore the Brazilian market. The first was from 1997 to 2006 when the business model ran more or less as it was originally set up to run. During this period, a number of global companies entered Brazil and local companies entered the oil and gas business.

Patrick Postal, country manager, CGGVeritas Unexpectedly, from 2006 to 2009, bidding rounds were cancelled and blocks taken out of bidding. “It was nothing serious but at the end of the day it cast a different light on a system that had succeeded in attracting a lot of interest,” he said. “Now we are in a third phase where we can see a form of a secondary market with companies leaving and selling assets while other players are looking to buy these assets,” Postal explained.

Globally for the geophysics industry, it has been a rougher time than in 2007. “But it has been somewhat different in Brazil,” Postal thinks. “Firstly, like many large National Oil Companies (NOCs) that manage their assets over the long term, Petrobras did not change its capital expenditure program in Brazil. Secondly, concession-holders were still in the process of building their oil and gas properties. People received their concessions and they had obligations to invest in seismic surveys in a set period of time.”

He continues, “To stay one step ahead in the offshore acquisition segment, CGGVeritas presented its Sercel Nautilus steered Sentinel solid streamers.”

Postal also affirmed that “wide-azimuth is a very effective advanced technology CGGVeritas operationally brought to the market, particularly as the pre-salt fields are developed as it provides information previously unavailable with older techniques and a much clearer image for a more accurate interpretation of the reservoirs in this complex salt environment.” Industry waiting new bidding rounds

In general, executives hope that with the changes in the market out of the way, a new ANP auction will be announced, either in the later months of this year or next year, and the offshore acquisition segment of the market will be able to sell data to many interested parties.

Kjetil Hove, country president, Statoil Brazil Another option is that there may be large oil and gas companies with strong offshore deepwater operation capabilities who would like to partner with Petrobras, if the new model is adopted the way it is being proposed to the Congress (regarding royalties).

“We need other options to develop in Brazil and be a bigger part of the business,” noted Statoil’s president Kjetil Hove.

“At present, Statoil’s very attractive portfolio will carry the company over the coming 18 months. However, I think it’s important both for Statoil and every other operator in Brazil that new opportunities are put on the market,” he concludes.

“We must increase our portfolio to grow the company, and after such an aggressive exploratory campaign, it will be very hard for us to develop more fields if the ANP does not offer more blocks,” concurs Paulo Mendonça, general director of OGX.

Paulo Mendonça, general director, OGX OGX, founded in 2007, has shaken up Brazil’s oil industry with its huge success. Today OGX is the second largest oil company in Brazil after Petrobras with the amount of offshore acreage it owns.

OGX announced on August 12 that, through its subsidiary OGX Maranhão, it has identified gas in the onshore basin of Parnaiba. "This discovery opens a new exploratory frontier in an onshore basin, the first in two decades. It is important to note that this exploratory campaign was initiated in October 2009 and is conducted by Brazilian companies, obtaining important results in record time," commented Mendonça.

Room for smaller players

“If we look at the future, as I see Brazil looking much the same in the coming three years. Petrobras will have a better understanding of the pre-salt and there will be other pilot projects up and running. I hope that the license rounds will return in the non-pre-salt regions as well as clarification for the pre-salt itself,” Kjetil Solbræke, NBH/Panoro’s CEO forecasted.

Kjetil Solbraekke, CEO, NBH/Panoro He hopes, “I would like to see our company starting up production in the BS-3 area as well as discovering new potential in our round 9 licenses. I also expect to see consolidation in the market between independent operators as companies realize cooperation is the best approach to the Brazilian market and I think we will play a role in this. When you compare us to Petrobras – who is a giant – or OGX – who wants to be a giant – as well as the IOCs that are here, we are very different.”

NBH/Panoro Energy ASA is an international independent oil & gas company with offices in Rio de Janeiro, London and Oslo. The Company holds a balanced portfolio of production, development and exploration assets in the Santos and Camamu-Almada basins offshore Brazil, as partner and operator.

The merger with Pan-Petroleum, a company with assets in Nigeria, Gabon and Congo, will create a strong E&P independent with a significant resource base of approximately 200 million boe, focusing on both sides of the South Atlantic.

Developing the supporting technologies

Javier Moro, Repsol Brazil president recalls, “We were the first partner of Petrobras which was an interesting experience both for them and for us.”

“The Campos basin is receiving a lot of renewed attention due to the production figures Petrobras wants to reach. That being said, BM-S 9 with whom we are partnered with BG and Petrobras, is going to be our biggest asset in the next two to three years,” “Santos basin is one of the key projects for Repsol internationally,” he added.

Javier Moro, president director, Repsol Brasil “The government today is trying to define what the pre-salt region is but this is a country-making find. What government in this world would allow this discovery to be developed without having a say? Brazil had a goal of obtaining hydrocarbon resources and accessing them which they fulfilled. The problem today is in the secondary sector, with the development of supporting technologies and a workforce that can keep up with the growth. This is a big opportunity for companies all over the world to come to Brazil and be a part of developing what has already been found,” observed Moro.

LOOKING PAST CARNIVAL AND SOCCER: Real opportunities ahead

Fernando Martins, responsible for all GE’s Oil & Gas portfolio in Brazil, including VetcoGray, recalled that CEO Jeff Immelt announced early this year the decision to build GE’s fifth Global Research Center (GRC) in Brazil.

Fernando Martins, VP Latin America, GE Oil & Gas “We are considering the hiring of more than 200 engineers to work in the R&D facility,” he said. “GE Oil & Gas in Brazil started the year very well by securing some important orders such as a contract for Petrobras’ new Comperj petrochemical complex. Serving the market both in the upstream and downstream in Brazil, GE is another player acknowledging a tremendous amount of growth in the market. Main clients are Petrobras and OGX. To provide technical support, GE has a field services unit in Macaé.”

“So far, the eight drillships being ordered by Petrobras to the local market will require 32 turbines as well as 48 compressors. It’s just the beginning of the 28 unit plan (drillships and vessels) that has been detailed to the industry.”

“Just a few weeks ago GE delivered two complete compression modules for the P-56 platform. At a certain point, the building process required 600 employees. This was an initiative to increase our local content so we imported the skids but managed to make the modules with 65% local.”

“GE Oil & Gas secured the largest contract with Petrobras for wellheads for $250 million worth of orders. Petrobras has strict technical requirements and they usually ask for customized systems. For instance, for the contract mentioned takes an estimated 200,000 engineering hours for the four custom systems.”

“When it comes to Subsea Wellhead Systems we are very well positioned and we want to keep that way. On subsea production systems, subsea trees and manifolds, for example, we have a lot of opportunities to improve.”

Critical success factor

John Oliver, senior VP South America, M-I Swaco John Oliver, senior vice-president of M-I Swaco South America said, “In the last 18 months, Brazil has been a critical factor for our success.” Indeed, “In recent years M-I Swaco invested some $100 million in infrastructure in the Brazilian market and has facilities in all of the key operational areas.”

All four of M-I Swaco segments are represented locally. The drilling and the environmental solutions segments; the wellbore productivity group, and the production technologies segment providing production chemicals.

A new addition is the Deeptec Brasil joint-venture, formed to provide expertise to Operators and the shipyards in rig, FPSO and supply vessel construction. “This is a departure from M-I Swaco normal four segments,” noted Oliver, “but it is important to help build the shipbuilding industry here in Brazil using both foreign expertise and local content.”

“All credit has to be given to our Brazilian staff who have believed in the market and maintained a relationship with Petrobras which represented much of the industry for many years,” highlighted Oliver. “Our employees also seized the opportunity to pursue the IOCs market when it first opened up. They believed in the future and made the necessary investments to serve this segment.”

“However, it’s very competitive so while the top line growth is there it can be a struggle in terms of profitability. That being said, the activity levels here have been a significant help over a period when worldwide, the rest of the industry was really struggling,” warned Oliver.

Oliver concluded, “The dream projects in Brazil are participating in the new rig builds because what we want to do is bring customization to the design process. This is why we’ve founded a Brazilian joint venture to establish Brazilian expertise.”

The leading directional drilling company

Nelson Ney, president - Latin America, Baker Hughes “Today, we are the leading directional drilling company for Petrobras with 50% of the market share for the past three years. In order to maintain this position, we need to continue investing within the country, not only in infrastructure but also people. Therefore, we are engage in significant knowledge transfer to develop the local talent,” explained Ney, Baker Hughes’ president for Latin America.

The company’s overall scope of operations includes from reservoir characterization to production. “Our artificial lift product line enjoys the highest market share in electrical submersible pumping (ESP) systems in Brazil and will continue to grow as more subsea and deepwater projects develop. Of course, drilling is a big focus in the market now, given the exploration and development of the newest offshore fields,” he said.

“We have broken our own drilling records in the new discoveries. The faster and more efficiently you drill the more money you can save,” said Ney. “We have also signed agreements with five different universities for technical cooperation, personnel development and sourcing.”

Recently, Baker Hughes signed a technology cooperation agreement with Petrobras as they seek to lower the cost of production in new fields in order to make it feasible at oil price levels of $45 per barrel. “They feel the best way to do this is to develop the technology locally,” noted Ney.

Baker Hughes has five geo-markets in Latin America and the growth has not come from every one of them. “We have seen considerable growth in Mexico, Brazil and the Andean countries - including Colombia, Ecuador and Peru. Two geo-markets have been relatively flat in recent years, Venezuela and the South Cone, mainly driven by Argentina.”

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Australia: LNG excellence down under

The best view overlooking the energy world these days is from the land down under. A long-time mining giant, the growth of Australia’s petroleum industry is now adding a preponderant dimension to its international energy standing. With more than $200 billion worth of projects to exploit over 400 Tcf of gas, the eyes and resources of the oil and gas world are being drawn to Australia’s free-market, OECD environment. Domestic industry and foreign investors need only look north to energy-hungry Asia for steady long-term demand that has helped Australia avoid an economic downturn and positioned it, as the IMF described, at the “forefront of the global recovery.”

Despite the favorable outlook, 2010 has presented new challenges to the industry. Fallout from an ill-received proposal for a “super profits” resources tax spiraled into a mid-year prime minister change and subsequent federal elelections - nonetheless, the industry still yearns for fiscal certainty. Deepwater Horizon has heightened safety concerns, particularly as liquefied natural gas carries industry further offshore. And the infrastructure demands of prospective projects have exposed a looming labor shortage. Australia has the resources below ground to grow into an energy powerhouse, but how it surmounts the above-ground risks will have equal bearing on its success.

Gas is the biggest game in town

While a country of Australia’s continental size is no stranger to big proportions, its plethora of “mega” liquefied natural gas (LNG) projects planned for the next 10 years is breaking new ground for global oil and gas. Geoscience Australia, an entity of the Federal Department of Resources, Energy and Tourism (RET), estimates conventional gas reserves off western basins to be 164 Tcf, with as much as 250 Tcf of coal seam gas (CSG) assets in the eastern states of Queensland and New South Wales.

Belinda Robinson, chief executive of the Australian Petroleum Production & Exploration Association (APPEA), whose member companies represent 98% of Australia’s oil and gas, estimates reserves-to-production to be in excess of 250 years. “Taking into account the other energy sources we have, it is an indisputable statement to say that we are an energy superpower,” she asserts.

Dr. Clinton Foster, Chief of Petroleum and Marine Division, Geoscience Australia Hon. Martin Ferguson, Minister for Resources and Energy, Minister for Tourism - Federal Government of Australia LNG is projected to be Australia’s fastest growing energy export over the next two decades. Twenty-one years after the first LNG cargo delivery from Australia’s flagship Northwest Shelf Venture (NWSV), there are over $200 billion worth of LNG projects in the planning phases, with final investment decision (FID) imminent for many of them. Australian LNG exports could exceed 40 million tons per year by 2015, as Chevron’s Gorgon Gas Project and Woodside Petroleum’s Pluto Project come onstream. Beyond 2015, up to 10 other prospective projects could make Australia the world’s second largest LNG exporter. Along the way, Australia will be home to cutting-edge developments: the first conversion of CSG-to-LNG; the first application of floating LNG technology; and the world’s largest carbon capture and sequestration project.

The proliferation of Australian natural gas projects coincides with declining levels of domestic crude oil production. Australia’s oil production has steadily declined since 2000, leading to a $16 billion trade deficit in crude oil, refined products, and liquefied petroleum gas. Geoscience estimates the deficit could reach $30 billion by 2015 with net imports of liquid fuels as high as ¾ of consumption by 2030 in the absence of a major new discovery.

“The outlook for oil is not too good,” says Robinson. “The oil reserves-to-consumption ratio is less than 10 years. The upside is that there is still a prospect of a major new discovery: only 20% of our sedimentary basins have been explored. But barring a major discovery, the outlook for oil in Australia is very grim.”

Meanwhile, gas production continues to grow in order to meet both domestic and export demand, reinforcing its importance to the energy mix.

The wild and gaseous west

Hon. Colin Barnett, Premier of Western Australia Seiya Ito, Managing Director, Inpex Australia Ann Pickard, Country Chair, Shell in Australia Jeff Dowling, Oil & Gas Leader Oceania, Ernst & Young

Gas in Australia is segmented between onshore CSG assets in the east and predominantly offshore deposits in Western Australia (WA) and the Northern Territory. While a palpable excitement is sweeping both markets, the offshore projects out west that are stimulating innovation and strengthening marine services suggest that the right time and right place for gas today is in WA.

“Seventy percent of Australia’s oil and gas is off the Western Australian coast,” says Colin Barnett, the premier of Western Australia. “The industry is dominated by WA. Of the three major reservoirs off the coast of WA – the Carnarvon, Browse, and BonaparteBasins – only the Carnarvon has been relatively explored.”

The offshore oil and gas reserves in WA today have been compared to the stage of development of the Gulf of Mexico 30 years ago – an analogy brought to the premier’s attention on an April 2010 visit to Texas. Perth, consequently, has drawn references as the “mini-Houston” given its landscape of supermajors and multinational contractors. “What is happening here is of world significance,” Barnett remarks. “The sizes of the gas fields that have been and will continue to be discovered are large by international standards, and certainly large by Gulf of Mexico standards. The significance of the gas reserves here is their proximity to the expanding markets of Asia.”

Where to find the majors

Attractive linkages to Asia and a stable political environment have drawn substantial investment from the world’s major oil and gas companies. Commitments vary from Shell and Chevron with over 100 years in Australia to GDF Suez and Petrobras, both relative newcomers. But the message is clear: Australia is a high priority market for global growth strategies.

Shell, a founding member of the NWSV, projects half of its global output to come from gas by 2012. “Globally, Shell produces over 18 million tons of LNG per year,” says Ann Pickard, country chair of Shell in Australia. “By 2020 we will add another 15 million tons per year, more than half of which will come from Australia. Australia is critical in terms of Shell’s growth in the LNG marketplace.”

Underpinning Shell’s projections are its 25% equity in the Gorgon Gas Project, and a joint venture (JV) with PetroChina which will acquire the CSG-rich Australian junior Arrow Energy for LNG developments in Queensland. Shell is also pioneering floating LNG technology through 100% equity in the Prelude Project and 27% participation in Sunrise LNG. Prelude is widely expected to be the first successful demonstration of floating LNG. “Prelude will open up a whole new game in terms of access to stranded gas reserves,” Pickard says. “It will also be the first of several FLNG facilities. Our plan is to design one and build many.”

Jean-François Letellier, General Manager, GDF SUEZ Bonaparte Given that the French were the original pioneers of the LNG trade – launching the first shipment from Algiers to Britain in 1964 – it is only fitting that GDF Suez, the industry giant in integrated LNG projects, has invested in offshore gas’s hottest market. In January 2010, GDF finalized an agreement to purchase a 60% share in three gas fields in the BonaparteBasin. Already present in Australia through the waste and water businesses, the Bonaparte LNG JV with the Santos – owner of the fields’ remaining 40% – represents GDF Suez’s first move into the Australian energy sector.

“Bonaparte LNG is a strategic project for us,” says Jean-François Letellier, managing director of GDF Suez Bonaparte. “It adds a major component to the natural gas value chain of GDF Suez, while reinforcing our position as a world leader in LNG.”

Bonaparte LNG is an integrated project whose purpose is to build a floating liquefaction plant with 2 million tons per annum capacity in the Timor Sea. Final investment decision is expected by 2014. “We consider integrated projects as key to accessing competitive LNG resources,” Letellier adds. “Australia provides the opportunity to have an LNG project with exploration, production, liquefaction, shipping, and marketing all together. LNG is becoming a global market and an LNG leader such as GDF Suez has to be present in the Asia-Pacific market.” While the French pioneered the LNG trade, many would argue that LNG today is very much an Asian industry in both production and consumption. Limited natural resource endowments have made Japan, South Korea, and Taiwan big customers of Pacific Basin LNG. China and India, of course, are growing consumers. Japan in particular – only 16% energy self-sufficient and the world’s largest LNG importer – has a strong presence in Australia to address critical energy security needs. Osaka Gas, Tokyo Gas, and Kansai Electric all hold minority interests and long-term purchase agreements in Australian LNG projects. Japan Australia LNG Pty Ltd (MIMI) is a founding partner of the NWSV.

The face of Japan in upstream Australia, however, is INPEX. In the late 1980s, INPEX targeted Australia as the next stop in its international diversification. A joint exploration block with BHP Billiton yielded 10 years of successful oil production, allowing for more aggressive growth in Australia: the result was WA-285-P. Better known as the Ichthys field, it is one of Australia’s largest gas fields with an estimated 12.6 TcF of gas and an expected operating life in excess of 40 years. Ichthys’ 527 million barrels of condensate makes it the largest petroleum liquids discovery in Australia since 1966. Joint venturing with Total to glean LNG expertise, the ambitious field development plans call for one of the world’s largest offshore central processing facilities and an 885km pipeline to an LNG facility in the Northern Territory city of Darwin. Ichthys will engender unprecedented engineering challenges as well as usher in what managing director Seiya Ito describes as a “new beginning” for INPEX in Australia. “We have been successful as an exploration operator. It is now time for us to shift into a developing operator and ultimately a production operator. Ichthys is an asset that will help us grow towards these new stages of the company.”

The new paradigm for Australian energy

Unequivocally, the project that brings Australia to center stage is Gorgon LNG, operated by Chevron with Shell and ExxonMobil each holding 25% interests. Superlatives abound for the $43 billion resource investment, the single largest in Australia’s history. Estimates suggest that Gorgon will produce 15 million tons of LNG per year – 8% of current global capacity – over its projected 40 year lifespan. “One project; 8% of global capacity. By any measure, that’s huge,” emphasized Geroge L. Kirkland, Chevron Corporation’s executive vice president of Global Upstream and Gas, at Gorgon’s FID ceremony in September 2009. According to ACIL Tasman, an economic consultancy, Gorgon will boost Australian GDP by A$64 billion and generate government revenues of A$40 billion over its first 30 years. It will also create 10,000 jobs during peak construction and 3,500 more throughout the project’s life. Gorgon’s gas processing plant will be developed on BarrowIsland, an A-class nature reserve located 56km off Western Australia’s coast. As part of its environmental stewardship, Gorgon will host the world’s largest carbon capture and sequestration project. Gorgon’s externalities can be felt here and now in Australia in the way that project planning is categorically elevating the environmental standards and shaping the strategic directions of companies throughout the entire Australian oil and gas value chain.

An appetite for exploration

Just how untapped Australia’s offshore basins are can soon come to light after a change in regulatory framework that has made speculative surveying a growing business in Australia.

In 2007, Australia increased the stipulated time frame that speculative survey data becomes public domain from five to fifteen years – a move that is drawing the attention of the world’s top geophysics companies. In practice, oil companies picking up relinquished blocks could have waited until data became public rather than pay for new data sets. “Essentially, you only got one big ‘bite at the cherry,’” explains Tony Weatherall, CGGVeritas vice-president and geomarket director for Australia, New Zealand, and Papua New Guinea. Tony Weatherall, VP Geomarket Director Australia, New Zealand and PNG, CGGVeritas Weatherall chaired the International Association for Geophysical Contractors for two years which lobbied hard for the government to change the regulation. As a result, he comments, “the regulatory change altered the landscape of seismic in Australia, probably forever.”

Results of the change are evident. There were no speculative surveys shot in Australia after 2002, with Veritas (before the merger with CGG) being the last to shoot in 2D. Since 2007 CGGVeritas has shot at least 3,000km of speculative surveys by Weatherall’s estimates.

Boasting the largest fleet in the world amongst geophysics companies, and with seven vessels in Asia-Pacific, the goal for CGGVeritas is to bring its first vessel into Australia since 2008. “We are certainly going to grow both proprietary and speculative surveys in Australia,” he asserts. I would like to be shooting surveys up in the BrowseBasin and in the Northern Territory. The other growth here is obviously processing: we have a very strong depth processing team here, and we get a lot of work from Australia.”

If you build it, they will come

LNG projects pushing the industry further offshore are stimulating a new generation of marine services. Novel ships are rapidly advancing in both size and design, and the importance of supply bases in addressing logistical challenges is becoming more apparent. Despite being entirely within Australian waters, the northwest’s offshore gas fields are equidistant from the industrial hubs of Singapore and Perth. The competition amongst supply bases can very well see Singaporean marine yards servicing Australian offshore projects.

WA’s response for infrastructure in support of local industry is the Australian Marine Complex (AMC). Located 20km south of Perth, the AMC is an industrial cluster of manufacturing, fabrication, and assembly services for the marine, defense, oil and gas, and resource industries. Earlier this year the AMC commissioned WA’s first floating dry dock which will prove critical in servicing upcoming projects. “We are expecting about 80 vessels to be on the Northwest Shelf over the next few years,” says AMC general manager Mike Bailey. “A lot of those vessels will be running to and from this facility. All of them will need repair, maintenance, and dockings.”

The AMC’s most iconic representation and greatest asset is its Common User Facility (CUF). Bailey characterizes its enabling role as a form of “industrial empowerment.” The CUF exists to provide Australian-based businesses with access to large scale industrial infrastructure. The CUF was initially funded by $100 million and $80 million from State and Federal Government, respectively, which enabled the construction of wharves, fabrication halls, and a protected harbor.

“Our role is to enable a company to do projects that they could not undertake with only their own facilities, by giving them that virtual capacity increase,” says Bailey. “Whereas they could fabricate something up to 200 tons in their workshop, our role is to give them the ability to make a module of 2,000 tons. We want to see projects coming to WA that can and should be done here. We are very biased in that sense.”

A second piece of vital infrastructure for servicing Northwest Shelf projects is the Dampier Supply Base, owned by Mermaid Marine Australia, the country’s largest marine services provider for offshore oil and gas. A stand-alone $100 million asset, managing director & CEO Jeff Weber also considers it Mermaid’s single biggest competitive advantage. “People often underestimate the challenges of operating vessels in the northwest, compared to Singapore where, if a vessel encounters a problem, there are 20-30 suppliers to help at any time. It is a tremendous asset for a region where it is hard to operate because of minimal infrastructure and scarce supplies.”

Mermaid’s core business continues to be the provision of support vessels and has invested over $100 million in fleet renewals over the last five years. Utilizing its vessels for pipelay support on the Pluto Project not only insulated the organization from the financial crisis, but triggered growth in 2008-2009. But with Gorgon and other projects approaching production, supply base operations are becoming increasingly important. Mermaid’s operations have shifted from 95% vessels and 5% supply base in 2002, to 70% and 30% this year. “You can move boats around to meet the market. But with a supply base it creates a ‘build and they will come’ type scenario,” he adds.

As projects and customers come, Weber sees a host of externalities driving business. “You get to know your clients very early on in the cycle. If you are doing offshore work, the first thing that you do is get an office and a warehouse to store your gear. By the time a client needs a vessel to begin their offshore work, we already have an established relationship with them.”

Exposure to long-term contracts was particularly beneficial to Australian marine service companies during the crisis. With Gorgon reaching FID in September 2009, losses carried into the crisis years were quickly recouped, if not evaded altogether. Andy Cowan, QHSE manager at Bhagwan Marine, light-heartedly comments, “what financial crisis?”

Founded in 1998 with just one ship, Bhagwan Marine has flourished over the past 12 years into the owner and operator of a fleet of over 35 vessels. Its newest addition will be a custom-built landing craft – the Bhagwan Shaker – to service Barrow Island; the Shaker’s sister ship, appropriately named the Bhagwan Mover, has already been in operation on Gorgon for the past 12 months. In addition to obvious revenues, servicing Gorgon has provided an immediate opportunity to exploit the strength of Bhagwan’s vessels while positioning it for future growth. “This is a niche market and there are not many companies dealing in port services out to and around BarrowIsland, which is largely shallow water,” explains Cowan.

Made in Australasia

Construction of the AMC’s floating dry dock and the Bhagwan Shaker was done by Strategic Marine, Australia’s largest builder for oil and gas industry supply boats. Strategic Marine leans on a rich tradition of shipbuilding born out of WA. Chairman Mark Newbold explains that WA developed a commercial expertise in building aluminium boats before anyone else. “There were a number of companies in WA that became exporters, and a host of reasonable sized yards that became experts. We are now exporting the technology that we developed over the years.”

Adapting to the economics of the industry, Strategic Marine has exported its capabilities to its four shipyards in Australia, Singapore, Vietnam, and Mexico. While proximity to Asia allows operators to satisfy a hungry commodity demand, Australian manufacturers and fabricators benefit from cost-competitive labor and resources. Globalization and the fully developed Asian supply chain have shifted industry dynamics, forcing Australian manufacturers and fabricators to adjust their strategies. John Sheridan, CEO of AusGroup, the largest fabricator in WA, explains that “what typically comes local is schedule-critical or a product that is price insensitive.” Fully developed project modularizations, meanwhile, are sourced in Asia.

Strategic Marine has followed suit by developing niche specialties for its Asian yards. “Singapore is very much a specialist aluminium yard, that is quite mature in its development and is producing high quality work. The Vietnamese yard has opened up quite a bit of business for us because of its steel capabilities,” says Newbold. The Vietnam yard also played an integral role in the construction and assembly of the AMC’s floating dry dock. The Australian yard, meanwhile, being located within the AMC and mindful of the future demands of the Northwest Shelf, is shifting more into marine services repair and maintenance.

Global content, local continent

While state-supported projects such as the AMC provide an important impetus for industrial development, the synergies from mature oil and gas provinces are proving equally beneficial in fostering service sector growth. The talent and resources that have made Aberdeen and Stavanger centers of subsea excellence are now gravitating to Perth. From executive managers to new global headquarters, WA oil and gas services are becoming a truly global mosaic, with a North Sea twist.

Perhaps no greater testament to Australia leveraging, and ultimately overtaking, North Sea activity, is TSMarine, a subsea contractor specializing in integrated life of field services. TSMarine was founded in Aberdeen in 2004. The Perth office, which began in 2006 from a Woodside contract, quickly established itself as one of the best-performing centers and completed a management buyout of the parent company in November 2009.

As chief executive John Edwards explains, “There was a period of nearly two years when this office was funding the head office, which was in pretty bad financial shape. We decided that the best way to ring-fence what we had and make sure that our success continued was to buy the business from the parent company. That also gave the parent company the needed cash to resolve their financial issues.” Shortly after finalizing the deal, the Aberdeen head office shut down. To complete the circle, TSMarine plans to reopen an office in Aberdeen on the back of a service contract.

The technical challenges of subsea field developments are creating a market for life of field service providers. TSMarine, however, explains Edwards, is quite different from other subsea construction companies. “We focus most of our activities around the well. In addition to our rigless intervention capabilities, we can do all the low margin work for a drill rig typically done by them because no one else has the technology to do so. In our business, any activity close to the well is the highest margin work that we can do, because of its value for oil companies.”

TSMarine’s integrated capabilities, afforded by its vessels and ROVs, were a serendipitous surprise for Woodside when fulfilling its first contract. Essentially, TSMarine’s services exceeded their original mandate. “We did not just do well intervention. We were the first company in this region to install and run a Christmas tree, thereby freeing the drill rig to fulfil its real value of actually drilling. We installed flow bases. tied trees into each other with jumpers, and installed drilling conductors. It is not typical that a company has all of those services under one roof,” says Edwards.

Mark Newbold, Chairman, Strategic Marine Scotland’s North Sea neighbors and fellow experts in offshore services, the Norwegians, are also finding a comfortable home in Australia, as multinational companies steadily increase their presence and grow alongside major operators. Subsea specialist Acergy made the full leap into Australia in 2006 with the establishment of a permanent office in Perth. “The scale and complexity of the LNG projects coming to market over the next few years are of great interest to a company like Acergy,” says Darren Cormell, managing director of Acergy Australia.

Well-equipped with world-class technology, Cormell considers Acergy’s greatest growth driver in Australia to be its human assets of strong local talent leveraging the resources of a global corporation. “The Acergy model is based on having the right mix of local knowledge, backed by a global consistency,” he explains. “We have been building a local track record over the past several years to understand the local issues. You back that up with a company that understands how to deliver very large projects and I think it is a model for success.”

Acergy has been strategically building its portfolio of assets to support its local talent. SapuraAcergy, a JV between Acergy and SapuraCres, commands the Sapura 3000, a regionally-based vessel with leading capabilities in heavy lift and deep end pipelay. A proposed combination with Subsea 7, currently awaiting regulatory approval, will see an enlarged global fleet of 42 vessels with the full spectrum of pipelay capabilities, several of which would likely be bound for Australia. According to Cormell, “the enlarged fleet will have the opportunity to make more vessels resident in certain parts of the world. As Australia becomes an ever increasing part of the world, it is likely that we will look to optimize the fleet, to make it as attractive as possible in the region.”

With over 20 years experience providing mooring solutions in the harsh conditions of the North Sea, Norwegian incorporated Viking Moorings now brings its suite of offerings to Australian waters. “In Australia we have not had the high caliber technical mooring solutions that we have now,” explains Perth branch manager Trond Watland. “We have introduced different methods for semi-submersible rig mooring, such as fiber ropes which are new to Australia.”

A premium on safety has placed a strong emphasis on expert training. With the training still sourced from Norway, Viking Moorings embodies a North Sea-Australian knowledge exchange. “Training people in anchor handling, fiber rope management and being able to certify, qualify, and repair on deck is a trait that the Australian market does not yet have, so most of our training has come out of Stavanger,” Watland explains. “We have an all-Australia crew in Karratha and Dampier, that is being trained by Viking Moorings staff that has come in from Norway. Members of that crew are the only ones who can do what they do in Australia. It is a valuable input that is coming into our workforce.”

When combining North Sea know-how with Asian manufacturing and a strong local industrial base, the oil and gas sector’s organization has a truly multinational dimension. As Christian Lange, CEO of Neptune Marine Services, argues, “I am intolerant of people saying that Australia lacks the technology, or expertise, of the Gulf of Mexico or North Sea. Australia has a fantastic education system and most of the industry workers here have either come from those regions or have worked there and repatriated. In many cases we lead the charge.”

Structured for success

Major multinationals with established expertise in their fields are finding that success in Australia comes as much from their corporate structuring as their product offerings. Oilfield services giant Baker Hughes, for example, is comfortable accepting the challenges of Australia with the backing of an internationally innovative body of work. “A priority is to focus on more deepwater and high temperature reservoirs, aligning with the work undertaken by major operators in the area. Most of the high-tech infrastructure required is very familiar to Baker Hughes,” says managing director Bernie Kelly.

Christian Lange, CEO, Neptune Marine Services The biggest difference for Baker Hughes in Australia, however, has been the efficiencies generated from the geomarket model that the company developed over one year ago. The model shifted vice-presidents to regions and consolidated the management of various product lines.

Historically, Baker Hughes’ product lines were managed separately and entered the market at different times to coincide with stages of clients’ oilfield production. “In Australasia, we inherited seven different offices and five different sites,” says Kelly. “One of the areas we are focusing on is consolidation of our separate operational bases, which were the result of our previous divisional approach, to provide improved efficiencies to customers.” New efficiencies now ready Baker Hughes to capitalize on both the offshore and CSG segments of the Australian market.

Darren Cormell, Managing Director Australia & New Zealand, Acergy “Deep water and high temperature reservoirs are the areas in which there is a lot of exploration to come. The level of the tools that we are going to run down in Australia are becoming much more high-tech than we have seen historically. We can export our learnings here to other areas,” says Kelly. The immediate impact of Baker Hughes’s offshore reservoir services will be complimented by future growth in the CSG arena, by way of its September 2009 acquisition of BJ Services and its large CSG portfolio. Kelly notes, “Baker Hughes will be reassessing its strategy in servicing CSG, leveraging the synergies gained with BJ Services’ customer base, infrastructure, and expertise.”

Integration, meanwhile, is the defining feature of professional services giant Ernst & Young throughout Asia-Pacific. Just as major operators have set up regional centers for value chain operations, Ernst & Young has replicated this approach by establishing hubs of expertise for its practices: an upstream business in WA and Queensland; a trading business in Singapore; and a specialist service business to support buyers in Beijing. The result, as Perth’s managing partner and oil and gas sector leader Jeff Dowling notes, is that, “of the ‘Big Four,’ Ernst & Young is the only firm that is financially integrated throughout the whole Asia-Pacific region.”

“Shell is a very good example of this,” Dowling adds. “Shell has relocated its upstream business in Oceania to Perth. They also have a trading hub in Singapore and they are interfacing with customers in Beijing. All of the global majors are doing the same, and we are replicating our business model accordingly. We have evolved into three hubs, with oil and gas specialists across our disciplines in those three areas, to provide a seamless service between the producers, buyers, traders, and support services.”

Chapter 1

Emerging from the Dark

Having taken office in 2005, the current Socialist "center left" government is facing a daunting array of issues and spending all of its political capital on promoting the country's long-delayed economic reforms. To begin with, by 2005, Portugal was facing a 6.1% budget deficit increase in terms of its GDP, far beyond the 3% recommended by the European Union's Stability and Growth Pact. As a result, the Portuguese government has agreed to embark on an aggressive three-year budget deficit-reduction program that includes a range of severe measures. As the drama unfolds, the rising healthcare costs are being identified as a natural target of the state cost-containment initiatives.

Naval combat Off the coasts of Lisbon, by Theodore de Bry The financial recovery, combined with the job of increasing the population's access to medication, is under the strict hand of the Portuguese Minister of Health, Antonio Correia de Campos. "It is not easy. There is a lot of pressure from pharmaceutical companies, pharmacies, diagnostic tests, efforts in hospital management, extra time for doctors and nurses and so on, but I am very optimistic," says the minister, who is returning to the job five years after his first assignment as Minister of Health. "The 2007 budget for the health sector can only be controlled under certain conditions. One of them is the reduction of pharmaceutical prices by 6%; another one is the reduction of co-payments by the national health system on different levels, depending on the classes of reimbursement," he adds.

The first set of price cuts, introduced in September 2005, targeted all prescription medicines. "Price reduction has been fair in comparison with other European countries. France has decreased prices by 20%, and Spain by 12%; it is always a very difficult situation for the industry, but both sides are trying to be reasonable," continues Correia de Campos, justifying the country's second price reduction of 6% on pharmaceutical products. This price reduction, enforced in February of 2007, is a burden also shared by the pharmaceutical distributors for the first time. The efforts don't stop there; the Ministry of Health has decided to collect a daily fee of US$6 per intern patient and US$13 for each ambulatory surgery and has frozen its investments in diagnostic tests. By reducing pharmaceutical purchases in hospitals by 6% in 2006, followed by another 6% in 2007, the government expects to save up to US$65 million. This is in addition to efforts to reorganize the health system's workforce, such as cracking down on extra hours worked by doctors and nurses, which should save the country about US$26 million.

On top of that, the country's remarkable efforts to introduce generic drugs - which achieved a 16% market share in a four-year period - are now expected to be transferred to the non-prescription segment, as Portugal authorizes the sale of over-the-counter drugs in non-pharmacy outlets. The move should boost the OTC market share by 4% or 5% in the next couple of years and increase the sales of medication outside the government's reimbursement scheme.

As a result, in 2006, for the first time in many years, the Portuguese health budget was respected. Nevertheless, the European Union expects the Portuguese public deficit to sink below 3% of its GDP by 2008. Given the complex nature of the task, that seems very unlikely.

Hospitals: Take a Number, Get in Line

Antonio Correira de Campos Minister of Health While Correia de Campos has been trying to work his magic with the country's health system budget, public hospitals have accumulated a critical debt with the pharmaceutical manufacturers. At the end of 2004, it reached an estimated 977.6 million (US$1.3 billion), a 51.1% increase compared with 2003.

However, reports from October 2006 show that the debt has decreased to 712 million (US$935 million), of which "over 100 million (US$131 million) belongs to Roche," notes Adriano Treve, Roche's general director for Portugal. Since his return to the country in 2000, the company has managed to consolidate its leading position in the hospital market. "We know that the government will pay one day; the question is just when," he says. "It is a continuous negotiation effort to ensure we get paid. On the other hand, Roche is committed to provide a service to public health, and the current portfolio that we have, particularly in the area of oncology, is very important to the country."

The government is remodeling the business structure of its public hospitals to create a system of private management and is building new hospitals within the Public-Private Partnership (PPP) scheme. Treve, who previously worked in Portugal as a marketing manager, acknowledges the positive changes but also points out some limitations. "The hospitals' environments have definitely changed and are becoming more dynamic. I see more flexibility from the various stakeholders in the hospitals. However, there is one thing to bear in mind: Since 2001, Portugal has had four different governments, and every new government means changes to the health sector. A new prime minister usually will nominate a new health minister, who may change people in the important functions of the health administration."

Such concerns are also shared by James Hassard, general director of Amgen Portugal, the second-biggest hospital player in the country. "Amgen Portugal is almost 100% focused on the hospital sector; consequently, we are under a lot of pressure. In terms of invoice sales, Amgen Portugal is close to the US$50 million mark and is primarily focused in two areas: supportive care in oncology, and nephrology," he says.

Hospitals Take 300 Days to Settle Their Accounts

J. Miguel Noriega Further complicating matters, hospitals are taking, on average, 300 days to settle their accounts; this situation led the Portuguese Pharmaceutical Association (Apifarma) to create a company just to take care of these debts, a "guarantee that especially the small companies would get their money. After strong negotiations with different ministers, health, economy and finance, we were able to collect 0.5 billion (US$657 million)," says Joao Gomes Esteves, chairman of the board of Apifarma. He continues, "Today, Apifarma is studying a mechanism which gives to the pharmaceutical industy at least the same rights which other suppliers have."

Although hospital reforms are underway, forging a commercial mind-set out of a civil servant culture is very challenging, particularly in Portugal, where the state employs 15% of the country's entire workforce.

Gearing Up for the Fight

For every action there is a reaction. Instability, according to Gomes Esteves, is the fundamental reason behind the lack of foreign direct investment in the pharmaceutical industry in Portugal, a country where 95% of pharmaceutical activities are commercial. Esteves, who has been the man behind the Portuguese Pharmaceutical Association for almost 15 years, has the tough challenge of representing all classes of companies - from manufacturers to distributors, generics to innovators. "A country that changes the rules every day can forget about FDI," he says. Indeed, the lack of competitiveness often haunts the Portuguese pharmaceutical industry. "The Portuguese pharmaceutical market is a small market which represents around 4 billion (US$5.3 billion), including hospitals," he continues. "It is clear that in the future, all the European Union member States will try to squeeze the pharmaceutical industry more and more. The country needs to understand that it is losing competitiveness; some centers of excellence are moving to the United States or even India."

The performance of the companies operating in the Portuguese pharmaceutical market is a true reflection of the current governmental policies. "The two consecutive 6% price cuts in less than 18 months are a serious threat to any serious corporate planning and profitability levels. For the second year in a row, due to the restructuring of the Portuguese health system, we will be offering all the extra profits generated by our growth rates to the government," says J. Miguel Noriega. In spite of that, his company, Organon Portuguesa, is seeking to further develop its position in the areas of neuroscience and anesthesia and consolidate the strong image it has achieved in Portugal in the areas of gynecology, contraceptives and fertility.

For companies that aren't selling generics or OTC medicines, bringing new products to the market has been the only way to increase sales in such an unwelcoming environment. There is no one better than the market leader to illustrate such a trend. In 2006, MSD Portugal boasted a 4.5% sales increase compared with 2005. "The current growth is based on the positive performance of the company's new products launched over the last two years, particularly in the Inegy franchise and also in the osteoporosis franchise. Nevertheless, the last years suffered a major impact from patent expirations; the company lost the exclusivity of important products such as Zocor and Proscar to generic producers. The year of 2006 was a time of recovery that allowed MSD Portugal to consolidate its number-one position in the market," says Jose Almeida Bastos, who is about to complete his 10th anniversary as general manager of MSD Portugal. For 2007, he places his bets on the areas of diabetes, cardiovascular, oncology and CNS therapies (the latter more in the medium term), but he isn't leaving out "pain, respiratory, rheumatology, HIV and hospital products, segments in which MSD is already very strong in Portugal," he concludes.

Antonio Araujo As general director of Novo Nordisk Portugal, Antonio Araujo works for an important player in the fight against diabetes in the country. He finds it very difficult to explain the Portuguese government's numerous policy changes to his company's Danish headquarters. But despite all the setbacks and "a portfolio which still does not contain all of the company's most modern insulin," notes Araujo, "Novo Nordisk has managed to remain a market leader in Portugal."

As he expects to introduce the company's leading European growth drivers, the products Levemir and NovoMix, to Portugal in 2007, his company has a good outlook for the next year. "We all know that the prevalence of diabetes is increasing dramatically - in Portugal as in other parts of the world," he says. "Novo Nordisk is committed to changing diabetes. We have the broadest portfolio of modern insulin, and our objective for 2007 is to make these products available in Portugal in order to offer people with diabetes the best treatment options."

Make no mistake - despite what many regard as good prospects for the coming years, general managers of multinationals doing business in Portugal are very concerned. Over the 10 years prior to the beginning of 2006, inflation in Portugal climbed 35% and the prices of pharmaceuticals grew by only 7%. Drug prices have been frozen since 2002, and the industry has experienced two consecutive 6% price decreases since September 2005. In addition to that, the Portuguese pharmaceutical market is a very competitive one. Among the country's roughly 200 players, the market leader, MSD, holds a market share of 6.4%.

MSD's building in Portugal: MSD Portugal consolidated its market leading position in 2006 According to data provided by the consulting firm IMS Health Iberia, the Portuguese market struggled to reach a 4.7% sales increase during 2006. This growth was largely driven by the evolution of generics (which reached a 16% market penetration by the beginning of 2007), the boost in OTC products since they were cleared for sale in non-pharmacy outlets, and new products brought to the market.

The good news is that, according to the IMS Health prognosis, the next four years should be better than the last two. The Portuguese pharmaceutical industry should expect a growth rate of approximately 6% in the retail business and 9% in the hospital business until 2010 - that is, unless the government decides to follow the path of further price reductions.

So, Why Invest in Portugal?

Gilda Parreira Ironically one of Portugal's major weaknesses is also one of its major attractions. The country's pharmaceutical purchases represent a large proportion of its public health expenditure – around 28%, which is among the highest in Europe. It is, in fact, as Minister of Health Antonio Correia de Campos points out, "a world reference. Spreading the figures," he says, " 1.5 billion (US$2 billion) is spent on ambulatory care plus 0.8 billion (US$1 billion) in hospitals." The 2.3 billion (US$3 billion) spent on pharmaceuticals out of 8.7 billion (US$ 11.5 billion) "is a considerable amount," he concludes.

A Competitive Advantage for Portuguese Producers

Antonio Barros Ferreira, executive director of the 100% Portuguese company Lusomedicamenta, has a positive perspective on the local pharmaceutical players. "The fear often channeled by the companies operating in Portugal is related to the future of the Portuguese market, not the Portuguese industry," he says. "Obviously, we are also affected by these constraints in the Portuguese market, but not on the same scale. I believe that, although it is a difficult process, more and more Portuguese companies will shift their capabilities to exports, and that will guarantee the sustainability of the Portuguese pharmaceutical industry."

LUSOMEDICAMENTA : A RISING STAR

Laboratorio J. Neves is very attuned to the market changes. The company's acquisition by the Soquifa Medicamentos group nine years ago transformed a family company with little investment behind it into a very successful player. The efforts to rebuild the company's image, rearrange its workforce and introduce new products to the market have certainly paid off. "As a result, from 1 million (US$1.3 million) in turnover in 1997, J. Neves achieved 18 million US$23.6 million in 2006, and the objectives for 2007 are very ambitious: to reach 25 million (US$33 million)," says J.Neves' general manager, Rui Ribas. The company's strategy of consolidating its position in markets bigger than US$13 million annually has guaranteed a performance increase of 25% to 30% every year. In addition to that, J. Neves recently announced the acquisition of a new production unit, which, according to its director, aims more to increase the company's production independence than enhance its turnover.

"J. Neves has its production line distributed in 13 different countries, and the company's volumes are usually low considering its supplier capacities," explains Ribas. "Portugal is a very small country; sometimes the company needs 1,000 boxes, but we have to produce 200,000, an amount for three or four years, which is obviously a big investment added by the warehousing costs. Therefore, in terms of logistics, it is very different to manage a company in such a situation," he concludes. This is a common problem for local companies, but at the end of the day it could be twisted into a competitive advantage. Small markets and volumes demand flexibility, and flexibility is currently Portugal's trademark when it comes to pharmaceutical production.

Still an Attractive Destination for FDI

Although Portugal has been increasingly overshadowed by lower-cost producers in Central Europe and Asia as a target for foreign direct investment FDI, Pierre Fabre, a French company that has been in the country since 1985, mostly in the areas of ambulatory care and oncology, is a clear example of how Portugal can succeed as a destination for pharmaceutical industry investment. Following its strategy of seeking out opportunities in emerging pharmaceutical markets (such as Morocco, Poland, Turkey, Tunisia and Mexico), as opposed to the traditional European countries (such as the United Kingdom or Germany), the company recently announced that it would be targeting Portugal for new investment. "Portugal, competing with other countries such as Germany, Poland and Italy, was able to take the European production of a respiratory products line, which will be done by a third party in the country. The choice of Portugal has shown the commitment and efforts of the Portuguese operations to create and add value to the country's industry," says Gilda Parreira, general director of Pierre Fabre Medicament Portugal.

Despite its success in attracting new production to Portugal, Parreira points out, "the pharmaceutical sector is the easiest target to counter-balance the budget deficit, and this is no different in other European countries. There are bigger and more attractive markets than Portugal, and the Portuguese government has to understand the impact of these measures on the country's ability to attract investors." Noting Pierre Fabre Medicament's ability to foster international partnerships and share development costs, Parreira seems to be very optimistic about the company's prospects in Portugal: "The company will have two very important launches in 2008 driven by the urology market, and in 2010 a very innovative project involving fibromyalgia."

Pick a Partner, Please

IMS Health, a longstanding source of information analysis for the pharmaceutical business, has found an immense opportunity to develop its consulting skills. Carlos Mocho, general director for Spain and Portugal, explains: "Following an aggressive strategy of establishing partnerships and hiring skilled talents from established companies such as Deloitte, KPMG and Boston Consulting Group, IMS Health has consolidated its consulting division." The impact of the shift has been immediate. "IMS Health Iberia is growing above 20% per year," continues Mocho. "The traditional areas of information analysis are following the global IMS trend of 12% increase; on the other hand, the new areas have a major contribution in these successes, reaching 40% increases in some cases."

The new structure of IMS Health Iberia divides the company into two parts, one focused on information management and the other on health economics. "Recently, IMS Health has acquired a company in Barcelona called HRO Group that enlarged our competencies in such fields," Mocho says of the expansion of the company's consulting business. "At the moment, there are 10 people in Portugal and 30 in Spain involved in the consulting business." Furthermore, IMS Health has decided to take a strategic approach combining its Iberian operations in Lisbon. "We are discussing two very close regions. The Portuguese market, compared to some regions in Spain, is very similar in terms of size and trends. As an example, the trend is taking companies such as Pfizer or Merck Sharp & Dohme to introduce products and approach clients in both markets at the same time. In such a way, IMS Health can provide better services to its clients."

ITF Farma, part of the Italian Italfarmaco Group, is one of IMS Health's clients. When separating from its Portuguese partner in 2003, ITF took into account the particular nuances of the Portuguese market to design a tailor-made approach. "The size of the Portuguese market demands a very particular strategy. In addition to having the traditional portfolio of the group, Portugal has some generic products that no other facility in the group has, considering that it is a very good financial opportunity," says Ana Girbal, general director of the company in Portugal. "In terms of results, if you have to break even by the fourth year as an independent company in the country and increase investments, you have to be very pragmatic," she continues. "The group's traditional core business is represented by the cardiovascular and immuno-oncological areas; nevertheless, ITF Farma Portugal does not have products related to such areas, with the exception of generic products." The strategy has proven to be very effective as the company moves toward a US$12 million turnover in 2007, representing an increase of 13% compared with 2006.

Chapter 2

Innovation: Provincial Style Central Planning

Wang Hongguang, Director of China National Center for Biotechnology Development The Chinese central government has made a fundamental commitment to transforming the country from a manufacturing economy to an innovation-driven economy. The state has supported basic research for many years and its strong support for science education has created a highly trained pool of researchers. Wang Hongguang, of the China Naitonal Center for Biotechnology Development (CNCBD), notes that annual R&D investment has reached USD 44 billion. Mr. Wang relates that "the number of essays published in international journals is six times larger, and eight new drug applications were granted clinical approval. Compared to the year 2000, the number of patent applications between 2001 and 2005, has increased 11 fold." Mr. Grapow further analyzes the nature of state support for R&D, saying, “There is a significant political push on the national level to accelerate the growth and importance of innovation. However, the execution is completed on a provincial level. Some regions such as the Shandong Province or Shanghai Municipality have made a huge commitment to pharmaceuticals and biotechnology and pharmaceutical innovation will certain play a role in such regions.” One such Shandong pharma pioneer is Luye Pharma. The firm’s banker turned entrepreneur CEO, Liu Dianbo, decided to axe a profitable API business to focus on moving up the value chain with formulations. Mr. Liu has also decided to take the road less traveled, building his business. “Luye is a small company that cannot afford a lot of new drugs,” says Mr. Liu. “So we decided to focus on differentiating our drug delivery systems and concentrating on the most difficult applications with the aim of using these platforms to make a new global standard.” Beijing has also produced a number of innovative firms, which are coordinated through the Beijing Pharma & Biotech Center. The center has helped a number of firms overcome early stage hurdles through its affiliate the Alliance of Biobox Outsourcing (ABO). Ting Lei, Director of the center, described a member company who had “encountered obstacles in operation since the establishment of the company. We provided consulting services and convinced him to transform the core technology of his company, transitioning to a service based business model. The company then grew 10 times in two years.” Despite the emergence of other innovative hubs, Shanghai is the epicenter for China’s innovative industry, with a wide array of institutes, biotechs and service firms all engaging in cutting edge R&D. Most Big Pharma players have R&D facilities in Shanghai including Roche, Novartis, Eli Lilly, AstraZeneca, Pfizer, and GSK, while other firms such as Merck have established collaborations with local firms. These multinational firms followed the talent and infrastructure in coming to Shanghai and that makes the local players the true success stories. WuXi PharmaTech pioneered the outsourcing trend, opening its doors in 2001 and its success has spawned a huge service industry whose epicenter is Shanghai’s Zhangjiang Science Park.

One of the most unique firms in the Zhangjiang park is Shanghai Biochip. The company was founded in 2000, when the mapping of the human genome had captured the worlds attention. Chairman Hua Yuda describes the context of the founding of the company, saying “the US and various European countries invested a great deal in developing the biochip industry. China had limited resources at the time and thus we decided to build up capacities in this area through this organization.” This state backed approach to development has enjoyed significant success in lower tech industries, but there has been a more collaborative, public-private approach in R&D oriented sectors, particularly pharmaceuticals. Shanghai Biochip is designed to develop technologies that change the way research is conducted. Mr. Hua says, “Our firm focuses on providing diagnostic and profiling products designed to measure and test human health conditions.” China’s vast potential pool of patients provides and excellent population for these diagnostics. The company has also been utilizing the country’s large population to build out a sample collection directory and tissue bank in addition to a pharmacogenetics analysis platform. Shanghai Biochip already provides these services to ten leading global firms. According to CEO Jason Jin, the company already has a number of personalized medicine products in clinical trials, in addition to diagnosis and testing services. The company’s highlight thus far is a biomarker product that allows physicians to target chemical and radiotherapy treatment regimes. Companies such as Shanghai Biochip are utilized as a site of translational research, whereby work done in universities and institutes be channeled into the market directly, without hoping for the market to develop on its own. Additionally, for core emerging technologies such as genomics, these technology platforms are a part of the push to catalyze expertise and jumpstart innovation. Reflecting a commonly held view, Mr. Jin is highly bullish on Shanghai’s future as a hub for innovation citing Shanghai’s highly trained scientists, dramatic MNC investment, ambitious local entrepreneurs and extensive outsourcing services. Mr. Jin says, “I have a bold vision that within five to ten years, Shanghai will become the epicenter of global pharmaceutical R&D.”

Dropping the Traditional in TCM

For the past 3000 years, Traditional Chinese Medicine (TCM) herbal treatments have undergone a process of trial and error that yielded a vast corpus of remedies. A medical system based on balancing opposing energies, known as yin and yang, TCM includes acupuncture, acupressure, massage, Tai Chi, and various other treatment regimens in addition to herbal mixtures. TCM is highly regarded in China. When patients are given the alternative, many choose a TCM treatment. The market for herbal treatments is projected to reach USD 28 billion in 2010, accounting for 40% of the total Chinese pharmaceutical market. While it has roots in ancient history, this industry has moved far beyond homemade mixtures. Many TCM firms use modern purification and formulation techniques, and the central government has put a major emphasis on further developing the industry. Medicinal chemists are also mining TCM compounds for lead generation in drug discovery, which is particularly attractive as licensing pools dry up in Western markets. The major success story thus far has been Artemisinin, an antimalarial developed from a TCM remedy in the 1970’s. However, that is the only true success story to date, and researchers often find it extremely challenging to isolate the active ingredients in complex herbal mixtures. Nonetheless, the central government has directed a great deal of funding towards leveraging China’s medicinal legacy into a global drug industry. While there are challenges, scientists are also developing new screening and analysis methods and the results of their efforts are starting to work their way into patent applications and clinical trials across China. Given the level of commitment and interest in modernizing TCM, there is no doubt that a good deal of China’s future innovative drugs will be firmly rooted in its ancient past.

Chipscreen Bioscience: A Southern Innovator

XianPing Lu, President and CSO of Chipscreen With leading research institutions and company clusters based in and around Beijing and especially Shanghai, one may be surprised to learn that a prominent Chinese biopharmaceutical company is based in sunny Shenzhen. Chipscreen Bioscience is bringing its San Diego inspired flair for innovation to the southern province of Guangdong. The name is derived from their chemical genomic screening process, which allows for the parallel comparison of research against an established library of compounds. Using this method, Chipscreen competes with larger research organizations by identifying potential targets early in the R&D process.

Moreover, Chipscreen’s approach is paying off as they were the first company in China to license out pharmaceutical research to a foreign firm and are quickly changing the face of Chinese genomics. The Chinese government has also noticed their success and the Ministry of Science & Technology has recently named them as one of the six most innovative rising stars in the pharmaceutical industry. In fact, the government is so supportive that when it became apparent the company would need a world-class manufacturing facility, the local municipality stepped in to build one. “The vision behind Chipscreen is to create an R&D driven biotech, company that will be a leading innovator in China,” says Dr. Xian-Ping Lu, President and CSO of Chipscreen. With multiple products in the pipeline and several in trials, it appears that they are well on their way to realizing this goal.

Huya Bioscience: Bridging the Pacific

Mireille Gingras, President & CEO of Huya Bioscience The proliferation of Chinese pharmaceutical research initiatives both at state run institutes and also at privately funded startups, have the ultimate goal of producing successful drugs to improve patients’ quality of life. In most markets Big Pharma plays a crucial and direct role in the later stages of commercialization, by partnering or buying IP. However, China proved so vast and had such a rapidly shifting playing field, that MNCs found it difficult to effectively separate the wheat from the chaff. In stepped Dr. Mireille Gingras, an entrepreneur from Quebec by way of San Diego, who saw the tremendous potential of Chinese research along with the unmet needs on both sides, with multinationals looking to expand to new licensing pools and Chinese researchers in need of the experience and resources necessary to commercialize and launch novel therapeutics. Over the past four years Gingras’ company, Huya Bioscience, has signed first look agreements with thousands of Chinese organizations that have yielded over 1,500 compounds. On the other side of the table, she also works with MNC partners including Abbott, Solvay and Schering-Plough. “Our model is focused on reducing the risk, cost and timeline necessary to produce a drug,” says Gingras. “We are providing a means to help Big Pharma fill its pipeline in a moment where many of these firms are scrambling to overcome the patent cliff.” In addition to cultivating a large portfolio of compounds as well as having built relationships and credibility with individual PI’s, Gingras insists that the firm is ‘not a matchmaker or broker.’ Huya invests its own capital to take candidates through Phase II trials in the US. After they share part of the risk in developing these compounds, Huya is able to set up out-licensing agreements at later and far more profitable stages. Thus risk is reduced for MNC partners and Chinese organizations receive drug development assistance and leverage that they might have trouble attaining independently.

Service Companies: Buffet or Gourmet?

The service sector boom, occurring primarily in Shanghai, has the potential to reshape the way pharmaceutical research is conducted. Firms have been experimenting with different risk sharing and outsourcing models and a single approach has yet to dominate the market. Chen Chunlin, Co-Chairman of Medicilon/MPI Preclinical Research – Shanghai sees “a trend among companies in the region starting with chemistry based services, adding preclinical services and then expanding with biology services.” Medicilion was indeed one of the first firms to take this approach and it is now a major player in the space. The company entered a joint venture with US based MPI in order to broaden its service offerings and provide a more fully integrated approach to drug discovery outsourcing. Mr. Chen believes that the current wave of startups is just the tip of the iceberg. “I foresee an increased number of viable start-up companies as the bio-eco system and workforce matures in China. Many of my colleagues in the service sector, and in pharma positions, are frustrated entrepreneurs who eventually want to start their own companies to launch novel biologics and pharmaceuticals.” Many firms including Wuxi Pharmatech, ChemPartner, and Sundia Meditech have achieved rapid growth and repeat business with this business model. However, some of these newer firms have a different outlook on the best strategy to thrive in this crowded sector. Mr. Ji, from PharmaLegacy sees a future in highly specialized services. Mr. Ji’s philosophy is that “everybody can set up a good banquet, with every type of dish available. But there’s still a market for a great coffee shop, and we want to brew the best coffee in town.” Thus far, the market is hungry enough to sustain both models, but when supply finally comes to keep pace with demand for outsourced drug discovery services, there may be a sharp consolidation in the cards.

Latecomers Face Growing Challenges

David Yang, Managing Director of Biogen Idec The Chinese challenge for Big Pharma is to scale up operations and start building profitability. However, a number of international biotechs and midsized players are only now starting to break into the market. These firms face a new set of challenges as the big MNCs have the incumbents’ advantage and a broad array of dynamic local firms crowd the playing field. Mr. Zwisler warns new entrants, “The market is very, very competitive and the cost of entry in China is quite high. The time to market for registration and reimbursement, the scope and scale of sales forces needed, and learning to navigate in a complicated operating environment all contribute to a high barrier to entry.” A company in just this position is Biogen Idec. The world’s first biotech firm, Biogen Idec had previously targeted its international expansion efforts in Europe. Without an extensive branded generics portfolio to leverage, Biogen Idec has had to carefully time market entry, lest it invest too rapidly before the market could bear its products. General Manager David Yang seeks to ease his way into the market through partnerships. “When our products are approved we will form partnerships with local Chinese or foreign companies to help us commercialize our products,” states Yang. “Operating in China is about recognizing risks and then minimizing them. This is a daily exercise where you are constantly evaluating where to share profits and where to go it alone.” Another biotech to recently enter the market is Genzyme, which has attempted to overcome barriers to entry through intensive commitment to the country, including USD 90 million in R&D to produce the first cell therapies in China. Henri Termeer, the global Genzyme Chief Executive is also personally committed to building the business in China. Nonetheless, it still takes time to penetrate this market, and without support through the reimbursement system, Genzyme’s orphan drugs have yet to realize any revenue in the Chinese market.

A strategy for overcoming these barriers is innovative product offerings. One of Biogen Idec’s principal strengths is its product Avonex, which is currently the number one multiple sclerosis treatment in the world. Part of Avonex’s success is owed to the firm’s comprehensive follow up program, which includes advice and counseling. Mr. Yang seeks to replicate this program in China as part of a strategy to differentiate the firm’s offering in customer service. He believes that these types of programs will elevate Biogen Idec above the competition to effectively penetrate this challenging market. As part of a longer-term strategy, Mr. Yang is looking to construct a regional clinical development plan for so-called ‘Asian Diseases’ in addition to investigating ‘the full spectrum of pharmacoeconomic operations.’ To this strategy, Mr Zwisler would add the following warning, “Be prepared that anything you do in China will take twice as long as you think, be twice as hard, and cost twice as much.”

Conclusion

The dramatic changes underway in modern China are shaping the course of world events. China's image as a low cost manufacturer and source of 'me-too' products is on the verge of transformation, with thousands of firms vying to bring innovative products to market. As Big Pharma is leveraging this scientific talent to refill drug development pipelines, 'made in China' will certainly be joined with 'discovered in China.' The health care reform will introduce hundreds of millions of new patients to the benefits of modern medicine, accelerating the trend driven by urbanization and rapidly expanding purchasing power. Performance in the Chinese market today is likely a predictor for the global leaders of tomorrow. Thus, both as a market and as a source of innovation, the rise of China has already begun to transform the global pharmaceutical industry.

Note: Since the date of the interview, Michael Ryde has left Lundbeck China and is now working as Commercial Counsellor, Teamleader Health, at the Danish Embassy in Beijing. Oscar Parra currently holds the position of General Manager for Lundbeck China.

Chapter 1

China: Big Pharma’s Long March to End in China?

Introduction

As with most everything in China, the market also has ‘Chinese Characteristics,’ where Traditional Chinese Medicine (TCM) represents another segment worth approximately USD 21 billion encompassing sales of herbal remedies and other treatments that have been handed down over the millennia. TCM treatments are part and parcel of an ancient Chinese philosophical tradition that aims to bring the body’s various organs into harmony, rather than focus on individual symptoms and proximate causes. The TCM segment is undergoing rapid modernization with both modern formulation techniques as well as exhaustive research into isolating active ingredients for pharmacological efficacy. However, these modernization efforts are still in their infancy. In the pharmaceutical segment, innovative therapeutics are dwarfed by generics at a scale of four to one, and this proportion is likely to increase as healthcare reform favors local generic producers. Only a few years ago, investing in Chinese R&D was hamstrung by fears of IP leakage. Today these fears often seem a distant memory as global pharma sinks hundreds of millions of dollars into R&D infrastructure, while Chinese startups build competitive IP portfolios of their own. In some cases, Chinese firms have even pursued IP litigation against the multinationals. If there is to be a reset to the innovative pharmaceutical business model, the Middle Kingdom will likely be ground zero.

Chinese Style Universal Healthcare: A dose of pragmatism

As the Chinese economy has rebounded, global investors are hoping that Chinese consumption may make up for continued lackluster performance in Western markets. Unfortunately, a household savings rate at nearly 40% has kept a lid on consumption. Consumers’ reticence to open their wallets is frequently attributed to shortcomings in the social safety net, particularly in education and healthcare. Thus the 2009 Chinese healthcare reform, an investment of USD 124 billion over the next three years, will not only directly impact the lives of tens of millions of rural Chinese, but also may have global implications. The reforms are not in response to a deficit in the quality of care. Eric Bouteiller, Chairman of the EU Chamber of Commerce in Tianjin, believes that “now, especially in the big cities and large hospitals, you have doctors on the same level as European or American specialists.” The major problem is sharply unequal access to high level care and disseminating services to a large and impoverished rural and suburban population. There are a number of programs currently in place and they have been rapidly expanded in an attempt to cover China’s 1.3 billion citizens by 2020. However, conditions are far from perfect. Christian Grapow, General Manager of Solvay China, indicates that corruption, inefficiency and inequities in the system have even prompted cases of patients attacking doctors in hospitals. The government is certainly aware of poor patients’ frustrations and has long been searching for an effective solution. Howard Balloch, former Canadian Ambassador to China and Chairman of China’s leading independent investment bank, The Balloch Group, relates an encounter between a Canadian official and the Premier of China. “The Premier turned to the Canadian official and said, ‘we would love to be as Socialist as Canada, but we can’t afford it.’” Ambassador Balloch observes “Like many areas of reform, this country doesn’t start from an ideological basis, but rather from a pragmatic viewpoint, recognizing that the provision of basic healthcare services to the people is a necessary component of social stability.”

Yu Mingde - China Pharmaceutical Enterprises Association The mechanics of the health care reform are very much a pragmatic affair, emphasizing the construction of community health centers in rural and suburban areas to alleviate the pressure on this under served population. Yu Mingde, former member of the National Development and Reform Committee (NDRC), describes the highlights and implications of the health care reform. "There will be a general expansion of the total market affecting all companies across the country,” predicts Mr. Yu. “The five policies adopted by the government include: new farmers and the health care system, the health care insurance system for urban residents, the 15 types of infectious diseases with the national free treatment policy, the planned 13 types of vaccine with nationwide free vaccination, and the State-aid system for poverty-stricken populations." Mr. Yu further estimates that reform policies will result in an "increase in drug consumption between 160-170 billion RMB." There will also be strong support for generics and the primary drug reimbursement list, under the auspices of the Basic Medical Insurance program (BMI), is undergoing a long awaited overhaul, the first since 2004. Dan Zhang, Chairman and Founder of Fountain Medical Development (FMD), a Contract Research Organization (CRO), outlines other structural reforms such as “new guidelines issued by the SFDA specifically saying they will speed up approval for four classes of drugs. First are New Chemical Entities (NCE), candidates that have never been approved anywhere. Second are unmet medical needs such as oncology or pandemic diseases. Third, orphan medications. Fourth, new uses or combination uses of Traditional Chinese Medicine (TCM).” Mr. Zhang believes that further changes are on the horizon. He points out that the State Food & Drug Administration (SFDA) “has begun to systematically translate US drug development guidelines into Chinese.” This is a significant signal regarding the direction in which China wants to move.

Big Pharma executives have not played a very vocal role in the Chinese health care debate. Many would probably agree with Merck Sharp and Dohme’s GM Michel Vounatsos who advises, “One should not be in China to change China. One should come to this country to understand China and be here to support the policy priorities already established in the country.” However, many multinational pharmaceutical firms view the short-term impact of the reforms with a certain level of caution. Pony Lu, General Manager of Servier, notes, “We are likely to see even stronger price controls by the government in order to manage its healthcare spending. The patient pool in these new areas is indeed huge, but consists mainly of people with very low income levels, who have little ability to pay for drugs themselves.” These concerns have kept most MNCs on the sidelines, yet there can be little doubt that current infrastructure investments and structural reforms will significantly improve patient outcomes over the coming years.

Let a Hundred Flowers Blossom: A Deeply Decentralized Framework

China has always had a deeply decentralized political structure, where ancient emperors could often hope for little more than loosely administering the many far-flung provinces. The modern Chinese government is somewhat more centralized, however, aside from military and foreign affairs, regional and local governments often have tremendous authority. Decentralization has played an important role in China’s rapid economic growth, spurring intense competition to attract investment. Less positively, decentralization has spawned a vast array of policies and standards across the country. These regional differences have a distinct impact on all economic activity, and particularly on heavily regulated industries such as pharmaceuticals. To begin with, there is no Chinese pharma company with nationwide operations. The largest Chinese firm is Hayao, based in the far North Eastern city of Harbin, and it remains a distinctly regional player. Some distributors have attempted to build nationwide scale through acquisition, such as Sinopharm and Shanghai Pharma, but they are quite far from operating as a single entity. These firms function as holding companies comprised of independent, and at times competing, regional players. David Ricks, General Manager at Eli Lilly observes, “people talk about the country in terms of cities, and there’s a reason for this: the cities behave differently. There is not one China. I think of it more like four Europes, which in population and differences between markets is roughly right.” This impacts every aspect of the business from sales and marketing to the design of manufacturing facilities. Hooker Cockram, a construction firm headquartered in Melbourne, has extensive experience working with multinational pharmaceutical firms. The company has developed a consultative approach to help multinationals navigate the complexities of an ever-changing rulebook. Hooker Cockram General Manager, Greg Mithen, believes “The SFDA (State Food and Drug Administration) rules are more like guidelines, as the interpretations in Jiangsu Province and Tianjin Municipality could actually be completely divergent. When we create a design, we have to do it on a basis of what we think will work in China but when we put it through the actual process, we need to adjust our plans based on each province’s characteristics.” The SFDA itself is quite decentralized with independent branches that execute policy in each of the leading urban markets. Thus, many foreign firms tend to approach the Chinese market with an array of regional strategies as opposed to conceiving of the country as a single market.

Sinobioway: Prescriptions for a Sick Economy

Pan Aihua - Chairman of Sinobioway When Pandemic H1N1/09 virus, commonly called ´swine flu´, broke out in Mexico in early 2009, scientists all over the world raced to produce a backstop against the spread of the highly pathogenic virus. Chinese biotechs were swift. Specialized in vaccine R&D and manufacturing, Sinobioway’s subsidiary Sinovac Biotech, has been in the spotlight as the first firm worldwide to produce an H1N1 vaccine. International consulting firm Deloitte had previously named the firm as one of China’s 50 fastest growing companies.

Meanwhile, the mother company has fixed its gaze on a loftier ambition than fighting the flu pandemic. Chairman Pan Aihua has developed a theoretical framework for the growth of the company as well as the industry, and has begun to explore cross-disciplinary applications of his Bioeconomy System Theory. “The bioeconomy system theory is now established through the Universal Central Dogma, and expressed in the study of Social-genology and Econo-genology. Social-genology is a field that investigates economics through the views and methods of medical science and biology,” says Dr. Aihua. His fundamental axiom is that “Capital controls the world. Life determines capital. ‘Gene’ dictates life.” Dr. Aihua’s background, with PhDs in both political economy and molecular biology, positioned him to engage in such cross-disciplinary theoretical work. “The aim is to uncover the ‘invisible hand’ of economic development, which is modeled as the economic genome. There are a number of concrete applications of methodologies and concepts from life sciences such as economic assets in bio-recombination theory, the medical pattern of the stock market, concretized circulation of invisible assets, and open-ringed chain operation.” Dr. Aihua is also investigating human social development and is seeking to apply his theory in other areas of study. He describes his efforts at Sinobioway as an attempt to bridge theory and practice, testing his ideas in real world conditions as well as a “promotional exercise in spreading this theory and applying it in innovative ways.” Dr. Aihua’s ambitions also extend beyond the Bioeconomy Theory. One of the company’s goals is to have at least one world-leading product, which he defines as reaching RMB 1 billion in sales. To reach this goal the company is reinforcing its manufacturing cost advantages while investing in building out a robust research-based line of products. Thus, both through theory and practice, Dr. Aihua works to make Sinobioway “the flagship in the Bioeconomy.”

The Search for the next Growth Center: The Rural Question

It is often said that there are two Chinas, a sophisticated urban and modern China, close to or on par with the developed world, as well as a rural and poor China that is still very much a part of the 3rd world. Of course the truth is far more nuanced. Major cities such as Shanghai, Beijing and Guangzhou have large, wealthy populations and are experiencing steady growth, while the markets in lesser-known cities such as Zhengzhou and Chongqing are undergoing booming expansions. As quickly as the recent boom markets have emerged, new ones will necessarily take their place and companies are constantly on the lookout for the sudden emergence of the next growth engine. There are certainly many options to choose from as outlined by Michael Ryde, General Manger of Lundbeck. “The market is extremely fragmented; in a way it is as if there were several coexisting small markets for different groups of patients such as those paying out of pocket, city workers, farmers, etc.”

David Ricks, President of Eli Lilly Drug portfolios must be carefully tailored to these fragmented market dynamics, especially to the huge potential in lower market segments. Eli Lilly still sells Prozac in China, which is actually one of the key markets for the ageing drug worldwide. However successful penetration of these segments comes down to more than careful portfolio selection. Marketing carryover is sharply lower than in Western markets, meaning that drugs are far more promotionally responsive. Thus portfolios need to be sustained with constant investment, but on the other hand, new drugs can grow far more rapidly than in Western markets. Lilly’s GM, David Ricks, comments, “We know that if we don’t invest, it will slow down, and if we do invest, it will grow stronger. A manager can’t be so clever with their money in China: they have to make a business case product by product.”

Liam Condon - Managing Director of Bayer One of the big challenges in creating the right marketing strategy is timing. The opportunities are staggering and in some ways obvious, but timing ones penetration is not. Some companies have even suffered from premature investment in this market. Ryde remarks, “one of the keys to success in China is to have a lot of patience and long-term perspective.” In this vein, Lundbeck has been working to increase sophistication in the marketplace and has recently opened a branch of the Lundbeck Institute to help train doctors in the field of Alzheimers and other Central Nervous System (CNS) diseases. Mr. Ryde sees this as particularly important in fighting misperceptions, such as the idea that Alzheimers is an unavoidable ‘old man’s disease’ as opposed to a treatable, chronic condition. Bayer is also taking a proactive approach to market creation through its doctor training program, but on a vastly larger scale. While most other innovative pharma companies are content to take a wait and see approach regarding the health care reform’s community health centers, Bayer is committed to building a presence in this segment. Liam Condon describes Bayer’s program, which is conducted together with the Ministry of Health. “There are a lot of people in rural parts of China that call themselves doctors, often it is a role handed down by families, but in reality they have undergone no formal education.” Simply educating doctors is vital to improving care in rural regions, while improving these centers will also alleviate pressure on the overall system. Condon continues, “One of the main problems in China is that people who feel sick flock immediately to the big hospitals and specialist centers. Of course this leads to a very chaotic and inefficient system in which patients can wait half a day or more in overcrowded centers just to see the doctor for a couple of minutes and then walk out with a bag full of antibiotics. So what the government wants to do is set up a gatekeeper type of system in which community healthcare centers play a key role.” Bayer’s investment in the public health infrastructure and its cooperation with the Ministry of Health will certainly give it a favorable position in this segment, laying a foundation for the day the rural market becomes profitable for MNCs. However, as the number one multinational pharmaceutical firm in China, Bayer is probably one of the few firms to have the scale and experience to engage in such an undertaking. At this point, most MNCs are sticking to the urban centers and trying to capture market in China’s booming Tier Two cities.

Many Strategies for Waging the Talent War

Howard Sui of Merck Serono China has been called the pharmaceutical battleground of the future, and understanding this market will be at least as important as understanding the US or Europe, if not more so. Executives who understand China are already in hot demand at the headquarters of multinational firms and thus GM positions in China are highly coveted. At the same time the prospect of such a vast, rapidly changing and high stakes market can be daunting. One of the primary challenges that GMs face in China is extremely high turnover. Howard Sui, GM of Merck Serono refers to an “ongoing talent war.” He says, “Every company is committed to China and is expanding here. The competition for talent is quite intense.” Training at Western firms is highly prized and some employees are looking to eventually ‘cash out.’ However, firms employ a wide array of strategies to retain top talent. As in any market, focusing on career development and providing opportunities for advancement is crucial. While salaries have gone up, many MNCs avoid bidding up salaries, instead offering training and frequent promotions in fast growing organizations. Perks can help as well. Mr. Mithen advises on the benefits of social events, noting, “We look after our staff and coordinate social activities such as company conferences, barbeques and the like. Interestingly, 10 to 15 years ago these kinds of perks were something most Chinese would not care about, but today these benefits are becoming more attractive.” While MNCs offer, on average, better pay than local firms, local players find ways to adapt. For example, Mr. Zhang has built a relationship with the local government that allows the director of his central lab to have a position and publish through a local university. Mr. Zhang describes this as “a huge golden handcuff. This is a non-cash reward that allows me to be competitive with Quintiles but at a lower cost.”

A distinct genre of China oriented business literature has emerged, advising foreign managers on how to avoid cultural pitfalls in the Chinese workplace. There is certainly a Chinese management style that is often discussed. Mr. Grapow encapsulates this advice as “ensure employees get respect and recognition for their work. Praise in public, criticize in private.” On the other hand, some firms have managed to build more of a hybrid culture, which prize outspokenness and minimize hierarchy. Bioduro exemplifies this mixed company culture, and is an R&D outsourcing company founded by serial entrepreneur John Oyler. Oyler relates an anecdote that occurred during a visit from a French scientist. “He was asking where people on the team are from and they were telling him the names of some cities that he didn’t recognize. I drew a rough map of China on the white board, and pointed out Beijing and Shanghai. The first team member said he was from Chendu and I drew a start on the map where that was, and the next team member said Xian and I drew a dot for that city. This young scientist who had worked at our company for less than one year jumped up, ran to the board saying, “no, no, you’re completely wrong,” and grabbed the pen out of my hand and drew it a little further South on the map.” Afterwards the French scientist remarked that even at his company, a first year team member wouldn’t tell the CEO that he’s wrong and grab the pen out of his hand.

However, beyond communication, the principle cultural barrier that newly arrived executives are cautioned on is ‘Guanxi.’ Often translated as relationships, many local executives claim they have it, while foreigners struggle to build it. Eric Zwisler, CEO of Zuellig Pharma, has over 20 years experience in China and seeks to debunk some of Guanxi’s mystique. “When markets are inefficient, relationships are important. When markets are more efficient, relationships become less important because the markets become more systematic, professional, and objective in the way they operate.” Mr Zwisler continues, “It may be a bit controversial, but I think the importance of relationships in this market is overstated. Relationships are a protective barrier to avoid change and a method of maintaining control in the market. If local companies use 70% relationship and 30% content, we use 70% content and 30% relationship, and we are just as successful.”

Sundia MediTech: Western Experience in a Chinese Context

Xiaochuan Wang, Chairman & CEO of Sundia “I always wanted to come back…I can make a much bigger impact here in China than in the US. I wanted to contribute and help improve conditions in China. I wanted to be an actor in making the world more flat. Before I went to the US, I didn’t even have a TV in my home, and the memories of poverty and living conditions prevalent in China always stuck with me.” Like many others, Dr. Xiaochuan Wang, founder of Sundia MediTech, felt that it had always been her duty to return and serve her homeland. But doing so came at a premium price. She convinced her husband to quit his job, sold the house and cars, and moved the family to Shanghai. Dr Wang sees the risks she took as integral to the success of the company. “All our clients see that we’re deeply committed to the company and this commitment makes the difference and has helped build our good reputation in the industry.” This reputation has allowed Sundia to grow extremely quickly, and skyrocket to its position as one of the largest CROs in China. Over the past five years, Sundia has completed six successful drug discovery projects, a tremendous accomplishment in a field rife with dead ends and disappointment.

Dr. Wang was one of many Chinese graduate students who, during the 1980’s, began coming to the United States to pursue postgraduate studies. These students became scientists and engineers and played a significant role in the biotech and IT booms of the 1990’s. Over the past several years, these now seasoned technology veterans have been returning to China to work in universities, MNC research centers, and most significantly, start their own firms. A huge percentage of the explosion in biotech and CRO activity has been due to these so-called 'returnees.' Ambassador Balloch outlines the importance of these reverse migrants. “Returnees are contributing a great deal to the growth of the country. It’s not just about the science, but also about combining the science and innovation with business. We see that even where local science has produced the advances, the returnee has a large role in the business in terms of access to funds, protecting IP, and the functioning of the company in developing an innovative business culture in addition to the scientific work. The last 30 years of growth have been accelerated by the fact that Chinese are travelers.”

The personal reasons behind their homeward orientation and spike in entrepreneurial activity are numerous. Lee Ka-Shing’s Hutchison strenuously recruited Dr. Samantha Du from Pfizer to found Hutchison Medipharma, but it took many months of persuasion, while Darren Ji, founder of PharmaLegacy, was inspired to come on his own. He says, “it wasn’t difficult at all to make the decision to go out on my own. The opportunities in China have been extremely attractive.” Dr. Wang enunciates how international experience grants returnees a significant advantage in the pharmaceutical industry. "All of our senior team has from ten to twenty-plus years experience and everyone on the team feels that their past experiences flow naturally into the work they're doing at Sundia." These individuals are making great contributions to the development of China’s technical industries, but they are by no means alone in this effort. Chinese trained scientists and entrepreneurs have also made a great impact, yet the returnees seem to attribute a good deal of their success to Western training and business acumen. Dr. Wang observes, “you really can’t do drug discovery or development as an individual; it’s inherently a team effort. The fundamental importance of teamwork is a great lesson we learned in the US.”

Chapter 1

Mexico: New Times, New Opportunities

“He who controls the present, controls the past. He who controls the past, controls the future” - George Orwell

Since the Gulf of Mexico Exploration Co. launched the first drilling activities in Veracruz in 1868, the Mexican oil industry rapidly developed under the control of foreigners. Over the years, demand for oil grew steadily and both the Mexican people and their government wanted the oil back.

A first step was made in 1917 when the Political Constitution of the United Mexican States was drafted. Article 27 of the Mexican constitution, which has become famous over the past 90 years, states that the Mexican nation has direct ownership of all natural resources. This includes hydrocarbons on the continental shelf and submarine shelf of the islands.

The next step towards regaining control from the foreign companies was the creation of the Petroleum Workers Union on January 18, 1936, which at present still has 5 representatives on PEMEX’s 11-member board of directors. Several years after putting the process in motion, President LázaroCárdenas made history when he announced the expropriation of the property of 17 foreign oil companies on March 18, 1938. To emphasize the importance of this event, Mexico is still celebrating Expropriation Day as a public holiday.

On June 7, 1938, providing the Mexican petroleum industry with a national champion, President Cárdenas issued a decree creating Petróleos Mexicanos. Today, better known as PEMEX, the company holds the exclusive rights of exploration, production, refining, and commercialization of all hydrocarbons in Mexico. The super-giant Cantarell field, discovered in 1976, has been the backbone of the Mexican oil industry over the past 3 decades.

It quickly became the second-largest producing oil complex in the world and turned Mexico into a leading oil producer and exporter. Mexico, the world’s sixthranking oil producer in 2005, has become crucially dependent on PEMEX, the world’s third largest oil company in 2004 in terms of crude production which is only preceded bySaudi Aramco and NIOC. Although PEMEX has become a symbol of national pride and a pillar of the Mexican identity, the monopoly has slowly been losing its invincibility.

Actually, many argue that Mexico’s state oil monopoly is in critical condition. For a long period of time, the state monopoly was consistently strengthened, meaning that the whole structure of the Mexican oil and gas industry increasingly reflected its monopolistic nature. Now, more and more stakeholders are characterizing PEMEX as an inefficient company that has become the piggy bank of the Mexican government due to the lack of fiscal reform.

While the international oil majors have been posting record profits in recent years, PEMEX continuously reported multibillion dollar after-tax losses since 1998. Last year, PEMEX contributed 93.2% of its profit to the Mexican treasury, accounting for almost 40% of the country’s federal budget. This unremitting financial draining of PEMEX, in combination with reserves replacement rates of 41% in 2006 and 26.4% in 2005, has created a situation that is unsustainable over the long term.

During the celebration of the 69th anniversary of the expropriation of the foreign oil companies, President Felipe Calderon, the leader of the National Action Party who came into power on December 1st, stated that “PEMEX will always belong to all Mexicans.”

However, Roberto Newell Garcia, General Director of the Mexican Institute for Competitiveness (IMCO), warned that “If we do not succeed in introducing the required reform in the oil sector within 5 years we won’t have PEMEX anymore.”

Time to shake things up in the Mexican oil and gas industry?

Reform is critical for the future development of the Mexican oil and gas industry, but the degree of reform is at the center of political and societal debate at the moment and opinions are highly divergent. On one side of the spectrum are political leaders such as Cuauhtémoc Cárdenas, son of former President Lázaro Cárdenas and founder of the Party of the Democratic Revolution, Mexico’s leading opposition party. His last name has important weight in Mexico and he is a strong protector of PEMEX’s monopoly and the legacy of his father.

“I wouldn’t be thinking of reforming the Constitution. We can develop the oil industry without a need of reforming the Constitution. I think that activities such as exploration and exploitation should remain the exclusive right of the Mexican state,” he emphasized. However, he agreed that “The Mexican government will have to find other sources of income, different from PEMEX, to meet its fiscal needs. PEMEX has to be liberated from this burden.”

Those on the opposite side take equally strong positions and even question the wisdom behind President Calderon’s decision to rule out amendments to the Mexican Constitution in the near future. Roberto Newell Garcia, reasoning with Mexico’s competitiveness in mind, summarized his thoughts in a letter to Santa Claus. “Dear Santa, please eliminate Article 27 of the Mexican Constitution. Let there be competition in the energy sector. Dear Santa, as a consequence of this, it could happen that PEMEX will suffer enormous distress as a corporation because it is grotesquely overstaffed and many of its assets are not very productive anymore. Dear Santa, make this change process as painless as possible.”

As opposed to many Mexicans, he is not praying that PEMEX will be saved. “I would be glad if PEMEX were saved, but that is not what I think Mexico needs the most. We need a vibrant, viable, competitive, energy sector,” he emphasized. “Like all Mexican chauvinists, I would like to see our flag carriers succeeding. For example, I would like the Mexican soccer team to do well in the World Cup. But I think that we are closer to winning the World Cup than we are to having a world class competitor in PEMEX; and we are not very close to winning the World Cup,” he concluded.

Fiscal, legal, and regulatory reforms have proved to be very unpopular in Mexico, creating a hurdle that previous presidents have not been able to overcome. However, continuing the current status-quo might prove to be suicidal. As a long-term observer of Mexican politics and business, John M. Bruton is a firm believer that the Mexican nation itself will need to define its future. “One of the things that the country is remarkably good at is crafting its own unique solutions,” noted the senior managing director of Manatt Jones Global Strategies.

Roberto Newell Garcia, General Director for the Mexican Institute for Competitiveness (IMCO) He continued, “The decision therefore has got to be entirely Mexican. Technical outsiders can talk about resources and potential resources, but they are not the ones at the switches.” Ing. Juan Casillas, managing director at Manatt Jones, added that “In the end, PEMEX will have to stop being an appendage of the Ministry of Finance in order to run the organization in a business manner. The Ministry of Finance will have to realize that investments in exploration, production and refining, for example, take time and money but the payback is much greater. Finding the right formulas is the key.”

Rising investment in E&P, better late than never

Manatt Jones Global Strategies’ Senior Managing Director (left) John M. Bruton and Managing Director (right) Ing. Juan Casillas With US$13.9 billion, the budget of PEMEX for 2007 is the highest budget in the history of the company, but Mario Gabriel Budebo, Mexico’s Undersecretary of Hydrocarbons, puts this figure into perspective. “This achievement is not necessarily sustainable, for it is associated to public expenditure based on current high oil prices. In order to keep this level of investment in the future, it would be necessary that oil prices remain at their current level. Only permanent and significant investment in exploration and production will enable PEMEX to maintain production levels and improve in the midterm, its reserves replacement rate, currently below 100%. In this sense, new formulas to finance PEMEX have to be discussed in order to achieve a reserves replacement rate close to 100%, desirable for the country.”

Mario Gabriel Budebo, Under secretary of Hydrocarbons for Ministry of Energy The sustainability of PEMEX’s contribution to the Mexican budget appears to have become a factor of political importance. “Mexico should not only benefit from its natural resources for only one generation, we should benefit for many more generations. We have a lot of work ahead of us to ensure that PEMEX will be able to continue making this vital contribution to the development of the economy and to social expenditure,” concluded Budebo. On December 31, 2006, Mexico’s proved hydrocarbon reserves equaled 9.6 years of production, against 11.0 years in 2004. In combination with a reserve replacement rate of 41% in 2006 and the long lead times between exploration, development, and production; the urgency of increasing exploration investment becomes obvious. In November 2006, before the publication of the 2007 budget, PEMEX indicated it is critical to invest US$18-20 billion a year in exploration and production to compensate for the declining output from the Cantarell field, which is expected to decline at an average rate of 14% a year between 2007 and 2015. Nevertheless, capital expenditure for 2007 has been capped at US$13.9 billion. PEMEX’s Exploration and Production Division, as well as the E&P service industry, must have found it encouraging that US$12.3 billion, 88.5% of the budget, has been earmarked for exploration and production activities.

Challenges for PEMEX

Jesús Reyes Heroles, General Director of PEMEX Recognizing that the future of PEMEX is intertwined with the future of Mexico, President Calderon had to carefully pick the right man to steer PEMEX through a very challenging administrative term. He turned to Jesús Reyes Heroles, former Mexican Ambassador to the US (1997-2000) and Minister of Energy (1995-1997) in President Ernesto Zedillo’s government. Showing great awareness of the weight that is resting on his shoulders, Jesús Reyes Heroles stated that “the kind of PEMEX that we aim to devise in the next 10 to 15 years has a lot to do with the kind of country we are visualizing.”

After being appointed as director general of PEMEX on December 1, 2006, he was quick to emphasize that “the institutional context in which PEMEX operates does not favor effective management and does not allow the company to capture the very many opportunities that have been emerging in the energy sector.”PEMEX has undoubtedly been losing opportunities due to the difficult operational and financial situation that the company is facing. “Other companies are running and we are not even walking, sometimes we are really standing still,” recognized Jesús Reyes Heroles.

Mexico’s recently appointed Undersecretary for Hydrocarbons, Mario Gabriel Budebo, took up his new post on the same day as Reyes Heroles. As one of the top officials in the Ministry of Energy, he is destined to play a key role in the implementation of a more enabling institutional context that enables PEMEX to move forward. He emphasized the importance of designing mechanisms that allow PEMEX to obtain access to more financial resources to intensify exploration activities.

“The mechanisms that will enable PEMEX to keep more of the revenues from crude oil and natural gas production are currently under discussion, and there are several possibilities,” he stated. Most likely these mechanisms will remain under discussion for at least the remainder of 2007.

The outcome of this debate will be instrumental in defining the balance that will be struck between increasing PEMEX’s budget and decreasing the tax burden on the company. Reyes Heroles does not have direct control over either budget or taxation, but he boldly stated that “PEMEX cannot keep paying as much taxes as it has been paying in the past. The numbers vary, but basically the reduction in the tax payment of PEMEX has to be around 1.2% of GDP; that would be around US$10-11 billion.”

Cuauhtémoc Cárdenas stated: “It is an obligation and responsibility of the administration to improve the operation of PEMEX in many ways to make it more efficient. It’s unacceptable to have an inefficient entity,” he emphasized. Efficiency: blending stability and progressPEMEX will not be facing this challenge alone, as the world leading providers of automation and process management have flocked to Mexico to offer their services.

Increasing efficiency to create a solid platform for growth is exactly what Ing. Pedro Farinas, a Cuban American, had to do when he arrived in Mexico in January of 1995. He joined Schneider Electric Mexico as its sales and marketing vice president in the middle of the Peso Crisis. On his first day he had 300 people reporting to him, one week later only 200 were left. “It was a very stressful time and bad for business,” he remembers.

However, it was already better than 1994, which had been the year of integration of the various companies that Schneider Electric had acquired in Mexico. “So 1994 was the transition year and 1995 has become the base year from which we have built our success,” explained Farinas, before boasting that “Schneider Electric Mexico has moved from being a loser in 1995 to now being one of the Top 5 profitability countries in the world of Schneider Electric which includes 190 countries.”

In addition, Schneider Electric Mexico has become one of the group’s Top 10 countries in terms of sales in the domestic market. “Our market share varies from segment to segment, but we are by far the number one market share holder in Mexico for our scope of products and solutions. In 1995, we also started to grow our internal export activities. In 1995 we exported about US$4 million, while this year we will export close to US$1 billion,” summarized Pedro Farinas, who moved up to become president and general director.

Schneider Electric’s companywide commitment to customer satisfaction is brought to life through a program called NEW 2, which stands for ‘New Electric World 2.’ This program focuses on three aspects: growth, efficiency, and people. According to Farinas, these are the 3 elements that guide a successful company. “It really all starts with people. People create efficiency and when you have an efficient set of processes then you can have growth. Growth is an output and not an input,” lectured Farinas.

Critics of the strong influence of the labor union on PEMEX’s operations and the resulting alleged overstaffing, may disagree that people create efficiency, but Farinas surely has proved his point. “Last year we grew 25%, which is truly outstanding for a market leader operating in an economy that grew 4.8%.”

The PEMEX account is a national strategic account for Schneider Electric Mexico. “We are an important supplier to PEMEX, but we can become much more important if we continue moving from being a supplier of products to being a supplier of solutions,” noted Farinas. Ing. Ernesto López Camacho, the sales director in charge of the PEMEX account, noted that PEMEX is increasingly demanding total package solutions that enable the company to deal with single suppliers. “We continuously adapt our products to PEMEX’s needs and specifications,” he stressed. “The presence of our different products is continuously evolving across PEMEX’s refineries, offshore platforms, petrochemical complexes, and pipelines.” In an environment of everlasting change and development, Schneider Electric relies on the stability of its management and its lead brand, Square D, which is widely recognized in Mexico after a 60-year presence in the country.

During the recent Schneider Electic oil and gas conference in Dubai, Jean-Pascal Tricoire, chairman of Schneider Electric, recognized that Mexico has taken an important lead in oil and gas through its ample offer in automation and control. “We don’t have the same strength in automation and control as in electrical distribution, where the company is market leader, so there is a great opportunity for us to expand our position in this segment,” realized Farinas.

This ambition was immediately supported by Enrique González Haas, vice president marketing and strategic development, who stated: “We are number 2 in automation and control in Mexico, but we have very aggressive plans to become number one.”

Increasing investment in cost saving initiatives

Alfredo Carvallo, Director General Mexico & Central America, Emerson Process Management While Schneider Electric’s entry into the domain of automation and control represents diversification from its core business of electrical distribution, automation and control have always been a core business for companies such as Emerson Process Management and Rockwell Automation. First of all, the efficient operation of the matrix structure that Reyes Heroles aspires to optimize is heavily reliant on the installation and optimization of automation and process control systems.

“There are a lot of efficiency gains that can be obtained with some additional investment,” recognizes Reyes Heroles. “Our first estimate of the potential cost reduction is in the neighborhood of US$1 billion, which is about 10% of our operating expenses. This is not trivial and has been quite well identified. I think that we should aim for more and we are in the process of putting together a strategy to achieve precisely that.”

According to Alfredo Carvallo, director general Mexico and Central America for Emerson Process Management, a conservative estimate is that PEMEX could achieve a 30% reduction in production costs through automation. In addition to this significant improvement, PEMEX should strive to continuously increase its efficiency level. “There is no need to aspire to directly jump to the efficiency levels of ExxonMobil or Shell,” reassured Carvallo.

“Our promise is that with the same assets our client can increase efficiency by at least 2% following the implementation of our PlantWeb solution. This is combined with a reduction in installation cost of up to 30% as mentioned before, while projects can be implemented much faster. Our offer to the industry is exciting and enabled Emerson to grow at a double digit rate for the past 5 years.”

Mexico has a lot of potential, but decisions have to be made immediately in order to maintain the current crude oil production level. “We can help Mexico in this process,” offered Carvallo. To accelerate its pursuit of efficiency through process optimization and control, PEMEX will really have to partner with companies that possess the required knowledge and not re-invent the wheel. “Automation systems will help PEMEX to predict the performance of their plants, avoid loss of production, and of course monitor all equipment on its wells. We cover everything to improve their efficiency, increase reliability and availability, and reduce variability,” noted Carvallo. He has identified 2 trends that support his vision. “First of all, a new generation of employees that pursue new technology is rising in the ranks of PEMEX. Secondly, PEMEX has traditionally tried to do everything in-house, but nowadays the company is increasingly outsourcing new technology implementation to external technology partners, which is really a way of transferring the technology into the Mexican oil and gas industry.”

Importance of the time horizon Investment in efficiency gains yields an obvious return, but in the planning of such investments PEMEX is facing the same illnesses that other public entities have in terms of planning. “We don’t have multiyear budgeting, not even of our investment program, which makes the planning and budgeting program extremely inefficient,” explained Reyes Heroles. A multi-year budget, with a planning horizon that stretches until 2015 or 2020, would enable PEMEX to define its long-term goals. It would also enable service providers to assist PEMEX in developing maintenance strategies.

“Every proposal has to be very well justified from a financial payback point of view. Changes in technology today are almost always justified by the overall savings associated with the system life cycle versus which vendor’s equipment is ‘cheaper’,” explained Robert Ninker, Rockwell Automation’s director general for Mexico & Central America. “A classic example would be the energy saving initiatives that PEMEX has started using variable speed drives technologies. We have been able to clearly demonstrate that despite larger initial capital investments PEMEX will realize greater energy savings over the extended life cycle of the project,” she stated.

Since Rockwell Automation entered Mexico in 1984, PEMEX has mainly acquired its installed based of control systems internationally. Rockwell Automation has been very successful with the OEMs that sent their equipment into Mexico, and as a result has built up a significant installed base. “Over the years, we have seen a significant change in PEMEX’s approach to automation, especially in the areas of safety control and strategic maintenance,” analyzed Ninker.

PEMEX had a number of incidents recently and is highly sensitized to being more pro-active with its maintenance. PEMEX is moving toward more predictive maintenance strategies, which, as Ninker outlines, involves putting systems in place to predict potential problems before they occur, and of course, automation technologies are essential to meet that objective. While sitting down with the information hungry people in PEMEX, Ninker has been “very impressed with their openness toward incorporating new technologies in their systems since this is not so common in similar state owned enterprises.”

“These develoments have really taken our relationship with PEMEX to a new level,” confirmed Ninker, referring to Rockwell Automation’s evolution from being a hardware supplier into being a collaborative partner in long-term maintenance and support of PEMEX’s systems. He concluded with the following observation: “It appears that PEMEX is making a significant shift from price and relationship-based buying behaviors towards a procurement policy based upon solid long-term value. This shift is really encouraging for value suppliers like Rockwell Automation.”

Think global, act local, perform regional

Armando Basave, Country Manager Mexico, ABB ABB is truly a global company. “We manage the knowledge and know-how through our centres of excellence and resources in more than 100 countries around the world that are focused on providing oil and gas solutions,” explained Armando Basave, ABB’s country manager in Mexico. “Whether a project is in Mexico, Venezuela, or South Africa there always is an engineering center that can provide top solutions by using the same technological platform for different markets.” To strengthen this approach, ABB invests around US$1 billion per year in R&D to work on solutions that provide improved performance for its customer’s processes and businesses.

ABB’s local team customizes any solution in order to meet the Mexican specifications and needs. To be closer to the customer, ABB has expanded its operations and increased its presence in Coatzacoalcos, Villahermosa and opened new facilities in Poza Rica and Ciudad del Carmen. “Therefore, ABB professionals are deployed along the main oil and gas hubs for PEMEX,” noted Basave. “The key to ABB’s success is the interaction between the centers of excellence and the local teams in over 100 countries where ABB has presence.” A true example of ‘think global, act local.’

Most of ABB’s projects in the Mexican oil and gas industry have concentrated on modernization processes. Some examples include the Production Platform Ku-H in the Ku-Maloob-Zaap field and the Cryogenic Plants at GPC Burgos. Basave emphasized that in both cases ABB has supplied world class technology providing added-value for PEMEX and the country.

“As an example, we are offering solutions for decreasing the use of turbines on offshore platforms. We are able to feed electrical power from onshore to offshore through ABB’s HVDC Light technology for transmitting electrical power over long distances by submarine cables, with improved efficiency and lower cost. This technology, which is only commercialized by ABB, eliminates the need to burn oil or gas on the platforms,” boasted Basave.

In recent years, Mexico has become a center of excellence for engineering work in the North American oil and gas market. “During the last 3 years, we have proved that the engineering capabilities in Mexico match international standards.” The North American region was utilized as a pilot project for ABB. In North America, targets based on regional performance were established, providing ABB’s operations in the different countries with a common goal and replacing the sort of silo mentality that was prevalent.

This approach has proven to be successful and nowadays different regions in the world are working in a coordinated way with the support of the Centres of Excellence. Building on this success, ABB’s vision for 2009 is to be recognized as the leader in power and automation technologies. Getting this recognition is not that simple. Although ABB Mexico is hiring professionals in Mexico to facilitate the ambitious plans of the Canadian oil and gas industry at the moment, the Mexican oil and gas industry will be at the core of Basave’s ambitions.

“PEMEX is in need of large investments to increase its capabilities in exploration and production. We believe that PEMEX has a lot of challenges in the coming years, which call for a holistic approach, to which ABB can contribute,” he concluded. “My dream is to grow ABB Mexico by 100% in revenues over the next 10 years.”

Efficiency is doing things right; effectiveness is doing the right things

Schneider Electric Mexico’s Enrique González Haas, Vice President Marketing & Strategic Development (left); Ing. Ernesto López Camacho, Sales Director (middle); and Ing. Pedro Farinas, President & Director General (right) While the size of the budget and PEMEX’s tax liabilities are at the center of debate, cost management is an equally important issue. PEMEX has to increase its cost efficiency, which is a challenge for a company consisting of 4 subsidiaries that operate with substantial independence and individual objectives. Some people think that PEMEX should integrate the 4 divisions into one firm again.

However, Reyes Heroles’ view is that the creation of the 4 subsidiaries brought more transparency to an organization that was characterized as a black box, but, it did create duplicity. Of course, PEMEX decided to concentrate several activities at the corporate level, but in many cases the centralization process did not eliminate the duplicated activities in the subsidiaries, it just added to the duplication and unnecessary costs.

Having identified efficiency as a focal area for PEMEX, Reyes Heroles explained that PEMEX has to take the best of the 2 processes: a matrix solution. This would enable PEMEX to reap the benefits of having the 4 subsidiaries, while creating efficiency gains. Information, communication, and control systems are destined to play a key role in the successful implementation of Reyes Heroles’ vision.

In addition to duplication, PEMEX has taken a diversification approach inthe development of the creation of its information, automation, and control systems infrastructure, which has resulted in rising maintenance costs. The industry is arguing that at some point PEMEX will have to start acting like other private oil companies and migrate toward a tighter set of equipment standards in order make their systems a more maintainable in the long run.

“The only way to pursue operational excellence and productivity is by creating an environment that produces the right information in the right context at the right time, with visibility of the entire enterprise,” commented Ygor Guilarte. “The concept is very aggressive and challenging, but it is the right path to take for the next decade.”

As managing director Mexico and Central America of Invensys, he is introducing InFusion ECS to the Mexican market, an innovative solution that optimizes both the availability and utilization of legacyautomation and control systems, expanding their life cycle.

“With minimal investment in comparison to a traditional implementation, we offer maximum return through business optimization, raising productivity levels and increasing our clients’ focus. We believe that putting the right platform and the right architecture in place will offer more value than buying the latest computer or the latest chip. Departments that typically worked separately and had different targets are linked by InFusion, which will optimize economical value,” explained Ygor Guilarte. This shift in targets makes the implementation more difficult to achieve.

“We believe that by providing dynamic, real-time performance measurement, we can help our customer realize the undeniable benefits of their automation investment,” stressed Guilarte. “That is important from a cash-flow and capital expenditure point of view for our customers, who are continually demanding higher quality at lower costs.”

Similar products have been considered by Invensys’ competitors. Most of these actually created middleware layers to fill the gap between the different applications. “We took that technological vision of unified automation to the next level and broke the cycle of delivering just the next version of a Distributed Control Systems and, instead, created the next generation of automation and control – the Enterprise Control System,” boasted Ygor Guilarte.

A few areas of PEMEX have already tried the middleware approach and have recognized issues such as the maintenance of duplicated databases, delays and underperformance associated with these solutions.

According to ARC Consulting Group, Invensys has a 2- to 3-year window before the market will react to its technology. “Of course, similar products will be introduced and, sooner or later, there will be competition, but we are established as the visionaries introducing the concepts and we will capitalize on that advantage,” stated Guilarte. “We have moved forward from only closing the control loop of the plant to closing the business loop of the organization.”

Chapter 1

Mexico: New Times, New Opportunities

After years of underinvestment in exploration and production the decline of Cantarell, the world’s second-largest oil field, is creating an urgent need for PEMEX to gain access the financial and technological means that will safeguard Mexico’s future oil production capability. According to an official statement, “PEMEX’s efforts are concentrated in pursuing the strategic goal of keeping oil production above 3 million barrels of oil per day. Accordingly, our exploration and exploitation efforts are directed towards that goal, facing technological, budgetary and other challenges with specific initiatives.”

Achieving this strategic goal is destined to be a great challenge. Today, Mexico has a relatively mature asset base and the cycle of discoveries of the 1970’s and early 80’s has started its declining phase. “The only thing that would stop that decline is a series of really major discoveries,” warned Adrian Lajous, who served as Director General of PEMEX between 1994 and 1999. “The major challenge is that after having developed this quite extraordinary set of super giant fields the era of easy oil, of low-cost oil in Mexico is over, as in any other place in the world. PEMEX now has the challenge of having to look for oil in areas that involve higher cost and higher risk.” He outlined four key issues that could serve as indicators of the challenges that PEMEX will be facing to maintain crude oil production above 3 million bbl/day.

The pessimist sees difficulty in every opportunity. The optimist sees the opportunity in every difficulty – Winston Churchill

Adrian Lajous, former Director General of PEMEX “The first challenge is the launch of several brownfield developments,” he started. “The application of new technology and better engineering can raise recovery factors and will enable PEMEX to get more juice out of existing fields”. Brownfield developments have proved to be very important.The increase in global oil production in the late 1990’s and the first years of this century has essentially come from brownfield developments in Western Siberia. “I think there are enormous opportunities, profitable opportunities, of doing something similar in some of the traditional producing areas in Mexico,” continued Mr Lajous. “PEMEX has the choice between facing this challenge individually or with the support of the international service industry.”

The second area of opportunity is the development of the Chicontepec area, which contains some of Mexico’s most complicated oil and gas reserves. Its tertiary sands hold a very different type of resource from the crude in the large super giant fields in the south east. “The development of this very large resource will prove to be engineering intensive, technology intensive, middle management intensive and perhaps most importantly capital intensive,” insisted Adrian Lajous. “This second area of opportunity will become particularly relevant in PEMEX’s production maintenance strategy from 2009 onwards.”

The third challenge, according to PEMEX’s former Director General, is going offshore into shallow waters where additional exploration could lead to the discovery of additional resources. These shallow water areas are not very different from the ones in which Pemex has operated in the Southeast of Mexico.

“The fourth challenge, of course, is the most complex one,” he cautioned. “It is the deepwater exploration and production.”Although this is probably the most important challenge that PEMEX has to face, it is something that will not provide any relief in terms of additional production for many years. The period that is required between the start of exploration and first production is very long,” Mr Lajous underlined. “That means potential discoveries in the deepwater in the Mexican sector are something that would only be relevant in a time frame of more than seven or eight years.”

To enable PEMEX to successfully face these challenges it is critical that a more enabling operating environment is created. “This implies the development of an adequate legal, regulatory and fiscal framework for the upstream sector that is fully developed,” explained Mr Lajous. “The other prerequisite is the development of the regulatory institutions associated with the new framework. That agenda has to be fully covered before we even think about any private participation in the upstream part of the business.”

Logic ends where the constitution begins?

Rogelio López-Velarde, Founding Partner of LVHS “PEMEX’s monopoly is not contained within the constitution”, explained Rogelio López- Velarde. The Mexican constitution states that all domestic hydrocarbons belong to the nation, that no concessions for exploration and production of these hydrocarbons are allowed, and that the petroleum industry is exclusively reserved for the state. The founding partner of López-Velarde, Heftye y Soria, a Mexican law firm specialized in the energy sector, reminded that the Petroleum Law, implemented by Congress in 1958, expanded this constitutional mandate by expanding the term ‘petroleum industry’ to include all industrial and commercial activities related to the oil, natural gas, oil derivatives and basic petrochemicals industry. The enactment of the Petroleum Law and the 1960 constitutional amendment outlawed exploration and production concessions and risk service contracts, as opposed to a common belief that this was initiated by President Cardenas following the 1938 expropriation.

“Thus, a legal reform, not a constitutional amendment, should suffice in order to allow competition and private investment in some activities that have been reserved to PEMEX”, he added. The declining production in the Cantarell field and the resulting pressure on the federal budget are destined to create an environment that is supportive of alliances between PEMEX and international oil companies and specialized service providers. The Calderon Administration and Mexico’s Congress have six years to reform the Mexican energy sector, and the need to move into deepwater exploration should serve as a catalyst for reform of Mexico’s complicated legal and regulatory framework. However, it is up to Mexico’s political leadership, and the Mexican people who elected this leadership, to embrace this opportunity.

The big political challenge is that the current Calderon administration will have to make decisions that will not have effect during Mr. Calderon’s term in office. “That is why, politically also, it is so challenging to initiate the process of reform in which the current administration has to assume all of the cost of the process of reform and none of the benefits,” analyzed Mr Lajous. “So it does require courage and it does require a long-term vision. Rodríguez Dávalos a lawyer with a strong energy focus, believes that the political will is there to make the essential changes to the legal and regulatory framework. “This will make a lot of projects financially viable and bankable, projects that Mexico really needs,” anticipated the founding partner of Rodríguez Dávalos Asociados. However, many Mexicans are worried that simply opening up the oil and gas industry effectively goes beyond privatization of the industry and will in effect mean de-nationalization. This makes the future of PEMEX not only an ideological issue but also an issue of national interest.

Management of the petroleum industry: the Norwegian model

Norway ranks as the eighth largest oil producer in the world and is the third largest oil and gas exporter. Since oil production started in 1971 success story has gradually gained recognition as a model for the management of the petroleum sector. “We had little to build this industry on, and had to depend on foreign companies and expertise,” reflected H.E. Knut Solem. The Norwegian Ambassador to Mexico continued: “At the same time it was a clear political wish to develop our own oil companies and a strong oil related industry to have as much added value as possible”. The Norwegian model is not one unique way of doing things. Elements of the models applied in different countries have been integrated and adapted to the Norwegian context while there is a continuous search for potential points of improvement.

Knut Solem, Norwegian Ambassador to Mexico “The final result was the establishment of the 100% state owned Statoil, which will merge with Norway’s second major oil company Hydro by October this year”, stated Knut Solem. The Norwegian Government, the biggest shareholder in both companies, is expected to increase its shareholding in Statoil-Hydro from 62% to 67%, but will not have a single representative on the Board, which is quite different from many other state owned companies.

Despite the fact that Statoil and Hydro account for 70% of production in Norway, all of the majors are present in Norway. “The Norwegian model continuously strives to create a balance between cooperation and competition, which is attractive for investment,” explained Kjell- Arne Oppeboen, Country Manager of Hydro in Mexico. The international oil industry in Norway has brought risk capital, leading edge technology, experienced people and a lot of opportunities to Norway.

Kjell-Arne Oppeboen, Country Manager of Norsk Hydro Mexico “Mexico’s situation now in deep-sea areas can be compared to the situation in Norway in the late 70s,” analyzed Ole Petterson. The Managing Director of Statoil Mexico continued that foreign companies provided Statoil with technical support through technical alliances. “We learned from them, but in our heart we were sceptical about the participation of the big companies because it was ‘our oil’,” he continued. “Nevertheless, the system worked very well and nowadays I like to believe that we are good competitors of our former partners, especially in the field of technology and increased oil recovery,” he emphasized. “Statoils experience with alliances is really good, and I would recommend Pemex to try the same strategy.”

For the moment, private participation in the Mexican upstream sector remains impossible under the current legal, regulatory and constitutional frameworks. Despite the constraints, IOCs and NOCs have set up shop in Mexico in anticipation of potential change and emerging opportunities. Statoil opened its office in Mexico in 2001, making it the first upstream company with an office in the country. “Statoil had a vision, but every year Statoil discussed whether having an office in Mexico was worthwhile,” put Ole Petterson. In March, when he hosted Helge Lund, Statoil’s President and CEO, and Statoil’s International Executive VP they assured him that Statoil is prepared to still be patient.

Should PEMEX reinvent the wheel?

“Our long term ambition is deepwater exploration and production,“ proclaimed Mr Petterson. “However, this is something that Mexico, and the Mexican people, will have to decide. We can just be available if they need us.” According to Statoil, an alliance with PEMEX in deepwater should include the sharing of risk and investment, but also the sharing of loss and profit. “We are definitely available for this sort of alliances,” underlined Mr Petterson.

Ole Petterson, Managing Director and Exploration Manager of Statoil Mexico Whether alliances under the Statoil definition will materialize in the near future remains uncertain. When asked about its definition of an E&P alliance with an international partner, PEMEX sticks to the Mexican regulation: no production sharing contracts, no risk contracts.

Mexico and PEMEX faces great challenges, specifically in the development of the deep-sea resources and increased oil recovery, and the question is who is really missing out on an opportunity. Additional risk capital and access to deepwater technology could boost PEMEX’s exploration and production activity, and the international oil and gas community is more than willing to cross the US-Mexican marine border. Statoil is already a top ten player in the US Gulf of Mexico. “It would be natural for us to cross the border. We have the deepwater technology that could unlock Mexico’s deepwater potential and are world leaders in subsea development and increased oil recovery,” stressed Ole Petterson.

The merged company Statoil-Hydro is going to be the largest company in the world in terms of offshore production in water depth exceeding 100 meter. “Statoil- Hydro will be producing, as operator, almost three million barrels per day, which makes us twice as large as the number two in these water depths,” boasted Mr Oppeboen. The merged company will have a strong position on developing new technology, doing focussed research when needed, and be an attractive new partner for oil companies.

Technology development has enabled Norway to optimize the producing life of its oil fields, an expertise that could prove highly valuable for PEMEX. “When Statoil develops an oilfield we start thinking about increased oil recovery from day one, as opposed to the day that the field starts declining,” highlighted Mr Petterson. “We have experienced that the Net Present Value of our projects increases significantly when we pursue a recovery factor that is as large as possible.” Statoil might not reach peak production in the short term, but optimizes the production life of its fields. In the current situation in Mexico that is probably difficult. Nevertheless, the Cantarell Field is declining and taking a long term production optimization approach to compensating for its decline is a huge challenge.

In the waiting room

Benigna C. Leiss, Chevron Representative for Mexico “PEMEX has been in this wonderful place where it has been exceedingly easy to produce crude, but that is now changing with the decline of Cantarell,” clarified Benigna Leiss. Chevron’s reprentative in Mexico has witnessed an increasing level of awareness that there is no other Cantarell around. “What I am really saying is that PEMEX has not yet faced producing in a difficult environment,” she underlined. Of course, Chevron has joined the ranks of Statoil, Hydro, Petrobras, ExxonMobil, Shell, Repsol and BP to offer its services to PEMEX. The company is top notch in the world in deepwater exploration and production as well as heavy oil. “These are the two areas in which we can see ourselves working with Mexico and in Mexico,” noted Benigna Leiss. Even though Chevron clearly stated that Mexico is of great strategic importance to the company, PEMEX yet has to select the partners it finds of strategic importance to the development of the Mexican oil and gas industry. However, Chevron finds itself in good company in the waiting room.

Spreading sustainability in the meantime

The Dow Jones Sustainability Index ratings, which track the financial performance of the leading sustainability-driven companies worldwide, ranked Statoil on the top spot in the “oil and gas” category for the third year in a row. While the political discussion on foreign participation in the Mexican oil industry is far from being concluded, Statoil is building on its sustainability track record by concentrating on agreements such as the recently signed deal to reduce carbon emissions from the Tres Hermanos oil field.

“The carbon emissions agreement is an opening in a new area for us,” stated Ole the future, we will be expanding our cooperation in the carbon emission-reducing projects,” added Mr Petterson, who indulges his personal passion for the outdoors through fly fishing trips in Mexico. “Actually, it is the first project in which we can have some profit in this country. It is not much, but it is a good start,” he concluded.

Chapter 1

Mexico: New Times, New Opportunities

The political factor in Mexican oil

The future of the Mexican oil and gas industry will be greatly impacted by the fiscal, legal and regulatory reforms that President Calderon will pass through Congress before the end of his term in 2012. On the day of the election, July 2, 2006, the Federal Electoral Institute announced that the race was too close to call and decided not to reveal the results of its exit poll. After all votes were counted the top two candidates were Mr Calderon with 15,000,284 votes and López Obrador who received 14,756,350 votes. The difference of 243,934 votes resulted in a 35.89% over 35.31% victory for Felipe Calderon, who took office on December 1. Since then, President Calderon’s approval rating has surged to 65 percent, supported by the success of the war on crime and drug trafficking, which he launched by sending thousands of soldiers and federal police to combat well-armed cartels.

Cross-party collaboration will be essential to accomplish President Calderon’s ambitious reform package. Following the deep divisions that erupted after the July elections, President Calderon will have to prove his ability to build agreements in Congress where his National Action Party is the biggest party but lacks a majority. “Changes in the budgetary situation of PEMEX and the relationship of PEMEX with the Ministry of Finance and the government budget can only be achieved through large scale consensus,” confirmed Mario Gabriel Budebo. Mexico’s Undersecretary for Hydrocarbons continued that these changes are not something that can be proposed lightly but will have to be constructed through cooperation between the different political forces in Mexico. In March, Mexico witnessed the first results from cross-party collaboration when Congress passed a pension reform bill, the first major reform approved under the conservative President Felipe Calderon.

The necessity of change is underscored by a recent World Bank analysis of the Mexican economy which indicated that both the tax system and the energy sector are in need of reform. Energy reform, which could include legal reform allowing private investment in the oil and gas industry, seems to be one bridge too far for President Calderon at this moment. A broad public opinion survey conducted last year by CIDE and the Mexican Council on Foreign Affairs revealed that 76 percent of Mexicans oppose foreign investment in oil.

Fiscal reform: a first step forward

With energy reform out of reach, President Calderon has opted to pursue fiscal reform. Six days before the Mexican government presented its fiscal reform plan to Congress on Wednesday June 20, Alan Greenspan, the former Federal Reserve chairman, warned that declining oil output in Mexico could spark a major fiscal crisis in the country. According to Luis Ramirez Corzo, former Director General of PEMEX, the Cantarell field is likely to decline by 14% per year on average between 2007 and 2015. One week after presenting the fiscal reform plan, President Calderon confirmed that he expectes Mexico’s crude oil exports to slip further this year and next, emphasizing the need for a fiscal reform to make the country less dependent on oil revenues.

Mario Gabriel Budebo, Undersecretary of Hydrocarbons the Ministry of Energy “Starting in 2006, the volume of our oil exports has been falling at an alarming rate and from what we have observed up until now, this year and the next will be no exception,” Calderon stated at a banking event. In 2006, Mexico’s oil exports decreased by 1.3 percent to an average of 1.793 million bbl/day, largely due to declining production in the Cantarell field. In the first five months of 2007, exports decreased by another 4.4 percent compared to the average 2006 export volume, or 11.4 percent compared to the first five months of 2006, and reached 1.714 million bbl/day. According to official statements, PEMEX has a target to keep oil exports above 1.648 million bbl/day throughout 2007. Nevertheless, the declining export volumes in conjunction with volatile oil prices provide strong incentives to transform Mexico’s dependence on oil and find more stable sources of public financing. “We will do whatever it takes, together with all parties involved, to optimize the energy sector’s positioning as a contributor to economic growth and generator of employment in Mexico. These are the main objectives of President Calderon,” added Mario Gabriel Budebo.

Over the next few months, Calderon will go to great lengths to get the key fiscal reform proposal approved by Congress before September, to ensure its inclusion in the government’s 2008 budget. In addition to reducing Mexico’s economic dependence on oil export revenues, the proposed reform is designed to raise the government’s tax take from 10.2 percent of gross domestic product today to 13 percent by 2012.

While PEMEX’s fiscal contribution has prevented the company from setting an autonomous business strategy, the institutional and regulatory frameworks for the energy sector do not allow PEMEX to attract private investment that would accelerate the expansion of its exploration and production activities. The fiscal reform should enable PEMEX to retain more capital and invest its after-tax revenue in essential exploration and production activities. Between 2001 and 2005, taxation of PEMEX’s revenue has averaged US$3.8 billion more than the company’s pre-tax income. As a result, PEMEX has been unable to increase investment, while according to the Energy Information Administration, PEMEX may need to invest as much as US$32 billion annually in exploration and production to prevent a sharp decline in oil production. The ideal outcome is that Mexico’s three dominant parties – Felipe Calderon’s PAN, Lopez Obrador’s PRD, and the PRI that ruled Mexico for seven decades until 2000 – agree on a viable fiscal reform that will enable PEMEX to operate like a real oil company while meeting the needs of both the Mexican economy and the Mexican people.

Energy reform and fiscal reform

Francisco X. Salazar, President of the Comision Reguladora de Energia “Mexico needs both a fiscal reform and an energy reform,” stated Francisco Salazar. The President of the Comision Reguladora de Energia, Mexico’s autonomous downstream regulatory body, noted that an energy reform without a fiscal reform would result in an open, but very weak sector. “Mexico needs a strong NOC that is internationally competitive and enters into strategic alliances with other IOCs,” he added. “Of course you could open the energy market without doing a fiscal reform but it will be a waste of money and is probably not in the best interests of the country. On the other hand, a fiscal reform without an energy reform is a perfect recipe for inefficiency. You would not have competition in areas where it would bring efficiency; you would not have diversification of risk and there would not be sufficient investment. Even if PEMEX had more resources from now on, would they be willing to run all the risks by themselves? I don’t think so.” This underscores that the proposed fiscal reform is a step in the right direction, but not yet a giant leap forward for the Mexican oil and gas industry.

A legal perspective

Mexican law firms specialized in the oil and gas industry look beyond the fiscal reform to the potential energy sector reform that would have a much larger impact on their clients. “PEMEX’s monopoly restricts the development of the sector,” confirmed Marcelo Paramo-Fernandez, Partner at Haynes & Boone, a Texas-based international law firm. “Something had to be done to open up the industry to make it more reliable, productive, and efficient. You probably know that this issue has been a political battle and for us practitioners it is really frustrating. Political parties are looking after their political agenda rather than the future of the oil and gas industry, or the country. The people in general are not knowledgeable of the problems that this industry is facing, but want to keep the industry under the Mexican ‘national’ umbrella. It’s really unfortunate.”

“Mexico has a legal framework that is quite difficult to understand since parts of the law dates back to the 1930s and 1950s,” noted Jesús Rodríguez Dávalos, Founding Partner of Rodriguez Davalos y Asociados. For example, there is a regulation that states that PEMEX has a monopoly on the transportation of gasoline through pipelines, but the private sector can perform this function with trucks. “I think that we are going to see changes to the legal framework in the near future. Maybe it won’t be a constitutional reform, but Mexico needs a modernization of the law,” forecasted Mr Rodriguez Davalos.” I think the political will is there to make the essential changes to the legal and regulatory framework. This will make a lot of projects financially viable and bankable, projects that Mexico really needs.”

Jesús Rodríguez Dávalos, Founding Partner of Rodriguez Davalos y Asociados It is interesting to see how the different markets, such as natural gas, have matured over the years. “E&P in natural gas would attract greater interest from the majors if certain small changes would be made in the legal framework,” assessed Mr Rodriguez Davalos. “However, I think that the majors are first of all interested in offshore oil and gas exploration and production activities. I also see a lot of opportunities for small and medium sized firms to do E&P work in the north of Mexico and Tabasco. I think that we could see Mexican E&P companies emerge, as we have seen in South America. Today there is a very large group of Mexican companies that have been providing many types of E&P services to PEMEX. The next step for these companies is to move into E&P as Mexican juniors.”

In anticipation of reform in the energy sector that would open op these opportunities, law firms operating in Mexico will continue to support Mexican and international oil and gas companies in optimizing their development within the current legal framework, while keeping a close eye on the potential implications of an energy reform.

Being both partners and lawyers

“As in any human activity, you must have a lot of experience to be a good lawyer,” started Sergio Beristain Souza. In 1978 he started his career working at the Labour Court. Subsequently, Mr Beristain found a new challenge as an associate, and later partner, at one of Mexico’s established law firms, focusing on important civil, mercantile and administrative cases. While working on labour issues and dealing with the Labour Unions, he started developing a special interest for the energy sector. “In the years, that followed I really explored this sector through all the amendments that changed the energy sector over the past decades,” noted Sergio Beristain. However, it was not before 1999 that he founded his own law firm that is highly specialized in the energy sector: Beristain + Asociados.

Sergio Beristain Souza, Founding Partner of Beristain + Asociados “Lawyers practicing in this field could be divided between ex- PEMEX and ex-CFE lawyers on the one hand, and lawyers specialized in the civil, commercial, labour and administrative areas on the other hand,” he stated while explaining the market opportunity that induced him to create Beristain + Asociados. His firm, operating across the entire value chain of the oil and gas industry, strives to mix an energy practice with expertise in civil, mercantile administrative and constitutional litigation, thereby providing a complete service to the energy companies operating in Mexico.

Explaining his competitive edge, Sergio Beristain noted that the thirty years of experience that enable Beristain + Asociados to understand its clients can hardly be matched by former PEMEX lawyers who have a background in a different corporative culture. Sitting behind a desk in his Mexico City office, Mr Beristain emphasized that visiting oil fields, refineries, power plants and construction sites, as well as local authorities, around the country is essential to provide an optimal service to clients in the energy sector. “You have to understand all the aspects that influence the business of your clients and understand how they really work,” he elaborated. “When changes to the legal framework, or a new authority criterion, start to become a headache for our clients, then we are committed to developing a way to resolve these issues with appropriate solutions in accordance with Mexico’s complex legal system.”

As in any country, operating within the boundaries of the law is a prerequisite for long term success in the Mexican market. “We have the key to doing successful business in Mexico, without corruption and with all the benefits of the law and the legal protection that are available,” emphasized Mr Beristain. “I think that any foreign company operating in the Mexican energy sector could be successful if they have the appropriate legal protection and support. We already try to provide this to our clients. We provide solutions to feared issues such as corruption and the complexity of working with PEMEX, CFE, or the Mexican government. Our contribution is really enabling our clients to work in Mexico while avoiding serious problems in their most important projects. For me this is a very important contribution. In the end, we are both partners and lawyers for our clients.”

Using accurate data as a weapon

During his career as a chemical engineer, Javier Sanchez realized that globalization forces Mexican industry to be efficient and competitive, turning technology into an important tool to survive. Before joining OSIsoft, he was working as private consultant in the field of automation and advanced process control. At that time OSIsoft, previously Oil Systems, had already developed its PI System, a software product that gathers, archives, and processes operational data from automation and control systems for delivery to users at all levels of the company for process analysis.

Javier Sanchez, Country Manager for Mexico, OSIsoft OSIsoft is truly focused on real time platform infrastructure, while automation and process control companies design and build devices to control various processes, some of which require real time data coming from the plant floor. These applications run on top of OSIsoft’s software platform. “PI is robust set of software modules, running on Microsoft infrastructure, designed for secure plant wide monitoring and analysis,” stated Javier Sanchez. The collected real time information can be shared and integrated with other data sources, such as data from financial systems, ERPs or relational databases, to optimize real time decisions. Mr Sanchez, OSIsoft’s Country Manager for Mexico, explained that OSIsoft’s software platform for real time monitoring and analysis is split in three different groups: the server, the analytics and the visuals. “This data collection process allows for the use of accurate data as a weapon and enables our customers to continuously improve their business performance,” he boasted. Predicting problems is difficult because by essence, there might be multiple variables causing them. However, the benefits of preventing problems by using real time and historical data, forecasting, analysing the history of the data, are undeniable. These days, many oil and gas companies monitor their operations with PI.

OSIsoft has implemented its Real-time Performance Management (RtPM) system at PEMEX Exploration and Production (PEP). OSIsoft’s RtPM platform implementation for PEP provided this PEMEX division with the ability to continue to integrate additional products and solutions within the existing enterprise architecture. According to information provided by Microsoft, OSIsoft’s technology partner, the real-time operational data is collected from sensors on well-heads, compressors and pipelines and is integrated with information from control systems, consolidating all operational data into a single location. The RtPM platform at Pemex PEP is transforming millions of data points into powerful role-based information that can be analyzed by equipment, by well, by reservoir, by field, by business unit or by enterprise. This enables team members to access a “single version of the truth” for faster, better-informed decision making.

In addition, PEMEX DCO (Direccion Corporativa de Operaciones) is currently using our technology to monitor the performance of their pipelines, while PEMEX Refining has also implemented our systems,” noted Mr Sanchez. “At OSIsoft’s Annual Users Conference this August, these two PEMEX divisions will be giving presentations showing the way they use our technology and the benefits they have obtained.” In addition to giving presentations, this conference also provides OSIsoft’s clients with the opportunity to talk with representatives of other companies and check if they are heading in the right direction. “PEMEX is eager to know what is new in the market and looks for tools and technologies that may make their job easier and the company more competitive,” added Javier Sanchez. Covering not only Mexico, but also Central American and the Andean countries’ markets from his Mexico City office, he is destined to be a busy advocate of OSIsoft’s technology solutions over the coming years.

Chapter 1

Mexico: New Times, New Opportunities

Acting on the risk of a future without reform

“Imagine an airplane heading straight towards a mountain. We can discuss if we should go right or left, but we need to go around the mountain,” Senator Labastida Ochoa stated to illustrate the urgency of fiscal reform. As the President of the Senate Energy Commission – as well as former Minister of Energy, Minister of Agriculture and Minister of the Interior and runner-up in the 2000 Presidential election on behalf of the Institutional Revolutionary Party (PRI) – Labastida Ochoa is one of the key drivers behind the fiscal reform that he characterizes as indispensable. Senator Graco Ramírez, Secretary of Mexico’s Senate Energy Commission representing the Democratic Revolution Party (PRD), offered a wider context. “Back in the 1970s, PEMEX was a world leader in offshore exploration and production. The company was developing its own advanced technologies and other companies around the world were very interested in learning from PEMEX’s achievements. This company, which served as an international example for successful offshore exploration and production, today is in a very bad condition.” This perspective was echoed by Senator Labastida, “PEMEX is bankrupt, not because it is an inefficient company, but because the state has squeezed out its resources”.

It is important to note that the fiscal reform does not only have financial objectives, it also aspires to stimulate innovation in exploration and production and make the system more rational. “We are just adjusting a part of the fiscal system that is badly designed,” explained Senator Labastida before putting two examples forward.

First, there is an inverse relationship between the applied tax rate and the oil price in the current fiscal regime. For example, at a crude oil price of US$20 per barrel PEMEX will be taxed at 85% of production value, while at a price per barrel of US$28 the tax rate applied to PEMEX production decreases to 78%. “The taxes increase when the oil price goes down while all fiscal regimes in the world work the other way around,” explained Labastida. “It would be very good for PEMEX if the average tax rate would be lower; an average tax rate of 90% is crazy. The production cost per barrel of oil exceeds the after-tax revenue per barrel of oil.”

Senator Francisco Labastida Ochoa, President of the Senate Energy Commission Secondly, the fiscal regime states that PEMEX will be taxed based on a production target set at 3.500.000 barrels per day. Currently, PEMEX produces approximately 3.100.000 bbl/day, and is charged a 76% tax over the value of the 400,000 bbl/day it is not producing. “I don’t think you can find any country in the world with a fiscal system that taxes companies for not producing,” assessed Senator Labastida. “If charging a company for not producing oil is not Kafkaesque, then I do not know what is Kafkaesque.”

“The fiscal system has not been revised before because attempts to implement reform failed, but attempts have been made in the past,” Labastida continued. “This does not only go against the interest of PEMEX, but also against the interest of the country, against Mexico’s oil production level and against basic economic principles.”

“The current situation in the Mexican energy sector, especially in hydrocarbons, creates a serious risk for the stability of the energy sector and the Mexican economy. Last year, PEMEX was responsible for 38% of federal taxes, over 30% of state taxes and more than 20% of municipal income. If the oil production falls, and it has started decreasing, not only PEMEX will be facing a crisis but Mexico will also have a financial crisis at all three levels of government”, emphasized Senator Labastida. “I see the future of the oil and gas industry not just as a problem of PEMEX, but as a national problem that requires changes in many laws. We have to initiate qualitative change that will make PEMEX more competitive and at the same time serves as a catalyst of growth for the Mexican oil and gas industry and the country.”

Reaching agreement on fiscal reform has been a roadblock for recent Mexican governments, with the different parties in Congress unable to reach agreement on a means of easing the burden on PEMEX. According to Labastida, there is great suspicion in his party that the current fiscal regime and regulatory framework were designed to intentionally weaken PEMEX’s financial position. In an effort to bridge the gap of trust and move the fiscal reform forward, the opposition parties PRI, PRD, Convergencia, PVEM and PT proposed a model of the PEMEX fiscal reform calling for a one-time cut in taxes on the value of oil and gas production from 79% to 70%. This joint reform package was aimed at increasing the efficiency, transparency and productivity of PEMEX, while reducing the rigidity of government control over pricing policies in the public energy sector and facilitating cost reductions. “We focused more on what united us rather than on what divided us,” reflected Senator Labastida.

In response, President Calderon’s National Action Party (PAN) characterized Senator Labastida’s initiative proposing a one-shot tax reduction as unfeasible. Rubén Camarillo Ortega, member of the Senate Energy Commission on behalf of the PAN, put a counter proposal on the table, calling for a gradual reduction of the 79% tax rate which will not be unconditional. Instead, the PAN’s proposed tax reduction will be take the shape of fiscal incentives tied to productivity and efficiency improvements.

After several weeks of negotiations, all parties reached an agreement on the reform proposal outlining a cut in the tax rate paid by PEMEX on extracted hydrocarbons from the current 79% to 74% in 2008. Between 2009 and 2011 the tax rate will be reduced annually by 0.5%, and a final tax cut of 1% in 2012 will bring the tax on hydrocarbon production down to 71.5%. This reform proposal was unanimously approved by Congress on September 14 and by the Senate on September 17. The reform will now be sent to President Felipe Calderon to be signed into law as part of a broader fiscal reform package, marking a legislative victory for the President in a country where economic growth has long been hindered by its tax collection rate, which is among the lowest in Latin America.

Senator Graco Ramirez Abreu, Secretary of the Senate Energy Commission The tax reduction for PEMEX will amount to approximately US$2.75 billion in 2008 and is forecasted to reach between US$4.6 and US$5.5 billion annually by 2012. Under the terms of the reform, PEMEX will be obliged to utilize these additional financial resources for investments in E&P, infrastructure and research as opposed to operating expenses.

Importantly, the tax reform recognizes the urgency for PEMEX of boosting its technological capabilities to unlock Mexico’s deepwater reserves and optimize production in mature and marginal fields, through technology transfer and research and development investment. The approved fiscal reform contains a 0.65% tax on the total value of hydrocarbon sales, which will approximate US$5 to US$5.5 billion depending on the oil price, which is earmarked for research and development and represents a fourteen fold increase of the current investment level. As PEMEX goes beyond its historic E&P frontiers, moving from shallow into deep water while optimizing recovery rates in producing fields, this new R&D investment program will enable Mexico to decrease its reliance on imported technology. “It will enable Mexico to become leader in deepwater exploration and production in the medium term,” Senator Graco Ramírez concluded.

Dealing with the decline of Cantarell

In November 2006, Ramirez Corzo informed the Senate Energy Commission that the output at the Cantarell field was expected to decline at an average rate of 14% per year between 2007 and 2015. During that last month before Jesus Reyes Heroles replaced Ramirez Corzo as Director General of PEMEX on December 1st, Mexico’s national oil company produced 3.163 million bbl/day. According to PEMEX statements, crude oil production averaged 3.122 million bbl/day during the January-August 2007 period, which indicates that PEMEX has successfully stabilized monthly crude oil production during the first eight months of 2007.

It is important to note that reduced crude oil production of 2.84 million bbl/day in August cannot be attributed to the decline of the Cantarell field. As a consequence of Hurricane Dean’s trajectory over the Gulf of Mexico, requiring in the evacuation of 18,197 workers from platforms in the Campeche Sound, PEMEX shut down oil production for several days which resulted in reduced production totalling 10.8 million barrels of crude and 10.3 billion cubic feet of natural gas. PEMEX resumed offshore oil production after Hurricane Dean, but the decline of Cantarell will not be of such a temporary nature. The question is whether Cantarell’s decline will follow the 14% per year between 2007 and 2015, and if fields like Ku-Maloob-Zaap, Mexico’s most prominent deepwater discovery Noxal, and the under-developed Chicontepec area, will be able to offset the production decline in the world’s second largest oil field.

It is highly doubtful that PEMEX’s current exploration and production projects will be able to make up for the declining production of Cantarell in the short to medium term. In mid-September PEMEX reached record production of 606,538 bbl/day in the Ku Maloob Zaap field, which now produces approximately 19% Mexico’s total crude oil output, while Cantarell represents round 50% of total production. PEMEX plans to drill 12 new development wells in the Ku Maloob Zaap field in 2007 and has begun injecting nitrogen into the reservoir to boost production to 800,000 barrels bbl/day by 2010.

Deepwater production will play an important role in PEMEX’s future, as the company estimates potential reserves of up to 29 billion barrels of oil beyond the Gulf of Mexico’s shallow waters. Earlier this year, Carlos Morales, Director of PEMEX Exploration & Production, stated that his division will start to produce oil in deepwater wells in 2012, 2013 or 2014. While PEMEX considers deepwater production an important part of its strategy to compensate for the declining Cantarell field, it may not be able to rely on production volumes from confirmed deepwater oil deposits such as Noxal, Lakach and Tabscob for another seven years.

The Chicontepec basin, which stretches across the states of Veracruz, Puebla and Hidalgo, was discovered 90 years ago. However, this large complex of scattered onshore oil and gas reserves only recently became an area of focus for PEMEX after decades during which E&P activities were focussed on the lower cost development of reserves in the shallow waters of the Gulf of Mexico. In the long term, PEMEX has the objective of raising production in Chicontepec from the current several thousand barrels per day to 1.0 million bbl/day.

The launch of a significant E&P investment program in anticipation of the decline of Cantarell has been the foundation of the development of Ku-Maloob-Zaap, Chicontepec and Mexico’s deepwater reserves. “Since 2001 we have seen increasing investment in PEMEX, setting historical investment records, but we are now realizing that it has not been enough,” analyzed Adán E. Oviedo Pérez. Earlier this year, he gave up his position as Exploration Vice President of PEMEX Exploration & Production to become Director General of COMESA. Created in 1968 by PEMEX, COMESA’s mission is to focus on PEMEX’s needs. While the company has been dedicated to the acquisition of seismic data onshore and in transition zones over the past decades, COMESA is evolving into an organization that is able to perform almost similar activities to PEMEX Exploration & Production.

Jesús Reyes Heroles, General Director of PEMEX “Moving forward, the oil and gas industry in Mexico is not just a matter of money,” assessed Mr Oviedo. “We need to complement our capabilities and be able to attract new technology and know-how to deal with the big challenges that we are facing right now. These challenges are improving the recovery factor in producing fields, deepwater exploration and production, and the development of Mexico’s marginal and mature assets that PEMEX left behind 30 years ago after the discovery of large fields such as Cantarell.”

The potential of mature and marginal fields

Enhanced recovery and production from marginal and mature fields continues to grow in importance for the Mexican oil and gas industry. “Mexico and PEMEX must be able to develop a specific business model in each sector in order to maximize the country’s value generation,” recognized Adán Oviedo.

The fiscal reform proposed by the PRI, PRD, Convergencia, PVEM and PT also included an incentive to stimulate the development of abandoned fields: the introduction of a 20% tax rate for production in mature fields that have been closed for at least three years. This fiscal reform would apply to the 6,000 to 7,000 wells that have been shut and abandoned since the 1920s. Concerned about distortions in the application of this model due to varying well conditions, the PAN rejected this initiative and called for a more flexible approach to stimulate production in mature fields, taking into account that the cost of redeveloping a closed well is directly related to the point in time it was abandoned. In addition, a lower tax rate for mature fields will not necessarily incline PEMEX to invest in mature wells since the company will inevitably dedicate its limited financial and human resources to the fields that yield the largest return. As one of the largest oil companies in the world, the giant and supergiant fields on which will remain a key priority for PEMEX. However, the development of mature and marginal fields offers great opportunities for small companies, and COMESA will be focusing on developing a model for the efficient operation of these fields in Mexico.

Adán E. Oviedo Pérez, Director General of COMESA Historically, COMESA’s greatest strength has been its ability to acquire, process and interpret 3D onshore seismic data. Over the past decades, COMESA has conducted around 100 seismic studies for PEMEX. At the moment, its five crews consisting of 1,000 people each are acquiring 90% of the 3D seismic requirements for PEMEX. In order to provide integrated solutions to PEMEX, consisting of seismic data acquisition, processing, interpretation and reservoir analysis, COMESA also operates a large processing centre in Villahermosa. Recently, COMESA started participating in marine acquisition through alliances with WesternGeco, the Wood Group, CBM and CGGVeritas. “COMESA could serve as the technological arm of PEMEX; we could be a small and dynamic version of PEMEX Exploration & Production,” noted Adán Oviedo, “while PEMEX will concentrate on its giant activities and will place emphasis on the question how to face the deepwater and ultra deepwater challenge.”

Six years ago, COMESA’s board formulated the strategic intention to build on the company’s mission of complementing PEMEX’s capabilities by assuming a critical role in developing a model for bringing Mexico’s marginal and mature fields into production. “COMESA will go beyond the acquisition of seismic data and will get ready to operate small fields for PEMEX,” confirmed Adán Oviedo. In its ambition to diversify its activities and get ready to operate fields for PEMEX, COMESA is entering into technological alliances with different service companies in order to acquire the know-how and specific technology required to operate mature and marginal fields.

According to Oviedo, COMESA could possibly start operating a natural gas field in the Burgos Basin in the first quarter 2008. “This field is producing around 50 Bcf per day, but there is opportunity to increase this level of production based on current reserves and additional resources,” anticipated COMESA’s Director General. “Also we are visualizing an onshore oil tertiary field to go in by 2009.”

Adán Oviedo emphasized that COMESA’s main purpose is to provide integrated solutions adding value to exploration and production activities in Mexico. However, Mexico’s border will no longer be COMESA’s borders in the near future. “We have the ambition to be international maybe by 2009. The first in our internationalization process would be getting access to several onshore seismic acquisition projects in the south west Texas, as well as in Colombia and Peru. That is a completely new challenge,” he concluded.

An urgent focus on reserves replacement

At the end of last year, PEMEX’s proven reserves were 5.8% lower than a year before. During 2006, the company replaced 41% of production with new reserves, which marked an increase from 26.4% in 2005, but remains well below the 100% reserves replacement rate that will sustain the company’s production in the long term. Mexico’s reserves - production ratio equalled 9.6 at the end of 2006, which illustrates the urgency of increasing exploration investment. Earlier this year, the Director General of PEMEX announced that Mexico will reach a reserve replacement rate of 100% in 2012.

“We view this as an opportunity to help out PEMEX in its search for ways to improve the production, and not only offshore, because an estimated 40% of Mexico’s remaining reserves are onshore,” analyzed Ing. Ignacio Orozco Ortiz, Director General of PGS Mexicana. On December 31st 2006, 30% of PEMEX’s proven reserves were located offshore, while 46%of the probable and 51% of the possible reserves had been identified onshore. With 82% of current production coming from offshore fields, this indicates that Mexico’s onshore potential should not be underestimated.

The evolution of seismic studies in Mexico

PGS Mexicana is part of PGS Onshore, which is one of the three divisions of Petroleum Geo-Services.

“In September 2000, we started acquiring data in the Transition Zone in the Salina del Istmo Basin, close to Coatzacoalcos,” noted Ignacio Orozco, who joined PGS when the company decided to open a branch in Mexico in March 2000. Subsequently, PGS won several projects, both in the northern and southern regions of Mexico, and besides COMESA, it is the only company that is currently working on onshore acquisition for PEMEX.

In 2003, PGS Mexicana was awarded a vibroseis contract in the Burgos Basin for approximately 5,000 km2. Since then, PEMEX has been restructuring and its focus has been more on marine exploration in deepwater, rather than onshore basins. “There will have to be another exploration boom,” assessed Mr Orozco. “Exploration is very cyclical, and the cycle is going up for offshore. Mexico’s position in this cycle is traditionally 180 degrees off the rest of the world; hence we expect improvement in 2008 and 2009.”

PGS Mexicana anticipates a lot of work in the transition zone all along the Gulf of Mexico coast, where onshore and offshore operations need to be connected in an enormous area. We have ample experience doing transition zone jobs here in Mexico for PEMEX and are expecting big transition zone projects in 2008 and 2009,” stated Mr Orozco. “PEMEX is already looking into how to integrate the marine regions with the southern and northern onshore regions.”

While PGS Mexicana identifies other opportunities in fields such as Chicontepec, the company is currently aiming to capitalize on the increasing investment in offshore acquisition. This entails a joint approach between PGS Onshore and PGS Marine, a leader in the marine data acquisition industry. In 2002 and 2003, PGS already completed two offshore projects covering a total of 7,800 km2 in the Bay of Campeche.

Ing. Ignacio Orozco Ortiz, Director General of PGS Mexicana At the moment, PGS is conducting one of the biggest marine acquisition projects in the Gulf of Mexico. In this project we are applying a new methodology, the wide-azimuth technique, which is highly adaptable to deepwater projects. “It is likely that PEMEX will be looking to apply this technique here in Mexico,” added Ignacio Orozco.

Optimizing production through swabbing services

Generally, quantities of various fluids, usually water, are building up in oil and gas wells over time and decrease production. When swabbing a well, water that is disrupting hydrocarbon production is removed. This results in immediate productivity improvement. Although swabbing services are value drivers in both the well completion and production stages, nitrogen injection has become a valuable technique for the stimulation of the extraction of oil. PEMEX has reported a high success ratio when nitrogen is used to revive oil wells that do not respond to mechanical swabbing. However, another alternative has become available in Mexico over the past four years: hydraulic induction.

Juan Manuel Barajas (right) and Carlos Lugo Ramirez, co-founders of Petroswab Introduced to the Mexican oil and gas industry by Petroswab, in association with GOTCO, this patented technology offers a safer alternative to the mechanical version of this solution and has produced excellent results in other countries. In 2003, Juan Manuel Barajas joined forces with Carlos Lugo Ramirez to create Petroswab, which operates from its base in Poza Rica, an oil town in the north of Veracruz. “We decided to bring the technology to Mexico, therefore offering a unique, low cost service to the industry,” reflected Mr Barajas, Director General of Petroswab. “We are pleased to have discovered a new area full of opportunities in Mexico. Initially, we focussed on optimizing drilling activities in the exploration process, but currently we are also offering our services to raise productivity in producing fields with low pressure levels.”

Over the past four years, Petroswab has worked on 195 wells around Mexico, 95 being in Burgos Basin. “In 2004, we began working with multiple service providers such as Petrobras and Repsol in the Burgos Basin,” stated Juan Manuel Barajas. However, Petroswab considered its operations in the Burgos Basin merely as the first step towards convincing PEMEX of the advantages of its service.

This year, Petroswab has begun working with PEMEX in Poza Rica, based on a contract that runs from May 2007 to March 2009. “PEMEX has been very accepting of Petroswab’s technology,” declared Carlos Lugo Ramirez. “The installation of our equipment is completed in forty minutes and the entire job takes about five or six hours.” This implies that after six hours, PEMEX can benefit from increased production during, on average, 60-90 days after intervention.

At the moment, Petroswab is looking for additional equipment to take advantage of opportunities in the Chicontepec field, where Petroswab aspires to work on 700 wells. “The great thing is that PEMEX is trying to make this service permanent,” noted Mr Barajas. “This would mean that Petroswab is operating in a growing market for the next twenty years.”

In addition to the Chicontepec fields, Petroswab will be concentrating on expansion in the southern part of Mexico as well as offshore. “We are investing a lot because we know that what we are offering to the Mexican oil and gas industry has great potential,” boasted Juan Manuel Barajas. In this context, access to capital has become the largest hurdle for Petroswab’s growth.

Chapter 1

Mexico: New Times, New Opportunies

Staying on the production plateau

“We must preserve the inalienable and imprescriptible right of the Mexican State to directly control the nation’s petroleum resources, while also incorporating elements that would enable the maximizing of the utilization of the oil wealth and promote the long-term supply of energy required by the economy, in a sustainable manner, at competitive prices and at international quality standards.” This is one of the opening statements that create the framework of the Energy Sector Program 2007 – 2012, which was revealed on November 28, 2007.

This program is the energy sector’s point of departure for President Calderon’s Vision Mexico 2030. Three primary objectives were outlined in the Energy Sector Program, the execution of which is in the hands Mexico’s Minister of Energy, Georgina Kessel. First, guaranteeing Mexico’s energy security in the hydrocarbons area. Second, foster the oil industry’s ability and commitment to operating at international standards for efficiency, transparency and accountability. And third, increase exploration, production and transformation of hydrocarbons in a sustainable manner.

In addition, this framework for the development of the Mexican energy sector also provides an operational target, albeit with rather large target ranges. According to the Energy Sector Program, PEMEX should raise its reserves replacement rate from 41% in 2006 to a minimum of 51% by 2012, while the upper target is 100%. The targeted crude oil production in 2012 ranges from 2.5 to 3.2 million bbl/day, setting an upper margin that only marginally exceeds current production of 3.113 million bbl/day over the first ten months of 2008. On the other hand, natural gas production, 6.35 MMcfd, in October 2007, should range between 5.0 and 7.0 MMcfd in 2012. The PEMEX leadership has set more precise performance targets for 2012, including achieving a 100% reserves replacement rate, and crude production at 3.1 million bbl/day.

According to official PEMEX statements, the company requires resources in the order of US$22 billion per year in capital expenditure between 2008 and 2012, a vast increase from last year’s US$14.5 billion, in order to meet its ambitious objectives. However, over the course of 2007, PEMEX officials have mentioned capital expenditure requirements of up to US$33 billion a year to ensure that crude production remains above 3.1 million bbl/ day. PEMEX’s forecasts are largely in line with a U.S. government report forecasting that Mexico’s oil production would decline to 3 million bbl/day by 2012 before gradually bouncing back to a level of 3.5 million bbl/day by 2030.

Offshore production continues to dominate

To achieve its performance targets, PEMEX displayed a strong focus on its exploration and production activities throughout 2007, dedicating 86% of its CAPEX to this vital area. Mexico’s national oil company has made gradual progress in key activities of the E&P process through investments in 3D seismic acquisition, contracting drilling rigs and seismic vessels, increasing drilling activity, accelerating and optimizing the process of turning discoveries into producing fields, investing in the optimization of production from active wells, and evaluating the potential of increasing recovery rates in marginal and mature fields.

PEMEX estimates that approximately 54% of the prospective resources are found in the deep waters of the Gulf of Mexico, while approximately 34% of the prospective resources are located in southeast Mexico. Moreover, with 88.2% of current crude oil production coming from Mexico’s marine area, the country’s oil industry continues to be concentrated offshore.

Undeniably, the future of the Mexican oil and gas industry will be dominated by deepwater production over the next 30 years, as Carlos Morales, Director of PEMEX Exploration & Production (PEP), stated last summer. PEMEX estimates there could be up to 29 billion barrels of oil in the deepwater of the Gulf of Mexico. However, becoming a successful operator in deepwater will take effort, time, commitment, and firm determination, since PEMEX will not be able to enter into risk sharing agreements with NOCs or IOCs that possess the required deepwater technology and experience. PEP expect to start producing oil in deepwater wells in 2012, 2013 or 2014 from confirmed deepwater oil deposits including Noxal, Lakach and Tabscob. Also, according to Carlos Morales, PEMEX aims to drill 50 to 60 more exploratory wells in deepwater until 2012. In order to overcome the numerous challenges in deepwater exploration and production, as well as future developments in shallow waters, PEMEX is turning to the numerous Mexican and international service providers that have established a presence in the country or are preparing their market entry.

These service providers, particularly those dedicated to offshore activities, have played an important role in turning Ciudad del Carmen, nicknamed “The Pearl of the Gulf”, into a booming oil city. Founded in the pre-Hispanic era, Ciudad del Carmen subsequently served as a maritime centre connecting the Aztec and Mayan civilizations, was a trade hub between Spain and Mexico, and became a safe haven for pirates attacking the Spanish. In the mid 1970s, when the supergiant Cantarell field was discovered in the region, Ciudad del Carmen was transformed from a fishing and shrimping city into a oil hub for the offshore industry. In addition to still being known as one of the best locations to find seafood in Mexico, the city has become the home of the country’s leading offshore service providers and the centre of PEMEX’s deepwater activities.

José Ignacio Seara Sierra, Presidente Municipal (Mayor) of Ciudad del Carmen Ciudad del Carmen, located in the southwest of the state of Campeche, has over 200,000 inhabitants who refer to themselves as Carmelitas. In July 2006, they voted Jose Ignacio Seara into the mayor’s office, a position that he will hold until 2009. “Needless to say, the oil industry is one of the main drivers of the Mexican economy, but Carmen is much more than just an oil town,” stressed Mr Seara. “Carmen’s uniqueness goes beyond the oil industry, the beautiful landscapes and nature; the people from Carmen are making the difference.” People generally assume that oil and gas activities in the Gulf of Mexico are concentrated offshore, but much of its impact is felt onshore in Ciudad del Carmen. According to the city’s mayor, the outcome of a cost-benefit analysis shows that the advantages of Ciudad del Carmen’s economic development have outweighed the negative externalities. The spin-off effect of economic growth driven by the oil and gas industry has been significant. “Despite the decline of Cantarell, the impulse of deepwater activities is creating enormous opportunities to develop and improve the infrastructure in our beautiful city. We know what needs to be done,” he concluded.

Dedicated partner from cradle to grave

P.J. Ruckman, Director General of FUGRO Mexico As one of the world’s leading providers of geotechnical, survey, and geoscience services, Fugro has been among the frontrunners in riding the wave of opportunities created by PEMEX’s rapidly growing E&P investment. Founded in 1962, Fugro has approximately 11,000 employees working in over fifty countries. The oil and gas industry accounts for 71% of Fugro’s global turnover, and the company’s strategic focus in this industry is twofold: exploration for and development of new fields, and the optimisation of the production of oil and gas from existing fields. As a “cradle to grave” service provider, Fugro can be involved at different times and with different services throughout virtually the entire lifecycle of gas and oil fields over a period of 20 to 30 years. Overall, Fugro is a geoscience service company, offering field services that range from early exploration, including satellite imagery, basin technology studies and 2D and 3D seismic studies onto exploration drilling services including positioning and engineering services. Then, moving to platform installations, Fugro conducts seismicity studies including earthquake analysis studies and dynamic analysis of platforms. As well, the company provides reservoir software that allows its clients to better understand the processes ongoing during the life of the field.

While the company has experienced enormous international growth in recent years, the Mexican activities become a very important element in Fugro’s global business portfolio. Its decentralised and market-oriented organizational structure has been at the core of the decision to manage its Mexican operations from Ciudad del Carmen, the undisputed centre of the Mexican offshore industry, as opposed to Mexico City which historically has acted as a headquarter magnet.

“We are not a top down company,” confirmed P.J. Ruckman, Director General of Fugro Mexico. After having worked in the North Atlantic, North Sea, Mediterranean Sea, and off the coasts of China, Alaska, Africa and South America, P.J. Ruckman settled down on the Gulf of Mexico no less than thirteen years ago. The business culture in Ciudad del Carmen – where a select number of companies play a vital role in the success of PEMEX’s exploration and production activities – seems to be a perfect match for the outgoing Ruckman and Fugro business philosophy. “The various companies operating under the Fugro umbrella work independently and are allowed to operate in their areas of expertise,” noted Mr Ruckman. “One of the reasons I love working at Fugro is that the company gives autonomy to its local companies. This enabled us to concentrate on our core strengths: positioning, geophysical, geotechnical and seismic studies. It has worked out quite well.”

Certainly, the decentralization strategy has paid off handsomely for Fugro Mexico, which won two major contracts in 2007. In April 2007, Fugro was awarded a contract to perform geophysical and geotechnical surveys in the Bay of Campeche. This contract, valued at US$21.9 million, will be performed in partnership with Constructora Subacuatica Diavaz. In addition, Fugro started undertaking Mexico’s second largest 3D campaign, off the coast of Veracruz, under a US$82 million awarded by PEMEX last June. The company will acquire and process 3D seismic data of an area that covers approximately 7,200 square kilometres in the Anegada - Labay area of the Gulf of Mexico. For this flagship project, Fugro is bringing its newest vessel – the “Geo-Celtic’, which is currently the largest purpose built seismic vessel in the world – to Mexico. In combination with the study that is being conducted by Western Geophysical in the Temoa area, it is the largest study PEMEX has ever ventured into 3D and deepwater areas.

“PEMEX is being very aggressive in fast tracking these projects,” explained P.J. Ruckman. “Your typical exploration company would start with a 2D study, follow up with a 3D study and then proceed with drilling. In this case, PEMEX wants to fast-track the process, as a result of which our 3D studies will be finished completely by the middle of next year. PEMEX is going to be picking sites as quickly as possible, then it is a matter of going into the next phase of the exploration process by launching high-resolution geophysical studies, and we expect to do that next spring. If PEMEX finds sites of interest and can access the right number of drilling platforms, which is difficult, then you will see deepwater drilling in at least a dozen sites over the next couple of years.” Deepwater drilling is interesting in Mexico because both the Cantarell and Ku Maloob Zaap fields are located at less than 100 meter of water depth. “PEMEX is taking a great leap by jumping into 1000+ meter water,” analyzed Mr Ruckman. It is a very aggressive step and PEMEX is moving very quickly.”

“The Cantarell Field, the second largest oilfield in the world, has been a wonderful gem in the Mexican crown but it is becoming tarnished, so its time to start moving into deeper water,” assessed Ruckman. In the next twenty years, he sees Fugro working with PEMEX as it moves into deepwater, using the experience that Fugro gained in the last fifteen to twenty years by working in deepwater areas of the Gulf of Mexico, West Africa, and North Sea. “Worldwide, in deepwater, we are the leader in geophysics, deepwater geotechnical and deepwater oceanographic work and are bringing that into Mexico in order to support PEMEX in the new deepwater markets,” boasted Mr Ruckman. “There is no need to reinvent the wheel and this is where Fugro sees a bright future.”

PEMEX is pressured for time in its exploration activities since oil production has declined in recent years, while its reserves replacement rate has not reached 50%. On the other hand there is a worldwide shortage of exploration seismic vessels, which creates a strain on Fugro’s ability to allocate vessels at will to the Mexican market. “Unfortunately, PEMEX has the obligation to contract all services and supplies in accor- dance with the Ley de Adquisiciones y Obras Públicas, which makes the process highly complicated,” explained P.J. Ruckman. Basically, there is a delay of about 140 days between the time of publication of a tender and the moment PEMEX can legally contract a company. “Obviously, this makes it extremely hard for contractors to schedule vessels. But as of right now, supply and demand are pretty well balanced.”

Currently, Fugro is trying to build a sufficient number of vessels for the 2D and 3D markets, with the objective of positioning them in various regions and leaving them there. This is destined to save a lot of time and money in mobilization and allows the company to plan ahead. “In the coming year, we will have three vessels working in the Northern Gulf of Mexico and we will do everything in our power to make these vessels available to PEMEX as they become available. The plan is to leave these three vessels in the area,” emphasized P.J. Ruckman. In its ambition to bring all the Fugro business lines solidly into Mexico, Fugro’s internal competition for vessels and equipment might prove to be as challenging as the contest for mayor contracts in the Mexican market.

It requires focus to take on Goliath

Jose A. Aguilar, Director General of C & C Technologies With 450 employees worldwide, C & C Technologies is a niche player in the surveying business that has found innovative ways to compete with industry Goliaths like Fugro. Formed by Thomas and Jimmy Chance, it was not until two years ago that C & C Technologies began operations in Ciudad del Carmen. With high resolution geophysical surveying and positioning services as its core business, C & C Technologies found a strong competitor in Fugro, which was the leader in providing these services in the Mexican market. “We entered a closed market, the cake was already divided very clearly,” remembered José Aguilar. As the Director General of C & C Technologies’ Mexican operations, he had to identify new opportunities in niche areas of the market where his company could fill the gap between the established companies.

Since C & C Technologies does not have the same financial resources as the largest players, it has to compete on technology. “We are developing new technologies to survive, and we have been pretty good at it,” confirmed Mr Aguilar. “We realized a 35% growth of the business last year and we are planning to continue growing at this rate.”

Two internally developed technologies have been the basis of C & C Technologies’ success. “In the positioning market we are providing highly accurate position services to PEMEX, at precision levels that cannot be matched by our competitors. Our GPS equipment services, which is now applied on 80% of the vessels in Ciudad del Carmen, offer ten centimetre accuracy anywhere in the world, while our next competitor offers one meter accuracy,” boasted Mr Aguilar.

C & C Technologies’ star of the show is the AUV, the Autonomous Underwater Vehicle. “This is a submarine that does not require any cable connections to the vessels on the surface and can autonomously collect all kinds of data. Collected AUV data is processed on-board and charts are transferred via satellite to a secure website for the fastest possible turnaround of client data. This is critical for the construction of oil rigs and service infrastructure in deepwater ranging from 1,000 to 4,000 meters,” clarified Mr Aguilar. “This is our most successful technology and positions us a step ahead of Fugro, which is developing the same technology, but we are 50,000 kilometres of survey experience ahead of them. You can’t just go to the supermarket and shop for this technology.”

C & C Technologies is looking to apply its AUV technology to deepwater opportunities in Mexico as it is already doing in Angola and Brazil. Together, these three countries make up what Mr Aguilar calls the ‘golden triangle’. “Three of the exploration projects we were involved in last year turned out to be the deepest wells in the Bay of Campeche,” noted José Aguilar. “We have definitely been in the right place at the right time. Now, our main goal in Mexico is to capture 90% to 100% of the deepwater market. PEMEX cannot go through a trial and error process in deepwater, which will cost fifty times more than in shallow water. We will be there to help PEMEX in deepwater and save them big bucks.”

At the core of the E&P process

John Lawrence, Director General of ResLab Geos Mexico The key to PEMEX’s short term success is a heavy investment in optimizing production in currently producing fields. But eventually, long term success can only come from heavy investment in exploration. One of the companies that have capitalized on the opportunities created as PEMEX is acting on this reality is ResLab. Officially called ResLab Geos México, the company was created on 19th August 2005, when ResLab acquired a 51% controlling interest in the Mexican laboratory service company Geos. Nowadays, the company is part of the Weatherford group.

Operating from its well established laboratory base in Villahermosa, the company has become Mexico’s market leader in core analysis and geo-science. “There still are two competitors in the Mexican market, but we have the greater portion of the PEMEX work,” confirmed John Lawrence, who came in as Director General following the acquisition. “The opportunity that I saw in terms of this position in ResLab was a niche market for the provision of petrophysical and geological data from core analysis which was only previously covered by one other service company. The data obtained by this service is rapidly growing in importance for PEMEX as it accelerates E&P investment. “It is the only measurement of rock properties made directly on the rock itself. All other measurements are made by remote sensing, such as well logs, geophysics or seismic surveys. These measurements are required to calculate oil and gas reserves and production rates, as well as to enable the proper calibration of the remote sensing methods against real direct data. Clearly the accuracy of those calculations and calibrations is dependent on the accuracy of the data obtained, and core data is the most accurate data obtainable,” explained John Lawrence. “We saw an enormous opportunity to grow the service, so we attacked that area of the market and have done very well over the past two years.”

The financial and technologic resources provided by Norway’s ResLab enabled the company to overcome its main obstacle to growth: the lack of equipment. Prior to ResLab’s market entry, the majority of the work was sent to established labs outside of Mexico, which meant the in-country profit margin was very low, limiting growth potential. “ResLab supported its Mexican operations through the provision of new equipment through an ambitious investment program. Whereas Mexico was previously seen as a generator of sales for international labs, ResLab turned it into a business in itself. “We are building an entirely independent profit centre that is focussing on becoming the major lab in Mexico, and we hope that this lab will start to serve other countries in the near future,” assured Mr Lawrence.

Business growth should predominantly be driven by increasing volume from PEMEX. “There is much talk of vastly increasing the number of exploration wells that are going to be drilled,” noted John Lawrence. “Typically, an exploration well will cut three cores. However, due to the growing awareness within PEMEX as to the importance of the data that can be obtained from cores, demand for the service may well increase faster than the rate of increase in exploration.

Riding the wave of E&P investment

Pride International entered the Mexican market in late 2000 with one rig, when PEMEX came out with its first international tender for jackup rigs, which turned out to be a successful strategic decision since within one year activity slowed down in the US Gulf of Mexico. As one of the world’s largest drilling contractors, Pride International operates a fleet of 68 rigs, ranging from platform and jackup rigs to semisubmersibles and ultra-deepwater drillships. Over the past years, Pride International rapidly expanded its Mexico-based fleet as activity continued to increase and PEMEX has been paying a premium compared to the US Gulf of Mexico.

“Mexico accounts for a significant portion of Pride’s revenue globally, and PEMEX is probably the biggest customer we have,” recognized Alan Porter, Director General of Pride International Mexico. “We currently have thirteen jackups and two platform rigs in Mexico contracted to PEMEX.” While major players such as Diamond Offshore, Noble Drilling, Todco and Nabors Offshore have entered the Mexican market over the past years, Pride International has been the most successful contractor, operating the largest offshore fleet working for PEMEX.

Alan Porter, Director General of Pride International Mexico Over the last several years, Louis Raspino, President and CEO of Pride International, has significantly changed Pride’s strategic direction to position the company as a pure play offshore drilling company, focusing its growth on deepwater and other high specifications assets. In the Q3 2007 Earnings Conference Call, which Pride’s CEO called “one of the most significant quarters in the history of Pride”, the company reported major accomplishments toward its strategic objectives. Both the recent US$1 billion sale of the company’s Latin American landbased drilling and workover business and its E&P services business to Sāo Paulo-based GP Investments, and the success in capitalizing on the opportunities in Mexico featured prominently on Mr Raspino’s strategic agenda. While the US Gulf of Mexico market remained soft, Mexico continued its rise as an increasingly important contributor to the company’s financial and operating performance. With average daily revenue for its mat jackup and platform rig fleet in Mexico increasing as contracts are repriced, and the mobilization of the Pride Oklahoma and Pride Mississippi to Mexico from the US Gulf, PEMEX is an increasingly important customer for Pride International.

In the same November 1st conference call, Kevin Robert, Pride’s Senior Vice President for Marketing & Business Development, predicted that a lot of growth is still to come in the Mexican market. Based on his understanding that PEMEX is seeking approval for a $27 billion budget for exploration and production, Mr. Roberts assessed that during 2008 that PEMEX will maintain its existing fleet of 35 jackups while also increasing its jackup fleet by 6 to 12 rigs. “Some of the new requirements could be satisfied with mat rigs, so in addition to renewing the nine Pride jackups that will roll over in 2008, we are also hoping to move a couple of more of our US Gulf jackups to Mexico”, he noted. Louis Raspino added that when looking at the rig supply and demand, the obvious place for PEMEX to get jackups is out of the US Gulf of Mexico.

Going forward, Pride’s strategy to become a pure offshore player will be closely linked with its growth in deepwater, which also is the next frontier for PEMEX. However, Alan Porter emphasized that there is a lot work still to be done in shallow water areas, both in terms of boosting the production of Cantarell and pursuing the numerous new opportunities. “PEMEX is moving into deeper waters but for the moment our rigs are located in the Canterell field, and on other development and exploratory areas,” he stated.

Nevertheless, deepwater opportunities with PEMEX are gradually gaining prominence on Pride’s radar. “We are already the largest offshore drilling contractor in Mexico with regard to the number of rigs in operation, however, I would personally welcome the opportunity to enter into deepwater work here,” recognized Mr Porter. “PEMEX has awarded work for deepwater semi-submersibles to three or four different companies and they will arrive in Mexican waters in the next couple of years. We hope to see additional opportunities coming next year, though this will depend to a great extent on PEMEX’s approved budget for 2008.”

“Personally, I would love to have a different mix of rigs, have a presence in the deepwater market, and have an increasing number of Mexican nationals working with us,” continued Alan Porter. “Also, PEMEX is making a significant effort to improve its safety standards and working methods, and one of our main goals is to ensure that nobody gets hurt on any of our rigs. Most importantly, I would like our operations here to be recognised for our safety performance and operational abilities,” he concluded.

Getting modelling into fashion

Luis Garcia, Director General of Ecomecatronica As drilling activities are intensifying, PEMEX has launched numerous tenders for platform construction in recent years, while many more are in the pipeline for the coming years. The bidding process for platform construction contracts is highly competitive, attracting companies such as ICA Fluor Daniel, Swecomex, J Ray McDermott, Dragados, Grupo Protexa, Bay-Inelectra and Bosnor. “Most of the times, proposals are subject to interpretation. “But if PEMEX would require all proposals to include a 3D model, they are no longer subject to any interpretation; you are already seeing the platform,” assessed Luis Garcia. “I wish things would work that way.” As Director General of Ecomecatronica, a Mexican company specialized in 3D electronic modelling, he might not be running the only company that has started applying this technology in Mexico, but his company is a frontrunner in promoting it.

“Presenting a model before the constructing contract is awarded would enable PEMEX to revise and analyze a platform fabrication proposal in detail. The question is why PEMEX is only asking for an electronic model after the contract has been awarded. I surely think that the logic policy would be to include the model as a part of the proposal,” noted Mr Garcia. “This would help PEMEX to identify the best proposal, and will result in cost and time savings while offering increased safety and security performance.” However, Mr Garcia recognizes that the problem is that the companies participating in the bid would then have to invest in those models.

Unlike some years ago, nowadays every platform construction contract requires the preparation of an electronic model that provides a preview of potential risks and events that might take place. “The electronic modelling is a step in the process of finding the perfect design while assuring drastic cost reductions. Before a platform is constructed physically, an electronic model can be applied to develop an optimal construction and maintenance strategy right from your desk. Also, after construction, electronic models facilitate discussion between engineers without the need to interrupt the platform operations,” explained Mr Garcia. “An interruption of a couple of hours on a production platform results in lost profit that exceeds the cost of three electronic models.”

Economecatronica has developed ten models between 2003 and today, which has supported the organization’s growth from 20 people to 130 people. Currently, the company is developing electronic models of PEMEX’s two largest platforms in the Bay of Campeche. Even though there are numerous challenges and opportunities ahead in the domestic market, Ecomecatronica has initiated its entry into the Anglo-Saxon and European markets. In addition to its traditional services, Ecomecatronica also sees opportunities for the application of its modeling technology in the field of design engineering. “For this purpose, we aim to visit companies abroad and here in Mexico,” stated Mr Garcia “we would like to model the biggest plants or platforms in the world.”

Ecomecatronica’s ambitions are based on a firm belief that modeling technologies will become a constant in PEMEX`s future projects and tenders, as well as worldwide. “There is amazing potential in applying the software world to the oil industry. All great ideas begin with a dream, and whoever has the information and the way to interpret it, will always be ahead,” concluded Luis Garcia.

Chapter 2

Growth partnering in the drilling process

Garrett E. Browne, Director General Mexico for QMax The drilling fluids component of the complex drilling process is often a key success factor impacting overall process cost. Adding value to the customer’s drilling process through innovation and technology has been the core of the Q’Max business model since the company’s inception in 1993. Q’Max now operates in seven countries including Mexico. The company innovated a concept referred to as “Growth Partnering”. In essence this involved pursuing a win-win method of engaging with customers and creating a network of technical resource capacity through relationships with key disciplines, R&D facilities and chemical manufacturers. Q’Max develops solutions specific to the challenges presented in each of the geographical areas through R&D conducted in local laboratory facilities supported by the corporate R&D team.

Six years ago, after a previous experience in the Mexican oil and gas industry between 1989 to 1996, and several years working with Q’Max in Canada, Garrett Browne was selected to run the Mexican Operations and grow the company through offering innovative solutions to local challenges. His first priority as Director General of Q’Max Mexico was gaining an assessment of the opportunities available in Mexico for an innovative Canadian drilling fluids management company. “With PEMEX increasing it’s investment in exploration and production there were more challenges and along with it more opportunities,” Mr Browne stated. “For oil and gas operators, such as PEMEX, the drilling process is a key success factor.”

Q’Max’s challenge is to be the best at creating customer value, which can come in the form of reduced total process costs or increased revenue from reservoirs. “We create value by being the best at applying technology, product, and service to the customers’ drilling process through the components of drilling fluids, solids control and waste management,” he emphasized. “The challenges that operators have in consistently performing an effective and efficient drilling process become our challenges.”

Trusting in teamwork

Garrett Browne was quick to recognize that Mexico has an immense supply of talented, skilled and knowledgeable people and that the Q’Max asset was people. “Therefore it was an exciting challenge to find and acquire these skilled people, and create an organization with a unique blend of Mexican and Canadian culture and business philosophy,” he reflected. “Our people have proven to be technically innovative, advancing the science of drilling fluids and helping us to lead in bringing solutions to the industry.” For Q’Max to continue to grow its people need to grow, therefore learning and training are key elements. We operate a school in Mexico to train our field supervisors and to-date 60 Mexicans have graduated from this program, with another 20 attending school now. Each class of 20 students is selected from approximately 200 applicants who are generally qualified chemical, industrial, mechanical or electrical engineers.

Drilling in Mexico can be difficult. Challenges include deep wells, high pressures, high temperatures, and unstable well bores. To meet these challenges Q’Max has invested in a network of facilities covering all of Mexico’s oil and gas centers including total liquid storage capacity of over 10,000m3, mixing plants warehouses, offices, and laboratories. Employing over 350 highly skilled people in Mexico, Q’Max provides technical capability and capacity.

Always looking for problems to solve

Q’Max presently supplies both water-based and oil-based muds with densities ranging from 0.7 to 2.3 S.G. The company has a stable low density water-based system, which can negate the use of expensive liquid nitrogen, and/or avoid the huge losses of diesel when the Direct Emulsion systems presently used have too high a density, or there are massive losses because of drilling certain formations. “Also, we have an oil-based system that can be weighted to 2.7 S.G. using only barite, so we have more potential capacity than anyone else in the industry,” noted Mr Browne. “If Pemex ever has a really severe pressure problem, we can treat it, without requiring hematite. We are bringing real innovation to the market.”

Examples of new technologies being introduced into Mexico include a patented thermal desorption process for cleaning oil contaminated drill cuttings. The first model is designed for onshore application, however there is a potential for developing a model that can be installed on offshore platforms significantly decreasing the risk of spills while transporting contaminated cuttings to shore for disposal. The oil is captured for reuse and the clean cuttings can be used in land reclamation or other uses, which creates both economic and environmental advantages. We expect this technology could become the standard for managing oil contaminated waste.

Recently, PEMEX was introduced to a new technology referred to as the “Q’Clear” system that Q’Max is using in the Barnett Shale drilling area of Texas. This solids-free technology has resulted in reducing drilling times and costs significantly. We are working with PEMEX to determine the application potential in Mexico. Possibly it will help in making marginal wells profitable.

“The true measure of success is the customers’ willingness to continue to use you as a supplier. At the end of the day we see ourselves as an investment for the client. He invests in us, choosing us over our competitors, and we give him a better return on his investment,” Garrett Browne concluded.

Carmelita competitiveness

Ing. Luis León Suárez, Director General of CICSA When Rudesindo Cantarell, a fisherman from Ciudad del Carmen, discovered oil seeps in the shallow waters of the Gulf of Mexico in 1971, he did not yet know that he found the world’s largest offshore oil field. The first well drilled in the Cantarell field, named after its discoverer, produced 36,000 bbl/day. However, by 1980, PEMEX had drilled over 200 wells, and the Cantarell field was producing more than 1 million bbl/day. Representing the majority of Mexico’s oil production, Cantarell’s production peaked at 2.13 million bbl/day in 2004 before starting its decline to 1.35 million bbl/day in October 2007, a production figure that was negatively impacted by a series of storms that shut production. Over the past decades, oil production at the Cantarell field transformed Ciudad del Carmen from a fishing town into the centre of the Mexican offshore industry, changing the lives of the generation that followed Rudesino Cantarell.

The grandson of the legendary fisherman, José Jesús Hernández Cantarell, started working in Ciudad del Carmen as a welder in 1970. Around 1978, his welding expertise and professionalism attracted the attention of private companies offering services to PEMEX in the offshore maintenance sector. While working on offshore platforms, he began to realize the potential opportunities in serving the needs of PEMEX. In 1987, he became an independent contractor for PEMEX, initially offering anticorrosion maintenance systems and applications for a diverse set of structures for PEMEX and other companies in the oil industry. “His innovative skills, experience, professionalism, honesty and responsibility to provide the best service got him the recognition of PEMEX and it was then, when he decided to risk it all and pursue his dream, which he named Construcciones Integrales del Carmen SA de CV,” noted Ing. Luis León Suárez, the Director General of CICSA, who is running the company with Lic. Rodrigo Santos, the legal representative of Mr Hernández.

CICSA, established in 1995 as a 100% “Carmelita” company – a company owned and operated 100% by people from Ciudad del Carmen – as kept its original activities but added a range of new services for PEMEX. In the years that followed, the company became more aggressive and competitive. From its strategically positioned base in Ciudad del Carmen’s Puerto Pesquero, CICSA started developing its activities directly with PEMEX by winning public multi-purpose contracts for the maintenance of drilling equipment located on the platforms in Cantarell, Abkatun, Pol Chuc and Ku-Maloob-Zaap, the repair of monobuoys and the maintenance of platforms.

At that time, Mexico’s marine platforms started presenting signs of structural deterioration caused by salt water induced corrosion, which inclined PEMEX to initiate a campaign to counteract the increasing impact of corrosion on its offshore structures. In 1998, having obtained broad experience in these areas, CICSA decided to participate in the bidding process and obtained its first contract to provide corrosion protection services with the Olgui One, the first vessel in Mexico to be specially designed to offer sand blasting and painting services. Until the end of 2005, the company consistently provided anti-corrosion protection services to PEMEX through three vessels, the Far Swift, Far Scotia and Ang Tide.

Nowadays, CICSA is opening itself to new opportunities that complement its anticorrosion services, and has entered areas such as supply design, engineering, construction, maintenance and rehabilitation, logistics, accommodation services, ROV, surface and saturation diving, cable laying and consulting. “These developments illustrate our vision and ambition, noted Luis Suárez. “Therefore, we are currently 2008, 2009, 2010 and 2011 model vessels that will be arriving in Campeche starting April 2008. In anticipation of its clients’ future need, CICSA has invested in the first 500t crane in the Gulf of Mexico, aboard one of its vessels, and the first 18-man integrated saturation diving equipment on another of its vessels, while all of CICSA’s vessels have at least 199 beds accommodation and over 400 square meters of covered space for workshops and storage. “Our challenge is to combine high technology and low costs,” recognized Mr Suarez. “Prices are set by PEMEX and intense competition makes Mexico a challenging market. CICSA understands that and is ready to demonstrate PEMEX that we can meet and exceed their requirements and are ready to provide these services at lower costs.”

Its founder was once a well trained, experienced and hard working offshore welder who relied on his vision and commitment to transform a dream into what CICSA is today, one of the leading players in the Mexican market for offshore support services. Nowadays, the company’s ambitious management is looking for opportunities beyond Mexico’s borders. “We are investing in new alliances to keep CICSA competitive, and recently opened a new branch called CICSAMarine in order to develop our international presence, our international alliances and most important our international contracts. With this objective in mind, CICSA has signed long term contracts with companies such as OCEANTEAM Power & Umbilical ASA, Sealion Shipping LTD and REM Offshore ASA that will enable us to provide our services to PEMEX in the Gulf of Mexico and to other important clients in the US Gulf, Africa, South America and the North Sea,” confirmed Luis Suárez. Despite the international ambitions, CICSA’s Managing Director realizes that CICSA is destined to grow hand in hand with PEMEX. “Our development is intertwined with the development of PEMEX, and as Mexicans we strongly believe that PEMEX will succeed in its ambition to continue producing over 3 million bbl/day. Our responsibility is to the future of our client, and today, our client is PEMEX and therefore all the Mexican people”.

Svein Moxnes Harfjeld, CEO of BW Offshore BW Offshore is one of the world’s leading FPSO contractors. From its operational head office in Oslo, Norway, Svein Moxnes Harfjeld oversees its operations in with assets operating in Mexico, Nigeria, Mauritania and Russia. BW Offshore’s CEO gives his vision on the future of FPSOs in Mexican waters.

What is the competitive edge of an FPSO over traditional solutions in the current environment?

The competitive edge of an FPSO relates to numerous aspects of that application. If we take a step back and look at the characteristics of the areas in which new oil is being found, we can conclude that easy oil is history. All the new oil that is being developed is either in deepwater, remote areas, and harsh environments, while the product itself is typically heavy crude or complex gas components. In general, it is much more complex to develop new oil. In particular, when it comes to deepwater fields that are far from shore, the FPSO is a truly independent solution. It does not rely on extensive subsea infrastructure connected to shore such as other applications. FPSOs have storage and offloading capacity, full accommodation, all the production facilities, and can connect to the production wells at the seabed. Also, once a field is depleted it is relatively easy to remove the equipment and sail away from the area. FPSOs are really a turnkey solution, in particular for deepwater and remote areas.

How would you compare the safety of an FPSO with the safety of platforms and pipeline infrastructure?

This is directly related to the aspect of weather, and we have seen an increasing number of hurricanes in recent years. An FPSO with our own patented technology, a disconnectable mooring system, is superior in rough weather. The flexibility of an FPSO to disconnect when bad weather approaches and reconnect quickly offers various advantages. First, you have minimum disruption to production. Second, you have no damage to the equipment, which also reduces the cost for insurance underwriter. Finally, FPSOs are also superior on safety issues related to spillage and people. The FPSO Yùum K’ak’Náab, which is working for PEMEX, is the first FPSO in the Gulf of Mexico. This September, hurricane Dean passed straight over the FPSO during a period when PEMEX had to evacuate close to 20,000 people from its oilfield operations. The FPSO had no damage. This technology is new for the geographical region for the Gulf of Mexico, but it is well proven in a large variety of geographical areas, particularly in the North Sea, which is known for its extreme weather. We happen to own this technology that has an unparalleled track record in these types of conditions.

Who do you believe to be the main users of FPSOs in the future, the NOCs or IOCs?

Three years back, we made the strategic decision to increase the focus on NOCs and move towards NOCs representing the predominant part of our portfolio. This is driven by the fact that the NOCs today control close to 80% of the world’s oil reserves. Because of the high earnings of the NOCs, resulting from the high oil price. We are seeing an increasing tendency by the NOCs to contract technology directly from the service industry and use their own funding. Our strategy of focussing on NOCs has been quite successful. We have contracts with PEMEX, Petrobras, Petrobras, CNOOC, Rosneft and Statoil.

As you indicated, BW Offshore operates around the world. What are the specific challenges and opportunities that you have identified in Mexico since BW Offshore decided to enter this market?

The first challenge is that this is new technology for the Mexican shelf. A new contractual and regulatory framework had to be developed together with PEMEX. Putting this into place created a great workload for both us and PEMEX, which is a highly competent organization. I believe that PEMEX has been very brave in being willing to pursue this new technology which is very competitive for the needs that PEMEX has in the Ku-Maloob-Zaap field. As you know, the Ku-Maloob-Zaap consists of some very heavy crude oils. The unique feature of the Yùum K’ak’Náab is its ability to blend the heavy crude down to 13 API with a lighter product, so that we can create the commercially viable Maya crude. Alternatively, PEMEX would have to build substantial infrastructure onshore to blend these products. That would be much more expensive than the cost of an FPSO. Going forward, if the current reports are even only correct on a margin, PEMEX will have substantial reserves in much deeper waters. We believe that the FPSO will provide a highly attractive proposition for PEMEX once they move into deeper waters. The infrastructure that is currently available on the seabed in the Cantarell and Ku-Maluub-Zaap field will not be available when PEMEX moves out to 7000, 8000, 9000 and 10000 feet water depth.

Which opportunities do you see for the use of FPSOs in mature and marginal fields, and would BW Offshore be interested in participating in that area?

We believe that smaller, dynamically positioned FPSOs could be very useful for PEMEX in that respect. We have equipment like that, and we have been in dialogue with PEMEX on how to potentially employ these equipments in Mexico. We believe there is a market, and yes, we would be interested in participating in that.

Putting heart and soul in chasing a dream

Gabriel Delgado, Director General of Maritima de Ecologia While being a frontrunner in FPSO technology, BW Offshore has not been one of the driving forces behind the introduction of smaller, dynamically positioned FPSOs in the Mexican market. The development of this niche commenced in 1997, when the Cora – a well testing vessel and the first vessel of this category – was converted and began working for PEMEX. At the time, Gabriel Delgado was the project manager for the conversion the vessel, which was referred to as the ecological vessel.

Following this initial project, he came with the idea to place production equipment on a dynamically positioned vessel, to address problems in oil exploration and production, and try to provide a solution.

The main idea of the service to be provided in this niche came from the observation of the pollution problems that occur in exploration and production activities. “Basically, when you are completing, repairing of stimulating wells, all the petroleum products that are released are flared. Maritima de Ecologia (Marecsa) provides a service to process and dispose of these products in an environmentally friendly way, thereby avoiding the flaring of products as much as possible,” explained its Director General, Mr Delgado.

Marecsa’s vessels approach platforms to receive the products on board that would otherwise have been sent to the flare boom. This process has three main effects. One is the obvious environmental benefit. The second effect is commercial, because you are not flaring a commercially valuable product. The third impact is related to public image, which is increasingly important. Even though the concept sounds very simplistic, it took Marecsa almost five years, from 1997 until 2002, to get the first contract.

Gabriel Delgado’s ambition started to gain momentum after he attended a conference in 2000, where Antonio Ceballos, currently General Director of PEMEX Refining, overheard him talking about the mini-FPSOs with dynamic positioning. He called Mr Delgado aside and said, “I think you have a wonderful idea. Why don’t you develop it?”

At the time, he potential of this technology was underestimated, which Mr Delgado explained when comparing Marecsa’s solution, with what he calls “the way of the future”, with “the traditional way”. The traditional way has two options. One traditional option is flaring, which Gabriel Delgado describes as a disaster that really does not have a price, even though flaring is just like burning money. The environmental impact of the emission of millions of tonnes of carbon dioxide is really hard to measure in monetary terms, but if PEMEX flares 2,000 barrels of crude, it could have saved over US$ 100,000.

The other option is bringing a barge with three or four tug boats, and using a big hose to dump all the product into the barge before transporting it back to shore. If you compare the traditional way with what we are doing, our cost is about 25% of the traditional way. Also, there is also a clear time advantage. “We can run one test, one fluid reception stimulation every three days, while the traditional way takes about 15 to 20 days at least, if not more,” boasted Mr Delgado. “Giving rough numbers, a traditional test would cost maybe US$1,000,000. Our vessels, including personnel, costs about US$200,000 to US$250,000 per test; not including the cost saving in terms of crude and environmental impact. The direct cost savings are about 75%, while the cost saving on environmental impact is immeasurable. Sixty percent of the charter of our vessels is already paid by the crude oil that is recovered. It is already a success by numbers.”

Outflanking the competition on price – Marecsa does the job at 25% of the cost of the traditional way – the company was awarded the first contract in 2002. Subsequently, it took the Marecsa a year to convert the first vessel, and get her in operations in March 2004.

Chapter 1

Mexico: New Times, New Opportunities

Innovation is an opportunity

Private companies introducing innovative solutions from abroad continue to play an important role in the technological advancement of Mexican oil and gas industry, however, innovation in the industry has historically been supported by the Mexican government through the creation of a range of research and development centres.

Among these centres the Mexican Petroleum Institute (IMP) is the only one solely dedicated to the oil and gas industry. This institution was created 42 years ago with funding from the Government and especially from PEMEX. At that time there was a partnership between PEMEX and IMP, while today these are separate organizations. Over time, PEMEX developed an increasing need for services and the IMP was gradually becoming a service organization rather than a research organization.

“We decided to change that,¨ noted Dr Cinco Ley, before explaining that the current budget of IMP comes from the work performed, making the IMP self-sufficient. Last year, the first year of Cinco Ley’s tenure as Managing Director, the IMP budget exceeded US$300 million, of which only US$6 million came from Government funding. The IMP has become a business oriented institution, which has to support PEMEX through the commercialization of services and technologies,¨ added Dr Cinco Ley. The Fiscal Reform that was recently approved by the Mexican Congress and Senate is destined to make more money available to PEMEX for technology development, in which the IMP will undoubtedly play an important role.

PEMEX Exploration & Production has a business plan that outlines what they are going to develop, what they are going to find in the future,¨ explained Dr Cinco Ley. We know that PEMEX will need technology for deepwater development, enhanced oil recovery focussing both on secondary and enhanced oil recovery to increase production in mature and marginal fields, and different aspects of heavy crude oil management, including production, flow assurance and upgrading of heavy crude oil, and the development of the Chicontepec field.¨

The Chicontepec field has huge oil reserves, estimated at 140 billion barrels of oil in place according to Dr Cinco Ley, however this oil is difficult to produce. First, it is a low energy system with a very low permeability, which means that the well productivity is slow. Secondly, it is a very heterogeneous reservoir, so continuity will be a problem. Chicontepec is really a challenge because you have to add energy and need communication between different places in the reservoir when producing,¨ explained Dr Cinco Ley. Right now, the average recovery factor, if the Chicontepec reservoir would be produced in a natural way, is round 7-9% of oil in place. This is very low. We would like to apply new technology to raise the recovery factor to 15-18%, which would represent a large increase for Mexico’s oil production. The potential for successful research to, for example, increase in the recovery factor is really huge here in Mexico.¨

While the IMP aspires to be recognized worldwide for its expertise in mature fields, fractured reservoirs, deepwater and heavy crude oil, other Mexican research institutes are excelling in different niche markets. Twenty seven of such technological research centres across Mexico are part of Conacyt (National Council for Science and Technology), a Mexican government agency responsible for supporting, strengthening, and improving scientific and technological research and development.

Based in Saltillo, located in the northeastern Mexican state of Coahuila, COMIMSA one of the technological centers of Conacyt with the most industry interaction. Although COMIMSA is part of Conacyt, it does not receive any federal funding. Without self generated income, COMIMSA is dead,¨ recognized Ing. Jose Antonio Lazcano Ponce, Director General of COMIMSA. We are involved in both important technological projects and services for the industry, we are an enterprise and a technological research center.¨

Dr. Cinco Ley, Director General of IMP COMIMSA’s principal sales are to PEMEX, representing 85% of total revenue. Through different engineering projects the centre works with all divisions within of PEMEX throughout Mexico. We attend projects from our offices in Ciudad del Carmen, Villahermosa, Reynosa, Tampico, Monclova, Mexico City and, of course, from our Headquarters in Saltillo where our main laboratories are located. These include metallurgical, metal-mechanical, chemical and environmental impact labs,¨ noted Jose Antonio Lazcano.

Even though he noted that the IMP is very important for PEMEX, COMIMSA’s Director General emphasized that PEMEX requires more than only the work of the IMP and COMIMSA. Now is the moment for PEMEX’s restructuring. I believe we can guarantee the oil production, not for only the next 10 years, but for the next 40 years, but we need new technology and more money has to be made available for PEMEX,¨ he stressed. In order to do our part of the job as well as possible, we need to acquire additional technology from international companies and cooperate with the other Mexican technology centres and universities.¨ COMIMSA strives to identify the latest technology around the world, assimilate it, and transfer it to PEMEX. We do not pretend to invest resources in R&D to develop Innovation is not the product of logical thought, although the result is tied to logical structure.¨ As opposed to Mexico’s ancient civilizations the current generation of Mexican service providers are increasingly successful exporters of skills, experience and technology. know-how that already exists in the world. However, in very specific niches COMIMSA develops intellectual property to commercialize it with its customers.¨

Initially, COMIMSA was operating as IMIS (Mexican Iron and Steel Institute) and was focussed on the steelmaking industry. Its longstanding reputation as one of Mexico’s most important metallurgy labs has guaranteed a good human infrastructure in metallurgical engineering, and has positioned COMIMSA as one of the most important failure analysis labs for ferrous materials. Nowadays, its focus is on the oil and gas industry, with particular expertise in ensuring the security and safety of PEMEX’s installations. COMIMSA has developed a Risk Centered Maintenance System that has great potential for PEMEX, ¨ continued Jose Antonio Lazcano. By applying our software, and training PEMEX employees, this tool reduces the principal risk in our client’s processes by performing preventive maintenance. COMIMSA has implemented this model in seven or eight different PEMEX plants. ¨

Also, COMIMSA is involved in Environmental Engineering. For instance, the technology centre has developed a bacteria based solution for the cleaning of oil spills. Another important speciality is Manufacturing and Materials Engineering. Right now we are working in a big project for PEMEX, focussed on the restoration of critical components in turbines, ¨ added COMIMSA’s Managing Director. In addition, COMIMSA’s training courses for industry are certified by the American Welding Society. As the Mexican certification branch for the American Welding Society, COMIMSA can guarantee the training of people in the different plants and industries in Mexico, for PEMEX and private industry. ¨

Ing. José Antonio Lazcano Ponce, Director General of COMIMSA Ing. Lazcano’s ambition is to consolidate COMIMSA’s units all over the country, emphasizing a specific focus for each one. The COMIMSA Unit in Ciudad del Carmen will be focussed on deepwater; the Unit in Villahermosa will be focussed in Risk Centered Maintenance Systems; the Unit in Mexico City will concentrate on Projects Engineering; while the Unit in Northern Mexico continues to be specializing in Materials and Manufacturing Processes.

In the foreseeable future, COMIMSA anticipates that its large projects will continue to come from PEMEX. We plan to help industry to become more profitable, productive, and efficient. COMIMSA needs to do that because the country and the economy need PEMEX’s production, and we need to ensure enterprise, government and PEMEX are working together to implement changes and improve technologies with Mexican resources to ensure our country’s future growth and success. By improving PEMEX, we improve Mexico. ¨

Made in Mexico: product quality and customer service

PEMEX operates a pipeline network that stretches approximately 50,000 kilometres across Mexico. The fact that during 2007 this fundamental infrastructure has been a target for attacks that were claimed by a leftist rebel group V disrupting oil and gas supplies and causing hundreds of millions of dollars in damage to PEMEX V underscores the importance of the reliability of PEMEX’s pipeline network.

While international pipeline producers such as Tenaris Tamsa have established a strong position in the Mexican market for pipe production, Mexican players have developed into formidable niche players with ambitions that are already stretching beyond their national borders. One of the leading Mexican pipe manufacturers is Tuberia Laguna, a privately owned Mexican company based in Durango, in north central Mexico. My grandfather started the company in the early 1960s, after he arrived from Europe in 1939, when he realized that the area needed water for agricultural purposes, ¨ started Ing Eduardo Anaya Kessler. In 1976, he bought the Torrance Mill, which we are still running today.

When Eduardo Anaya graduated from university he decided to move back to his hometown and started helping in the business, which was then run by his father, Jesus Anaya Vera. Of course, over the years we have made large investments in new technologies, welding equipment and inspection methods. A lot of people say that a pipe is just a pipe, but, of course, we have to comply with the API, ASTM and ASME requirements, ¨ noted Eduardo Anaya. Our production process strictly follows the quality assurance procedures prescribed by the ISO 9002 standards. However, it is one thing to comply with the standards, but in accordance with our philosophy of uncompromising devotion to quality, we have tightened and improved those standards. ¨

Tuberia Laguna, which considers itself a middle-size company without limited financial resources, does not have an internal R&D department, as opposed to larger international competitors. In its quest for continuous quality improvement, Tuberia Laguna has become Technical Associate Members of the Pipeline Research Council International. I am proud to say that besides TenarisTamsa we are the only Latin-American pipeline manufacturer to become a Technical Associate Member of the PRCI,¨ boasted Mr Anaya. The PRCI has members from all over the world, and our goal is to learn about what is transpiring in the rest of the world. Our membership gives us the opportunity to stay up-to-date on the latest technologies and materials that are being used around the world to make pipelines safer, cheaper to operate, and more environmentally friendly. We want to bring that knowledge to Mexico to contribute to the success of our oil and gas industry. We know that PEMEX is investing a lot of money in these issues, but we want to help them a little bit by sharing this knowledge with them. ¨

Tuberia Laguna is equipped with extensive facilities including a complete metallurgical laboratory, state-of-the-art non-destructive testing equipment, and all the necessary inspection apparatus required to meet the most demanding specifications. For example, the API standard for flattening tests states that there cannot be any cracks at the weld if you press a pipe to 1/3 of its diameter. At present, we are able to do a 100% flatness test without a crack. That is something that we have been working on and it is an achievement that we are very proud of. The manufacturing concept of Tuberia Laguna emphasizes our commitment to quality at every step of the production process, ranging from the initial quality of the material, its chemical composition and physical properties to the final dimensional accuracy,¨ stated Tuberia Laguna’s Managing Director. We are trying to help PEMEX to tighten the standards and make sure that they realize that there is one Mexican supplier that can provide these types of products. Also, we are working closely with the Mexican Petroleum Institute to develop new specifications for pipelines that will help to make the industry safer.¨

Ing. Eduardo Anaya Kessler, Director General of Tuberia Laguna Since Mr Anaya joined in 1994, Tuberia Laguna has been reinforcing the relationships with its customers, developed its distribution network, and widened its range of target markets. Fifteen years ago we exclusively serviced our steel distributors, but right now they only make up about 25%-30% of our total market, ¨ noted Eduardo Anaya. For many years we did not optimize our market share and I felt that we were not being aggressive enough in servicing PEMEX and CFE (Federal Electricity Commission). In response, we started building a wholly-owned distribution channel, recruited a new sales force and tried to be more in touch with our customers. Over the years we have determined that inventory is the key part of our strategy and our customers value this as a great competitive advantage for us, ¨ he added. We made these early changes while we continued to be committed to maintaining and improving our high quality image in the market. ¨

Over the past seven years, Tuberia Laguna has witnessed an increase in PEMEX’s investment in pipeline infrastructure, which directly contributed to Tuberia Laguna sales growth of 18% in 2006. Eduardo Anaya is expecting a growth rate between 10% and 14% for 2008, which he expects to be fostered by the energy sector. Four years ago we invested in a coating plant for three layer polyethylene, which is a coating required in the Mexican oil industry. Right now we are investing US$15 million to prepare ourselves for the investment that PEMEX is announcing, ¨ put Mr Anaya. We are not only trying to help PEMEX by supplying the pipe, we are also developing other services such as inspections, cathodic protection and welding inspection. These are services that PEMEX requires, but very few companies are offering this complete package. In the future we want to be considered as a provider of complete solutions for pipelines. ¨

Transcending business

We did not only want to do business in Mexico, but transcend business. ADS Mexicana does not want to just be a pipe-producing company, but to be an example for others who can do something good for the future of our country. That is how ADS Mexicana was born,¨ started Ing. Juan Raigosa Valadez.

Juan Raigosa Valadez, Director General of ADS Mexicana The charismatic Director General of ADS Mexicana aspires to make a difference for Mexico and be a source of inspiration for companies with social responsibility ambitions. At a point during his 1992 to 1999 period as director of Bufete Industrial, Juan Raigosa was working on a project at a wastewater treatment plant at Piedras Ing. Negras, where he was captivated by the mechanical and chemical resistance of currogated pipe, and its potential as an engineering product. I was not only thinking how I could make business, but I also saw an opportunity to help Mexico with its contamination and sanitation problems, ¨ he reflected.

After hesitating to plunge into this new market, following a career long experience of working with concrete and PVC, Ing. Juan Raigosa decided to create a Monterrey-based company to introduce Mexican made corrugated pipe into the market. Corrugated pipe does the same job as other pipes, but with far less size and weight. With ADS’s technology, you can use a pipe that is much smaller, but corrugated, and which can compete with concrete or PVC in drainage, sanitary, and storm uses. The lack of service that the government was giving to the population caught my interest, because there is only 60% or 70% coverage in drainage in Mexico, ¨ he explained his entrepreneurial decision. ¡§I want to help Mexico to improve its environment and create a better life for the future. We can use this pipe to bring clean water to the Mexican population.¨

At that time, nobody was producing corrugated pipe in Mexico, it was all imported from the US. Juan Raigosa realized that if this product was competitive in Mexico while being shipped from the US at high transport costs, there was a great business opportunity. After conducting thorough research he presented this opportunity to potential investors, and found four suitable investors. As a firm believer in alliances, Juan Raigosa invited two potential partners for a joint venture after setting up a modern production plant. We decided on a joint venture with ADS, gathered information and performed due diligence, and signed a contract at the end of 2000. From there we have been seeing great success, ¨ he stated.

Establishing a distribution network consisting of people with an entrepreneurial mindset has been a critical success factor. As a result, ADS Mexicana’s distributors have been growing at the same speed as their supplier in the last seven years. We went from US$5m in sales in 2001 up to US$80m last year, from two corrugators up to fifteen currogators, from 32 people to 400 people, and from one plant to two plants, ¨ boasted Juan Raigosa. ¨ The rapid growth of ADS Mexicana, and its type of product, even caught the attention of former President Fox. He attended the company’s open house where he was explained that with the same investment you can lay more kilometres of currogated pipe than traditional pipe solutions. There are many small towns, in the mountains or far away from cities, without the opportunity to install drainage, and our goal is to train the citizens in these locations to install the pipe on their own. I send the pipe, they dig the hole, and they install it on their own. If we were using concrete pipes in this case, it wouldn’t work because concrete is too expensive in transportation and construction, ¨ stressed Raigosa.Our pipe is very light, 6 meter instead of 2 meter, and does not require a big crane for installation. The main savings are in the indirect cost of construction activities, because something that may otherwise take three months with traditional pipe can be done in two months with corrugated pipe. If you take all these savings, everyone can do more with this technology. Market opportunities are enormous and we could easily reach a turnover of US$200 million. ¨

Also, ADS Mexicana has started working with PEMEX. In the beginning the company was importing all the resin used to produce its pipe. We asked ourselves, if PEMEX is so large and produces resin and polyethylene, why aren’t they our supplier? ¨ remembered Juan Raigosa. PEMEX is now buying his company’s pipes and is destined to become an important supplier of raw material.

ADS Mexicana is constantly working on identifying and developing new technologies and technical solutions to find a more rational and efficient use of water resources. Ing. Raigosa believes water will be as important in the 21st century as petroleum was in the 20th century. The issue of water is not as critical right now, but population projections show that 70% of the rainfall in Mexico occurs where 30% of the population is located, and we are contaminating the water. With deforestation and urbanization, we are creating a difficult problem to solve 10 to 20 years in the future, ¨ he explained. I think that each company in its own position has to do something, not only by doing business but by taking its responsibility towards the Mexican people. Based on our intelligence and God-given capability we can do more, and the best way to do that is by showing that you take your environmental and social responsibility, while remaining very economically successful. To sum things up, I would encourage the President to set environmental and water resource protection in the top of the agenda, ¨ Ing. Juan Ragosa concluded. Innovation distinguishes between a leader and a follower. The advantages of Coriolis mass-flow measurement systems V simultaneous measurement of mass, density, temperature and viscosity V are self-evident. It comes as no surprise to find that this principle is used in a huge range of industry sectors, including chemicals and petrochemicals and oil and gas among others.

Chapter 1

Indonesia: Shaping a Competitive, Part 2

INDONESIA’S ENERGY SECTOR: MATURE BUT INNOVATIVE

Purnomo Yusgiantoto, Minister of Energy and Natural Resources Policymakers, executives and international investors have their eyes on how Indonesia’s oil and gas industry, which generates almost a quarter of the country’s $100 billion export base, can achieve sustainability and competitiveness, ensuring financial security and identifying new opportunities in one of the most underrated economies in Goldman Sachs’ Next Eleven. As the oil fields mature and more investmentheavy state-of-the-art technology is required for exploring further afield, the two main challenges ahead for Indonesia’s energy future are diversifying the resources and solidifying the country’s local equipment and engineering players. Purnomo Yusgiantoro, Indonesia’s Minister of Energy and Mineral Resources, addresses these opportunities in highlighting the country’s market structure: “Indonesia’s oil and gas sector will grow through a combination of companies foreign and local, big and small. The country is undergoing a similar evolution to what was seen in the United States and other oil producing nations, where an initial domination by the ‘Seven Sisters’ gives way to the emergence of aggressive independent risk takers and eventually to smaller niche players.

As a consequence, Indonesia’s O&G sector has become very competitive and full of companies of different shapes and sizes.” Of these different shapes and sizes, it will be those at the larger end of the spectrum – and their partners – which will be looking to capitalize on the industry’s most exciting and prospective areas in Eastern Indonesia, where deepwater exploration requires high capital investment but could offer high returns.

Acknowledging this is a great opportunity, Suyitno Patmosukismo, Executive Director of the Indonesian Petroleum Association (IPA), explains that “With the high price of oil (and followed by the high price of gas), companies are more than eager and able to invest”, and suggests that the main challenges to overcome in order to materialize this investment have to do with harmonization between a variety of laws, including areas in oil and gas, taxation, and forestry. Abdul Muin, Vice-Chairman of upstream oil and gas regulator BP Migas, comments on the organization’s commitment to creating a favourable investor climate. “BP Migas understands that frontier activities are very expensive and technically challenging to investors, and we are quite generous in giving incentives as long as the economics are viable for both parties.

Undoubtedly, in encouraging investors to explore the deepwater areas, we must give support, and BP Migas will be a strong yet flexible partner in consideration toward these activities.” Faced with questions regarding the industry’s sustainability, Minister Purnomo remains confident, stating that “compared to many other energy exporting countries, many of which only have important oil reserves, Indonesia is in a good position thanks to its abundance of different energy sources.” However, these sources – ranging from organic substitutes such as biofuels, to new potential in coal bed methane (CBM) – are not without their complications. While oil prices reaching $100 barrel encourage exploration for other options, roadblocks such as subsidies, high upfront investment, and lack of technological innovation hamper the development of domestic innovation. Regardless, Indonesia perseveres, and as Purnomo puts it, will continue along a path of “diversifying the energy sources in order to reduce the reliance on oil products for domestic energy consumption. The government is therefore encouraging a shift towards non-oil energy sources which are fortunately numerous and abundant in Indonesia.” A need to ‘fuel’ the alternatives Indonesia is at a crucial juncture: its growing economy needs to satisfy its thirst for energy. In looking towards different ways of pleasing its power demands, Purnomo clearly articulates his country’s alternative fuel potential: “Indonesia is a country that is rich in fossil fuels but we are encouraging diversification into alternative energy sources. The main obstacle to the development of renewable resources like geothermal – with a potential for 27 000 MW and current level at only 800 MW – and biofuels is actually the subsidy system for petroleum products, which makes it very difficult for these alternative energies to be competitive on the market. This is an issue the government is addressing through fiscal incentives and other mechanisms, in order to allow the country to tap into its full range of energy sources.” Despite long-term plans to reduce subsidies and reform the system, constant delays coupled with soaring fuel prices have resulted in a significant – and controversial – burden on state budgets. Many critics blame the subsidy’s cash drain for shortfalls in much-needed investment for infrastructure, education, and poverty alleviation. Initial estimates of 2008’s total subsidy cost of 45.8 trillion rupiah ($4.9 billion), based on lower historical prices, have been revised to upwards of 106.2 trillion rupiah ($11.60 billion), reflecting the actual expected cost of maintaining state support in a bullish energy market. Although Purnomo contends that skyrocketing energy prices provide a positive windfall for the economy, many experts warn that even in this context, the fuel subsidy is unsustainable. James Castle, who has spent over 30 years in Indonesia as an economic advisor and Director of market entry strategy consultancy CastleAsia, explains: “The minister is correct in saying that the numbers are net positive, but this balancing act comes at a huge cost because of large subsidies for domestic fuels. The subsidies are fiscally sustainable at current prices but not wise, and tremendously distortive. They are one of the key reasons the sector has not grown domestically.” Although the government’s hesitation to change politically sensitive subsidies discourages broadening Indonesia’s energy horizons, eventual change implies a strong hope for the future. According to Purnomo, “based on our current situation and Indonesia’s natural resources potential, the government has elaborated a target scenario for the national energy mix in 2025 that would consist of: 33% coal, 30% gas, 20% oil, and 17% renewable energies (of which 5% geothermal, 5% biofuels, and the remaining 7% a combination of biomass, nuclear, hydro, solar, and coal liquefaction). That is the goal towards which we are working, through 5 year programs gradually developing the different energy sources in order to make the scenario a reality.”

Biofuels, a feasible green solution?

Indonesia’s rich biodiversity and vast potential for the development of biofuels is a tempting apple for national and international actors. The authorities know this and are keen in developing strategy and incentives for investment. Companies have been lining up to negotiate deals for the development of biodiesel and bioethanol projects in Indonesia, following the inclusion of biofuels with 5% of the targeted Energy Mix for 2025 and the Presidential Instruction No. 1/2006 on the provision and utilization of biofuels as an alternative energy source. The government’s commitment to biofuel development has also resulted in the creation of the National Team for Biofuel Development (BBN) charged with expediting the country’s adoption of biofuel. Al Hilal Hamdi, Chief Executive of BBN, points out that in January 2007, “60 commitments were signed by investors for biofuel projects worth about 12.4 billion dollars.

Since then, a few more have been signed, and here at BBN we are constantly receiving potential investors interested in learning more about the opportunities”. Seven local banks and several foreign financial institutions such as the Japanese Bank for International Cooperation (JBIC), the Interamerican Development Bank (IDB) and the French Development Bank (AFD) have all committed to give financial support to biofuel programs in Indonesia. In Hamdi’s view, biofuel development can offer a complete solution to the ‘triangle of challenges’ which Indonesia and so many other developing nations face: energy security, poverty and environmental deterioration. As ideal as all of this seems, actually implementing the policy for biofuels in a country as vast and complex as Indonesia encounters many challenges.

“Although initially there has been a very big interest in biofuel development from companies from the industrial sector, given the uncertainty and slow pace of progress in regulations this excitement is likely to diminish”, says Donny Winarno, Vice President Corporate Sales & Marketing of Molindo Raya Industrial, a leading ethanol producer in Indonesia. Other important obstacles include large scale availability of feedstock, lack of adequate infrastructure, and, in the case of biodiesel, soaring cost of crude palm oil (CPO). Nonetheless, Molindo Raya is actively developing its bioethanol business in the country and sees enormous growth opportunities once the regulatory framework for the sector is settled. In fact, Molindo Raya is a pioneer in biofuel production in Indonesia since 2004, which allowed it to become supplier of choice for Pertamina’s (Indonesia’s state oil and gas company) “Pertamax” blend (including 3.5-5% ethanol). Volumes are still relatively small as it has to coexist with the highly subsidized regular fuel at the pumps, but as the government phases out the subsidy over the coming years Pertamax should gain in competitiveness. With plans of building at least 2 new ethanol plants by 2012 in Indonesia, “Molindo Raya wants to continue as leader in ethanol and be at the forefront of biofuel business in Indonesia. This is a global and irreversible trend; therefore biofuels are destined to become a part of life for everyone around the world”, concludes Winarno.

The alchemy of CBM: turning coal into gas

Hadi Purnomo, Director Lemigas The magic formula for energy sustanability is diversification of power resources, and many in the Indonesian government see CBM as potentially one of the country’s main alternative energy sources of the future. Despite its strategy to divest non-core business units, Pertamina has decided to keep its geothermal activities and is betting on the development of CBM. CBM is a relatively young industry and scientific understanding and operations are in the early stages. To attract investors, the government is offering a split which is different from oil and gas contracts, depending on the areas and particular conditions. Pertamina is working on a CBM pilot project in South Sumatra with Shell and the support of the Indonesian Research and Development Center for Oil & Gas Technology (LEMIGAS). Hadi Purnomo, LEMIGAS director, considers that CBM potential in Indonesia is very promising, “as it will increase national gas reserves and contribute as an energy backup in the near future. The development of CBM will also be of great economic, social and ecological benefit”.

As the leading R&D institution for the oil and gas sector in Indonesia, LEMIGAS has been contributing to the country’s energy development since 1965. It conducts applied research in a wide array of areas in both upstream and downstream, providing the government crucial technical and scientific input so that it can make the optimal policy decisions. LEMIGAS also plays a key role by helping solve industrial problems, developing new technologies and acting as an independent arbitrator when technical differences of opinion arise between the government and O&G companies (or among themselves). With 70-80% of Indonesia’s oil producing fields at a mature stage, LEMIGAS is focusing much of its attention on helping companies optimize production through Enhanced Oil Recovery (EOR) technology. To this end it is actively partnering with local and foreign players in order to advance R&D for different techniques in the field, such as an initiative with Japan’s Sojitz Corporation to develop CO2 injections for EOR. Another example of cooperation is with Petrochina’s Research Institute of Petroleum Exploration and Development on technological services and field implementation of chemical injections for EOR. LEMIGAS is also collaborating with Heriot Watt University on flow assurance and natural gas hydrate technologies. Although LEMIGAS is a public institution with obligations towards the government, it also has business activities and is independent to a large extent in its growth strategy. LEMIGAS’ capabilities span a broad range of services in exploration, production, and gas processing and transportation. As Purnomo is quick to highlight, “we provide services for industry clients, which represents about 30% of our current revenues and is increasing. LEMIGAS aspires to take this number to 40% in the near future”.

Stepping on the gas…

Chris Phillips, President and CEO of Vico VICO, the third largest production-sharing contract operator in Indonesia, has also smelled gas. “Looking toward the future, the investment VICO is making in the existing reservoirs is good, but we started to wonder if there was anything else out there. In 2004 we started to recognize CBM potential, and subsequent studies revealed that VICO actually has the highest and best potential in Indonesia, in the Sanga-Sanga block. Every single well drilled in the block passes through a layer of coal containing gas. VICO knows the gas is there, and believes is present in considerable volumes,” says its President and CEO, Chris Phillips.

VICO Indonesia, the brain child of European giants BP and ENI, is interested in developing an alternative resource, with the view to quickly boost production and revitalize a company whose PSC is up for renewal in 2018. With the 1972 discovery of gas in Badak, VICO solidified its position at the forefront of the Liquified Natural Gas (LNG) industry, and initiated the trend towards Indonesia’s leadership as an LNG exporter. Currently a 50-50 joint venture between BP and ENI, VICO’s primary asset is East Kalimantan’s Sanga-Sanga block, with over 500mcfpd expected gas production in 2008, which confirms the company’s expertise of onshore gas in East Kalimantan. “We manage the whole pipeline production system for all of East Kalimantan, all of Total’s and Chevron’s production, and we are a 20% owner in PT Badak, which operates the Bontang plant,” referring to one of the world’s largest LNG plants, with a capacity of over 20mtpa, and a sizeable production record of over 227 million tonnes of gas exported to countries like Japan, Korea, and Taiwan.

Raw amounts notwithstanding, there are other factors at play in determining the feasibility of gas extraction from layers of coal hundreds of meters below ground. Third-party geological surveys have concluded countrywide reserves exceeding 450tcf of CBM potential, but this figure is highly susceptible to variation associated with high development costs and unattractiveness of greenfield developments. “The real challenge with CBM is how permeable the coal is, and whether gas is producible in economic quantities and rates. Generally, coal needs to be dewatered before gas is produced. This has two unfavourable consequences, of environmental concerns as well as large upfront expenditures,” Phillips notes, underscoring the challenges associated with the possible developments. However, despite potential downsides, Phillips is quick to counter. “Unlike gas production from conventional sands, CBM output tends to increase with time as water volume goes down. VICO realizes there is a lot of opportunity, and has been lobbying the government over the last year, making it known that we are ready to bring CBM aboard. VICO believes it can go into testing, appraisal and development of CBM very quickly. What is important is that the marketplace is hungry for gas, and will be desperate for gas in the next 10 years. Anything VICO can bring to the marketplace is going to be beneficial for us, but more so for Indonesia. In the end the country will always benefit more than the contractors.”

Indonesia’s Equipment Needs:

The right technology at the right time As the oil and gas sector goes through a global boom thanks to record-high prices and strong demand from large emerging markets, companies like VICO are increasingly turning to technology in enhancing operations across operations. Maximizing production from ageing fields “is the kind of area where VICO has an advantage in innovating with new ideas, and involves a new, different, and smarter investment,” says Phillips. “Indonesia as a country is less a place of testing new technology, and more a place of implementing new technology, such as horizontal wells, cluster wells, and fracturing, which is currently in trial and could provide further reserves from deep in VICO’s reservoirs.”

Hakam Bergstrom, Director Atlas Corporation Indonesia Likewise, the world’s supplying industries are building up specialized capacities in order to service this lucrative sector. Indonesia’s long history in oil and gas and the open nature of its upstream in particular have allowed for all of the major technological leaders to establish their presence and compete for business and establish partnerships. Though considerably affected by the financial crisis and instability of the late nineties, companies such as ABB, Endress+Hauser and Siemens have rebuilt their operations in the country and are paying special attention to opportunities across the value chain of the Oil & Gas sector. Similarly, the Belgium-based global provider of industrial productivity solutions, Atlas Copco, feels that after China and India, it is time to put Indonesia in the spotlight. This enthusiasm is based not only on the country’s large population and high levels of growth, but also on the dynamics of the mining, oil and gas and raw materials sectors. Though originally more concentrated on the industrial sector, in 2006 Atlas Copco decided to focus on the oil and gas industry. “Our products are already well known in the international O&G sector and our achievements in terms of quality and environment are acknowledged. This is not yet the case completely in Indonesia O&G industry where we are relatively newcomers, so our chances of success with contractors are higher among foreign firms for the moment”, says Hakam Bergstrom, Director of Atlas Copco Indonesia. Well aware of the fact that the compressor market is very competitive, Bergstrom stresses that, “what makes Atlas Copco the world leader in compressor technology and a preferred partner is that we place our brand name and responsibility behind every single action we make, moreover we can always count on the backing and resources within the Atlas Copco Group”.

Atlas Copco has already worked with major oil companies in Indonesia such as Chevron, ConocoPhillips, CNOOC, BP and Total. In the context of the company’s focus on the O&G sector, it is offering clients custom design for special requirements, collaborating with both its global and local engineering centres, and increasing its local staff. Bergstrom points out Atlas Copco’s special rental service division, “which is moving from the common market to more sector-specific niches. This shift is driven in particular by the Air Power special rental models division in areas like the US, and also through acquisitions of other companies working in the field”. Indeed, Atlas Copco’s current strategy combines both organic and external growth, all while striving to keep everything related to its core business in-house. “Our main challenge today regarding the oil and gas sector in Indonesia is to live up to the reputation already obtained in other industries through decades of satisfying customers”, affirms Bergstrom.

Now a company active in all the major markets around the world, Atlas Copco’s challenge is to maintain its culture and high standards regardless of location, all while adapting to the specificities of each country. “We still have some hard work to do before we can claim our position as #1 service provider in Indonesia, so our challenge is to be there within 3 years”, says Bergstrom.

Turbines, the industry’s motors

Indoturbine, created 35 years ago following a swell in the Indonesian oil and gas industry, is riding the crest of another wave, supporting major PSCs such as Total E&P Indonesie, Hess, and Kangean Energy Indonesia. Offering insights on the impact of this momentum for local equipment players, Wantya Sapardan, President Director of Indoturbine, remarks: “The oil and gas industry is very cyclical, and Indoturbine is proactive in terms of anticipating market changes. Indonesia’s growth tends to be delayed by a year or two compared to the rest of the world, which means that although momentum in global oil and gas sectors started in 2003, Indoturbine began seeing substantial substantial growth from 2005 onward. The upside of this delayed reaction is that by starting late, Indonesia also finishes late, and therefore while global markets may be currently poised for a downturn, Indoturbine foresees strong growth through 2009.”

As the exclusive Indonesia distributor of Caterpillar’s Solar Turbines brand, Indoturbine has, since its inception, “continuously developing the scope of Solar Turbines in Indonesia, through after-sales service and maintenance support, and investments in inventories and repair facilities,” including turbine overhaul and compressor repair and re-staging services in Bandung, which Sapardan summarizes as providing his clients “on-site, high-quality local service offers easier access to equipment, reduced turn-around time, and ultimately cost savings.” In addition to traditional competitors like Siemens, GE, and Rolls Royce, companies like Indoturbine are facing rivals from upstart China, undercutting on price and emerging as surprisingly competitive in materials technology. However, Sapardan remains confident that potential clients are more concerned with factors other than price, noting “Indoturbine has been in business since 1973, which gives us the edge over our competitors in terms of local support. We can offer a complete package, from understanding client needs at the outset, through to installation, testing, and after sales support with operations and maintenance. In achieving our vision to be recognized as a valued partner in the energy and industrial development projects throughout Indonesia, Indoturbine strives to become a solution provider that delivers the best product alongside a full range of maintenance and repair operations.” In fulfilling such on-site services, Sapardan notes that Indoturbine has “17 specialists in-field who can carry-on small EPCM projects for installation of compressors. These Indonesian engineers provide the local content mandated by the government, so that while the technology may not be sourced locally, the knowledge that goes into the after-sales support and engineering services is 100% Indonesian.” Establishing such a base of local Indonesian talent does not come easily, and Sapardan echoes an industry consensus of difficulties in recruitment and retention. “If companies in countries like Qatar, for instance, want to pay Indonesian engineers higher salaries, there is no way Indoturbine can match their offer. However, there are factors other than salary when engineers choose where to build their career. Indonesians are loyal to their families, their culture, and country, and moving to Qatar may not always be the most attractive option when all elements are taken into consideration.”

Commenting on the domestic opportunities present for companies like Indoturbine, Sapardan concludes, “Indonesia lacks energy infrastructure, so in addition to continued diversification of our activities toward different services is our goal of becoming a true Energy Solution Provider. Clients do not want to buy a gas turbine compressor or a gas turbine generator per se; they need to move oil or gas from one point to another point, or they need electricity, and Indoturbine can provide it.”

EPCM, Indonesia’s other frontiers

Smaller local Indonesian engineering companies are also seeking to conquer new frontiers to thrive in the energy market, or so says Triharyo Indrawan Soesilo, President Director of local EPC company PT Rekayasa Industri: “the first is offshore construction, which is a very challenging sector still dominated by foreign companies; and the second is related to the machines and equipment we need to import, an area in which industries and engineers in Indonesia should work together so that the country can become more selfsufficient in terms of capital goods for oil and gas projects”. According to Soesilo, the global boom for EPC business made many international companies focus on the most dynamic regions such as the Middle East, therefore leaving more space for local companies like Rekayasa to take on projects in Indonesia. Already used to competing with big international EPC players in Indonesia, Rekaysa is also learning from their experience in order to project itself overseas. The company has been involved in some of Indonesia’s most important projects all over the value chain of the oil and gas industry for decades, and has been a pioneer in areas such as geothermal and biofuels. Currently its main activities focus on upstream energy projects such as geothermal, coalfired power plants, as well as facilities for gas compression and distribution.

In downstream, it is working on several projects with Pertamina on the revamp of existing refineries and lube oil blending plants. In addition, the company is participating in biofuel projects with Medco (bioethanol) and Wilmar (biodiesel). BP Migas’ Abdul Muin concurs with Mr. Soesilo’s comments, noting the importance of equipment and associated regulations to EPCM companies, stating “BP Migas and the Department of Energy are very aggressive and the response from other departments is also very good in this regard. Upstream business prospects are very promising, and with continuing improvements in government regulation and a spirit towards improving investment climate, it’s a good beginning.” This optimism is shared by many EPCM companies, and PT. Dwisatu Mustika Bumi (DMB) is no exception.

Created in 1993, DMB has quickly moved up into the ranks of major Indonesian marine-offshore companies, participating in correspondingly larger tenders as a result. With increased oil prices creating interest inreactivating newly-profitable oil fields, and a $21 million contract with BP, DMB has carried this momentum forward by recently launching a project with Pertamina to build the $42 million Balongan oil terminal. Elaborating on this latter contract with Indonesia’s NOC, Chairman Halim explains, “For this project, DMB is building two offloading offshore terminals, what we call single point moorings (SPMs), and a pipeline to the shore. Onshore, DMB is building a tankfarm with all associated equipment. Additionally, the project required a custody transfer facility, because from Balongan oil is transferred directly to Jakarta due to congestion cutting off intake points. As there is insufficient space in Jakarta, DMB built this facility in Balongan, where the oil is stored in the tankfarm prior to transfer.” While growing in size, DMB has also grown its commitment to HSE, being ISO certified and receiving commendations from clients like Star Energy. Describing DMB’s philosophy toward safety matters, Halim notes that “Accidents mean costs, and that’s why DMB avoids them. Every time, before anyone starts working, we always stress to do everything safely. DMB’s motto is ‘Safety Is Our Priority,’ and we take safety very seriously: DMB has achieved over 7.5 million man hours with no lost time.”

Indonesian projects in search of local expertise

Bambang Gyat, Director Enerkon Back in 1994, Bambang Gyat, co-founder and Director of Enerkon, an Indonesian engineering and project management firm, asked himself this question: “this country has had the people and the oil and gas resources, so why weren’t locals engaged in the process?” His message was clear: “My vision was to develop engineering strength in Indonesia. I knew that Indonesia had engineering potential.” In trying to engage the locals, Gyat was sometimes not wellreceived. “In the beginning, Enerkon would often receive sceptical questions: ‘What can you do for me?’ to which we would respond, ‘Don’t worry, we can do it.’ And then we’d deliver, in a way that encourages and empower local engineering resources in the energy and oil and gas fields.”

Gyat’s strategy seems to have worked, as evidenced by Enerkon’s involvement on major projects in recent years. One such project is the $1.3 billion South Sumatra-West Java pipeline, for which Enerkon is performing co-project management and consulting services. Explaining the rationale behind Enerkon’s selection for this massive infrastructure development, Gyat explains: “Because it is an Indonesian project, there is a requirement for Indonesian engineers, and that’s where Enerkon fills the niche: local engineering expertise.”

Indonesia’s vast oil and gas sector has also created opportunities for local companies further down the value chain, particularly in downstream activities. Aditya Nugraha Pratama (ANP) is a prime example of this, with a highly diversified portfolio including the import/export of oil products for Pertamina and the distribution of bulk fuel for industry. ANP is also involved in the trading of Pertamina lube base oil and has recently launched its own brand of lubricant called Perri.

Mustafa Kamil Thahir, President Director, ANP ANP’s founder and President Director, Mustafa Kamil Thahir, accomplished one of the biggest dreams in his life when he created the company in 2002. Initially focused on trading and other downstream-related activities, this entrepreneur has expanded ANP’s scope of business to engineering & project development, and most notably to the upstream sector. In March 2007, ANP Energy together with a strategic partner was awarded the offshore Lampung 1 PSC by upstream regulator BP Migas, where it is currently carrying out exploration work in hopes of passing to development in the future.

“After several years of successful growth in the trading business, I decided to take a chance in the field of E&P. This is a potentially a very lucrative business, but also entails high risk, so for now we are concentrating on the fields we have and will see what happens next”, states Thahir. Though this adds a completely new dimension to ANP’s activities, Thahir is always looking for new opportunities arising in Indonesia’s O&G sector as it goes through fundamental changes, particularly with the liberalization in downstream. In fact, ANP is already considering new business ventures in petrochemicals and aviation fuel.

Chapter 1

India: An Emerging Knowledge Superpower

The advantage of cost competitiveness

At present, the pharmaceutical industry has become one of the fastest growing industries in the country, with a value of $10 billion and a growth rate of 8 percent. When the country joined the WTO ten years ago, Indian pharmaceutical exports were less than 4,000 Crore Rupees. A decade later, its pharmaceutical exports are 14,000 Crore Rupees, and account for more than a third of the industry's turnover. This is mostly the result of the confidence built up in this strategic industry due to India's progressive adherence to its IP commitments. Now, the country is poised to achieve an annual compounded growth rate of 30 percent in order to double its pharmaceutical exports in three years. Some $60 billion worth of drugs are going off patent in the next few years.

This industry at present consists of around 300 firms in the large and medium sector, and nearly 1,000 units in the small-scale sector. The market share of Indian pharmaceutical companies has increased from around 20 percent in 1970 to over 70 percent today. The Indian pharmaceutical sector has witnessed a remarkable growth, from around $1 billion in 1990 to $11.2 billion in 2004/2005. The industry accounts today for 8 percent of the world's production by volume and over 2 percent in terms of value in 2004/2005. Furthermore, the country has demonstrated its potential in high technological capabilities and manufacturing standards by presenting the highest number of FDA-approved plants outside the United States.

Indian companies' biggest competitive advantage is their cost-competitiveness. A generic medicine can indeed be locally developed, tested, manufactured, and marketed for 20 to 40 percent of what it costs in the West. This mixture of low costs and ingenuity has helped Indian firms to expand their sales and acquire companies far beyond their borders. For example, both Ranbaxy and Dr Reddy's, India's two largest drug firms, have daring patent strategies, challenging big drug makers on some of their core patents in key western markets.

Dilip Shah, general secretary, Indian Pharmaceutical Alliance Another great asset is that India has the second largest English speaking technical and scientific brainpower. This is why a lot of companies have started doing global clinical trials R&D, custom synthesis, bioinformatics, and statistics work in India, saving tremendous amounts in expenditures, because most of these things cost 50 percent less than in Europe or America. India offers, for example, a great opportunity to conduct clinical trials because a large number of patients are available and they are drug naïve—the system is pure from a research point of view. These trials can thus be completed for less than 30 or 40 percent of the cost in the United States.

"India is moving to a knowledge-based economy that includes the contribution of IT and technical manpower, which makes the cost of production cheaper", says Dr. Ajay Dua, Secretary to the Government of India for the Department of Industrial Policy & Promotion.

International compliance

In 2005, India took another step into intellectual-property protection by recognizing full product patents on pharmaceuticals. As India is a signatory of the WTO and the Trade Related Aspects of Intellectual Property agreement (TRIPS), the country's patent law has been made TRIPS compliant by fulfilling various commitments required. Pharmaceutical patents were introduced on April 1, 2005, with the amendment of the 1970 Act. These patented drugs would be subject to mandatory price negotiation before being granted marketing approval.

The law caused an outcry by public-health activists, who worry about its effect on drug affordability—not just in India, but also in even poorer countries that rely on Indian drug makers for their medicine. Dr. Dua is aware of these risks but remains optimistic regarding the side effects of the new legislation: "This is something that in the long term will be beneficial to everyone," he says. "There will be time for people to readjust, but the industry as a whole will grow faster than it was for two reasons: New markets will open to India, because we are internationally compliant; and the country will benefit because several nations will be attracted by cost advantages in setting up physical facilities."

Companies from the West are indeed already in the process of setting up R&D centers in India. Multi-National Corporations (MNCs) were so far not well positioned in the country. Quite a few of them even left in the 1990s when patents were not respected in the country. Today, with the New Amendment in the Patent Law, as well as with the fully integration of India into TRIPS, some MNCs are coming back. The leading MNC companies in the country are GlaxoSmithKline, Novartis, Sanofi, and Pfizer.

There is an inducement to relocate the research work here; this will be followed by relocation of manufacturing. Once that happens, the capabilities of the local producers will become much larger than they were before, and will bring in more revenue for the country.

Leading at Home, Aiming Globally The success of the Indian pharmaceutical industry has undoubtedly been fuelled by the financial sector, just as Eximbank has been helping to promote Indian foreign trade for 25 years. It also functions as the principal financial institution in the country. "There has to be an APEX bank," says Sridhar, the former Executive Director of the Export-Import Bank of India. "Not only to finance, but also to play a developmental role in a particular sector like for instance pharmaceuticals."

Eximbank's first triumph during the economic reforms was in information technology. India has since become synonymous with IT. "To the pharmaceutical industry, we pioneered the concept of strategic export marketing in India because we said that marketing is different from selling," Sridhar recalls. "Whatever you produce you try to sell, but with marketing, you produce what the customer wants. As far as pharmaceutical companies are concerned, we provide them with the whole range of products that we have on offer."

Sridhar also shares the vision of India as an emerging knowledge superpower: "The pharmaceutical industry is a knowledge industry. The reason that the big players are doing well abroad is because they have the knowledge that is required. Our strength is that we provide first rate knowledge very cheaply."

The challenge of accessibility

For all its promise, some important challenges remain ahead in India. The main concerns of the Indian pharmaceutical industry are accessibility and affordability of drugs, despite that the country is one of the major producers in the world. Despite having one of the lowest prices in medicines, access remains a great problem—only 35 percent of the population has access to drugs.

Infrastructure is another sensitive issue. The number of hospitals with the infrastructure to undertake clinical trials is still limited, and patients need to be followed closely so they do not drift away. Some firms have also had problems with Indian contract research organizations that caused some of their drugs temporarily to be taken off the World Health Organization's approved list.

But with experience, quality is definitely improving, as confirmed by Dr. Dua: "Our infrastructure investments might have come later than they should, but we are investing heavily on that. In ten years time, you will see an amazing development of infrastructure of this country. Around $40 billion will be invested in roads, and another $40 billion will be invested in other engineering programs," he claims. Dilip Shah is equally enthusiastic about infrastructure in India: "The key to accessibility is not giving free medicines, but there is a need to create an infrastructure which will guarantee both access to medicines and provide medical support for the poor."

The Resilience of API Companies

Matrix API manufacturing facility in Pashamylaram "The strategy for any API player today should consist in two elements," says Mehul Parekh, Executive Director of Unimark. "Firstly, it is very important to maximize the number of molecules that we can create for the regulated markets. The second element is backward integration, manufacturing the product from the basic stage. Integration is of great importance because chemistry skills are more or less equal for most API players, so one way to differentiate oneself is by achieving backward integration."

This strategy is particularly relevant to most Indian API companies, which currently stand among the top five global manufacturers of active pharmaceutical ingredients. The production of APIs continues to swell with an increasing number of international companies making a beeline to India to meet their supply needs. Bulk drugs produced in India belong to all major therapeutic groups. India ranks 17th in terms of export value of bulk activities and dosage forms. By 2010, the sector is estimated to achieve $22.5 billion in formulation, with bulk drug production expected to touch 5.6 billion. The Indian API manufacturing industry is currently the third largest in the world and is expected to generate sales of $4.8 billion by 2010 (up from $2 billion in 2005), at an average yearly growth rate of 19.3 per cent. Today, most of them who intend to stay in the race are looking towards America.

Unimark is the perfect example of an API manufacturer wishing to venture into distribution. Parekh is fully aware that the service sector is growing in India: "We have realized that there is a strong potential for this business because right now the trend is to outsource this activity. Particularly when it comes to MNCs, these companies are looking for efficient logistics partners that can handle their entire distribution. Instead of setting up their own distribution departments, they prefer to have someone else doing this job for them so that they can get straight away into business."

Penetration, reach, and inventory management are, for Parekh, the major challenges a company needs to overcome in order to become an efficient partner. "As long as you are able to penetrate the market, to reach the chemist shop, and to manage the inventory, you will add value to your partner. The main reason why Unimark is one of the most competitive companies in the market is because we manufacture all our major products from earth, fire, and water. This way the entire value addition chain is captured in the product and remains in the company. This allows you to become more competitive by sharing this value with your partner."

Unimark has invested 4.5 million dollars in R&D, which is quite rare for a company that is mostly focused on APIs. "We will be investing at least another $10 million in the next couple of years to achieve this. At that point we will have reached an adequate standard that will enable us to start talking about contract research with innovative partners," says Parekh.

Today, Indian generics and API companies represent about four percent of the world market. This means there is still 96 percent of the market available. "Considering that our closest competition comes from China and that no Chinese company is integrated—they specialize in either APIs or generics, but not both—I believe Indian companies will play a more important role and become more profitable in the future," concludes Parekh.

Lupin: number one for anti-tuberculosis

API is the core business of Lupin. In India, the company has a portfolio of more than 200 formulations in various segments. It is one of the world's largest manufacturers of drugs that combat tuberculosis, bacterial infection, and cardiovascular diseases.

Dr. Gupta expects Lupin to become a billion dollar company by 2009 "When I started the company in 1968, I realized that the disease that killed the most people in India and the world was—and still is—tuberculosis," says Dr. Desh Bandhu Gupta, Chairman of Lupin. "So we decided to start working in that area and today we are the number one producers of Anti-TB drugs in the world. Furthermore, we are currently working on a new molecule against this disease."

Lupin was the first in India to manufacture Anti-TB APIs. "This earned for us the respect of our peers and we soon went on to become a front runner for the title of world leaders in Anti-TB drug manufacturing," recalls Dr. Gupta.

Lupin's range of formulation is marked by brand leadership across various several segments, for it believes that its branded business possesses significant potential to not just improve patient treatment but also address unmet medical needs.

At the beginning of 2006, Lupin signed a memorandum of understanding with ASPEN for the establishment of a joint venture. Huge product synergies are expected, for Lupin has traditional strengths in Anti-TB formulations and APIs, and ASPEN will bring a range of multi-drug resistant TB (MDR-TB) products to the venture. "We believe there is a large space for extending our cooperation with ASPEN. This first joint venture will serve us to generate the core of the relationship, to better understand each other. We are planning to go further as the potentiality for cooperation is immense," Dr. Gupta explains.

Unimark Remedies Ltd.

As a part of the global strategy to increase its participation in the high margin / high value advanced markets of US and EU, Lupin over the years created the right infrastructure by upgrading its facilities to globally accredited regulatory standards and invested in R&D to introduce a product pipeline specific to the market requirements. Lupin has entered into an alliance with Watson Pharmaceutical to market its Cefuroxime Axetil tablet in the United States. It has also entered into an agreement with Baxter Healthcare Corporation, by which Baxter will exclusively distribute Lupin's generic version of Ceftriaxone sterile vials for injection in the US post-patent approval.

It's no wonder that by the end of March 2009, Dr. Gupta expects to become a $1 billion dollar company. "I am confident we will achieve this goal," he claims. "In terms of research, we have four molecules under different stages of development. We also have three DDS platform patents. Regarding APIs and dosages, whatever we decide to manufacture we are either number one or number two in the world. We know the job."

Aurobindo Pharmaceutical, one of today's another Indian generic manufacturer, also started as an API manufacturer. In the mid 1990s, the company decided to focus on the regulated markets, which meant entering the generics business. It invested over $350 million, mainly in infrastructure and R&D, to achieve this target. During this period, the company built seven USFDA approved plants, four for APIs and three for formulations.

"Our large modern plants have allowed us to become very strong in the APIs segment," insists K.Nityananda Reddy, Managing Director, of Aurobindo Pharma Ltd "These plants have also boosted our strength in the generics business as we manufacture the APIs that are used in most formulations that we file. We manufacture our own APIs for most of the ANDAs and dossiers that we file in Europe." The company has today a product portfolio of over 180 APIs and 250 formulations. Furthermore, this API strength has helped them to position Aurobindo among the world's top four manufacturers of semi-synthetic Penicillin, Cephalosporin and Anti-Retroviral.

N. Prasad (Left) and Rajiv Malik (Right) Last year, 80 percent of the company's revenues came from APIs' sales, and 20 percent came from generics. However, according to Reddy , this balance should change, as Aurobindo has lately been very aggressive at filing its products in the United States, Canada, and Europe. "We have also been using these dossiers to file our products in other important markets such as Brazil, Mexico, and South Africa. Subsequently, we expect that in the next three to four years the balance will shift to 35 percent APIs and 65 percent formulations."

As a result of these successes, Forbes magazine recently listed Aurobindo on its top 100 best-rising Asian companies. A fair decision, according to Mr. N. Venkat, Senior Vice President : "Aurobindo is a very strong company that is committed to investing in the necessary infrastructure for accomplishing our medium and long-term goals. In the last four years no other Indian player has invested more than $350 million, as Aurobindo did. These four new USFDA approved plants have given a boost to our manufacturing and R&D capabilities, which together with our efficiency at dealing with filings make Aurobindo a very interesting company."

The success of 'Peopleware'

Based in Hyderabad since its creation in 2000, Matrix Laboratories Limited is a public company engaged in the manufacture of APIs and Solid Oral Dosage Forms. Within five years under the present management led by Executive Chairman N. Prasad, Matrix has transformed into one of the fastest growing pharmaceutical companies in India, with a focus on advanced markets, such as the United States and Europe. "While we created global scale manufacturing infrastructure (hardware) and well represented marketing base (software), we attribute our success to Peopleware," explains Prasad. "Being a knowledgedriven company, we strongly believe in human capital. Our progressive HR policy is driven by the philosophy of 3 R: Recognize, Respect and Reward the knowledge."

Matrix has four manufacturing sites for APIs and intermediates in India. Of these, three are located near Hyderabad and one near Visakhapatnam; all are approved by FDA. The combined FDA-approved capacity is one of the largest in India.

Before Reddy acquired Betapharm, Matrix made history last year in the Indian pharmaceutical industry by acquiring Doc Pharma in Belgium. The company continues to look for synergetic alliances and acquisitions, after various alliances with ASPEN, Mchem, and Concord. To its CEO, Rajiv Malik, Matrix's success relies on "exploiting our potential, and partnering with different players at different sides. We never put all our eggs in the same basket. We cooperate with different partners at both ends."

R&D is naturally playing a vital role in the development of this leading pharmaceutical company, which is trying to further sharpen its skills around research. "We have already put decent assets to provide sufficient capacity for the forthcoming patent expiries," says Malik. "We stand out in this area. In today's competitive world, you need some sort of specialization to stand out and survive. Innovation will be the underlying fabric in our business."

Even though formulations account for a significant portion of Unichem's revenues, the company also manufactures APIs. The company has prudently addressed relevant and growing therapeutic areas like gastrointestinal, cardiovasculars, diabetes, psychiatry, neurology, anti-bacterials, anti-infectives, and pain management, among others.

Currently 30 percent of the company's turnover comes from international business operations. Just as its competitors, Unichem is eyeing to penetrate the regulated markets. "When talking about regulated markets, we cannot afford to ignore the USA, as it represents 40 to 45 percent of the world market. Our second focus will be Europe," claims Dr. Prakash Amrut Mody. As far as the United States is concerned, Unichem will be filling its own ANDAs through its wholly owned subsidiary, and intends to exploit this market with its own marketing model. Unichem's ambition is to partner with other companies. "This strategy is not rocket science," Dr. Mody says. "But we can be among the first to spot opportunities, find the right partners and produce our own APIs." By doing this, Unichem expects to be able to obtain better margins than the ones it has in India. "We look for a suitable US acquisition or setting up our own marketing team only when we have a reasonable portfolio of ANDAs marketed in the United States."

In terms of innovation, Unichem is not looking at new chemical entities but has projects being developed in the biotechnology area. "Hopefully in the future, we will be able to provide a lot of innovation in this area," says Dr. Mody." Unichem would rather take its expertise to foreign markets and partner with other companies in order to expand the reach of the company's products in rest of the world. Its aspiration is to become a $500 million company by 2010— growth it hopes to achieve through the interest in Indian companies and on some acquisitions in the domestic and international stages.

"Unichem believes its growth will be quite substantial," says Dr. Mody. "Organically it would not be possible to secure this kind of growth. We are not involved in contract manufacturing but in the contract research business where the company is concentrated in building some intermediaries for multinationals. Unichem is also looking for generic partners and providers of APIs and finished formulations."

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Taiwan: Pharma at the Tipping Point

The Taiwanese pharmaceutical industry is facing a crucial tipping point today: after many years of building up an impressive resource base, from world-class research institutes, universities and scientists to pharmaceutical entrepreneurs and internationally competitive companies, the industry is finally ready to take advantage of the wave of enthusiasm and interest surrounding pharma and biotech that is sweeping the nation. In March 2009, Taiwan's current president, Ying-jeou Ma, announced that healthcare and biotech would be two of six sectors selected by the government to bolster and diversify the Taiwanese economy. As the Taiwanese pharmaceutical sector develops and strengthens, the world holds its breath, waiting to see what is possible from this small island nation.

President Ma with Johnsee Lee, Chairman of the DCB, at the opening of Bio Taiwan 2010 Jin-fu Chang, Minister in Charge of Taiwan's Diamond Action Plan for Biotech Takeoff Chih-Liang Yaung, Minister of Health Several factors have led to this exciting momentum in Taiwan. The first of these is the government's drive to develop what it calls the country's 'biotech' sector. Perhaps a little confusingly, the term 'biotech' is used by the Taiwanese government not only to describe biotechnology, but also traditional pharma and medical devices. This year the government announced its 'Diamond Action Plan for Biotech Takeoff'Taiwan has been trying to get involved in the biotechnology industry for decades and we have been trying to figure out the missing links. We think that translational medicine is one thing we should work more on. We have also been trying to form an FDA-like organization, which we now finally have. It is responsible for effective regulatory review and regional harmonization because so many companies here are looking to do business on the other side of the strait. We also need to have biotech clusters. We plan to have one in Nangang and we already have one in the south of Taiwan. These will work together with a superincubator center, which provides intellectual property help to the industry. Finally, the last piece is the megafund or bio venture capital fund. The government will contribute 40% and the remaining 60% will come from the private sector. The total size of the total fund will be $60 billion NT (U$ 18.7 billion).'As DCB is playing the second leg in bridging basic research and commercialization, we need more international collaborations, good business teams, people who understand basic research, as well as the market and potential healthcare implications.'We need to build a capacity and capability to link basic research to industry. Many basic discoveries are not getting translated into commercial opportunities, so Taiwan needs to have a component there to identify the important early stage discoveries and move them into industry. In order to do this, the country needs to have a good investment team to identify key projects, and good legislation in place to encourage the translation into industry. The government's 'Diamond Action Plan for Biotech Chi-huey Wong, President, Academia Sinica Jeff Wang, President, DCB Takeoff' was designed for such a purpose. It shows that we have a good understanding of the problem, and are trying to move in the right direction.'Taiwan is very focused on discovery, and big pharma has more experience in development: most big pharma companies have shifted their focus from early stage to development in recent years. Moving from discovery to development costs from U$ 300 million to U$ 1 billion: 60% of which is spent on marketing. Taiwan cannot afford to focus on late stage development in this moment of its industrial development: we lack the requisite experience and skill. Hence, collaboration is very important.'Taiwan has a unique political situation that means it cannot join a lot of international organisations, which makes it very difficult to communicate with other countries. The way that the TFDA has approached this problem is through bilateral cooperation: in April 2010 we signed a memorandum of understanding with the TGA in Australia for example. We also have exchanged letters with US, Switzerland and EU for information exchange of medical devices. Further to Exchange of Letter, we established the Technical Cooperation Program with 12 Europe notified bodies to share GMP inspection reports as acceptable evidence for submitting Quality System Documentation applications to the TFDA.'Chifu can introduce a lot of products from Taiwan to China. A lot of Indian companies are afraid of going to China. Chifu can help them, and is already doing this. But the company is also helping Chinese companies to come to Taiwan. Chinese companies see Taiwan as an interesting market. They can also use it as a test market: Taiwanese people are perhaps more open and willing to spend more than Chinese patients.'Celgene is only now embarking on a China strategy but the market there still has many questions. Not everything is in place yet, and guidelines and policies are not so clear. So we have to have a business model to copy in those areas where Chinese is spoken. I would like to copy Taiwan's experience to China, especially in medical development. Many Taiwanese doctors have western education and experiences compared to Chinese doctors. We have many good ideas here. This is a very good opportunity for Celgene's drug development.'Once the bio-venture capital fund, one of the strategies in the Diamond Action Plan, starts operating, I expect that there will be a lot of start-up companies forming with several potential blockbusters in their product pipelines. DCB would like to work closely with the bio-venture capital management teams in terms of conducting due diligence studies and translational research for those start-up companies.'In any program you need to have some compromise. Even fifteen years after implementing the NHI we still have a lot of issues. For example, it is very difficult to increase the premium rate. There is one commission that decides the premium rate and another commission that decides the budget. So who is accountable? The Taiwanese healthcare system is one of the best in the world, but last year we had a $60 billion NT (U$ 1.88 billion) deficit. My predecessors were never able to adjust the premium rate ' it is a very sensitive political issue. Because of Taiwan's aging population, new drugs and technological advances, a premium increase is inevitable, yet raising the rate is political suicide. Taiwan only spends 6% of its GDP on healthcare, yet we have very modern hospitals and a low premium rate, so it is inevitable that the country builds up a deficit.'it is believed that change is crucial as the pharmaceutical industry has suffered considerably under current NHI policies. We are urging the government to amend the law, and shape a more reasonable environment. From the patient's perspective, this will improve the medication quality and increase the number of advanced drugs available to society.'I am of the opinion that it is going to get worse before it gets better,'I believe that there will be more price cuts to come in the next few years because the deficit is definitely an issue and it has not yet been decided whether increasing patient premiums is a politically viable move.'It's encouraging to see clinical trials will also help accelerate product registration and gain a higher reimbursement price.'logical evolution'Taiwan was able to establish something extraordinary if you compare with not just Asian standards, but even worldwide standards. You can see that the country is truly committed to providing healthcare not just to en elite, but to the entire population.'Lilly is in an interesting position right now: around 90% of our sales are for our patent products. Our strategy, discipline around negotiations, and portfolio has enabled high growth over the last four years.'It used to be the belief that if you knew how to run the US business then you could run the global business. I don't believe that to be true any more, because if anything the US represents the tail of the reform situation. Then it became the belief that if you ran the EU business then you could run the global business: however today the EU is in decline and there is a trend of research investment being pulled out of the EU to different parts of the world. Now we're shifting to a paradigm, which states that if you can run the business in Asia, you can run the global business. The combination of Asian experience with the fierce eastern method of negotiation and politics is a requisite experience for any president or general manager.'Taiwan produces a lot of good professional talent: many Taiwanese people have strong international educational credentials, especially from the United States. A lot of people choose to study overseas, and many of these people return to Taiwan once their studies are completed.'enabled me to work with my colleagues in the US and Australia in a much more rationalised manner. We don't have any difficulty communicating about new business models or business ideas or business language.'being born in Taiwan helped me to fit into the local scene. I can work here without any barriers, unlike American born Taiwanese or Chinese people. Sometimes these people have difficulty integrating back into the Eastern culture.'We moved very aggressively: as part of Abbott we had around a 67% market share. When Hospira moved out under its own roof the company became more aggressive in this segment and fought for the accounts of our competitors. Hospira Taiwan's sales revenues have grown to the point that the company here now competes with big pharma.'really needed someone to accelerate the transformation of GSK in Taiwan. Of course, my experience in Asia was also a deciding factor I guess: I've been in China for five years, and in Taiwan for five years, I speak Chinese and I have been working in the pharmaceutical industry for twelve years.'We know that we should work better to help people with diabetes have better glycemic control. Once we meet with problems we can work together, and because we are small company, we don't have a lot of bureaucracy. My door is always open.'Most expat general managers would be very unhappy to pursue a long-term market strategy that was not focused on short-term performance. I want to stay here for longer, and pass on this sense of responsibility to my staff.'ScinoPharm's business model is that before the train comes into the station we are ready to jump. Initially this business model was incredibly foreign to local investors. The first difficult concept for them was the role of GMP. They knew that GMP was important, but they did not fully understand that if an API manufacturing plant does not pass a GMP inspection from the US, then its APIs cannot be used for any customer who wants to sell their formulations in the US.'Investors didn't realise how powerful a skill it was to have that capability, and to be able to enter a market wherever you have taken care of the patent issue, and conversely how a particular patent situation can eliminate your chance of competing.'For most local companies, their first market view is South East Asia or China, and yet there is a smaller group today trying to aspire above this and penetrate regulated markets. In those cases there is still a lot for these companies to do to fully understand the patent situation and GMP requirements. Both of those things require investment. Right from the beginning ScinoPharm's business model was that the world was our market: there is no reason why being registered in Taiwan means you can only look at Asian markets. Our major market has always been the top tier, the most regulated markets: The US and Western Europe.

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Singapore: The roaring Lion

The Singapore Story: Leadership in Pro-Active Thinking

Lee Hsien Loong, Prime Minister Lawrence Wong, Chief Executive “If you go downtown to the business district, the theatre district, you can see it is well kept...handsome buildings, lots of theatres, plays, musicals, arts, along well-kept streets. There is a certain civic pride and confidence and a thrust to a better tomorrow, and I think that is the way Singapore should be”. Advocated by no less than one of Singapore’s most respected politicians, these words marked Singapore Prime Minister Lee Hsien Loong and his delegation’s visit to Houston, USA, in July 2010. With a growth of 24 percent in trade between Houston and Singapore in 2009, in combination with Singapore’s ambition to diversify its economy, it should come to no surprise that Lee aims to attract more foreign investment to the LionCity. What might be surprising however is the fact that the island country of less than 275 square miles in surface is looking to attract investors in the energy business, having nil natural reserves of oil and gas.

Commenting on the investment potential in Singapore, chief executive Chong Lit Cheong of International Enterprise (IE) Singapore, the government’s agency spearheading the development of Singapore’s external economy, says that “the word arbitrage is sometimes used to describe Singapore’s position, because it is central to the flow of values, money, information and people”. Lawrence Wong, chief executive of the Energy Market Authority (EMA), the body that acts as energy industry regulator, systems operator and industry developer, agrees that Singapore is an attractive location for new investments in the energy space. “Singapore and EMA certainly welcome collaboration with the private sector because these are areas where the government does not have all the expertise and would welcome the competencies and capabilities of private companies”, Wong finds.

The visit of Prime Minister Lee to Houston is only one example of Singapore’s outward-looking and proactive policy. The remarkable extent of Singapore’s proactiveness has allowed the nation to grow into its current hub status, servicing an integrated part of the oil and gas value chain. “Singapore has proven to the world that it has the infrastructure and technology as well as the management skillset to be able to help companies and businesses in this sector”, comments Tan Poh Teck, deputy executive director of the global business division of the Singapore Business Federation (SBF).

Supplying the World’s E&P Markets

S. Iswaran, Senior Minister of State for Trade & Industry, and Education If jack-up rigs would have a “made in” tag, it would immediately illustrate one of the key products that Singapore has been vigorously developing in-house. Following the latest statistics of its Ministry for Trade and Industry, Singapore holds a 70 percent manufacturing share of the world’s jack-up rigs. With the addition of an equal share of the world’s Floating Production, Storage and Offloading (FPSO) units being converted on its grounds, Singapore today has risen to become the world leader in this niche. The two local flagship companies bringing the majority of these contracts to the Republic are the well-established Sembcorp Industries Ltd and Keppel Corporation Limited. With heavily diversified operations, roughly 60 percent of Sembcorp’s and 67.5 percent of Keppel’s group turnovers were attributable to their respective marine divisions in 2009. Despite last year’s global downturn, the two giants were able to draw on the construction boom of preceding years to perform well nonetheless. “As a result, Keppel successfully delivered 14 rigs, 14 specialized vessels and six major conversions and upgrades for various customers in 2009”, says Choo Chiau Beng, CEO of Keppel Corporation.

Looking at how Singapore-based companies are able to export their expertise and gain market share on the international platform, most seem to have the ability to enter overseas markets quickly and efficiently. Ranked as the most globalised country by management consultant firm A.T. Kearney, Singapore’s internationally-exposed companies are consequently more adaptable when operating abroad. “The society is more understanding of local cultures because of the differences in cultures around Singapore from Thailand to Malaysia, Vietnam and Taiwan”, says Francis Wong, CEO of the USD 400 million Singapore EPIC contractor Swiber Holdings Limited. Exporting the groundbreaking expertise from leaders such as Sembcorp and Keppel, as well as smaller players such as Swiber, has been crucial in putting Singapore on the global oil and gas map, a progress that is set to continue.

Moving Towards a Safety-Case Regime: the Right Equipment

Chong Lit Cheong, CEO of IE Looking back at early 2010, the blowout on the Transocean / BP platform has become an adverse factor impacting the oil and gas industry worldwide. Concerns have been raised over the new and stricter safety standards that are to be imposed as the industry moves forward. However, as Singapore has grown into an engineering center renowned for its high standards, many of its oil and gas related businesses do not necessarily perceive this trend as a major threat. Quite the opposite, several of the Singapore-based players see the event as an opportunity to export their trusted brands. “Given that Prosafe is already positioned at the premium end of the offshore accommodation market, we know that we are well-placed to meet the high standards of the industry”, proclaims Robin Laird, managing director of Singapore-based Prosafe Offshore, the leading owner and operator of semi-submersible accommodation and service rigs.David Ong, CEO of process automation and safety systems solutions provider Excel Marco, sees the implications of the unfortunate tragedy as a growth opportunity for his Singaporean company. “Such events increase the market size, causing demand to go up. As new regulations come along, capital investments need to take place accordingly”, Ong concludes.

Choo Chiau Beng, CEO of Keppel Corporation Limited In view of these additional investments that may arise, many of the operators will be extra cautious when allocating their scarce resources. With shallow water oil reserves depleting and E&P companies increasingly moving into deepwater and harsher environments, cost management will become even more important. “Designing and constructing a drilling rig, you have to make certain critical decisions which involves accepting a number of compromises with respect to cost, weight, size, operational capabilities etc.” comments Simen Skaare Eriksen, CEO of Frigstad Offshore, the international drilling contractor headquartered in Singapore. Expected to be delivered by late 2010, the prestigious Frigstad D90 design lays the groundwork for ultra deepwater semi-submersible drilling rigs with the ability to cover 95% of the world’s deepwater areas. “One of the decisions that were taken in the design process was to focus on the worldwide deepwater market except Norway and the Barents Sea niche, because of its “ultra harsh environment” and special regulatory regime. This automatically takes away some essential cost-driving and capacity-hampering factors which would reduce the competitiveness of the rig when operating outside of these niche areas” Eriksen points out. Olivier Chapuis, co-founder and present director at rig designer firm Moonpool Consultants, concurs that contemporary rig design must focus on the following key principles: “easy to operate, easy to maintain, as simple as possible but with modern technology, comfortable and safe life on board, innovation but costs under control”.

Moving away from projects to day-to-day operations, stricter regulations in the oil and gas industry will in fact benefit many of the Singapore-based maintenance firms, anticipating an increase in demand for additional work on some of the older equipment out there. Robert Dompeling, Group CEO of EPC and EPCm provider PEC Ltd., explains that while the company is also involved in project work, the maintenance business is the backbone providing revenue stability. Specialist in plant and terminal engineering, PEC sees most growth potential in projects and maintenance services that require more specialized expertise. “We are already working with all the key players in the industry, and have won numerous awards from clients and Singapore government bodies for our ability to plan in advance and maintain safety and quality control standards at all times”, the CEO argues. Dompeling further points out that “Singapore companies have a competitive advantage in certain specialized areas when entering new markets, as they tend to have a deeper level of knowledge compared to many engineering companies outside Singapore”. When asked about PEC’s growth potential in Singapore’s booming FPSO projects, Dompeling concludes that PEC sees opportunities in offshore work, as he is convinced its expertise is transferable. “After all, work done in a petrochemical plant on land is not so different from doing work on an offshore platform”, Dompeling finds.

Moving Towards a Safety-Case Regime: the Right People

Robert Dompeling, Group CEO of PEC Ltd Singapore’s FPSO market has already attracted a plethora of well-integrated international players and today houses “some of the best shipyards in the world to perform FPSO conversion and integration work”, comments recently appointed CEO of Global Process Systems (GPS) Ian Prescott. “With GPS’ fabrication facility only a 40-minute ferry ride away in Batam, Indonesia, the company can do all the design in Singapore and have the fabrication done in Batam, before the finished products are brought back to the Singapore shipyards for implementation”, explains the CEO of this Dubai-based provider of technology-based -design and build- process facilities for the upstream sector. Prescott further praises his company for adhering to outstanding safety standards which, he says, “is being achieved by profiling GPS as a local company. In terms of HSE performance, GPS is locally driven but only because the company has the confidence in these people and sees that they are at the right level to manage the business”.

If the industry will raise its standards following the Deepwater Horizon incident, more work for companies such as PEC and GPS will automatically follow. Having the right people in place will therefore become ever more important. However, some might wonder where to find this human capital. Following an influx of expatriates, there now seems to be a recurring trend to progressively rely on indigenous workforces to spread knowledge across the region. “Asia Pacific is an attractive place for engineering graduates...the role of the company is therefore to ensure that opportunities are given to young people across all its operations”, comments regional director of Wood Group Production Facilities Asia Pacific, Bob Beavis. With an international track record of onshore and offshore oil & gas projects, the Aberdeen headquartered energy services provider offers a range of engineering, production support, maintenance management and industrial gas turbine overhaul & repair services worldwide. Today, the growth of the group is driven by Beavis’ region, who describes it as “the growth engine for Wood Group, where the Group’s ambitions are directly related to economic activity”. “Asia Pacific is not opportunity constrained”, Beavis adds. In Asia Pacific, the company interprets the group’s strategy as “step out and step up”. Explaining this dual strategy, Beavis clarifies that “Step out involves broadening the customer base and the services of the Group. Step up is increasing the intelligence and effectiveness of the group as well as pushing the range of capability to new areas”. When asked about the short term plans of the company in his region, he envisions that “throughout the divisions in Wood Group there is opportunity for growth and the role of Singapore is therefore to help in this development”.

From Traditional Shipbuilding and Repair to A Centre of Maritime Expertise

What drove Singapore shipyards from repairing and building ships into oil rigs and converting specialized vessels, was the need to justify higher labor costs following a talent drain driven by Singapore’s emerging electronics industry in the 1980s. At that time, both South Korea and China increased their shipbuilding and -repairing capacities. “These countries obviously faced lower labor costs, leading to Singapore losing market share”, executive director David Chin of the Singapore Maritime Foundation (SMF) recalls. Constant innovation towards high-end solutions is what kept Singapore’s maritime sector fundamental. Taking a closer look at Singapore’s fleet shows a diversity of capital-intensive anchor handling tug supply (AHTS) vessels, offshore support vessels (OSVs), seismic survey vessels, platform supply vessels (PSVs), and ROV support vessels amongst many others, most of which are chartered to support the region’s oil and gas industry.

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COLOMBIA: where good drugs thrive

Progress from the peril

Francisco De Paula Gómez, Executive President of Afidro Like most economic sectors, pharmaceuticals have reaped the benefits of enhanced domestic security. The strength of Colombia’s resurgence is best measured by the profundity of its crisis. For decades Colombia was engulfed in a conflict between government forces and insurgents who funded their war through the trade in illicit narcotics. The historical roots of the conflict stem from a complex disparity of political and economic resources spread amongst social classes, with the worst of the crisis peaking in the late 1990s.

In 2002 newly-elected President Álvaro Uribe made domestic security his #1 priority. American aid and a wealth tax that committed over 70% of revenues to defense led to the disarmament of thousands of left-wing guerrillas and right-wing paramilitaries. Better security, an export-oriented growth strategy, and high commodity prices boosted economic growth. While the economy slightly contracted .2% last year, projections are for a quick rebound to 2.5% growth in 2010. Violence and insurgency threats still remain, but the confluence of reforms rejuvenated the business landscape in Colombia.

Claudia Varela, General Manager of Genzyme for Peru, Ecuador and Colombia As Virgilio Barco, Executive Director of Invest in Bogotá, explains, “President Uribe’s focus on security was the beginning of everything. Since then his committed team has worked to improve the business climate. Colombia’s consistently high position on the various business rankings is a testament to this dedication; it reflects how deep the crisis was and the type of leadership present over the past decade.”

Pharma in a resurgent environment

Because of security concerns and globalization trends that consolidated production around the world, dozens of multinational (MNC) pharmaceutical companies closed their Colombian manufacturing plants. Today only a handful of MNCs operate their own plants, importing over 95% of their medicines and shifting mainly to a commercialization and marketing model.

“In their departure,” Barco adds, “they left an industry know-how. Colombia’s human resources in the medical and pharmaceutical field are renowned throughout Latin America. Many Colombian pharmaceutical companies purchased the plants of those who left and have developed home-grown operations. They are strong, sizeable, and expanding in Latin America.”

Jesús Chacón, President and Alejandro Valbuena, Vice President of Chalver The supply of over 60% of pharmaceutical companies being local producers mixed with the demand created by expanding health insurance coverage makes Colombia a predominantly generics market. “The average price of generics is one of the lowest in Latin America,” says Alberto Bravo Borda, Executive President of Colombia’s National Association of Local Laboratories (ASINFAR). “This is because of strong competition that drives prices down. With the expansion of healthcare, insurance companies are now covering the greatest part of the private market. This has led to more prescriptions and a growth in units.”

Nevertheless, MNCs’ success in the $2.2 billion Colombian pharmaceutical market still looms large. A small cluster of foreign MNCs provide close to 45% of market value with a plethora of local laboratories covering the rest.

Spending nearly 8% of its gross domestic product on healthcare and having the third largest population in Latin America with 45 million people, the fiscal and structural indicators suggest a promising pharmaceutical environment. Industry growth – 11% in 2008 and 7% in 2009 – is mainly driven by the institutional market. The high volume of generics that Borda referred to contributed to a 9% decline in retail market value last year despite increasing 3% in units. The institutional line, however, has posted a robust 32% compound annual growth (CAGR) over the last five years with a further 16% projected for the next three to five years.

As expected, MNCs vie for the pole position in the institutional line with their research-based products for rare, infectious, and chronic diseases. Local laboratories, meanwhile, remain committed to their tradition of generics that has branded success in the retail market. But the impressive growth of the institutional market has also drawn their attention. Mario Morales Moreno, President of Genfar, the leading retail units seller, refers to the institutional line as “a key growth sector” and is keen to increase institutional sales from its current 25% of portfolio value.

A new challenge confronts Colombia furthering an interest in the institutional line. The budgetary shortfalls of the national health system and the ensuing Social Emergency Crisis (SEC) declared in December strengthen an emphasis on cost-competitive products. More than a chance to provide cost-efficient medicines, the SEC is an opportunity to prove that Colombia’s 20-year-old healthcare reforms are still the optimal means to achieve the national dream of universal coverage. A dream nearly achieved.

Colombia’s healthcare system is governed by The Law 100 of 1993 designed to provide universal healthcare access through a system of managed competition of providers.

Seventeen million Colombians under formal employment finance their healthcare through a 12% income tax and collectively form what is referred to as the “contributory regime.” Another 24 million citizens who are unemployed or live below the poverty line receive subsidized healthcare. All citizens are entitled to a portfolio of medicines and treatments issued by the Ministry of Social Protection called the Obligatory Health Plan (POS).

A total of 63 public and private health promoting entities (EPSs) administer healthcare with government compensated risk-adjusted premiums for every individual covered. Because Colombia mandates a strict benefit package of primary and preventative care from each EPS, competition derives from quality, not price, of services offered.

Under this structure and guided by the principles of universal coverage; equity in benefits regardless of contribution value; free choice to select a healthcare provider; and timeliness in receiving services, health coverage in Colombia has expanded from under 25% of the population in 1993 to 93% today. “Very few countries can have such an effective system,” asserts Francisco de Paul Gómez, Executive President of the Colombian Association of Research-based Pharmaceutical Laboratories (AFIDRO). “Regardless of differing opinions, access to healthcare is a real fact which brings us closer to the expectation of a general insurance with universal coverage. This has substantially changed the behavior of the pharmaceutical market.”

Too much of a good thing

Ironically, the impressive 93% coverage rate has also indirectly contributed to the stress of the system. Because access to healthcare is listed as a constitutional right, many patients sue healthcare providers for refusing to cover certain treatments not included in the POS. From 2006-2008 there were more than 346,400 lawsuits, with the courts usually ruling in favor of the patients.

The result has been an explosion in costs for the government and EPSs. In December 2009, nine of the fifteen largest EPSs said they were close to bankruptcy. Finance Minister Oscar Zuluaga estimated that $400 million would be needed to save the system.

In an immediate response to the crisis President Uribe declared a social emergency and issued 16 decrees that bypassed legislative approval. Decrees 128 and 131 generated the most controversy. Decree 128 mandated patients to finance treatments not included in the POS using personal savings or retirement funds. Decree 131 ruled that doctors who prescribed non-POS medicines could be fined up to $13,000. Because of the widespread protests that these decrees triggered, the government repealed the $13,000 fine and limited out-of-pocket expenses to only the upper class. A final list of an updated POS will be issued in June.

Business as usual, innovation as always

While the ending remains unwritten on the SEC, the successful business of innovation carries on as usual for MNCs in Colombia. Colombia has proven to be a reliable market for MNCs with AFIDRO companies growing on 11-12% average during the years of the financial crisis. As Rolf E. Hoenger, General Director of Productos Roche S.A., light-heartedly comments, “you cannot call 12% growth a crisis.” Roche in fact grew by 25% in Colombia in 2009 on the backs of its specialized products in the institutional market that constitute 80% of their business. With 55% of their portfolio in oncology and majority of the remaining 45% dedicated to other specialized treatments such as rheumatoid arthritis and cystic fibrosis, Roche’s niche in unique biologicals will continue to drive its growth towards Hoenger’s goal of double its current market share within the next three years.

Personifying innovation and niche market penetration is Genzyme de Colombia S.A. A newcomer to Colombia in 2002, Genzyme’s growth to the tune of 20% in 2009, 46% in 2008, and 25% CAGR over the past five years is attributed in part to the typical exponential growth of a new company but also to their specialized offering of rare and orphan diseases medicines. Boasting a product portfolio for lysosomal disorders, renal infections, oncology, and biosurgery, Claudia Varela, General Manager for Peru, Ecuador & Colombia, takes special pride in the pioneer role that Genzyme has adopted through its attention for neglected patients. “It is the nature of Genzyme to work with niche patients in rare disorders,” says Varela. Particular inroads have been made in identifying patients and meeting the medical needs for lysosomal diseases such as Mucopolysaccharidosis (MPS). Genzyme has actively been identifying MPS I patients in Colombia and through variations in rare diseases in developing countries are now discovering patients of MPS Types II & VI.

Concurring with the reliability of Colombia is GlaxoSmithKline (GSK) Colombia. In 2008 GSK Corporate outlined strategic priorities centered on “more growth, less risk” with a special emphasis on emerging markets. According to Michael Sean Reilly, GSK Colombia’s General Manager for Pharmaceuticals, Colombia fits this strategy being classified as both a growth and emerging market. “Latin America has a mix between stable and volatile, short term high-profit markets. Colombia is a stable market that is not expected to grow excessively over the next few years. You can count on a relative 5-10% growth, but you are not going to lose money. The risk analysis for Colombia is normally a lot less than what you see for Venezuela or Argentina which experience frequent big shifts in the market and the economy.”

GSK’s strategy to fuel growth in this low-risk environment is to diversify the traditional business model and adapt to local market opportunities. Rather than relying on one or two blockbusters, the goal is to have many medium-sized products in different areas. “GSK before was very oriented towards internal intellectual property (IP) products. Now we are looking for local growth opportunities from in-licensing products from European or Asian companies that do not exist here in Colombia; local growth opportunities from vaccines; and opportunities from alliances with companies from China and India. This is a new strategy for us.”

Gran Colombia anew

Colombia emerged as one of three sovereign countries following the collapse of Gran Colombia in 1830, along with Ecuador and Venezuela. At the end of the 19th Century the United States seized control of Panama, then a Colombian province, thus ending Colombia’s ruling engagements abroad.

Mazen Makarem, General Manager of Farma De Colombia Pharmaceutically speaking, conquest of neighboring countries is back on Colombia’s radar. Colombia’s geographic positioning as the gateway to both Central and South America, makes it natural for industrial sectors to have an abroad-oriented vision for nearby markets to penetrate. This is indeed the case for a multitude of local pharmaceutical companies competing domestically, but sharing equally great ambitions to bring a new Gran Colombia of pharmaceutical prowess to the neighboring markets of Central America and the Caribbean.

“When you have 54% of the market, how much higher can you get?” asks Emilio Sardi, Executive Vice-President of Tecnoquímicas, 15th in both sales and units in the 2009 retail market. “It is much easier to go to other markets which you can do with the right marketing technology. We can become very strong in Central America because they are markets of small countries that are not necessarily interesting for big multinationals. Our idea is to buy strong companies in each country and become a dominant player in the whole area.” Sardi’s strategy is similar to many other local companies: in the face of fierce competition domestically, penetrable and culturally similar foreign markets are just around the corner.

Luis Gabriel González, General Manager of Vesaluis Pharma The regionalization of Tecnoquímicas was supported by the International Finance Corporation. “Their idea was for local companies to become regional. They wanted companies good at selling generics to expand abroad in order to help poor countries and fulfill the World Bank’s social commitment,” says Sardi. A $25 million equity investment helped finance Tecnoquímicas’ 2009 purchase of the El Salvadorian pharmaceutical company Teramed. Future similar acquisitions are in store for 2010 to bolster their regional presence.

Buy, conquer, and directly represent always remains an option for companies flush with cash. The more typical practice, however, has been penetration through a reliable chain of alliances and regional distributors. Farma de Colombia, fresh off its 50th anniversary in February, has leveraged strong relations with distributors in Panama to boost exports to 17% of its total revenue in 2009. “Panama is our gateway to the rest of Central America and the Caribbean,” says General Manager Mazen Makarem. “We sell them our products, offer marketing input, and they do everything from there. It is not necessarily Farma de Colombia being present in these markets; rather, it is the distributing companies themselves.”

Jorge E. Jiménez, General Manager of Biochem With high quality standards set by INVIMA, Colombia’s regulatory agency for food and drugs, companies are in favorable positions to push exports abroad. One of Genfar’s slogans “A Multi-Latin company, 100% Colombian” speaks to its regional presence in 14 countries facilitated by its network of affiliates and strategic distribution partners.

Jorge E. Jiménez, founder of Biochem Farmaceútica and a self-described man “born in the pharmaceutical industry,” describes his market of interest to be “any regional country where we are not currently present.” With branded generics in antibiotics, antihistamines, flu and parasitic treatment, Biochem actively seeks distributing alliances to cover new regional markets. With over 40 years industry experience working for American, European, and now his own Colombian company, Jiménez drives Biochem with an expansion, yet, survivor mentality noting that “a company that does not grow is likely to disappear.”

Chalver Laboratories, founded in 1960 by Jesús Chacón, began manufacturing small products but was constantly driven by a mentality of growth. Purchase by purchase, Chalver expanded to its present-day structure of export and warehousing operations in 15 countries with over 380 commercial partners. “Our experience and market knowledge allows us to project ourselves as a company capable of growing consistently in the region with a broad scheme of products that are adjusted to each country’s needs,” describes Chacón. The first Colombian company to offer an alternative medicine for prostate cancer, combining polymer and peptide, Chalver’s delivery of high value and necessity products embodies the tendency of local generic producers to shape a cost-competitive environment. “Before our prostate cancer product the price for the original drug was around $500,” Chacón explains. “After our launch the price dropped to $120.”

Chalver is unique as a company that has pushed exports by basing itself within one of Colombia’s 69 Free Trade Zones (FTZs), an incentive which lowers their corporate tax by more than half of Colombia’s normal rate. The benefits of the FTZ’s systematized processes, storage, and transportation facilities, according to Chacón, allow Chalver “to provide better service and to become more efficient in a highly competitive market.”

“Home”work through alliances

According to Rodrigo Arcila Gómez, Executive Director of the National Business Association of Colombia (ANDI), 71% of pharmaceutical industry production supplies the domestic market. With Latin America’s third largest population, there is still plenty of business to take care of at home.

Diana Valencia, President of LatAm Colombia’s sizeable population, healthcare coverage, and unique epidemiological profile naturally make it an enticing market for foreign pharmaceutical companies. Farma de Colombia represents five companies from countries ranging from the US, Switzerland, Mexico, and Brazil. “Fifteen years ago, however,” comments Makarem, “our licenses exceeded our own products. The situation reversed because of mergers and acquisitions” that granted market access to synergized companies. When Makarem began as General Manager in 1999, Farma de Colombia lost its license agreement with newly merged Astra-Zeneca, costing them $8 million. After company soul-searching, Farma de Colombia emerged less reliant on licensing and determined to strengthen its own brand lines as it has done with Calcibon, the Colombian market leading calcium prescription, and Akatinol, a market share leader in Latin America for Alzheimer treatment. “With Colombia approaching universal coverage and with the tremendous reach of the population to healthcare, there is still an important private market which we focus very strongly on. The private sector is a good arena to build the brands that we value.”

The same trend of blockbuster M&As coupled with stricter INVIMA standards that forced companies out of the market produced opportunities for smaller players focused on low-incidence diseases. Created in 1999, General Manager Luis Gabriel González explains that Vesalius Pharma’s purpose was to represent foreign companies entering Colombia. González notes that “the Colombian market is permanently growing in units but decreasing in value” due to expanded health coverage which attracts many competitive suppliers. Rather than competing in the crowded generics market, Vesalius, “deals in closed markets with exclusive products manufactured by biotechnology companies that have no representation in the country.” Founded with a focus on tuberculosis, Vesalius has expanded its portfolio to over 150 products for orphan diseases, anesthesia, intensive care, and oncology.

González’s logic for ambitious export growth is refreshingly simple: there is a world of business out there. Colombia represents only .26% of the global pharmaceutical market. There is a huge demand for rare disease treatment in the US, Mexico, and Brazil that Vesalius seeks to supply through strategic alliances. “The fundamental goal towards the future for Vesalius is to look for new alliances to cover Latin American market. We believe that Colombian market is a highly competitive and saturated one. The future of our company is in the rest of America,” he says.

A regional player at your service

The global contract research organization (CRO) market is set to grow 14% over the next three years to be a $35 billion industry by 2013 as companies seek to cut drug development costs through outsourced R&D. CROs offer pharmaceutical companies the chance to roll-over fixed research costs into lower variable costs and boost productivity by focusing on competitive advantages. Situated in the tropics, Colombia is an advantageous market for clinical trials because of its population size, diversity, and proximity to the US.

LatAm Clinical Trials capitalizes on these dynamics. As a niche CRO specialized in vaccine testing and infectious disease treatment, LatAm provides a one-stop shop for pharmaceutical companies looking for a regional contact. LatAm conducts Phase 1-4 testing and clinical trial management from project start to finish throughout Colombia, Panama, Costa Rica, Peru, and the Dominican Republic. “We have a tremendous knowledge of the cultural diversity of this region,” says Diana Valencia, LatAm’s Executive Director. Labeled by Valencia as an untapped region, Colombia, unlike Argentina and Brazil with their high volume of clinical research projects has “opportunities through new, untested subjects,” she explains. Additionally, “the therapeutical profiles of our subjects overlap with the same areas that are associated with the ten major causes of mortality in the US. Colombia, epidemiologically, behaves very similar to developed countries. We can also offer treatment and services in infectious diseases that are typically found in developing countries but are now emerging in the developed world.”

Taking the responsible LEED

More than suppliers of drugs and medicines, Colombian pharmaceutical companies embrace their role as socially responsible agents of change.

Novartis, consistently atop industry rankings as one of the most ethical and socially responsible pharmaceutical companies, added a new dimension to its innovative identity when inaugurating in February its new nine-story office in downtown Bogotá as the first LEED-certified (Leadership in Energy and Environmental Design) building in Colombia. “I know that because of this building other buildings in this area, in this city, and in this country are going to follow the trend that we set,” says Maria Álvarez, General Manager of Novartis de Colombia. President Uribe, speaking at the inaugural ceremony, praised Novartis for its environmental stewardship and recognized the important contributions its work has on instilling investor confidence in Colombia. In industry and social responsibility, leadership and trendsetting is second nature for Novartis. Investing over $19 million in 123 clinical trials from 2007-2010, Novartis’ R&D penetrates cardiovascular, respiratory, and oncology areas in over 150 medical centers throughout Colombia. Furthermore, they were the first pharmaceutical company in Colombia to sign the United Nations Global Compact on socially responsible business practices. Promoting access to healthcare is a core pillar of Roche’s work in Colombia. The same applies to their inroads in social responsibility with Roche working side-by-side with patient associations to increase informed access to medicines. Hoenger explains that Roche “does extensive work in patient education to clarify questions a patient has about disease and treatments. As can be the case with institutions, doctors have very little time to explain detailed information to them. Our outreach is all about ensuring access to proper information about healthcare.”

A different type of risk

Proexport, the government agency for foreign investment and tourism promotion, launched a campaign inviting people to Colombia where “the only risk is wanting to stay.” Fifteen years ago the message of visiting Colombia, risk, and staying behind carried starkly different imagery. Visitors to Colombia today will find a safer atmosphere whose risk profile favors the country as a preferred investment destination. As Virgilio Barco explains, “Brazil and Mexico are the largest economies, but the panorama is shifting. Argentina is an attractive market but relative macroeconomic instability can worry investors. Chile is very stable, but small and with a high cost structure. Central American countries are very small and Venezuela is out of the question right now. Colombia is a very interesting third destination in Latin America because of its large market size and its quality of human resources.”

Left to right: María Cristina Álvarez, President of Novartis Colombia, Álvaro Uribe Vélez, President of the Republic of Colombia, and Daniel, Vasella, Chairman of Novartis Global Colombia is lauded by pharmaceutical executives as a talent pool because of its strong level of education, work ethic, and professionalism. “When you ask an investor why they consider Colombia a trustworthy market, they will reply because of the strong workforce and excellent human resources,” asserts Rodrigo Arcila Gómez. “The country is riding a double wave of emerging market growth and improved domestic security,” adds GSK’s Reilly. “Colombia is a very resilient country with resilient people.” This resurgence earned Colombia the accolade as “the best place to do business” in Latin America by a World Bank Doing Business Report in November 2009.

Questions still surround the state of healthcare in Colombia as it navigates the transitions of the Social Emergency Crisis. POS reforms will usher in changes for new players, medicines, and technologies. National laboratories vehemently call for liberalizing intellectual property requirements to allow them to compete with cost-efficient medicines. MNCs believe that the future of the pharmaceutical industry rests with innovation, respect for its protection, and adherence to the principles of free market trade.

But with the future still unwritten the current pieces are in play for the Colombian pharmaceutical industry to continue its success of the past several years. At home, scientific and marketing innovations enhance the medicines that 93% of Colombians have access to. A talented workforce is engaged in the sustainable and responsible development of its industry and community. Abroad, new alliances promote exports and bring innovative medicines into the country. Long stereotyped for its violence and lawlessness, the pharmaceutical industry is poised to put Colombia on the map for all the right reasons.

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Hon. Anna Bligh, Premier of Queensland

“We see the LNG industry as an opportunity to create a new generation of employment and prosperity in Queensland,” says Anna Bligh, the state’s premier.“We have just come out of the global financial crisis, and are still building the recovery. We identified the LNG industry as a very important part of rebuilding and creating new industries.” Despite the challenges confronting Queensland from devastating floods in early 2011, the burgeoning CSG industry is still gaining momentum. The government has played an instrumental role increating the correct environment to encourage the development of the world’s first CSG-to-LNG projects, and today four liquefaction terminals are planned for the coastal town of Gladstone. Speaking in December 2010, Blighexplained that “the emergence of the CSG and LNG industry is a natural progression from our gas policy – our energy policy – in the early part of this century. But it is equally true that it could nothave reached the stage that it has, as quickly as it has in the last 8 months, without enormous focus from government.”As a well-established coal exporter for several decades, Queensland has taken advantage of relatively new technologies to bring gas out of the state’s coal seams in response to global shifts towards cleaner energy. As Bligh explains, “these projects are, in both resource and investment terms, as big as the Gorgon Project in Western Australia. They have been brought to regulatoryapproval and financial decision stage within 2-3 years which inworld terms is remarkable.”

Mark Macfarlane, CEO, GLNG

Eastern flagships

FID for its $15 billion Queensland Curtis LNG Project (QCLNG) in November 2010. A 380 km pipeline will link CSG fields in theOver the past year huge progress has been made to ensure thatAustralian CSG-to-LNG will deliver. Of the four mega-LNG projectsplanned, two have reached final investment decision (FID) totallingover $30 billion, and one has crossed the crucial threshold ofenvironmental approval.Queensland Gas Company, a subsidiary of British Gas, reached Surat Basin to its 8.5 mtpa LNG plant on Curtis Island with first gas expected in 2014.The Santos-Petronas-Total-Kogas consortium rang in 2011 withFID for its $16 billion, 7.8 mtpa Gladstone LNG (GLNG) project.With first gas expected for 2014, Mark Macfarlane, ceo of GLNG,describes it as “a world class CSG-to-LNG project that will put Gladstone and Queensland on the world LNG stage. It is a project of great significance for Queensland and all of Australia.”The ConocoPhillips and Origin Energy joint venture, Australia-Pacific LNG, gained federal environmental approval in February,paving the way for FID by mid-2011. Still waiting in the wings is environmental approval and FID for Royal Dutch Shell and Petro-China’s Arrow Energy LNG project.Economic studies indicate that a medium-sized 28 mtpa LNGindustry – far below what Queensland will produce – could createover 18,000 jobs, generate $40 billion of private sector investment,and increase gross state product by one percent. Outputfrom these four projects will propel Australia to become a top-twoglobal LNG exporter over the coming decade

A rising tide

Movement from the majors is mobilizing industry across the greater eastern seaboard. Much of the buzz about Queensland and NewSouth Wales CSG stems from the relative proximity of fields to mass markets and their connectivity to existing infrastructure.Feedstock for LNG is an enticing option. But when considering domestic clean energy targets which favor investment in gas-fired plants, then asset prospectivity becomes highly valued for internal consumption. “New South Wales currently imports 7% of its energy requirements and consumes about 27% of Australia’s total energy,” states Ian Halstead, ceo of Sydney-based junior Planet Gas. “Another 12-14 gas-fired power plants are projected for construction between now and 2016. Additionally, large scale LNG projects in Queensland will consume much of the gas produced in the eastern Australia, leaving a potential deficit in the domestic market. Planet is targeting that deficit.” Backing Halstead’s assertion are Planet Gas’s welladdressed CSG licenses in the Sydney and Gunnedah Basins that are adjacent to existing discoveries; Cooper Basins blocks containing significant thicknesses of coal with high gas formations; and exploratory shale potential in its Cooper reserves. With a diversifiedportfolio of asset classes in strategically proximate areas to market and infrastructure, Planet Gas embodies the strategy for success of the next generation of CSG-minded juniors.

David Casey, Managing Director and CEO, Eastern Star Gas

Ian Halstead, CEO, Planet Gas

While gas-fired plants are in the planning phases and the major LNG projects ramp-up construction,some companies have moreindependent ambitions. Rather than waiting for the big consortia to bring LNG facilities online,Eastern Star Gas is building one of its own. Originally focused on conventional oil and gas, Eastern Star Gas shifted to CSG in 2005 in New South Wales – away from the traditional hotbed of Queensland. David Casey then joined as managing director to apply his 20 years experience in CSG to the company’s new assets.The company currently has three agreements to provide over 1,700 petajoules to domestic power generation companies. But,as Casey explains, “the challenges from a CSG perspective were produceability: the fact that unlike a conventional reservoir you do not get maximum production on day one. Looking at those challenges, we realized that you cannot change how a CSG field can be developed; so we looked at how to liquefy it, and not necessarily at the liquefaction process itself, but rather the size and scaleability.” The company is now progressing to front-end engineering and design on a mid-size LNG plant with Hitachi and Toyo. This is particularly groundbreaking given the size of the company and their ambitions for the future scale of their plant. “Small scale has been done elsewhere,” says Casey. “What hasn’t been done is looking at a large project using small-scale technology: genuinely looking at a project that could deliver four million tons, but doing it in half millionton increments. One of the attractive qualities for Hitachi and Toyo in dealing with Eastern Star Gas is the opportunity to prove that their technology and their skill sets can actually match worldscaleprojects, only with smaller trains. The more we look at it the more we get excited by the prospects and the benefits of using smaller scale technology.”

Start local, think global

In addition to innovative methodologies, international players have been converging on the state to strengthen their global brands.“In terms of development opportunities there is nowhere in the world that has as many opportunities as Queensland does right now,” says Terry Bayliff, Laing O’Rourke’s global leader for oil and gas. The British construction giant recently made its first foray into the hydrocarbons sector bringing Bayliff on board to lead the charge after a distinguished career at Bechtel.The global oil and gas movebegan in Australia with a contractto build a liquefaction plant for mid-scale specialist LNG Ltd. Thedeal was suspended when ArrowEnergy, the plant’s originally slatedbuyer, was acquired by a Royal Dutch Shell-PetroChina joint venture.Undeterred, Laing O'Rourke has since been awarded contractsfor a Gorgon Gas utility project and a BG water treatment plant.The company also recently completed the Dalby Power Project forOrigin Energy, which is powered by gas from unconventional fields.Bayliff is confident in Laing O'Rourke’s strengths to compete in acrowded oil and gas construction market. The company specializes in multi-discipline, self-perform construction for which thereare few general contractors in Australia. “Most contractors aresingle discipline,” says Bayliff. “They are either civil, mechanical, or they are electrical disciplines. Laing O'Rourke offers a full suite of packages.”Bayliff hopes to use Australia as a springboard for launching Laing O'Rourke’s oil and gas offering across the world. “I expectthat there will be a period of up to three to five years of growth here in Australia: winning projects and demonstrating excellencein execution. This is the offering we are going to take around the world and it has to be grown here in Australia initially.” The Australian experience that Bayliff aims to replicate at theglobal level has already come to fruition for another multinational resources contractor, Nacap. The Dutch pipeline constructioncompany looks to Australia for a high benchmark of technical learningsand, more lucratively, 30% of total global turnover. “Australia is somewhat unique in our global pipeline market,” says Mark

Mark Bumstead, Managing Director, Nacap in Australia Bumpstead, managing director of Nacap Australia. “Contrary to most other Nacap markets, our pipelines here are characterized by long distances.” Indeed, the tyrannies of distance and strict environmental codes in Australia require many service companies to streamline logistics and innovate their operational models. These models will certainly be tested, with the construction wave of transmission infrastructure to connect CSG fields to markets. “When considering not just the trunk lines but the upstream gathering facilities, there are many thousands ofkilometers of pipelines to be built to support these CSG projects,”says Bumpstead.Daunting as the challenge might be, a company such as Nacap leans on paramount experience. Nacap is currently constructingpipelines for two nationally significant projects – a $5.4 billiondesalinization plant in Victoria and 940 km of looping for an Epic

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Serbia has had an undoubtedly troubled history since the breakup of Yugoslavia in the early 1990s. A costly war and ensuing UN sanctions have left the country’s economy a few years behind those of its regional counterparts. The subsequent global financial crisis in the late 2000s resulted in another hit to many of the country’s key industries, including Serbia’s pharmaceutical and healthcare sectors. These historical events explain some of the key issues that underlie the sectors’ current challenges, such as nonliquidity and inadequate funding. And while Serbia’s population currently amounts to roughly 7.3 million inhabitants, “it is a littleknown fact that 1.2 million people have no income, and that the state provides 520 dinars (roughly $7.30) per year for them,” asserts Serbia’s Ministry of Health. In an attempt to address the liquidity crisis in the Serbianhealthcare industry, the government of the landlocked republic recently decided on a 10% price clawback across its drug reimbursement list. It has created an atmosphere of unpredictability for the pharma industry in the country. However, whether it is to grow the product portfolio, to expand into new markets via Serbia as a gateway, or to reduce manufacturing costs, both the national industry and the multinational companies (MNCs) in Serbia still see a huge potential for this roughly $1.21 billion Eastern European market.

Zoran Stankovic, Minister of Health, Republic of Serbia; As general manager of Serbia’s No. 3 flagship pharma company, Nenad Ognjenovic agrees with this view. Overlooking Belgrade’s municipality of Zemun from the Galenika headquarters, Ognjenovic expresses how it is his personal wish to see as many MNCs as possible present in Serbia. Explaining why, he states that “we do drug manufacturing for all world markets here. While doing so, we also enjoy cheaper inputs; we have a relatively cheap labor force, are in close proximity to the tries in the Balkan region, Serbia’s lack of development has left EU, and have more privileged relationships with Russia and the large room for growth and expansion. “Serbia experienced very strong growth in the years before the financial crisis, and although the country’s recovery is happening a little slower than in more developed countries, today’s data suggests that Serbia is starting to rally.

Dragomir Marisavljevic, Executive Director

high risk, high rewardAlready the only country outside the CIS with an FTA with Russia, Serbia, as an export-oriented nation, has high expectations for potential EU accession. “I strongly believe that EU integration will play a very positive role,” agrees Dejan Sencanski, AstraZeneca’s country manager for Serbia, Montenegro, Albania, and Macedonia. For Sencanski, accession will send a strong message to politicians to fully exploit the pharmaceutical growth areas through avenues such as the country’s vast potential for clinical trials. “There is a lot of potential to do clinical trials here,” the local head of the UK-headquartered MNC concludes. “I believe that the main hope for change is the process of Serbia becoming a member of the EU,” concurs Bojan Trkulja, managing director of the Innovative Drugs Manufacturers Fund (INOVIA), Serbia’s leading association for MNCs. “Serbia is a market where there is a lot of space for new companies to expand and try to find better positions, because nothing is set in stone. Even in the pharma industry, almost all the major players are in Serbia. There is still a lot of space in the market for them to position themselves,” Trkulja finds.

Dr Bojan Trkulja, Managing Director of Inovia

Very few MNCs are better positioned in the Serbian market today than the Danish Novo Nordisk. Predrag Radoševic, general manager of Novo Nordisk in Serbia, believes that the company’s 85% share of the Serbian insulin market can be explained by the fact that the company was present in the market in the 1990s, through a cooperation agreement with local manufacturer Hemofarm. When NATO intervened in Serbia in 1999, Novo Nordisk took the unusual decision to remain in the country to become Serbia’s sole insulin provider. As a result, Serbia is the only country outside of Denmark where Novo Nordisk enjoys such a high market share. In 2002-2003, the company restructured and Radoševic took on the position as general manager. He explains that learning from other countries in the region was extremely useful to him at this time. “In those early days, I relied a lot on the knowledge and experience of our neighboring countries, because everything that was happening in Serbia had already happened there in the years previous. It was an excellent opportunity to avoid mistakes, take advantage of their experiences, and approach things in an organized way,” he says.

Predrag Radosevic, GM of Novo Nordisk

welcome foreigner!Indeed, Trkulja of INOVIA supports the argument that companies have found Serbia so attractive since the market opened up at the beginning of the new decade. Compared to other European countries and even countries in the Balkan region, Serbia’s lack of development has left large room for growth and expansion. “Serbia experienced very strong growth in the years before the financial crisis, and although the country’s recovery is happening a little slower than in more developed countries, today’s data suggests that Serbia is starting to rally.

Nenad Ognjenovic, GM of Galenika

I strongly believe that we are now in a position where we will see large growth in the years to come,” Trkulja asserts. There is indeed plenty of data that supports the openness of the Serbian market for drugs of foreign producers. The country’s Minister of Health, Zoran Stankovic, adds in a public statement that “there are 4,000 pharmaceuticals licensed to trade, which are produced by over 300 different producers. From the aforementioned number of pharmaceuticals, about 2,500 are produced by foreign producers.” The growing trend of cost-containment measures across Europe has led companies to focus harder on the long-term future of healthcare. Many, including Zoran Labudovic, general manager of Pfizer Serbia, believe that copayment will play a larger role in the future of European healthcare. Labudovic believes that in Serbia, this leaves a lot of room for growth. “Pfizer has prospered in Serbia because of the potential of the country, which is apparent from the size of the population and the country’s attitude toward paying for healthcare out of pocket. Despite the fact that Slovenia and Croatia are much richer countries, the fact is that their populations are not in the habit of paying for healthcare. This is due to the fact that dur- Nenad Ognjenovic, GM of Galenika SPONSORED SUPPLEMENT AUGUST 2011 FOCUS REPORTS S5 Country Report ing sanctions, Serbians got used to the idea that in order to have access to certain medicines they needed to pay. This provides a good basis for the future,” Labudovic explains.

Gatekeepers of prosperityMany of the MNCs operating in Serbia today are run by Serbians who are dedicated to ensuring their long-term presence in the Serbian market. Ana Govedarica is Roche’s general manager in Serbia, and few in the industry are more dedicated to bringin high-level innovation into thecountry than her. Govedarica explains that, while the route Roche has taken around the world has certainly made doing business in Serbia tricky in recent years, she is positive that the company’s presence in the country should be for the long-term benefit of patients. “Our strategy is based on a five year perspective.

Ana Govedarica, GM of Roche

We would not be successful here as a company if we only planned on a daily basis,” Govedarica explains. “Our strategy is to be the most successful company here in the Serbian market, and Roche certainly has the products in order to achieve this. We are moving purposefully, and we are a very brave company because we have taken the decision to stay committed purely to innovation. Innovation requires very knowledgeableand brave people, because any innovation demands courage. I am therefore paying close attention to my people, in order to equip them to be brave and extremely knowledgeable in their work, so that we can transmit Roche’s science to Serbia.” Surely, a lot of bravery and hardwork will also be required in the Republic’s governmental layers. While the potential is there, it will be up to Serbia’s policymakers to provide the necessary political stability to nurture an environment for growth, as they continue to hold the keys to fully unlock this growing Balkan market.

ULYANOVSK: the investment oasis in love with aviation

ULYANOVSK: the investment oasis in love with aviation

Ulyanovsk: romance and ambitions

XIX century view of old Ulyanovsk If you look for Ulyanovsk in the Lonely Planet, all you will find, before a brief historical overview, is “Founded as Simbirsk in the 17th century, Ulyanovsk is a tourist stop for only one reason: it is the birthplace and childhood home of Lenin (born Vladimir Ilych Ulyanov)”. What Ulyanovsk is doing now is working to add ever more reasons to visit it – whether for tourists or for investors. But it is not surprising if you never heard much of this small (by Russian standards) city 893 km east of Moscow on the shores of river Volga, an endless source of beauty and a strategic transport corridor. In fact, Ulyanovsk is all about poetry and great ambitions: it is a romantic landscape sketched by Pushkin, the world famous Russian poet, on his Volga trip in XIX century, and is the birthplace of the world famous revolutionary; it also represents people devoted to aviation and businessmen devoted to investments and added value; moreover, it represents the cultural capital of the Privolzhsky federal region and the new aviation capital of Russia.

Sergei Morozov, governor of Ulyanovsk region The latter is just one of the numerous poetic titles granted to Ulyanovsk in its new stage of development, now that Sergei Morozov, governor of Ulyanovsk region, is working to connect four key elements – his passion, his authority, local and federal investments and international business – to prove that the revival of Russian aviation will start here, 35 years after Aviastar-SP, the first local aircraft production facility of national importance, appeared in Ulyanovsk. Five years ago, on the dawn of this new movement, Ulyanovsk woke up to realize that it is now facing the ambitious target of becoming “The aviation capital of Russia” by 2020. In the following years, news was flashing up (this is probably why Lonely Planet still thinks Lenin) of the arrival of Michael Porter’s cluster philosophy in the local aviation context, the birth of the brand “Ulyanovsk: ready for take-off”, the federal approval of the Airport Special Economic Zone (ASEZ) “Ulyanovsk-Vostochny”, forming of the science-education-industry consortium “Ulyanovsk-Avia”. All this occurred in a matter of a few years – hardly enough for a non-native speaker to learn to say ‘aviastroenie’ (‘aircraft manufacturing’ in Russian) and ‘tekhobsluzhivanie’ (‘MRO’ in Russian), something that foreign investors will need to do.

Aviation starts with love

River Volga is an everlasting source of inspiration It would be logical to ask: why here? It is far (relatively far) from Moscow, well away from busy cargo hubs, it has a relatively weak (but no longer stagnant) local economy and outbound migration, and lies among stronger regional rivals like Samara and Kazan… While the regional economy is still recovering, a broader look at its geography speaks for itself: within a 500 km circle, Ulyanovsk is surrounded by 3 cities with over one million strong population. Before introducing numbers, let Morozov explain his standpoint: “In 2005, when I started talking about the importance of developing Russian aviation and aircraft production, I was merely interested in boosting the work of Aviastar-SP, our city-forming enterprise. But I realized that this was no panacea for a city with very diverse aviation companies. As the governor of the territory of aviation, I felt the need to set up a high target – to save aviation – and involve state leaders, heads of aviation companies, specialists and journalists. Today, I can say that it is a success: Aviastar-SP is working, the theme of Russian aviation is more and more present on the federal agenda, and the state machine is slowly turning towards supporting aviation. What is most important is that people now believe that there is a solution”.

Sergei Krasnov, rector of Ulyanovsk Aviation College What characterizes ‘the territory of aviation’ that the governor discovered in the beginning of his first term, aside from having true believers? Ulyanovsk has a proven aviation background in various segments of the industry. This is the key to build up synergies among the companies that represent aviation in its diversity: Aviastar-SP, the largest Russian aircraft manufacturing facility, UKBP and Utes, avionics and radio electronics manufacturers, Ulyanovsk branch of Tupolev design bureau, two airports – Ulyanovsk-Vostochny and Zentralny, two cargo carriers - Volga-Dnepr, the major world carrier of unique heavy cargo, and Polet, Ulyanovsk Aviation College, a unique pilot training center, Ulyanovsk State University and Ulyanovsk State Technological University. Synergy of local manufacturers, avionics companies, design bureaus, airports, carriers and universities - as the backbone - is the main idea of the Ulyanovsk aviation cluster that borrows the best world practice in industrial clusters.

The new elements of the cluster, essential for its development, are an investment platform and a transport forum. The investment platform - the Airport Special Economic Zone “Ulyanovsk-Vostochny” (named after the airport that it is based on) - is the financial motor of the cluster. SEZ is a greenhouse for large investors who share Morozov’s belief in aviation. “Ready-made investment platforms, administrative support, growing aviation cluster, a unique geographic position, and favorable tax regimes for the import of cargo and export of Russian goods, as well as a structured system of tax exemptions, preferences and budget subsidies make Ulyanovsk one of the best investment centers in Russia”, summarizes Dmitry Ryabov, general director of Ulyanovsk Region Development Corporation.

The idea of the transport forum was embodied in April 2011 in the International Aviation and Transport Forum, Ulyanovsk’s own exhibition, airshow and conference platform supported by the Russian transport ministry, Russian ministry of industry and trade and United Aircraft Corporation (UAC).

Evgeny Aronzon, head of the project Aviation Capital of Russia

According to Evgeny Aronzon, head of the project “Aviation Capital of Russia” and executive director of the Forum, the big idea is to “pick out” the professional community from 5* hotels and bring them in the fields where aviation is made. Ulyanovsk is a perfect platform to see real aviation and discuss the federal issues of the industry that are applicable anywhere in Russia. According to the regional government, the International Aviation and Transport Forum held in April 2011 brought US$32.8 million of investments in the region. Aronzon stresses that both the Forum and the project “Aviation Capital of Russia” are federal projects that are meant to “breathe life in the aviation industry”.

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Peru Oil & Gas: The Modern Inca Gold

As a country surrounded by mysteries and enigmas; dotted with kilometers-wide geoglyphs only seen from the sky; with dozens of deserts and the lush Amazon; from the depths of the Pacific Ocean to the Andes’ 6000m heights – Peru’s luring mystique is undeniable. For centuries, this country has enticed opportunist explorers with tales such as the lost city of El Dorado. Nevertheless, Peru’s new explorers are now searching for something much more intangible and precious: energy.

Luis A. Gonzales Talledo - General Director of Hydrocarbons - DGH As Latin America’s seventh largest economy and a market of 30 million people, Peru has been the Guillermo Ferreyros Cannock - Vice-President SNMPE continent’s fastest growing market in the last five years, expanding more than 8% in 2010. This growth has aggravated the need for energy resources. Since the discovery of the 11 trillion cubic feet of natural gas and 482 million barrels of natural Isabel Tafur Marin - General Manager Perupetro gas liquids in the Camisea field in 1986, Peru has increasingly shifted its energy grid so that hydrocarbons play a greater role in fueling the country. Such discoveries, together with an assertive government plan to attract foreign capital, have boosted investor confidence in the country as much as it has laid the ground for an emerging Peruvian industry ready and able to study, explore, extract, transport and market its own natural resources. While some investors were uneasy with the election of left-wing presidential candidate Ollanta Humala in June 2011, the majority of them are confident that the new President will not interfere in the country’s economic policies that have allowed for its impressive economic performance over the last decade. Furthermore, while the rush for the new “Inca gold” has been expeditious it definitely has not been careless.

Natural Gas: a modern Peruvian gold rush

After two decades of market deregulation, privatization, financial discipline and trade openness, particularly in the hydrocarbon sector, Peru seems to be once again close to reach its energy self-sufficiency status lost in the early 1990s. “One of the main objectives of Peru, as all countries, is to have energy self-sufficiency, especially now during times of such high volatility. The national demand is getting close to 200 thousand bpd - right now Peru is consuming around 186 thousand bpd… I’m confident we can supply this demand in a few years with the current speed of discoveries” explains Luis Gonzalez Talledo, director general of the General Directorate for Hydrocarbons (DGH), which serves as Peru’s regulator for the oil & gas sector. Private and public sectors alike have taken upon themselves to develop and exploit the country’s natural resources as efficiently as possible to turn Peru into an energy self-sufficient nation. These efforts have surely paid off allowing the country’s largest natural gas reserve to be exploited and marketed to serve not only the local market, but also those of neighboring countries and beyond. With Latin America’s first LNG mega-terminal and suspected gas reserves far beyond those of Camisea, Peru is ready to reap the benefits of its new prized commodity well into the future.

The revamping of Peru’s hydrocarbon industry began in the 1990s when it was decided that the NOC, Petroperu, was too inefficient to adequately manage the hydrocarbon demands of the country. It was during this period that the company’s upstream activities were sold off and privatized while it focused on is commercialization and distribution activities. Parallel to this privatization the Peruvian government began an overhaul of the legal and regulatory frameworks that would become the backbone of today’s flourishing industry. In 1993 “it was decided to create an independent organization – Perupetro – solely in charge of promoting, negotiating, subscribing and supervising the license contracts between oil and gas companies and the Peruvian State”, describes Isabel Tafur, today’s general manager of Perupetro. That same year a new legal regime was established as the basis to attract foreign investors with pockets deep enough to tap into Peru’s unexplored hydrocarbon areas. Tafur is proud to elaborate that “the hydrocarbon law gives a lot of guarantees to investors. The signed contracts are law-binding; they ensure tax stability and exchange rate guarantees, as well as guarantees of remittance of foreign currencies by the Peruvian Central Bank and tax return on investments in exploration”. Furthermore, Perupetro has taken upon itself to become a proactive agent in luring foreign capital by promoting the country’s indefinite potential in oil capitals around the world, such as Houston and London. This year the organization will launch a bidding round for up to 25 exploration blocks that will push the total number of blocks in the country beyond 100, compared to the original 21 that existed when Perupetro was first created. “These blocks offer high prospects for gas in the South, with important on-going projects and new discoveries such as the ones from Petrobras in blocks 57 and 58” concludes Tafur.

Miguel Celi Rivera - General Manager - Petroperu One company the bet early on Peru to find immense returns is that of Argentine Pluspetrol, who in Gustavo Navarro Valdivia - Production & Operations Manager - Petroperu 2000 led the consortium that would explore the Camisea gas fields that are the country’s hydrocarbon pride and joy. Initially discovered in 1986 by Shell, Camisea is estimated to contain over 11 trillion cubic feet (TCF) of natural gas reserves and is the source of natural gas for the country’s LNG mega-terminal, which represents Peru’s largest investment (US$ 3.8 billion) into a single infrastructure project and the only terminal of its kind in the region. Located deep within the Amazon jungles of Peru, the extracting, transporting and distribution of Camisea’s gas was no easy task and required the expertise and financial backing of several companies. For the upstream, Pluspetrol joined forces with Hunt Oil from the USA, SK Corporation from South Korea and Tecpetrol (owned by Techint) Roberto Ramallo - Executive Manager - Pluspetrol Peru Corporation from Argentina, while the transportation concession was headed by Tecgas (owned by Techint) and also included Pluspetrol, Hunt Oil, SK Corporation, Sonatrach and Graña y Montero. The transportation concession involved the construction of two 540 kilometer pipelines, one for natural gas (NG) and the other for natural gas liquids, from central Peru across the Andes Mountains and ending at a terminal in the city of Pisco on the Pacific coast. Additionally, the concession required that the gas be transported and distributed to Lima and the main port-city in the country, Callao. This required the construction of a second 714 kilometer pipeline that carries the gas along the coast to Peru’s capital. Roberto Ramallo, general manager of Pluspetrol, says that “Camisea represents for Pluspetrol the most challenging project to be accomplished by the company. Logistically, the project was truly a test because of the lack of roads and having to transport everything via rivers or by air”. Today Pluspetrol is the largest hydrocarbon producer in the country and counts on its Peruvian operations for 70% of its global revenue.

Camisea was symbolic for the country in many ways as it marked a turning point for Peru’s hydrocarbon industry. It was because of this and other NG discoveries, as well as a diminishing petroleum production, that the country decided to shift its energy matrix to focus on natural gas rather than petroleum derivatives. Before Camisea, Peru relied on petroleum to supply 69% of its energy needs while natural gas only represented 7% and other energy sources (hydroelectric, biofuels and renewable sources) 24%. The aim today is to shift the country’s energy supply to rely predominantly on natural gas and hydroelectric power, and by 2009 NG and its liquids had already moved to become more than 52.5% of the country’s total energy produced while petroleum had decreased to 28.7%. In essence, NG has become the promise of a steady energy supply to the country’s booming economy as well as one of the most lucrative commodities comparable to the precious metals that are also sourced from Peru’s mineral-rich earth. Guillermo Ferreyros, vice-president of the National Association for Mining, Petroleum and Energy (SNMPE), explains that “Peru’s current economic growth brings higher energy demand. This year alone our hydrocarbons consumption grew at double digits and the natural gas consumption in 2009 was at the level expected for 2016. In order to supply all this energy demand, Peru managed to attract grand investments, such as the $3.8 billion Melchorita LNG plant. Until 2016 this project alone will drive more than $7.5 billion to the country. Thanks to Melchorita LNG Plant the trade balance will be reversed into positive results in the coming years”. The colossal project leading to the inauguration of the Melchorita LNG plant in June 2010 was conducted by a consortium of companies known as Peru LNG, headed by Hunt Oil with the participation of SK Energy, Repsol and Marubeni. The world-class liquefaction plant was built by the Chicago Bridge & Iron Company (CB&I) and has an annual capacity of 4.4 million tons of LNG that will be exported to other countries in the region.

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New Horizons Offshore

The story of India’s offshore started with the discovery of the Bombay High oilfield 160 kilometers off the coast of Mumbai,. “The Oil and Gas (O&G) discovery in Bombay High took the country by surprise,” explained Satpal Singh, managing director and CEO of Dolphin Offshore, one of the first Indian offshore support companies. “There was no expectation that India had offshore oil resources. We had historic findings in Assam and Gujarat, which had been found during the days of the British presence in India. The entire production was oil - hardly any gas was restricted to that source. There was no development of O&G technology; there was no trading institution over here, although after a period of time, ONGC started to develop certain institutions.”

Ashley Jerome D'sa, CEO, Oil Field Instrumentation (OFI) “It actually all started with a lot of foreign companies, considering there was no Indian company that had sufficient expertise,” Amit Biswas, CEO of Ambico, explained the initial development of India’s offshore industry. Biswas’ company is a service bound offshore agency with Joint Ventures (JV) with Malaysian offshore engineer IEV, British Found Ocean and a partnership with the Australian offshore project contractor Tamboritha. “Over the last fifteen years, a lot of Indian companies have come in, for exploration and production (E&P) of offshore oil and gas,” Biswas continued.

“The crews of the vessels, along with the companies mastering the supply vessels, were foreigners,” Biswas continues. “It took us some time to train local people and qualify them (…) My partner was, in fact, the first ever Indian master to handle an offshore vessel. Slowly, Indian companies came in. Now we see some JV or full-fledged Indian companies taking lump sum turnkey jobs. Before, only foreign companies were doing it, and Indian companies were providing a bit of support.”

“The country’s offshore sector”, said Singh, “possesses such levels of homegrown expertise nowadays that it could do without foreign expertise. The growth and development of the Bombay High field provided tremendous opportunities for Indian companies to start new ventures and over the next 2 decades the country grew towards self reliance in being able to meet the requirements of the Oil & Gas industry.”

Beyond Bombay High

While the output of the Bombay High field run by state-owned Oil & Natural Gas Corporation (ONGC), decreased from a 20 million ton peak in 1989 9 million tons now, India’s offshore industry received a next boost in 2002, when Reliance Industries, India’s largest private player in the petroleum sector, discovered the biggest natural gas reserves in India. This was in the D6 block in Krishna Godavari (KG) basin, 37 miles off the Indian east coast in the Bay of Bengal. The field has proven plus probable reserves of 11.3 Tcf. Similar to what happened in the Bombay High field, the development of the operations at the east coast has seen India’s domestic industry, with the support of foreign companies, working hard to close the knowledge gap .

Satpal Singh, managing director & CEO, Dolphin Offshore Enterprises Amit Biswas, CEO, Ambico Reliance Industries’ operations in the KG basin were quickly recognized as India’s most important offshore activity and even one of the most important in the world; the field was the world’s largest gas discovery in 2001. Indeed, as P.M.S. Prasad, Reliance Industries’ executive director, told Focus Reports, “our drilling partner, Transocean, says that our operations at a water depth of 10,194 feet are the deepest that have ever been done [worldwide]”; this project has also seen the participation of the Houston-based oilfield service company, Oceaneering, with an all Indian team.“We had to start from scratch, so having created an organization, trained a lot of people and acquired some competencies and infrastructure, we are now looking at opportunities outside India,” continues Prasad. “We have a very good safety, exploration, development and project management record, and now we are looking to capitalize on these competencies outside the country.”

Full of achievements, including 125 deepwater wells drilled and a strong track record, Reliance Industries signed another milestone in its international strategy by signing a joint venture with BP last February through which the American supermajor committed to invest 7.2 billion USD (30 per cent stake) in 21 of Reliance’s oil and gas blocks.

In a press conference following the signing of the deal, Reliance Industries chairman Mukesh Ambani said that “These guys are the best (in exploration). If you want to climb the Mount Everest, make sure you have the best Sherpa with you.”

Reliance’s successful deal was followed last August by news that ONGC was holding talks with international oil companies already present in India including Shell, Eni and BG to sell stakes in its deepwater wells off the country’s resource-rich eastern shore. At the same time, ONGC has also been carrying out a Rs. 9,000 crore (approximately 2 billion USD) redevelopment investment to increase oil and gas output of its Bombay High field.

Indeed: “In India we are endowed with around 138 billion barrels of oil and oil equivalent, but most of them lie in frontier locations/deep water and ultra deep water. In order to search for these resources our country needs advanced technology,” explains Ashley Jerome D'sa, CEO of Oil Field Instrumentations (OFI), a company delivering mud logging services.

D’sa praises the New Exploration Licensing Policy (NELP) introduced in the early 1990’s to further liberalize participation at E&P tenders, as: “the general impact of such policies is the increasing entry of foreign investment and private companies in the Indian upstream market. Obviously, this has also given more opportunities for growth in the sector that we are in. We have been working on almost every project; with ONGC for instance, we have been working with them in all the assets and basins – onshore as well as offshore. We have also been working with private and MNC’s like Cairn, Reliance, GSPC, British Gas, Shell, Gazprom, NIKO, Hardy Petroleum and many others. If the exploration industry continues to grow we hope to see growth in OFI’s business as well.”

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Paradigm shift:' the two words that best describe what the Indian pharmaceutical industry has experienced in the last 40-plus years. Numerous developments have drastically altered the healthcare and pharmaceutical environment in the world's seventh-largest and second-most populous country. Within an industry that traditionally moves at a slow pace, the rapidly changing playing field has required both Indian pharmaceutical companies, as well as multinational corporations (MNCs), to adjust their strategies accordingly. Provided that India's $12 billion market will keep growing at the same rate, its total domestic market size is set to reach between $49 billion and $74 billion by 2020, according to a recent PricewaterhouseCoopers (PwC) estimate. With a consistently higher growth rate than most other countries, India is expected to soon earn a place in the world's top 10 largest pharma markets.

India GDP Growth rate % (PPP) While the country's astounding GDP growth has recently enabled Finance Minister Pranab Mukherjee to lay out an increase of 20% in health allocations in 2011-2012, India's public expenditure on healthcare as a proportion of GDP still stands at a worrying low of around 1%. Policymakers are aware of the issue, but a country the size of India has many challenges to tackle. How, then, to step away from a model where 80% of health expenditures are out-of-pocket payments? "The role of the insurance providers is obviously the answer to many issues India faces today," says Sujay Shetty, pharma and life sciences leader at PwC India. "This is the single most important thing that should happen in India, and is bound to lift up the broader markets, as well as certain specialist therapies which would otherwise be unaffordable." Tapan Ray, Director General of OPPI Government has already taken a number of measures to ensure affordable medicine in the country, and 74 drugs and formulations have been under price control by the National Pharmaceutical Pricing Authority since 1995. These downward price pressures explain the high penetration of bioequivalent versions of innovator drugs (branded generics occupy roughly 90% of the market according to industry experts), as well as the fact that a market massive in volume has remained low in value. Whether differential pricing is the solution to enhance uptake depends to a great extent on the therapeutic portfolio and strategic course companies embark upon.A 1970 law that recognized patents on processes, rather than products, meant the start of a booming domestic generic industry in India. However, having joined the World Trade Organization (WTO) in 1995, Indian policymakers were obliged to harmonize local legislation with the global-standard Trade Related Intellectual Property Rights (TRIPS) agreement, resulting in the adoption of product patent law from 2005 onwards. "The previous paradigm was one of replication, where Indian manufacturers were Kewal Handa, Managing Director of Pfizer replicating and marketing products at a fraction of their international price," recalls Tapan Ray, director general of the Organization of Pharmaceutical Producers of India (OPPI), India's premier association of the largest research-based international pharmaceutical companies in India. While it has been a practice that gave India a pool of some of the most brilliant process chemists in the world, Ray believes that further progress within the country's economy and pharma industry will be driven, to a large degree, by innovation.

DECADES OF PATENT POWERPLAY TO BOOST AFFORDABLE MEDICINE

India's 2005 change in patent regime became a true paradigm shift: flagship generic companies such as Cipla, Ranbaxy Laboratories, Zydus Cadila, Lupin, and Dr. Reddy's Laboratories had emerged on one side of the spectrum, while an increasing presence of MNCs in India's domestic market space concurrently took place on the other side. For the latter, the strategies to tackle the very fragmented, competitive, and price-sensitive Indian market varied significantly. Japanese innovator Astellas, for example, has been one of the youngest entrants, having set up offices in India only in 2009. Its managing director, Teruo Yasufuku, points to the robust 2005 patent law in justifying a full presence. "India's growing economy, the lifestyle changes, and the affordable income increase, are also some of the factors we used in our evaluation to decide whether it would be really viable or feasible to set up an Astellas subsidiary in India," he says. To establish its presence in India, Astellas chose its flagship product Prograf, a cornerstone immunosuppressant to prevent organ rejection in transplant recipients. "We launched Prograf at the end of March 2010, at a time when 19 generic versions were available. Yet, after one year of sales, we can say that Prograf is already the second-most-prescribed immunosuppressant for new patients," says Yasufuku.

D.G. Shah, Secretary General of IPA Kamal K. Sharma, Managing Director of LupinSatish Reddy Ascribing the success to the know-how, the global network, and over 20 years of product experience in nearly 100 countries, Yasufuku and the Prograf story give high hopes to innovators that may have held back to compete in the backyard of the world's largest generic labs. Those that took the courageous leap may—by now—have realized that there are two markets in India, and a range of branded generics actually complements an innovator portfolio. "Launching quality branded products at a very competitive price is what makes the difference at Pfizer," says Kewal Handa, managing director of the Indian subsidiary of the world's No. 1 pharma major.The decision of a number of prominent Indian generics players to sell their portfolios to MNCs has sparked various sentiments in the corridors of the Indian pharma scene. Recent eye-openers, such as the 2008 acquisition of Ranbaxy by Daiichi Sankyo and Abbot's 2010 deal to take over Piramal's domestic branded formulations business, certainly reveal what has been boiling beneath: a drastic change in India's pharmaceutical terrain. "Now, what are Indian companies doing?" asks Dilip Shah, secretary general of the Indian Pharmaceutical Alliance (IPA), representing the interests of the country's leading domestic pharmaceutical companies. Shah continues, "One, they are building marketing infrastructure, and selectively getting into various countries where they can compete independently. At the same time, Indian companies are looking to capitalize on Big Pharma's push to enter emerging markets via generics. Other things that Indian companies are doing include looking at African markets to establish local production and reinforcing their presence in mature markets. For the mature markets, some Indians are growing via acquisition." , managing director and chief operating officer of Dr. Reddy's Laboratories, confirms that some of the company's key growth drivers in 2010 came from international markets, and comments that "at the top of the list are the USA, India, Russia, and Germany, followed by countries such as Venezuela." Other flagship Indian generics players, such as Cipla, Zydus Cadila, and Lupin, have similarly been increasing their international footprint. "You need to remain aware of the fact that India still only captures 1.5% to 2% of the world's pharmaceutical markets. With 98% of the market share outside of India, you have to ask yourself how to grow, and how to grow rapidly. In that pursuit, you have to prepare yourself to partake in advanced geographies, where you can be part of a larger pie," comments Lupin's managing director Kamal Sharma.

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Increasing integration with the world economy and accession to the European Union (EU) in 2007 have been key pillars in taking the growth potential of Romania's pharmaceutical market to greater heights. Valued at $3.3 billion, Romania was recently labeled an IMS Tier 3 category of "Fast Followers" among the world's 17 pharmerging nations. "One of the larger EU members, Romania stands for an incredible market opportunity in terms of size and population—9th and 27th in the EU, respectively—offering investors a strong market potential as the second-largest country in Central and Eastern Europe (CEE) after Poland," explains Sorin Vasilescu, director of the Foreign Investment Department under Romania's Ministry of Economy, Commerce and Business Environment.

Regrettably, a European Commission (EC) and Organization for Economic Cooperation and Development (OECD) joint study from 2010 showed that Romania still has the lowest life expectancy in the entire EU. Historical analyses show how chronic underfunding of the healthcare system has taken its toll on the Romanian patients. According to a June presentation of the Romanian Association of International Medicines Manufacturers (ARPIM), current healthcare expenditures amount to only 3.6% of the country's GDP. In comparison, the 2009 averages in the EU and Africa stood at 8.6% and 5.9%, respectively, putting Romania in the same line with Madagascar and Burundi.

GOING DUTCH?

"We have a major dysfunction. Underfunding is recognized, there are problems regarding transparency in the allocation of funds and the inefficient use of these funds, and inequities exist in access to health services—especially in rural areas. Thus, patient satisfaction is quite low," states Romania's new Minister of Health, Ladislau Ritli. And while institutions such as the Romanian National Health Insurance House (CNAS) have been lobbying for rectification of the insurance budget, President Traian Băsescu has denied additional financial resources before the Ministry of Health (MOH) demonstrates adequate control of its spending.

2010 funds allotted for medical products, equipments and services Is there a way out of this vicious circle? According to Nicolae Lucian Duta, CNAS's president, increased involvement from the private sector could help. While a number of different routes can be considered, Duta presents two possible scenarios. "The first one is that CNAS remains the main public insurance fund that will finance a basic benefit package, while the private health insurance market fulfils a complementary or supplementary role. The other one is to move towards a healthcare system based on the Dutch model, where CNAS will become a regulatory body in charge of distributing the funds between several private insurance funds, which will offer variants of a basic benefit package." Nicolae Lucian Duta, President of CNAS "With regard to public expenditure on medical treatment, Romania regrettably holds the last place in the EU. Current expenditures are roughly €70 ($97) per person per year, which is a very low figure. At the same time, the public system is using most of the budget to purchase very expensive drugs. Therefore, a lot of people from the industry have come to believe that an important shift in Romanian public health policy is imminent," explains Laurentiu Mihai, executive director of the Romanian Association of Generic Medicines Producers (APMGR).

As the MOH has been urged to free up government funds through greater use of generic medicines, Romania has started viewing its drug spending differently. This eagerness has sparked the interest of the world's leading generic players. India's Dr. Reddy's Laboratories, for example, appointed Cristina Garlasu as early as 1995 to build a platform for growth in Romania.

Laurentiu Mihai, Executive Director of APMGR Set to cross the $20 million turnover milestone this year, the country general manager reflects on the importance of Romania. "Within Dr. Reddy's global operations," Garlasu posits, "Romania forms part of the so-called G8 of countries that the company focuses on worldwide." Ascribing the attractiveness of Romania to the market's growth potential and the overall profitability of the business, Garlasu now looks at a compound annual growth rate (CAGR) of 30% through 2015, which will potentially include inorganic growth opportunities. "There is big potential in the Romanian market, which still has to grow in value and structure. This means that we also expect growth in the new therapeutic areas of success. For instance, Dr. Reddy's is successful with various biologic products in India, and I hope to be able to provide such products to patients in Romania one day. As a market, I feel we are now at the bottom and can only move up from here," concludes Garlasu.

The challenge for Romania's generic players is to ensure that the proper generic medicines reach patients with the support of the country's retail sector. At present, government has increasingly delayed its payments to the retail sector, which in turn creates delays with the wholesalers and eventually the manufacturers. "At the end of the day, the pharmaceutical industry in Romania has supported the healthcare system by financing it with a record €1.15 billion ($1.59 billion) in 2010," explains Makis Papataxiarchis, managing director at Johnson & Johnson Romania. Lacking liquidity has driven a high number of pharmacies into insolvency or bankruptcy, whereas surviving pharmacists consequently prefer selling innovative drugs to generate better cash flow. And all this when only 11 million out of the 21 million people in the country have proper access to medicines.

Apart from retailers, the long payment terms have pushed smaller, cash-hungry wholesalers and distributors to tap into parallel trade opportunities (accounting for an estimated 15% to 25% of the market). Now at a record 330 days, the industry remains hopeful that a recent EU Directive will take payment terms down to EU standards of 60 days by 2013. If successful, this will ensure better availability of cheaper medicines to the Romanian population.

Российская вертолетная отрасль: глобальный игрок

"Российская вертолетостроительная отрасль недавно завершила консолидацию, объединившись в холдинговую структуру", - констатировал Дмитрий Петров, генеральный директор Холдинга "Вертолеты России", в мае этого года во время Helirussia 2011. С момента завершения консолидации, Холдинг представляет весь модельный ряд вертолетов российского производства.

Холдинг "Вертолеты России", дочерняя компания ОПК «Оборонпром», был создан в 2007 г., но его ключевые предприятия имеют более чем 60-летнюю историю. На их счету - одни из самых успешных во всем мире вертолетов: Ми-8/17, Ми-26—вертолет, способный перевозить рекордный груз весом до 20 тонн — и Ми-35M, единственный военно-транспортный вертолет во всем мире.

Консолидация вертолетостроительной отрасли привела к положительным результатам. Отрасль уже четыре года подряд демонстрирует положительную динамику: за этот период консолидированная выручка "Вертолетов России" увеличилась почти в четыре раза, объемы производства предприятий холдинга "Вертолеты России" в 2010 году выросли до 214 вертолетов. По итогам 2011 года холдинг также ожидает дальнейшего увеличения объемов производства и поставок вертолетов. Кроме того, консолидация отрасли позволила Холдингу внедрить единую ценовую политику и расширить свои возможности в разработке и производстве новых вертолетов.

Говоря об увеличении объемов производства, Андрей Реус, генеральный директор ОПК «Оборонпром», упомянул во время крупнейшего российского вертолетного форума Helirussia 2011, что цель «Вертолетов России» - выйти на производство 262 вертолетов в 2011 г. и более 300 вертолетов ежегодно к 2012 г. Этот темп позволит России занять как минимум 15% мирового вертолетного рынка к 2015 г. По словам Игоря Коротченко, руководителя Центра Анализа Мировой Торговли Оружием (ЦАМТО), доля "Вертолетов России" в общем балансе мировых поставок вырастет с 11% в 2011 г. до 17% в 2020 г.

Дмитрий Петров, генеральный директор ОАО Вертолеты России В качестве логического продолжения успешной консолидации отрасли, в 2011 г. "Вертолеты России" планировали провести IPO, которое впоследствии было отложено. В недавнем интервью газете «Коммерсантъ» Дмитрий Петров пояснил: «По сути, холдинг является первой компанией российского ВПК, которая решила стать публичной. И инвесторам было сложно оценить нашу уникальность: просто не с чем было сравнивать, сопоставлять. Главная проблема заключалась не в отсутствии спроса на акции — спрос был, и мы могли разместиться, но нас пытались откотировать с большим дисконтом к рынку. Мы решили этого не делать: размещение не было самоцелью».

По словам Дмитрия Петрова, каждое предприятие Холдинга выступает как производственная площадка, в то время как Холдинг отвечает за маркетинговые функции — продажа вертолетов, продвижение моделей на рынок, проведение логистической поддержки, послепродажное обслуживание вертолетов. В интервью газете «Коммерсантъ» Петров подчеркнул, что управление холдингом строится на проектно-программном методе: было отобрано девять программ, у каждой из которых есть свой руководитель, полностью ответственный за программу - от опытно-конструкторской работы до маркетинга – благодаря чему работа изначально нацелена на конечный результат.

"Вертолеты России" занимают доминирующее положение на рынках России и СНГ (в 2010 г. на долю Холдинга приходилось 85% продаж вертолетов в данном регионе). Согласно авторитетным источникам, Холдинг является одним из лидеров на растущих рынках Индии и Китая, быстро наращивая свое присутствие на рынках Латинской Америки, Ближнего Востока и Африки. По данным Холдинга (по состоянию на середину 2011 года), свыше 8500 вертолетов российского производства эксплуатируются в более чем 100 странах, что составляет 13% мирового вертолетного парка.

Основные тенденции в производстве, эксплуатации, рыночной политике и послепродажном обслуживании вертолетов в России

По мнению экспертов, развитие российского вертолетного рынка в среднесрочной перспективе будет охарактеризовано двумя основными тенденциями: во-первых, операторы столкнутся с большим объемом авиационных работ, что вызовет потребность в увеличении количества новых вертолетов в среднем классе. Во-вторых, больший спрос операторов на вертолеты со взлетной массой 1,5-6 тонн увеличит емкость российского рынка в части легких вертолетов в связи с глобальной теденцией последних десятилетий – увеличением эксплуатации вертолетов в частных и корпоративных целях. Увеличение спроса на вертолеты легкого класса выразилось в потребности принятия новых стандартов и правил, которые находят свое отражение в международном воздушном праве. Российской вертолетной отрасли все еще предстоит «переварить» тенденции мировой практики и ввести соответствующие изменения в Воздушный Кодекс. Над решением этой проблемы активно работает Ассоциация Вертолетной Индустрии (АВИ): при ее активном участии созданы практически все федеральные авиационные правила полетов (ФАПП), которые были введены на территории России за 2010 г.

Михаил Казачков, председатель Ассоциации Вертолетной Индустрии (АВИ)

«Мы смогли добиться коррекции Воздушного Кодекса благодаря введению в ноябре 2010 г. уведомительного порядка использования воздушного пространства, что дало возможность расширить диапазон использования вертолетов. Принятие ФАППов также позволило увеличить до 30% объем налета часов – один из ключевых показателей в авиационной отрасли – и расширить временную зону эксплуатации вертолетной техники, получившей возможность летать ночью по правилам визуальных полетов. Это особенно важно для расширения использования воздушного флота в зимнее время», пояснил Михаил Казачков, председатель правления АВИ.

Помимо продвижения вертолетов как вида транспорта, АВИ принимает активное участие в развитии российского вертолетостроения. По мнению Михаила Казачкова, одним из основных препятствий здесь является то, что российская вертолетная отрасль, в отличие от ряда других стран, на протяжении практически двух десятков лет не создавала новые образцы вертолетной техники. Иными словами, упущенное время будет необходимо наверстать, если российская вертолетная отрасль хочет оставаться конкурентноспособным игроком.

Тем не менее, в части производства вертолетов в России есть положительные тенденции. Во-первых, «Вертолеты России», по словам Дмитрия Петрова, определили 9 производственных программ по 9 моделям вертолетов, приоритетом среди которых является вертолет Ми-171 – модернизированная версия Ми-8, которая позволит продлить доминирующее положение российской отрасли в сегменте вертолетов средней тяжести еще лет на 10-15, как пояснил г-н Петров в интервью «Коммерсантъ». Сейчас на различные модификации Ми-8 приходится порядка 60% от общего объема продаж «Вертолетов России». Интерес со стороны операторов есть: в августе 2011 г. было парафировано соглашение на поставку 40 вертолетов Ми-171 с одним из крупнейших в мире операторов вертолетной техники - авиакомпанией "ЮТэйр", которая уже эксплуатирует 50 вертолетов Ми-171. Рыночный дебют Ми-171 с новой авионикой запланирован на 2014 г.

Ми-171 производства Улан-Удэнского Авиационного Завода Акцент «Вертолетов России» на вертолет Ми-171 - способный перевозить до 37 пассажиров, с дальностью полета 610 километров, скоростью 250 км в час и грузоподъемностью в четыре тонны - доказывает, что Холдинг вполне осознает необходимость диверсификации своего продуктового ряда в силу роста спроса на средние вертолеты. Есть что показать и в легком сегменте: во время 10-го юбилейного Международного авиакосмического салона МАКС-2011 «Вертолеты России» представили новейшие легкие вертолеты Ми-34С1 и Ка-226Т с медицинским модулем американского производства, а также "Ансат".

ударный вертолет Ка-52 Аллигатор «Вертолеты России» продолжают развивать традиционно сильный для России сегмент тяжелых вертолетов: на МАКС-2011 были также представлены новый модернизированный супертяжелый Ми-26Т2, боевые вертолеты Ка-52 "Аллигатор" и Ми-28Н "Ночной охотник". "У нас большие рыночные перспективы, особенно по боевым машинам. Сложилась уникальная ситуация: ни одна компания в мире не выпускает сразу три боевые машины, разработанные двумя разными конструкторскими бюро,— это вертолет Ми-35М, ударный вертолет Ми-28Н "Ночной охотник" классической одновинтовой схемы и ударный вертолет Ка-52 "Аллигатор" с соосной (двухвинтовой) схемой расположения винтов. Такое предложение с нашей стороны позволяет варьировать различные модели по клиентам и тем самым сохранять лидерство в мире по поставкам боевых вертолетов", прокомментировал г-н Петров в интервью «Коммерсантъ». Эти машины вобрали в себя последние достижения в области производства вертолетной техники, включая инновационные решения в области авионики, снижения шумности и минимизации любого воздействия на окружающую среду, отмечают эксперты "Вертолетов России".

Развитие военного и военно-транспортного сегмента представляет новые перспективы и для поставщиков запасных частей. По словам Игоря Емельянова,генерального директора ОАО «Авиазапчасть» — крупнейшего независимого поставщика запчастей для российской авиационной техники — большой интерес для компании представляет недавнее соглашение "Вертолетов России" с США на поставку 21 боевого вертолета Ми-17В5 для выполнения задач в Афганистане.

Денис Мантуров, заместитель министра промышленности и торговли России Еще одно воплощение серьезных намерений российских производителей и разработчиков идти в ногу с современными требованиями к вертолетам – это программа перспективного скоростного вертолета, начатая в 2011 г. По словам Дениса Мантурова, заместителя министра промышленности и торговли России, высокоскоростной вертолет имеет серьезные перспективы на рынке.

"Это - второе дыхание для "Вертолетов России", - отметил г-н Мантуров. "Какое-то время назад я пообещал, что мы активно будем поддерживать со стороны государства "Вертолеты России" в части разработки высокоскоростного вертолета. Мы это обещание выполнили. С этого года мы открыли данную работу", - сказал он. По словам Мантурова, в 2011 году на разработку скоростного вертолета выделяется 400 млн рублей. В 2012 году создание вертолета будет профинансировано в размере 700 млн рублей, в 2013 году - 2,5 млрд рублей.

"Вертолеты России" стремятся также к расширению рынков сбыта гражданских вертолетов – не только как поставщик, но и как партнер. По информации Холдинга, рынок Европейского союза является одним из важнейших для присутствия вертолетной техники российского производства, в том числе с учетом возможных перспективных поставок и реализации совместных российско-европейских проектов в сфере вертолетостроения. «Холдинг «Вертолеты России» и его интеллектуальные и производственные активы наращивают свое присутствие в системе международной промышленной кооперации, - заявил Дмитрий Петров на 49-м Международном аэрокосмическом салоне Paris Air Show – Le Bourget 2011. – В этом контексте сотрудничество с европейскими партнерами для нас всегда было приоритетным. Уже сегодня мы совместно с французскими компаниями реализуем ряд международных проектов в вертолетостроении, включая вертолеты Ка-226Т и Ка-62, которые стали ярким примером эффективного промышленного взаимодействия России и Франции».

В данном случае речь идет об установке двигателей Arrius 2G французской компании Turbomeca на легкий вертолет Ка-226Т - один из первых совместных проектов современности, реализованных во взаимодействии российских производителей вертолетов с французскими производителями двигателей. Помимо Европы, давний и главный партнер России в области двигателестроения – украинский ОАО «Мотор-Сич», крупнейший производитель двигателей для вертолетов российского производства.

Наконец, организация послепродажного обслуживания – вопрос, напрямую влияющий на мировую конкурентоспособность российской вертолетной отрасли, что признается уже на официальном уровне. Игроки в различных сегментах отрасли — производители вертолетов, ремонтные компании, а также производители авионики и двигателестроители — стремятся улучшить собственные компетенции в этой сфере. Как управляющая компания в области производства и ремонта вертолетов, «Вертолеты России» планирует создать сеть сервисных центров на основных мировых рынках своего присутствия к 2012 г. В этом им готовы содействовать, в том числе, поставщики: по словам Игоря Емельянова, ОАО «Авиазапчасть» готово к сотрудничеству с Холдингом в области сервисной поддержки на внешних рынках.

Что касается ситуации внутри России, развитие сервиса требует создания соответствующей инфаструктуры, смягчения таможенных процедур и налогового бремени. Особенно активно за решение данного вопроса взялись в портовой особой экономической зоне (ПОЭЗ) «Ульяновск-Восточный», расположенной в сердце российского авиационного кластера в Ульяновске – «территории авиации», как назвал ее губернатор Сергей Морозов. Цель ПОЭЗ «Ульяновск-Восточный» - единственной специальной экономической зоны в России, специализирующейся на авиации - открыть «дверь в Россию» для иностранных производителей, заинтересованных в сотрудничестве с растущим внутренним рынком и «окно в Европу» для российских производителей, которые могут использовать ПОЭЗ как площадку для получения компетенций мирового уровня в области ТОиР. Уникальный налоговый режим и упрощенные таможенные процедуры в ПОЭЗ призваны создать комфортные условия для ТОиР авиационной техники иностранного производства (благодаря возможности оперативного ввоза импортных запчастей).

Возможности для иностранных производителей

В связи с растущим спросом на легкие и средние вертолеты, на российском рынке открываются хорошие возможности для иностранных производителей, таких как Eurocopter, AgustaWestland, Bell, Robinson, и др. Более того, иностранные производители, понимая объем спроса со стороны коммерческих и государственных эксплуатантов, а также частных клиентов на российском рынке, делают упор на постепенное развитие более глубокой интеграции с отраслью. В частности, Eurocopter и AgustaWestland, основные иностранные производители в сегменте легких и средних вертолетов в России, видят Россию в качестве долгосрочного стратегического партнера с огромным опытом в создании вертолетной техники.

EC135 для Газпром Авиа «Доля Eurocopter среди иностранных производителей газотурбинных вертолетов в России и СНГ на данный момент составляет 70%, что доказывает, что мы выбрали правильную стратегию. Очевидно, что мы не можем развиваться только продавая вертолеты. Стратегическое партнерство – главный инструмент поддержания высоких показателей нашей работы и расширения нашего присутствия» - таков был комментарий Лоранс Риголини, генерального директора Eurocopter Vostok.

Главный конкурент Eurocopter в России – итальянский вертолетостроитель AgustaWestland (часть группы компаний Finmeccanica). Выход AgustaWestland на российский рынок в 2007 г. нашел поддержку со стороны руководства отрасли: Денис Мантуров, в то время занимавший пост руководителя ОПК «Оборонпром», заявил, что российская вертолетная отрасль определила AW139, бестселлер AgustaWestland, в качестве идеального иностранного вертолета, который не пересекается с модельным рядом российских универсальных двухдвигательных вертолетов со взлетным весом 6-6,5 тонн. В 2008 г. «Вертолеты России» заключили соглашение с AgustaWestland по созданию совместного сборочного производства AW139 в России.

Российские эксперты согласны: несмотря на то, что сборка AW139 в России не даст отрасли всех преимуществ от собственной продукции, это действительно наиболее быстрый и эффективный способ получить дополнительный опыт и развить культуру производства, исторически нацеленную на производство тяжелых вертолетов.

По словам Дмитрия Петрова, сегодня холдинг "Вертолеты России" ставит перед собой реальные задачи. «В последние годы мы вышли на стабильную позитивную динамику роста производства вертолетной техники, что свидетельствует об увеличении спроса на продукцию наших предприятий во всем мире, а значит, и о повышении ее конкурентоспособности, - отметил г-н Петров. - С этой целью "Вертолеты России" диверсифицируют модельный ряд в сторону увеличения числа моделей легких вертолетов, модернизируют наиболее популярные образцы средней и тяжелой вертолетной техники, разрабатывают новейшие гражданские и военные вертолеты, ориентируясь, с одной стороны, на заказ от традиционных государственных операторов, а с другой стороны - на глобальный рыночный спрос, где мы активно ищем новых партнеров на всех континентах».

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Gennady Shirshov, executive director of the Society of Professional Pharmaceutical Organizations (SPFO), was recently a guest on a national television program. "You might know," he starts, "that many such programs are strictly controlled by the government."

Andrew Somers, AmCham President & CEO Shirshov continues: "All of a sudden, in the middle of the session—and it was live!—they started asking these ugly questions about integrity; about why a government official would promote a specific drug, and things of that nature. I could not believe it. And the fact that it was being spoken about, live, on a government-controlled program, is a great sign of where we are heading."

Russia is a country of insistent vicissitudes—in fits and starts, through monetary crises, oil surpluses, shifts in geopolitical trade policies, corruption scandals, seasons of animated economic development, and over and again. When asked how much has changed since 2007—when Focus Reports produced its first overview of the Russian pharmaceutical market—managers, coy, simper widely. Where, really, to begin?For investors, the central indicator should perhaps be attitudinal. The general manager of Pierre Fabre in Russia, Pavel Chistyakov, offers simple words: "Do not be afraid of the Russian market." It is an invitation, a reassurance, a solicitation, and—even this—a warning. No aspirational multinational, nor hitherto self-effacing domestic player, can afford to be bearish about Russia. Not anymore.And is there anyone now afraid of the Russian market? International industries are veritably jostling for position here. Russians themselves are upending their image problem; the country is "on the verge of breaking away from its past and entering the global economy with full sail," maintains the president of the American Chamber of Commerce in Russia, Andrew Somers.

There are caveats; Somers goes on: "Russia is the largest market not yet in the WTO, which can intensify certain trends towards 'over-nationalism' and isolation. And moving forward, the country needs to diversify its economy and one of the priorities needs to be the pharmaceutical and healthcare sector."

Gennady Shirshov, SPFO Executive Director Pharmaceuticals and healthcare, indeed, are starting to enjoy the very highest of priority. Both President Medvedev and Prime Minister Putin are regularly seen, across all forums and media, speaking with impassioned gravel about improving the state of the healthcare system, and boosting the productivity of the domestic pharmaceutical industry.

As Frank Schauff, CEO of the Association of European Businesses (AEB), notes, there is no other choice. "This industry is a political priority here, and rightly so. When you consider the demographic situation in Russia, the statistics with regard to healthcare, and the pharmaceutical environment, the circumstances are quite disconcerting. In a country where life expectancy is very low in comparison to European neighbors, and where we are still battling communicable disease on a wide scale, things have to be done."

According to the Russian Federal State Statistics Service (Rosstat), the population of 141.9 million has been in decline since 1994 (apart from a rather negligible increase last year), and early mortality rates, especially for males, are troubling at the least: average male life expectancy is 62.8 years. Not to speak of Russia's famous lifestyle problems, such demographic blight is in large part attributable to treatable disease. Milos Petrovic, managing director of Roche in Russia, estimates that an astounding 80% to 90% of Russian patients, especially those with severe therapeutic needs, do not receive adequate treatment.

GSK Russia's area director Michael Crowe provides an illustration. "We estimate today," he says, "that out of 1.5 million registered asthma sufferers, only approximately 300,000 receive a modern combination product." In chronic obstructive pulmonary disease (COPD), there are "anything from 2.5 to 10 million sufferers, but less than 100,000 patients receiving an optimal treatment." Patient inaccessibility to effective medicines, most acute outside of the nation's major cosmopolitan centers, is fast eating away at the Russian citizenry.

Nycomed President Jostein Davidsen presents Russia's Prime Minister Vladimir Putin Nycomed's future plant in Russia. One of the greatest causes is lack of public funding: as a proportion of GDP, the World Bank estimates that state expenditure on healthcare approaches 4%, relative to 7% to 10% in many Western economies. Most people still pay for medicine out of pocket and, by calculation of pharmaceutical research group IMS Health, drugs sold through retail constitute 70.1% of sales. Furthermore, 'prevention,' a notion well worn in the West, is only now coming to popularity in Russia.Therein lies the woe; therein lies the good. Nycomed Russia's president Jostein Davidsen points out, "There is a long way to go. But by looking at all of this, you can see that as a healthcare company, these are all upsides. These are all growth opportunities." It's rather a matter of making lemonade. Every year, companies can well expect to reach more patients, bring new products to the market, and broaden participation as state reimbursement becomes better funded. Celgene's country manager Victor Ferkovich, to wit: "Russia is one of the best places in the world for the pharmaceutical industry to help patients."

Failing healthcare is not only a social problem, but an economic problem, as well. So too is an undiversified economy. Finance Minister Alexei Kudrin declared in a 2010 Moscow news conference that oil and gas accounts for 25% of the Federation's GDP, and that the number must fall to 14% within 10 years. In the pharmaceutical sector, this means giving up a decades-old reliance on imports, which in 2010 approached 75% of drugs sold, according to domestic market research group Pharmexpert. As Viktor Geisler, country division head of Bayer Healthcare in Russia, maintains, it is perfectly reasonable that Russia should want to conceive a true domestic pharmaceutical industry: "You may call it strategic interest, or, more simply, you may say that a developed country with over 140 million inhabitants deserves its own pharma industry." In response, the authorities are taking sweeping, ambitious action.

Again, again, therein lies the good! Russia's GDP growth—4% in 2010 (World Bank)—is nothing to sound the trumpets about—at least not today. But its pharmaceutical market, currently valued at 14.8Bn USD, easily outpaces world growth rates. (Globally, IMS Health expects a 5-8% compound annual growth rate through 2014.) This year is looking up: to quantify, Pharmexpert forecasts 15-21% growth in 2011. While some are less optimistic, barring disaster, a minimum growth rate of 11% is all but guaranteed—the charming 'BRIC' double digits.

Ivan Blanarik, managing director of Boehringer Ingelheim in Russia, speaks to what the entire industry believes. "I think the one logical headline, for emerging markets, and Russia, is, simply, 'Growth,'" he says.

Reckitt Benckiser Russia general manager Bruno de Labarre is a bit more blithe: "In a Western European country, you might oscillate between -2% and +2% growth, and perhaps you are a hero if you grow the business by 2.5 percent. What is the fun in that?"

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Poland: A Sleeping GiantBy Sponsored by Focus Reports

This sponsored supplement was produced by Focus Reports.

Project Director: Léa Boubon

Project Editor: Nicolas Carayon; James Waddell; Manuel Mendoza

For exclusive interviews and more info, please log onto http://Pharma.FocusReports.net|~http://Pharma.FocusReports.net/ [http://] or write to contact@focusreports.net [contact@focusreports.net]

Niebianska Parmiec (Celesitial Memory) by Elzbieta MurawskaStretching across the heart of continental Europe, Poland is a massive bridge that links east and west, old and new, and which epitomizes a changing continent. At one time an enigmatic behemoth cast behind an iron curtain, Poland's accession to the European Union in 2004 has injected its economy with new levels of competition and investment. A population of 38 million citizens, in turn, offers an enticing market for companies looking to expand east. The country's leaders proudly boast that Poland was the only EU economy to grow in 2009—the nadir of the financial crisis—and last year Poland surpassed the Netherlands as Europe's sixth-largest economy. Today the pharmaceutical industry looks to Poland for a skilled pool of human resources, an eastern platform for competitive manufacturing, and high-quality clinical trials. Yet there is still much work ahead, and in order to fully embrace the future the industry must overcome certain communication barriers stemming from the country's long, closed-market past. Greater room for innovation and increased dialogue between business and government are necessary steps to truly awake Europe's sleeping giant.

ECONOMIC REVOLUTION ...

Ewa Kopacz, Minister of Health Ewa Kopacz, Minister of HealthThe past two decades have brought about sweeping changes and lasting benefits for Poland through its transition to a market-based economy and, more recently, incorporation into the European Union. The Balcerowicz Plan of "shock therapy" undertaken in the early 1990s liberalized trade and privatized former public assets, thereby increasing industrial competition and promoting foreign direct investment. Poland was widely lauded as a success story among transitional economies. Since 2004, EU membership has compounded the positive effect of capitalist reforms by granting the Polish economy access to structural funds. Today the country is the largest beneficiary of EU funds among the 27 member states, receiving approximately 20% of total EU financial support. While GDP per capita in Poland is still below the EU average, it is on par with that of its neighboring Baltic states. With 1.5% GDP growth in 2009, Poland was the best-performing European economy during the global financial crisis. Peter Koetsier, general manager of Bristol-Myers Squibb Poland beams that "the country has gone through a remarkable transition in the past twenty years, if you consider the huge steps forward in terms of infrastructure and the financial and legal systems. I look forward to continued progress in healthcare that will see the people of Poland reach health outcome levels more akin to other EU countries."

... AND PHARMACEUTICAL EVOLUTION

Valued at slightly over €5 billion, Poland is the sixth-largest drug market in Europe, according to classifications by the European Pharmaceutical Market Research Association. The country's pharmaceutical industry is shaped by high generic penetration and government-dictated cost-containment which limits market access to innovation.

Waldemar Pawlak, Minister of Economy Waldemar Pawlak, Minister of EconomyHowever, compared to similar-size markets such as Spain, Poland has an uncharacteristically high penetration of generics, which account for 85% of volume and 66% of value, according to PZPPF, the leading association for generics companies in Poland. As PZPPF president Cezary Slediewski explains, the dyamics behind high generic rates stem from "a patent system and data exclusivity which allowed Polish companies and importers to introduce generics earlier on in Poland than in Western European countries. There are some molecules in Poland that are already generics, whereas in Western Europe, generics for the very same molecule are not yet in the market."

Additionally unique to Poland are minimal price spreads between generic and innovative drugs. Pawel Sztwiertnia, general director of INFARMA, the leading association for R&D companies in Poland, notes that "the average price of innovative originator products is one of the lowest in Europe. Subsequently, there are expensive generic products in Poland when compared to the average originator product prices in Europe. This is due to a market structure overpowered by generics. IMS Health data demonstrates that the average generic price is roughly 70% of that of an originator."

Per capita expenditure on healthcare and pharmaceuticals—less than $100—is one of the lowest in the OECD, three times less than Slovakia and the Czech Republic, and six times less than France and Germany.

As Sztwiertnia explains, "The system in Poland reduces the already very limited window for innovative products. When a company manages to establish its product on the reimbursement list, it can then be prescribed by any doctor and be made available in every pharmacy. Thus, from the government's perspective, there is always the fear that reimbursement costs will skyrocket if a new product is added to the list. Reimbursement costs are very difficult to control; monitoring of prescriptions is practically nonexistent in Poland. There are no specialized categories of drugs that specialists could prescribe under certain conditions. For instance, because many patients need treatment for diabetes or cardiovascular diseases, the government is afraid that costs could grow out of control."

The federal government notes the necessary limitations on health expenditures in even the most developed countries. "The reasons for this are, among others, constantly growing health needs resulting from the aging of the population, quickly growing costs of medical technologies, and financial expectations of medical staff," cites Ewa Kopacz, Poland's minister of health.

Despite the prevalence of generics, INFARMA assesses that market growth for innovative drugs is quite sustainable in Poland. Compound annual growth of 8.5% for innovative medicines from 2007 to 2010 exceeds EU-15 markets over the same period, a trend that reflects growth in value more so than volume.

WELCOME TO THE CLUB

Like many industries, the Polish pharmaceutical sector has capitalized on the country's inclusion into the EU, and key statistics are positive indicators of investor confidence in an open market. IMS estimates that more than 700 pharmaceutical companies presently operate in Poland, with increasing numbers every year. Similarly, the local market's 3.3% year-on-year revenue growth in 2010 is consistent with the average across all EU pharmaceutical markets over the same time.

Jacek Glinka, President of the Management Board of Polpharma Jacek Glinka, President of the Management Board of PolpharmaPrior to EU accession, foreign innovative companies were deterred from entering the Polish market due to weak patent legislation. During the communist era local manufacturers were essentially the sole providers of pharmaceutical products. Closed Eastern European markets and prohibitively stringent EU standards turned industry inward favoring a lower cost culture of generics. Companies such as Teva and Sandoz established a strong presence. With today's open borders, product marketing is less of a threat and greater data protection is now implemented.

Geography and a malleable East/West cultural cohesion is one driver behind an attractive pharmaceutical climate in Poland. "In Polish history, the country has always stood between two great powers: Germany and Russia," says Michael Pilkiewicz country manager of IMS Health Poland. Pilkiewicz assesses that in both market potential and value, Poland is recognized as a big Western European Union country that shares many similarities with other European markets. "At the same time," he adds, "Poland knows the culture of Eastern countries. Poland can easily talk to its partners in Russia, Slovakia, Hungary and the rest of the East. The East of Europe has a completely different culture to that of the West. Polish exporters therefore have a very good starting point in terms of knowing how to operate in these markets."

Jacek Glinka, President of the Management Board of Polpharma Maciej Adamkiewicz, CEO of AdamedA recently liberalized market with a relatively low-cost base in the geographic heart of the continent also makes good economic sense for manufacturing. Innovative companies have invested hundreds of millions of dollars in Poland through the privatization process of state owned companies. GlaxoSmithKline, Sanofi-Aventis, and Novartis operate factories in Poland employing thousands of people and provide a positive stimulus for the local economy.

Recognizing operational benefits, perennial top-five pharma giant GSK has invested $417 million in modernizations for its manufacturing warehouse in Poznan, 175 miles west of Warsaw, which it deems one of its most strategic plants in Europe. As Big Pharma companies increasingly review global manufacturing sites for cost-saving synergies, "Poznan is definitely one of the key sites in the region where GSK continues to invest," according to Jerzy Toczyski, president of the board and general manager of GSK Pharmaceuticals in Poland. Capitalizing off of Poland's central location, production of one of GSK's R&D-based products is currently being shifted to Poznan. "Poznan is one of the four European multimarket warehouses where we keep the stocks of our products to be distributed to the regional markets," says Toczyski. "Additionally, since we have such good access to qualified personnel, one of GSK's global information technology (IT) hubs is located in Poznan. Indeed, more than 200 highly qualified IT experts work there to support GSK's global network. Apart from regular business operations such as marketing and sales activities, there are three other major areas of investment for the company: production, logistics, and IT."

Pawel Sztwiertnia, President of INFARMA Pawel Sztwiertnia, President of INFARMAThe closed market under communist times made it difficult for even generics players to enter Poland, notwithstanding the presence of Teva and Sandoz. Poland is therefore a relatively new market for multinational generics companies such as Canada's Apotex. Having registered several products such as Ranitidine or Verapamil in the early 1990s, it took Apotex nearly seven years to make the full leap into Poland, ultimately launching a range of medicines and employing 20 sales representatives in 1998. Today, managing director Michal Pietraszek says that "Poland is considered by the head office in Canada a very good market for the long run." Primed to take on the competition in a crowded generics market, Apotex is closely tracking patent expirations across Europe to seize potential new market share. "The company's best generic products have been chosen for registration in Poland, and the affiliate will now be focusing on new products," he says. "The group is looking at the patent situation in every European country. In Poland, if a patent expires today, Apotex is ready to enter the market tomorrow."

The rising tide of EU accession certainly benefitted Popharma, the No. 1 generics company in Poland. With drastic, industry-wide changes occuring in Poland following EU membership companies were requested to upgrade their documentation for existing products to conform to European standards, which, as Jacek Glinka, president of the Polpharma's management board tells, "practically meant for most of them that 100% of the product portfolio had to be invested in or redeveloped." While EU requirements were originally only on the development side, uniform standards also triggered major investments in manufacturing facilities. "Everything had to be upgraded to some extent," Glinka adds. "The result is that Polpharma has today one of the most modern facilities in Europe, completed over five to 10 years ago and based on state-of-the-art technologies. In a way, the company has been forced to build a more competitive platform to grow its generics business in Poland." Enhanced manufacturing facilities add to Polpharma's dominant market presence. With 13% of the market and 18% in value, Polpharma is both a mature and constantly growing company in Polish generics.

FROM NEXT TO NOW

Cezary Slediewski, President of PZPPF Cezary Slediewski, President of PZPPFAs a signal of the market's bursting potential in the eyes of many multinational affiliates, Poland is often included in the discussion as the "next" or "sixth" country for multinational affiliates invested in Europe after the big five of England, France, Germany, Spain, and the United Kingdom. "The country can be considered as a 'sleeping giant,' when looking at the overall population, the economic growth, and the fact that it is now an EU member," asserts Bednarz Bartosz, general manager of AstraZeneca Poland, one of the fastest-growing pharma companies in Poland in 2010. "Given its size and population, one could expect that Poland should somehow get closer to Spain in terms of the size of the pharmaceutical market," he adds.

However, the juxtaposition between a geographically massive, well-populated, and economically liberalizing market that is cautious about creating the financial access for innovation has convinced many industry executives that pharmaceutical industry development is still very much an ongoing process. "Naturally, the primary objective of the pharma industry is to continue its mission to improve health standards and sustain profitability, whereas the primary objective of the national healthcare system is to introduce more and more control over its spending, especially in the area of reimbursement," opines Anna Gajec, general manager of French consulting house Cegedim's Polish business. Peter Koetsier, general manager of Bristol-Myers Squibb Poland concurs, stating that "the transition to a free open market and a world of innovation will continue to be an evolution." Drawing a more figurative analogy, Koetsier likens the healthcare system in Poland to an adolescent. "It has its adult moments mixed with moments of being quite underdeveloped, and sometime a constant movement between the two."

Peter Koetsier, General Manager of BMS Peter Koetsier, General Manager of BMSWithin this context, a better dialogue is called for between various stakeholders of the healthcare sector, including local authorities and the pharmaceutical industry in order to reach a common goal—better health outcomes for Polish patients—and to move Poland from "next" to "now."

DEMANDING A FASTER PACE OF CHANGE

Poland's accession to the EU has, of course, stimulated the competitive landscape and pushed local industry to align with European standards and regulations. Consequently, the benefits that have come with joining Europe's exclusive club have also fueled an appetite for further reforms and at a faster pace. Commenting on this two-fold effect, Michal Bichta, managing director of Germany's Merck Group, which is present in Poland through both pharmaceuticals and chemicals, notes that "the socio-economic situation has dramatically changed in Poland in the last 10 years, partly due to the fact that Poland became a member of the European Union (EU), but also due to the evolution of the national economic situation. Poland is gradually applying more and more European directives, yet at the same time, some existing regulations from the communist period still remain. Since Poland is part of the EU, Polish people have started to look around and compare what is available in neighboring countries. This awareness creates more pressure on healthcare services in Poland, as the population expects the country to be catching up much faster than the current pace."

Jacek Barlinski, General Manager of Nycomed Jacek Barlinski, General Manager of NycomedThe rapid pace of reforms, however, is countered by a government that is keen to control spending. The result has been what Cegedim's Anna Gajec describes as idiosyncrasies in the Polish regulatory and reimbursement systems. She notes, for example, that Poland negotiated a 15-year transition period before implementing the EU's harmonized 8+2+1 data-exclusivity standard. The regulatory environment is therefore typically characterized by long delays for reimbursement approval.

However, as Health Minister Ewa Kopacz posits, due to limited funds at the National Health Fund's disposal, "The existence of waiting lists cannot be avoided. It is important to provide equal access to services, taking into account, among others, health status and acceptable waiting time for a given patient to receive service. In Poland, depending on health status, a patient is granted urgent or stable status, which means that the order of patients is not only established on the basis of the date of reporting to a doctor, but also on the basis of medical indications."

Total Market ValueStrong economic conditions of the Polish healthcare sector will indirectly influence the security of funds for reimbursement in a positive way. Numerous discussions within government circles are taking place regarding potential changes to the healthcare system and medicinal reimbursement. Minister Kopacz says that "the draft legislation on the reimbursement of medicines, food for particular nutritional uses, and medical devices has provided for the total reimbursement budget indicator at the level no higher than 17% of expenditures on total healthcare, which guarantees that access to reimbursed products will be gradually wider, along with increased the budget for total healthcare."

But according to Gajec, draft legislation is not so clear-cut. With complexities in proposed scenarios varying significantly from one to the other, building up long-term strategies in a capricious and ambiguous environment can be real challenge. "As a consequence of these characteristics I would say that Poland is highly different to some others markets in the region and that every single general manager in Poland must find a good, sometimes very specific, operational way to conduct business," she adds.

Michal Pietraszek, General Manager of Apotex Poland Michal Pietraszek, General Manager of Apotex PolandFully concurrent, Merck's Bichta notes that in Poland, "business is driven by change; planning years in advance seems almost impossible in our country." However, adaption to local market specificities and the adoption of different cultures—in this case, the demand for reform and the need for patient planning—is of second nature to Merck Serono. Having assisted in the corporate integration of Merck and Serono in 2007, Bichta attests to the experience as an "alignment of mindsets and culture." He recalls that "whereas the Serono legacy was customer-oriented, highly specialized, and focused on short-term results, Merck's legacy was more focused on the general practitioners market and with emphasis on long-term growth and lifecycle management." Very applicable to the disparities in the Polish market, "Merck Serono is today benefiting from both mindsets and cultures, which have a very positive impact on the performance on both sites—pharmaceuticals and chemicals—in real terms." Merck in Poland is a market leader in treatments for highly prevalent social diseases such as oncology, cardiovascular, and neurodegenerative disorders and, according to IMS data, was the fastest-growing top-40 pharma company through the first three quarters of 2010. Underscoring flexibility and diversity as a key to success in Poland, Bichta states, "It is important to be close to people who understand the market from different angles, who show their expertise in certain areas. General knowledge is definitely not enough; companies should be specialized."

FLEXIBILITY IS A VIRTUE

The ambiguity that exists in the Polish market, which Cegedim's general manager Anna Gajec previously referenced, stems from a lack of communication between industry and government concerning national healthcare planning and reimbursement initiatives. With a new reimbursement act slotted for January 11, 2012, many mixed signals are being sent in the interim for industry to interpret and strategize against. Naturally, this can stymie forward-planning for pharmaceutical companies. "There is today in Poland a serious problem of lack of dialogue with the government authorities," opines Don Bellamy, country president of Swiss pharmaceutical giant Novartis. "There is heritage of mistrust between the two sides: The government believes that it should take decisions on the future of healthcare by itself, behind closed doors, and the industry sees only things that are released, which are in my opinion not very well thought out, not very strategic, nor constructive either for the patient or the industry."

Michal Bichta, General Manager of Merck Poland Michal Bichta, General Manager of Merck Poland Consequently, turbidity and ambiguity have engendered an enhanced flexibility for Polish pharmaceutical affiliates in order to appropriately respond to whatever reimbursement policy unfolds. "As the environment is evolving so quickly in Poland, the ability to remain flexible is probably a leader's greatest skill," according to BMS Poland's general manager Peter Koetsier. Conscious that rigidity often brings disappointment, Koetsier advocates the importance of companies to take advantage of the changes. "As having complete, timely, and accurate data can be challenging in Poland, you have to be good at taking decisions and calculate the risk, sometimes with little information. If a pharmaceutical company wants to be successful in Poland, it needs to be strategic and execute its plans well, and to do all this without the full set of decisions tools available in other places." Indeed BMS sees the unpredictability in the market as more of an opportunity than a threat. "It forces us to focus on customers, to get out of our offices and meet people; to get an understanding of how the market is moving on a daily basis." This extroverted mindset is especially applicable to BMS's patient-centric business model in Poland. BMS works closely with hospitals in specialized therapeutic areas such as diabetes, HIV, immunology, and hepatitis. "Even though there is recognition for the need of these products," notes Koetsier, "the processes are sometimes slow and unpredictable," thereby requiring a streamlined and extroverted workforce to truly understand movements in the markets.

"The industry often has to operate blindly," says Tapani Sura, general manager of Astellas Poland. "More transparency is needed in the administration system, regulation, drug approvals, and market authorizations for reimbursed products." The need for quick, flexible responses to a potentially changing reimbursement market hits close to home for Astellas, No. 25 in sales in Poland last year according to IMS. Sura took over as general manager of Astellas Poland in 2006, one year after the merger of Yamanouchi and Fujisawa, which formed the company as it stands today. Astellas Poland was hit particularly hard in 2006 due to reimbursement delays and a 13% government-mandated reduction of prices on foreign drugs. But driven by a strong pipeline of therapies for urology, transplantation, dermatology, anti-infective, and pain management, Astellas has been one of the fastest-growing pharmaceutical companies in Poland since 2006. Today, Poland ranks as the sixth-most-important market for the group's European operations, with revenues in Poland growing on par with top-five megamarket Italy. Sura projects that within two years the Polish affiliate can even catch up to Italy. Relating past performance to current market signals, Sura stresses that "Astellas strives to be fast and, more importantly, flexible in all its operations.

Tapani Sura, General Manager of Astellas Tapani Sura, General Manager of Astellas"The quick ones can be better than the bigger ones," says Pawel Ciapala, managing director of Ipsen Poland. Although Ciapala notes that quick decision-making is characteristic of Ipsen due to a lean and effective structure—an advantage over larger competitors—in Poland "Ipsen has understood the importance of flexibility, which it has strongly developed as one of its main assets." The idiosyncrasies of the Polish market have led Ipsen to, as Ciapala describes, increasingly work on key account management projects, strive to better understand the market, think ahead, and find out what is the best business model to be applied for its specialty products in oncology, endocrinology, neurology, and hemophilia. Having grown by double digits in 2010, Ipsen is indeed proving that quick and flexible is indeed better.

But even the biggest of Big Pharma shifted resources and optimized results. "I am relatively optimistic for the future of Pfizer in Poland," says country manager Patrick van Ginneken. "The reform will indeed bring a serious calibration, but the company already experienced it to a great extent in 2010. At Pfizer Poland, we have already shifted gears from a unique research and development perspective to a combined focus on R&D and medicines that are already off-patent. We are starting to see the positive effects of this strategy."

THE SOCIAL NETWORK

Dr. Arvydas Norvaisas, General Manager, Torrex Chiesi Polska Dr. Arvydas Norvaisas, General Manager, Torrex Chiesi PolskaItalian family-owned company and COPD specialist Chiesi is another company that has seen recent success in Poland's complex market. Having first forayed into Poland in 2001, it took roughly eight years for Chiesi to reach critical mass when its blockbuster respiratory product, Fostex, was granted reimbursement. "Before 2009 the operation in Poland was just a small affiliate, with a hospital portfolio focused on niche markets and sales in the range of €2 million to €3 million—low relative to the size of the market," recalls. Dr. Arvydas Norvaisas, general manager of Torrex Chiesi Poland. Fostex reimbursement immediately tripled sales, bringing in €10 million in sales in 2010, 65% from Fostex alone.

Sympathetic to the plight of innovation still seeking market access, Norvaisas sheds an interesting light on the reimbursement discussion. Referring to the cost-containment debate as a "schizophrenic state pervading Europe" he draws on a passage from the book "The Leader's Way," written by the Dalai Lama to best sum up his take on the state of the market: "While the amount of information is growing exponentially, people are becoming narrower in their worldview and are no longer able to understand how all these ideas for moving society interact. On the one side business moves in the direction of profits whilst society attempts to limit these profits." Moving beyond a monetary debate, Norvaisas urges government to recognize the social value behind pharmaceutical innovation. "I have a feeling, as the Dalai Lama said, that in this era of hypercommunication, hyperinformation, and informational noise, people and governments are losing capability to see and understand the essence of the matter," he asserts. "We should not talk about budgets. We should all together talk about long-term health needs of the population and the ways to satisfy those needs. At this level, all stakeholders should have common understanding and strategy. It is a pity that still a lot of mistrust, misinterpretation, and misunderstandings among governments and companies do not allow to bloom healthy process of communication between them. Solutions are there. It is just necessary to come to them from both sides.

THE CERTAINTY OF TRIALS

Wojciech Kuczynski, General Manager, Pierre-Fabre Medicament Polska Wojciech Kuczynski, General Manager, Pierre-Fabre Medicament PolskaIn contrast to the uncertainties and ambiguities of future reimbursement schemes, an element of the value chain that pharmaceutical companies can confidently rely on in Poland are clinical trials and a strong research culture. Novartis Poland's country president, Don Bellamy, sums it up best: "Poland has a heritage of clinical trials and of being a center of excellence in the development of science. From the days of Marie Curie, there has been a legacy of medical discovery in Poland, today demonstrated by a dynamic and active clinical research platform."

A November 2010 PricewaterhouseCoopers report on clinical trials identified Poland as the largest clinical trials market among Central and Eastern European countries and the Commonwealth of Independent States. High level of medical education, improved standards and processes, and increasing accessibility to diagnostics drive the importance of clinical trials in Poland for multinational pharma companies. Merck is benefitting from this situation as well as contributing to it," says Michal Bichta, the Polish affiliate's managing director. "Indeed, most of the leading clinical operations at Merck Serono also take place in Poland. Poland is a solid part of the group's corporate strategy for clinical trials."

Pawel Miskiewicz, General Manager, Genzyme Pawel Miskiewicz, General Manager, GenzymeRoberto Servi, managing director of Eli Lilly Poland, believes that a robust research culture and the strength of clinical trials in Poland will "increase the value of innovation in the country and the degree to which innovation and R&D are recognized in this country as an essential parameter for the patients and the community in general." Present in Poland for over 30 years, Lilly has done its part in innovating therapeutic treatments in Poland predominantly focusing on diabetes, neuroscience, critical care, and oncology. Its present strengths and a pillar of its business in Poland lie in human and analog insulin. "Since the beginning of our operations in Poland, the company has performed major breakthroughs in Type 1 and Type 2 diabetes," Servi notes. "The market for insulin represents today over 60% of Lilly's sales in Poland thanks to its major brands, which makes insulin the main driver of the affiliate's growth."

Globally, Lilly has committed itself to organic growth and strategic alliances. Despite consolidation and acquisition trends among Big Pharma, Lilly sees itself as beyond the point in which it can substantially grow its innovation capacity through acquisition. This will therefore subsequently place a strong emphasis on homegrown innovation with Polish research and clinical trials playing a prominent role in the process. A company that breaks industry benchmarks in innovation—reinvesting approximately 20% of revenues in R&D—Lilly strives to further expand its current portfolio of therapeutic solutions in Poland by strengthening its focus on diabetes and neuroscience, as well as on areas such as cardiology and osteoporosis.

CAGR% (2000-2010)A 30-year presence in Poland for Lilly is perhaps only outmatched by more than 100 years of operations for Novartis. "Through its various original companies, Novartis and its predecessors have been in this country since the 19th century," explains Bellamy. Citing the relevance of Polish research to his company, Bellamy says, "Novartis is one of the many companies that invest in Poland for the sake of clinical trials. The company indeed conducts a whole variety of clinical trials that cover the wide range of the company's portfolio. Novartis Poland has 3,000 patients on 80 clinical trials at this moment in the country. The standards of clinical research that this country offers, at relatively low cost compared to Western Europe, are very attractive for a company such as Novartis."

Clearly a dominant player in the market for clinical trials and innovative treatments, Novartis has also been steadily increasing its stake in the Polish generics market. Bellamy says, "Since the creation of Novartis in the early 1990s, there has been a rapid period of expansion for all our businesses, particularly with mergers and acquisitions for generics. Sandoz comes from a few acquisitions that took place in the last 10 years, the largest of them being the purchase of Lek Pharmaceuticals, a very large Eastern European generics manufacturer. This acquisition was the impulse that gave Sandoz the size it has today." With a critical mass behind its generics business, the combined Novartis-Sandoz entity makes it the No. 1 healthcare provider in Poland today and the market leader in 2010 sales according to IMS.

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India: The Silent Revolution Pt.1

India's economic growth is widely praised, and with a GDP of $4.046 trillion USD in 2010 and a GDP growth rate of 8.3% last year, it is clear why the country is making the headlines in the most positive of lights. In his latest visit to India, U.S. President Barack Obama stated that "India is not simply emerging: India has already emerged." However, before it can complete its transformation into one of the world's superpowers, India must address two big issues that are hampering its development. These are its infrastructure and energy challenges.

Despite the fact that stories of India's booming economy and emergence on the world stage shout from newsstands across the world on a daily basis, very little time is dedicated to discussing the industry that is needed to fuel this growth. However, India has taken important steps to address its energy imbalance. Indeed, it has been remarked that the transformation that has taken place in the Indian oil and gas industry over the last two decades has been a silent revolution, and today India stands as one of the most influential and important oil and gas markets in the world – and more importantly, it has reached this position without the rest of the world noticing. Focus Reports has spent some time on the Indian subcontinent in order to uncover the factors that have caused this revolution, and discover where the Indian oil and gas industry is now headed.

RPN Singh, Minister of State of Petroleum & Natural Gas

"The transformations in the Indian oil and gas industry represent a silent revolution," says S Sundareshan, outgoing secretary of the ministry of petroleum & natural gas, "because, besides allowing India to grow and improve the lives of hundreds of millions, it goes largely unnoticed. For instance, India's refining capacity jumped from 68 million tons to 185 million tons in only ten years. It is likely to increase to 240 million tons before 2012." Today, India has excess refining capacity, and as a result the country currently exports about 40 million tons per annum. When capacity is further bolstered, India will be in a position to export more than 80 million tons per annum.

However, India is the world's fourth largest oil consumer after the United States, China, and Japan, consuming around 3 million bbl/d in 2010 while producing only about 900 thousand bbl/d, making energy security one of India's major bottlenecks for its future growth.

Sunil Kumar Srivastava, director general, DGH

As a response to this, Indian policymakers have gradually liberalized India's oil and gas industry over the last 15 years in an effort to boost the country's 5.6 billion barrels of proven oil reserves (as of January 2011), the second-largest reserves in the Asia-Pacific region after China. Its main policy tool has been the New Exploration licensing Policy (NELP), which aims to provide a level playing field for all players active in E&P. Under the NELP regime, organized in rounds and starting with NELP I in 1999, 87 oil and gas discoveries have already been made in 26 exploration blocks, not counting this year's bidding round.

AK Arora, secretary general, Petrofed

The latest NELP round, NELP IX, closed in March 2011, and offered 34 exploration blocks in 10 sedimentary basins covering an area of 88,807km2. The blocks comprised 19 onshore blocks, 8 deep-water blocks and 7 shallow water blocks. 19 of these blocks were being offered for the first time to interested parties. At the close of the bidding cycle, 33 of these blocks had bids placed on them, with 10 new companies entering the Indian E&P sector for the first time, 2 foreign and 8 Indian.

Sunil K Srivastava, the director general of Directorate General of Hydrocarbons (DGH), India's upstream regulatory authority, believes the country's sound governance and stable rules have been the main ingredients in its efforts to attract more private investment to its oil and gas industry: "Reliance Industries' KG-D6 discovery took only six years to go from discovery to production; its success was not only a product of the competence of the operators but also the government's fast-tracked decisions, approvals, governance and policies. Thanks to India's sound policies, investors both domestic and international have increased their stakes in India's E&P industry."

As a result, since April 2009 India has added 2.1 billion cubic feet of natural gas production per day to its existing 2.65 billion with the start of production on the Krishna Godavari (KG) basin and specifically the KG-D6 block, the biggest natural gas discovery in the world for the year 2002.

Even so, India is aware that it is far from achieving self-sufficiency in the oil and gas sector. As a result, it has applied pragmatic policies to boost national production and import capacity; internationalize its companies and secure assets and markets overseas; and become a prominent international refining hub by importing crude oil from its Middle-Eastern neighbors and exporting refined products to new markets.

The silent raise their voices

On reflection, what many may regard as a fairly quiet player on the oil and gas map seems to have an awful lot to shout about. Admittedly, the vast nature of the market, the history of state influence in India, and the need for subsidies in order to make fuel affordable to India's rural poor make the downstream a fairly unattractive option for private companies as it stands at the moment. But as BP has shown recently, there are attractive options in the country for multinationals willing to take a bet on India's untapped reserves, and less of a bet on the country's massive refining capacity. On top of this, the private sector players have gone through a period of change and emerged on the other side as profitable, energized and creative businesses, diversifying and evolving to overcome new challenges and build themselves a market for the future. The private sector cannot be forgotten in this equation. Having established a formidable presence in their home market, companies across the value chain are now looking abroad to find the next frontier. As India's pioneering spirit develops and matures, the world will see a tiger awake – one that can beat competitors on price, and still bring an excellent level of quality to bear. Traveling to India, it is hard to describe the country as silent, but now it is time for the country to roar.

India, in need of a little NELP

For a long time the Indian oil and gas industry was dominated by its top state-owned players: the so-called ‘public sector undertakings' or PSUs. Once funded by the government, these companies are now self-sufficient, although due to fuel subsidies imposed by the government, they rely on regular compensation in order to keep themselves profitable. As a result, many of these companies, headed by new management, are now looking to diversify their businesses and make them independently sustainable, whilst continuing to play the role for which they were established; ensuring that India has access to the energy it needs.

Outside India, these companies are not particularly well known, but on the subcontinent, these companies are the public face of India's fight for energy security. From ONGC, the major E&P player in India and the country's most profitable company, to GAIL, involved across the entire natural gas value chain including pipeline infrastructure and LNG terminals; OIL, mostly onshore oil E&P in the north west of the country but increasingly growing in other regions, both onshore and offshore; IOCL, focused mostly in the downstream sector owning around half of India's refineries; and HPCL and BPCL, two companies traditionally focused in downstream and marketing activities, bringing finished products to consumers; and finally EIL, the engineering consultancy created specifically to solve the challenges that would be faced by India's fledgling oil and gas industry.

In the 1990s, the liberalization of the industry and the introduction of the NELP started to change this state-dominated environment. Companies such as Cairn and Reliance Industries have become prominent private players in the upstream and downstream sectors – Reliance Industries recently completed the world's largest refinery complex at Jamnagar, with a combined production capacity of more than 1,200,000 bpd. The development of private players, together with the fast modernization and development of India's state-owned companies, has contributed significantly to the creation of a complex and mighty service and equipment industry that is now crossing India's borders and conquering international markets.

However, this excitement about the potential of India does not yet seem to have spread to the world's major oil and gas players. The fact that only BP out of the global top ten is currently investing in India's upstream says a lot about the attractiveness of the Indian market for many large foreign companies.

RK Singh, chairman and managing director, BPCL

Vikram Singh Mehta, chairman of Shell India, explains this lack of investment from the international majors: "If Shell takes the decision not to invest in Indian exploration, it is not a reflection of a purposeful strategic decision not to invest in India—it is simply a decision based on the relative geological attractiveness of the various opportunities that are available to Shell, at any particular point in time, throughout the world." Though this seems clear, Shell's decision years ago to sell its Northern Rajasthan assets to Cairn was later regretted when the massive Mangala oil field of 1 billion barrels of recoverable oil was found.

S. Roy Choudhury, chairman and managing director, HPCL

Indeed, as Rahul Dhir, managing director and chief executive office of Cairn India points out, "based on our success, it becomes hard for us to imagine the reasons why the world's majors have not invested in India." He believe that " people still don't understand India's full potential; about 80% of our sedimentary basins are not as well explored as elsewhere, so people have been very cautious about coming in. But on the upper side, the fiscal terms are very well understood; the licensing regime is very transparent; India has one of the fastest growing markets in the world; there is a very comprehensive downstream infrastructure with India being a net exporter of refined products; so there is no shortage of access to oil and gas, with the demand for gas being constrained only by supply bottlenecks. The government is very keen on overcoming these challenges by, for instance, giving open access to the pipelines. Therefore, it is a bit of a mystery to us to understand why some majors are not investing heavily in India's upstream sector."

Article 1

Introduction

Historically, quality and R&D in the Russian metallurgy industry was driven by the civil aviation and military sectors. Essentially all civil and military jets occupying Soviet Union and Comecon country airspace were produced in Russia with technological innovations and new materials traditionally reserved for the military industry. Today, however, there are clear signs that a new wave of value-added production is emerging amongst developers and manufacturers for civil aviation and new aerospace projects.

Alexander Romanov, president of the Russian Union of Metal and Steel Suppliers (RUMSS), is confident that Russia has the resources, opportunities, and unique growth potential to develop value-creating downstream operations. “Aviation and aerospace represent high technologies that will drive the continued development of other industries such as machine building and composite materials. The current projects developed in the Russian aviation and defense sectors – Sukhoi Superjet, PAK FA, MS-21, and the black wing project involving composite materials for construction of civil aircraft – are witnessing the changes and growing needs of the industry which will consequently help develop the Russian economy.”

Alexander Romanov, president of RUMSS: aluminum supplies for the Russian aviation will grow

Modernization in special metallurgy (comprising the manufacturers and developers of special metals and alloys) and composite industry (the manufacturers and developers of carbon fibers, prepregs and composite materials), together with integrated solutions from industrial software and machine tool vendors, are expected to increase production capacities and product qualities while broadening the range of industries that consume aluminum and new materials. The use of carbon fiber, for example, was traditionally limited to special industries such as aerospace and defense. According to Viktor Avdeev, general director of Unichimtek, the Soviet Union was one of the top three carbon fiber consuming countries in the world alongside the U.S. and Japan. Today, the aviation industry consumes hundreds of tons of carbon fiber per annum while the automotive industry is capable of consuming dozens of millions more. “Whoever has carbon fiber and modern technologies has a unique position in special materials and special equipment,” he adds. Composite Holding Company, eager to corner the market for composite materials in Russia, is constructing and modernizing its facilities to expand carbon fiber production and offer larger volumes of civil products. “To make composites the present of Russian strategic industries, we need to increase our competencies and create strong integrated companies and technologies,” comments Vladimir Khlebnikov, Composite Holding Company’s deputy general director.

Currently, Russian aviation is developing in accordance with the approved Federal Program, “Development of Russian civil aviation for 2002-2012 and through 2015”. Specifically, United Aircraft Corporation (UAC) plans to produce approximately 360 jets by 2015 generating an income of 320 billion rubles ($10 billion). However, according to Evgeniy Kablov, general director of VIAM (the Russian Institute for Aviation Materials), in his March 22, 2010 message to the Russian Ministry of Industry and Trade, “annual consumption of aluminum roll in Russia will grow from 12,000 tons in 2010 to 19,000 tons by 2020.” Former UAC president Alexey Fedorov predicts that by 2015 the Russia’s aviation sector will consume slightly below 5,500 tons of aluminum per year.

Natalia Vasilenko, Director of En+ Downstream

“Unless we modernize the available facilities and construct new ones, very soon we will be unable to competitively produce for Russian aircraft manufacturers who themselves are competing with Airbus and Boeing. Beyond raw materials, Russia is interested in selling aircrafts and equipment,” says Natalia Vasilenko, director of En+ Downstream, one of the top four manufacturers of aluminum products in Russia.

While there is a clear need for metal companies to invest in supplying the aviation industry, essential to the process, as many players agree, are efficient cross-sector cooperation and, most importantly, mutual understanding between business and government. Joint efforts between metallurgists; aluminum, titanium and special steels producers; composite producers; software vendors; and integrators of brand new engineering solutions will not go far without the support, as Russian say, “from above,” – state decision makers who regulate imports, provide technological platforms to engage business and science, and create a comfortable environment for manufacturers to invest in modernization with confidence.

In 2008, former prime minister Viktor Zubkov, promoted the need to provide state support for the special steels and alloys industry in order to pursue technical modernization. The repeated calls for innovation and modernization have resulted in a number of orders issued from 2008 - 2010 by Igor Sechin, deputy prime minister of Russia; Vladimir Putin, prime minister of Russia; and Viktor Zubkov, first deputy prime minister of Russia, for developing metallurgy between 2009-2011. They envisage increasing exports of metal equipment and high value added metal products; expanding the range of metal, forge-and-press, special steel, and alloy products listed as high added; simplifying procedures used by exporters to confirm timely tax payments; and subsidizing Russian heavy machine building companies loans taken out from 2009 - 2010 for modernization of value added production equipment. The government also encouraged investments by exempting new metallurgical facilities from taxation for three years after their commissioning and reducing taxes for innovative metallurgical equipment.

Modernization requires better quality which opens new opportunities for metal producers and novel ways of integrating composite materials in airframes made of traditional aluminum – “flying metal,” as it is poetically referred to in Russian. Traditional aluminum has no direct alternatives yet, although composites offer unique capacities in weight reduction and improved durability. In financial terms, Evgeny Romanov, general director of RT-Metallurgy, notes that at current fuel prices, every fifth flight is for free. This represents an attractive alternative, but realistically it is a journey of a thousand li. Eventually, all doubts voiced by the industry boil down to the expectations of demand for products, solutions, and equipment. At the same time, major players realize that waiting for the demand is the best way to lose it, according En+ Downstream director Natalia Vasilenko.

Alexander Romanov, president of RUMSS, believes that civil aviation in Russia is facing a dilemma: is it more worthwhile to pay $50 million for a foreign jet or invest in launching Russian-based production to replace an outdated fleet? “As soon as aircraft manufacturers come up with their requirements for the coming years for volumes of raw materials and production capacities, the metallurgical industry will be able to construct the necessary facilities,” he comments.

The major investment projects of the key suppliers to the aerospace industry which are aimed at modernization and increasing product range, illustrate the readiness of the manufacturing industry to boost both output and competitiveness, locally and on the external markets, in support of Russian aviation projects.

VSMPO-AVISMA, the world’s largest titanium producer, plans to invest up to $250 million to develop production in 2011, equivalent to half of all investments in modernization planned between 2011-2015.

En+ Downstream (aluminum semi product manufacturer formed on the basis of Krasnoyarsk Metallurgical Plant, KraMZ, and DOZAKL) is working on its key investment projects – the world’s largest rolling facility initially, evaluated at $350 million and increased to $500 million after deciding to expand its products range through additional equipment installation.

Kamensk Uralsky Metallurgical Works (KUMZ), Russia’s largest manufacturer of aluminum semi products, is undertaking mass-scale investments to construct new facilities and overhaul key equipment and technologies prompting chairman Vladimir Skornyakov to describe the current period as a “rebirth” for the corporation. In early 2010 KUMZ’s Board of Directors approved the new version of its Strategic Development Program through 2015. The company aims to become a Russian and European leader in high quality aluminum alloy products whereby reducing its share of semi-products and strongly increasing its share of ready-made products.

Part 1

The Philippines : once silent, an emerging market raises its voice

Despite a population of 95 million and a growing economy, the Philippine pharmaceutical industry has been largely overlooked in the past--but things are about to change. The industry has been quite radically reshaped in the last year, following the approval of the Universally Accessible Cheaper and Quality Medicines Act, that includes the Maximum Drug Retail Price (MDRP) scheme. After years without any regulation, the MDRP called for a 50% price reduction on 21 molecules, and introduced some systematization to drug pricing in the country.

Esperanza I. Cabral, M.D., Former Philippines Secretary of Health Reiner Gloor, Executive Director, Pharmaceutical and Healthcare Association of the Philippines (PHAP) Edward Isaac, President, Philippine Chamber of the Pharmaceutical Industry (PCPI) The law is meant to increase access to medicines for the poor, in a country where the price of pharmaceuticals is among the highest in Asia and 60% of the population has no access to even basic drugs. So far, the effects of the Cheaper Medicines Law--as it is informally called--have been negative on the pharmaceutical industry. Reiner Gloor, president and executive director of the Pharmaceutical and Healthcare Association of Philippines (PHAP), points out that “there have been no real volume increases, and particularly the molecules which have been touched, have been flat. It is still too early to say if it has really expanded the market, but it has taken [even by recognition of Department of Health (DOH)] PHP 12 billion [approximately USD 270 million] out of the pharmaceutical market”.

Critics claim that in addition to negatively affecting the pharma industry, the law has not truly increased access to medicines for the poor. But former secretary of health Esperanza Cabral, who was a promoter of the voluntary price reductions adopted by the industry, believes that “the industry may be right that the very poor are still not able to afford the medicines they need. However, there are many people who were struggling before--a group in between rich and poor--who could only afford some, but not all of, their medicines before the MDRP. These people have benefited from the MDRP because now they can afford the medicines they are prescribed.”

The MDRP is the first step in increasing access to medicines. The next step is increasing social support. Currently, Philhealth, the national insurance, covers only 38% of the population. The recently elected Aquino government, that took office on July 1st 2010, has set universal healthcare coverage by 2013 as one of its primary objectives. If it becomes reality, universal healthcare will further change the competitive landscape in the Philippine pharmaceutical industry.

The industry will also be reshaped by the prospective harmonisation on pharmaceutical regulations that is currently being discussed by the Association of Southeast Asian Nations (ASEAN). The harmonisation will provide opportunities for local Philippine companies to expand beyond national borders; it will also facilitate entry into the Philippine region for foreign pharmaceutical companies. Within the Philippines, of course, this legislation will increase competition as more products flow in. According to Edward Isaac, president of the Philippine Chamber of the Pharmaceutical Industry (PCPI)--the voice of the Philippine companies--the harmonisation will, at the beginning, “be a threat.” Yet he continues, “There will be a learning curve for us, but in the long run it will be good. We believe in competition, so we are getting ready for that.”

An industry adapting to a changing environment

Local players are indeed getting ready for increased competition. While historically, multinationals controlled 80% of the market, in recent years local companies have steadily increased their share, and locals now represent 27% of pharma business in the country. In addition to United Laboratories (Unilab), the number-one company in the Philippine pharmaceutical industry and a local Phillipine brand, other local players have carved out a space for themselves--including Pascual Laboratories, GX International, and Natrapharm. They have gained leading positions in some therapeutic areas, and are challenging multinationals.

On their end, multinationals are coping with the challenges presented by the MDRP by making modifications to existing pharmaceutical lines, and expanding their offering outside of traditional pharmaceutical products altogether, by moving into areas such as consumer healthcare and nutraceuticals. Otsuka (Philippines) Pharmaceutical, an affiliate of the Japanese company--and active in the Philippines since 1998--has adopted this strategy. As Leopoldo Dimerin, president and general manager, explains, “as a solution to cope with unpredictable scenarios, we have extended our pipeline by introducing line extensions with a new delivery system--like we did for our antiplatelet product, from a tablet to a powder preparation, for stroke patients who had difficulty in swallowing.” The company continues to invest in various pharmaceutical products, and as Dimerin points out, “there will be new products and line extensions in the next 3-4 years and we expect them to be the growth drivers for the pharma segment.” There are still a number of pharmaceutical products developed in Japan that are not yet available in the Philippines, and a key objective of the company is to expand their pharmaceutical portfolio in the coming years.

In addition to its pharmaceutical business, which currently accounts for 90% of its total revenue, Otsuka (Philippines) Pharmaceutical has diversified with the recent launch of new medical devices. The company also plans on strengthening its consumer healthcare and its nutraceutical businesses--areas that have strong growth potentials--and is looking into the possibility of introducing other products to accompany their successful health drink Pocari Sweat. Dimerin hopes these strategies will bring the company into the top 15 in the next seven to ten years.

Multinational companies are not the only ones who have diversified their production; local players have also branched out. Market leader Unilab--which was founded in 1945 as a drugstore, and evolved into the leading pharmaceutical company, with affiliates in Indonesia, Thailand, Malaysia, Singapore, Hong Kong, Vietnam and Myanmar--is now looking into consumer healthcare. In the words of Joey Maria Ochave, corporate vice president of the business development group, “the basic DNA of Unilab is to provide a more affordable quality option. Initially we were offering only medicines, but we have expanded our mandate to include healthcare. We are not focusing on pharmaceuticals only. We have started going into other businesses as well.”

Part 1

FRANCE: The French Revolution

The French pharmaceutical industry received Sarkozy’s pronouncement as an extremely positive sign. Indeed, like most of the nation’s industrial sectors, pharma reels from the country’s trademark government interventionism. According to Hervé Gisserot, president of GSK France, “This was the first time any French president has said this about our industry.”

Sarkozy’s symbolic keynote speech at the CSIS underscores the government’s new understanding that there is more to pharmaceuticals than cost-containment. “We now live in a country where health industries are no longer regarded as a problem but as a solution to the end of the economic crisis,” enthuses Philippe Lamoureux, general director of LEEM, an organization representing 98% of pharmaceutical industries in France.

Breakthrough measures include the creation of Innobio, a €130 million ($161 million USD) biotechnology fund utilizing a combination of funds from France’s sovereign wealth fund (Fonds Stratégique d’Investissement) and multinational laboratories including Sanofi-Aventis, GSK, Pfizer, Roche, Ipsen, Lilly, Novartis, Boehringer Ingelheim and Takeda.

Philippe Lamoureux, Director General of LEEM Other highly anticipated, and long-awaited, changes include dual pricing for exportation, the possibility to start manufacturing generics before patent expiration, increasing public-private research cooperation, and announcing the national life and health science alliance AVIESAN’s[FU1] new role as the unique interlocutor for private companies willing to cooperate with public research institutions.

Pharmaceuticals contribute significantly to the French economy. In 2008, pharmaceutical revenues reached €47 billion ($58 billion USD), 45% of which are from exports generating a €7 billion ($8.7 billion USD) trade surplus. The industry is responsible for over 100 000 direct and 310 000 indirect jobs. Until recently, it was creating 2500 jobs per year.

As Europe’s largest producer, and manufacturing powerhouse with over 210 production sites, France has long attracted investment in pharma. Market size, stability, and an exceptionally educated and productive workforce far outweigh concerns about high taxation, and price control that limit profitability (6.7% average in France compared to 15% in the US).

France is also a significant market for the international pharmaceutical industry. In 2008, France surpassed Germany to become the world’s 3rd largest pharmaceutical market, despite having a headcount that is 20 million less than its neighbour. These numbers reveal, not wayward over-medication, but attest rather to the country’s robust social healthcare system and strong tradition in the medical and innovation field. Indeed, French social health insurance (Assurance Maladie), established in 1945, currently finances up to 67.6% of all drug expenses, and universal health coverage was introduced in 2000.

In an industry boasting such performances, why were there so many worries and expectations?

Firstly, 2008 marked the end of a decade of strong and steady growth in the domestic market, due to a cocktail of patent-ending and cost-containment measures to minimize healthcare’s chronic deficit, which hit €27 billion ($33 billion USD) in 2009. That’s just for employees in the private sector.

Further, there are also fears that France may have lost its attractiveness as a production hub. The sector is indeed facing rough times ahead. Expiring patents will force factories, designed in the 80s-90s era of the “blockbusters” model, to shut, while the country hasn’t developed sufficient bioproduction platforms to be able to replace them.

Lastly, in the country that saw Louis Pasteur discover immunology and Marie Curie medical applications with radioactivity, there are fears that the French public research infrastructure is no longer at the center of growth.

Pros and Foes of the system

“France has kept up with the world market albeit with some notable differences, namely in terms of our social security and healthcare systems”, explains Jean Pierre Cassan, honorary chairman of the LEEM: “French people have always received good healthcare: you can see your doctor when you want, we have access to the drugs we need, and our generous system caters for all, even the very poor”.

While the Assurance Maladie and the Sécurité Sociale have guaranteed growth and stability in the healthcare industry, France, like many mature markets, is currently confronted with chronic deficits due to longer life expectancy, demographic imbalance, and rising treatment costs. With blockbusters’ patents expiring and poor pipeline issues, newly introduced cost containment efforts are changing the market: stricter price controls, promotion of the use of generics and OTC products promotion.

As a result, French market segments are reacting unequally. While generics, OTC and hospital markets are still growing very fast (between 12% and 15%), the market for prescription drugs sold in pharmacies shrank in 2009 by 0.8% and the overall market slowdown should continue until 2012, directly impacted by a €400 million ($480 million) saving plan mainly targeting reimbursable prescription drugs. A direct consequence is the mutation of marketing organizations with drastic cuts in the number of medical visitors, and a market reorganization along the lines of high tech expensive drugs and “low cost” products.

Valuing Innovation

In the words of Christian Lajoux, president of LEEM: “France’s challenge is not a reimbursement system but whether it remains a great country for life sciences or not. There are indicators that blur the message: we are the largest producer and biggest exporter. We are in fact a giant with feet of clay. It is important to get involved in rebuilding the structures of pharmacy research if we wish to remain a great country.”

Véronique Robours-Mory, General Director of Nordic Pharma France & Belgium In a context of regulated prices and cost containment, pricing is obviously significant. Finding the right balance between the system’s sustainability and fair prices rewarding innovation is critical.

French authorities tried to put a pricing system that would focus on innovation and reward real improvement compared to past treatments. AFSSAPS, France’s pharmaceutical equivalent to the USFDA, looks to provide a completely transparent view of their operations, which, according to its director Jean Marimbert, is “a necessary action if we want the outside world to trust us.”

“It’s simple to explain as the market place doesn’t work for drugs for quite serious reasons. Primarily, the end-user does not have to pay in our market, so logically when you do not have to pay price does not have an influence. Somebody must interfere in a situation like this which is where CEPS comes in,” explains Noel Renaudin, president of the CEPS (health products’ economic committee) the organization in charge of setting the prices.

Renaudin explains: “We reward innovation by pricing through assessment that has been centralized under the High Authority for Health (HAS). When a drug looks to come to market, the company who produces it asks for an evaluation from the commission. There are three criteria in this discovery process, the first of which is satisfaction of medical demand in the market. Secondly, the improvement of medical benefit which we obtain by comparing the new drug against already available options. The grades for this level range from I-V where I means significant step forward for medicine and V indicates no improvement. Lastly, the distinguishing characteristics and size of the target population are examined.”

“Thus for innovations that are considered to be important enough we accept to pay what we refer to as the ‘European price’ so that the developer is appropriately rewarded. The discussion in this scenario is not necessarily about the price as it lies within the European standard but rather the volumes and conditions. If the new drug does not offer anything interesting in comparison to those already on the market, then we should have to pay less.”

Renaudin believes: “The best approach is to reward innovation through merit rather than allowing money to go indifferently to whatever drug comes to market.” The system not only looks great on paper; it actually works and Renaudin has been praised by the industry for his innovative approach.

Véronique Rebours-Mory, general director of Nordic Pharma France and Belgium, points out the environment’s challenges, which go beyond getting a fair price for your drugs but also include a negotiation on volumes and target population. “The competition in this market is becoming increasingly difficult each day and the authorities put a lot of pressure on the sector…for each product there is a strict price negotiation which is long and difficult. If we sell more than planned we have to give some money back…. Having said that, it’s undeniable that the French market is still very attractive and the continuous growth of Nordic Pharma France proves that.”

According to Rebours-Mory, France is now leading the group in terms of revenues and has become Nordic Pharma’s most dynamic subsidiary. Since 2003 Nordic Pharma has launched more than 10 products in oncology, gynecology and rheumatology on the French market, “but not every new player is as successful as us”, she notices.

Market access still a slow process

Nordic Pharma started with its main focus on the hospital market and its biggest business is with gynecology. But in 2007 it successfully launched Metroject, tapping into the rheumatology market, which was new to the company. “Getting the reimbursement of Metroject was a challenge,” Rebours-Mory remembers. “But we were quite happy to get reimbursement at a reasonable price, because we are bringing an important novelty to patients”.

Despite its core focus on innovation, the system’s major drawback might be timing. “The process takes six to seven months which can be perceived as a long time to market. As a result, the first patient may not have it as quickly as in the UK or the US,” acknowledges Renaudin. “We don’t want drugs to come to market quicker. In France, for the most innovative drugs there is a Temporary Authorised Use (ATU) system which allows for the use of these drugs in hospitals even before registration and is free to the developer of the drug. Thus, all the new drugs and technology are available in hospitals. On the other hand, we are of the opinion that it is worth the assessment time before outpatient use. This allows for an examination into whether it deserves an innovative price or not,” he explains.

For Olivier Daubry, general manager of Celgene France, the ATU is one of the best examples worldwide of early access to innovation, allowing patients to quickly receive innovative drugs for life-threatening diseases with high unmet medical needs. This was the case of Revlimid, which obtained a market authorization in France in June 2007 as a treatment for patients with multiple myeloma after prior therapy. It is now a leading therapy for this indication in France, and the #1 brand worldwide.

Hence the French system seems to fit perfectly with Celgene’s overall strategy. “What we try to do at Celgene is to deliver absolute breakthrough innovative medicines. If we understand a project does not bring a significant clinical benefit that dramatically changes people’s lives, we drop it,” he says.

Celgene also benefitted from a system with Thalidomide, which for several years was available through the ATU process to patients in first line myeloma for elderly patients but also other rare diseases where patients are desperate to have an effective treatment. Thalidomide was eventually officially accessible to outpatients in October 2009, but within a very strict safety framework.

“For life-threatening diseases with high unmet medical needs and where patients have used all registered drugs the ATU system allows innovative drugs to be administered in a very controlled process before registration. It is a positive example for early access to innovation,” says Daubry.

“France has a very good system in terms of access to market compared to many other countries so fundamentally, the system of assessing innovation is good. If we take an example in oncology, a study done by a Swedish team last year shows France at the head of Europe in terms of speed to market,” concurs Hervé Gisserot, head of GlaxoSmithKline France. With investments reaching €850 million ($1.2 billion) in the past three years, GSK is the largest foreign investor in the sector.

“Instead of complaining, the health community has to work together to clearly define what we consider to be innovation. For instance, when it comes to clinical trials we should work not only with clinicians but with regulators and payers, in order to ensure that the design of our clinical trials and the profile of our drugs meet the answers to their questions. In the past getting an approval for your drug was sufficient because access to market was relatively easy so the entire process was focused at getting approval. Now, at the very least, you have to focus on getting access which is why within GSK we have taken to specifically developing a reimbursement file for a drug to make sure it meets these further requirements. In our industry, getting approval without access is basically like getting nothing at all”, Gisserot concludes.

HOWEVER YOU LOOK AT IT

Mike Seeley, Senior VP Europe for BMS Of course, not everyone is entirely happy with the French system’s strict regulations, longer processes for getting market access, and other administrative hurdles. “If you examine the market access process, there are more hurdles to get your drug approved so it clearly eats away your protection period.” complains Mohamed Chaoui, general manager of UCB France.

“France has improved from the past but I believe more can be done. Moreover discussion would be easier and quicker if we were to obtain a price that is commensurate with the amount of R&D investment.” he says.

Nevertheless, having lost most of its initial patents at an earlier stage but looking forward to the launch of three new products (Vimpat for epilepsy, Neupro for Parkinson’s, Cimia for rheumatoid arthritis), Chaoui acknowledges: “France’s advantage–however you look at it- is that it is one of the world’s biggest markets.”

Even when compared with emerging star countries, France seems to retain its status as a priority market for players. “If you consider the prices that regions like Brazil or China will be willing to pay… French health expenditures per capita will remain more attractive for quite some time. Therefore, even if worse ranked in the future, this country will play an important role in the global pharma market,” reckons Eric Fatalot, president and CEO of Chiesi France.

Olivier Daubry, General Manager of Celgene France “When you look at the entire health market one of the main drivers is the elderly population and if we look at the population of France in the coming 20 years it is no exception to the rule in Europe: percentage wise the population is getting older. It needs to be taken into account especially when you consider one of our up-and-coming therapeutic areas like chronic obstructive pulmonary disease (COPD) which is prominent in elderly populations,” he concludes.

The importance of France is even more critical for an international giant like BMS. In 2008, BristolMyersSquibb’s Plavix, then the largest molecule on the French market, went generic. It represented €600 million ($720 million) of revenues that dropped by 60% within ten weeks. Despite a number of new product launches in the pipe, Mike Seeley, senior VP for Europe at BMS knows that 2010 should still be a year of contraction. He is, however, confident that growth shall return in 2011 and that France “should also remain the largest affiliate outside the United States.”

Mohamed Chaoui, General Manager of UCB France Replacing blockbusters by new products is high on Seeley’s agenda, but there is another challenging process he has had to supervise. “Our vision for manufacturing in France involves adapting to our future reality as a global, next generation biopharma company. (BMS) took the next step to focus all of our research on ten disease areas where we believe there is a serious unmet medical need. Of course, this reorientation impacts our industrial structure and we are adapting it to a portfolio that represents the company’s future.”

As a result BMS is closing down two sites in France. But this is by no means the end of BMS’s industrial story in France. Actually close to 50% of the BMS’ global volumes output still comes out of its Agen factory, in southwestern France. “This is where the UPSA business is located...There is a center of excellence for pain products like paracetamol and effervescent so we made the decision to develop this asset for France and as an important export business,” explains Seeley.

Krisja Vermeylen, Vice President France & BeLux - Novo Nordisk When asked about the complexity of working in France Seeley first jokes, “the first thing is to speak French,” but on a more serious note adds, “I have had regional roles for a long part of my career. In the time that I have been here I have found that French culture can be very demanding, specifically because getting to a decision is not the linear Anglo-Saxon way. You need to learn to let a discussion process work its way through. My experience has been that you will start with one issue and end with ten before getting to a solution for the original problem. However, the good part of this is that you have dug deep on a number of tangents to the issue which develop into a more robust final solution.”

Mind magnifying effects

France is also well known for its deterrent political and social environment. “We have the reputation for being a strictly regulated country where social tensions are frequent. That image, I am afraid, is too caricatured. Multinational companies settled in France are much less critical of the situation than foreign observers. Mind magnifying effects,” replies Lamoureux, a strict advocate of the need for the sector to go through a re-industrialization phase.

Philipe Chêne of Baxter France also believes that the image of a problematic country is often overplayed. “The country has an image of labor complications, poor productivity and complex tax systems. In reality, the productivity level of our subsidiary versus the rest of the world is one of the highest in the organization. Moreover, while the tax system may be complex it’s highly attractive for research which is why I have worked with my finance director to draft a position paper to communicate the opportunities of France to our external colleagues.”

“France is a centralized country so you have to consider the impact of this structure on healthcare authorities. It helps to take the time to understand how it works and to empathize with the position of key stakeholders at the governmental level. Rather than complain about each decision that is made, work with authorities to find a compromise,” advises Chêne. Baxter has been present in France for nearly 40 years where it distributes both drugs and medical devices.

Unquestionable potential

While many are feeling the heat of a changing environment in France, with growth figures down, headcount downsizing, and facility closures or sell off, Novo Nordisk is thriving. In 2009, with an 8% increase in revenue, France was a driving force for the group’s European growth, which only reached 4%. In the past five years, Novo Nordisk doubled its French headcount and invested €200 million ($240 million) to increase capacity in its Chartres insulin production facility near Paris.

While Novo Nordisk’s main production facility remains in Denmark, Krisja Vermeylen highlights that Chartres is one of the group’s top three facilities alongside Brazil and China. “France may have the 35-hour law but it does not hamper the quality of work here and our results prove it,” she says. “Moreover, our site operates a high level of productivity and the quality is highly recognized which is why we were able to attract extra investment in France.”

2010 should be another good year for NovoNordisk’s French affiliate with the launch of the “first human GLP1 analogue to the market with Victoza.” The product is already on the market today in several countries such as the UK, Ireland, Germany and Denmark “where the feedback from patients has truly been amazing,” says Vermeylen.

Interestingly, the diagnosis rate for diabetes in France is above average with 85% of the population aware of their disease compared to Europe’s 60%. “This is likely linked to the obligation of French employees to visit the doctor annually”, surmises Vermeylen, another reason to not forget France.

She won’t be contradicted by Laurent de Narbonne, general manager for Octapharm France, Belgium and Luxemburg. Over the past 5 years, French sales doubled to reach €40 million ($44 million). France and Octapharm have a long common history as the independent Swiss based global plasma fractioning company was originally founded in France by Wolfgang Marguerre, the company’s chairman.

Octapharm manufactures and markets high tech plasma derived products on the French market, but only 5% to 10% of the production from its Alsace biotech facility (on the border with Germany) is directed to the French market.

Located close to the Strasbourg university, one famous for its chemistry department and the Alsace biocluster, the Lingolsheim plant is one of France’s 10 biological production sites. Seeing that the French market is not self-sufficient for certain type of plasma (IVIG, Albumin or fibrogen notably), Octapharm is increasing the level of its investment there. It has already injected over €100 million ($120 million) over the past 10 years (including acquisitions). “The French market’s potential is unquestionable!” concludes de Narbonne.

Part 1

Malaysia goes deeper and further afield

Brian Wiesner, Director of Marketing, Commercial, Asia Pacific Region, Baker Hughes Since the establishment of its National Oil Company (NOC), PETRONAS, under the Petroleum Development Act in 1974, the hydrocarbon industry has been crucial for the country, contributing much to the nation\'s wealth. Over thirty years later, Malaysia still exports more oil and gas than it consumes, although this trend might change as Malaysians become richer and use more energy. Oil and gas have been and will continue to be at heart of the Malaysian economy, generating 41% of the country’s revenue and being among the country’s top-10 foreign exchange (forex) earners.

As of January 2009, Malaysia had proven oil and gas reserves of 20.18 billion barrels of oil equivalent. The country is also the largest LNG exporter in the world, and has built international giants such as MISC, Sime Darby, Scomi or KNM. PETRONAS alone employs some 40,000 people.

Malaysia has reached a defining moment in its development path and its oil and gas industry wants to continue be at the forefront of the country´s economy by going deeper under water, reaching further internationally, and capitalizing on past successes to develop a strong base of service providers.

CEO + COO of ALCIM The industry is well aware of PETRONAS’s lead under the direction of Tan Sri Hassan Marican, and how the former President and CEO pushed the company beyond its own comfort zone. Replacing Marican at the head of PETRONAS, Shamsul Azhar Abbas is now determined to bring some change, starting by focusing the industry’s effort on the domestic market and prospects in deep waters to replace depleting reserves. Rozali Ahmad, President of the Association of Malaysian Oil & Gas engineering consultants (MOGEC) highlighted that the NOC´s impetus would help to develop the local capabilities: “Malaysian companies have already developed expertise in shallow water, so the place where new competitive edge can be developed in the new ten years is definitely deepwater.”

Shifting from shallow waters to deeper waters will require intensive technology transfer and international companies´ support, especially for seismic acquisition. As K.T. Tong, Country Manager for CGGVeritas Malaysia noted “now with the technological focus mostly on deepwater, this presents different types of challenges such as high temperature, high pressure, and changes in drilling technology. CGGVeritas has advanced technology in terms of being able to record and image these deeper targets with specific data acquisition and processing & imaging techniques.”

The future of Malaysia lies in deeper waters, but not just in Malaysia, as many Malaysian service providers have shown they can stand on their own feet internationally. For Sofyian Yahya, President of the Malaysian oil & gas service council (MOGSC), “PETRONAS has created a healthy environment for Malaysian business to grow and establish their capabilities and experience in the Oil & Gas industry. Malaysian businesses on their part have risen to the challenge, and from purely representing foreign companies in the beginning, to developing joint ventures with foreign partners, and now we see many Malaysian companies with their own capabilities and experience which they can even export other Oil & Gas regions around the world.”

Location, location, location!

Dato Sri Mohd Najib Tun Razak, Prime Minister of Malaysia Only one year after being hard hit by one of the deepest economic slowdowns since World War Two, Asia is now considered to be spearheading the global recovery. While the US and Europe have typically guided the recovery of the past three world recessions, for the first time Asia is leading the way. With 61% of the executives in the region being optimistic about their revenue growth in Asia-Pacific (APAC), according to IDC (International Data Corporation) researches, the oil and gas sector would not be outdone and has well recognized the potential that APAC represents. And they have reasons to be optimistic: in 2009, 35% of the global discoveries were made in the region, creating therefore prospects for strong exploration and production (E&P) investments to be done in this area. For most executives within the industry, the reason for Malaysia’s success lies in its strategic location at the center of Asia Pacific, and a hub for all activities from Russia´s Sakhalin to the Middle East. As far as oil transportation is concerned, the importance of Malaysia is even more blatant: Roughly one-third of oil shipments transported by boat pass through the Strait of Malacca, making it one of the two most important oil shipping lanes in the world.

Oil and gas companies used to choose Singapore to head their activities within Asia-Pacific, as it was considered the most developed and stable nation in the region. As Ziyad Elias, who founded one of the most promising Exploration and Production geosolution and engineering groups in Malaysia – Orogenis - explained, companies soon realized the advantages of setting up camp in Malaysia too. “Malaysia is a business friendly country with energy resources on site, compared to Singapore which has the technology but no resources. Indonesia has the resources but its business environment is not as promising as in Malaysia.”

$Dato\' Wee Yiaw Hin$ In the same way the founder and CEO of IEV Group, Christopher Do, believes Malaysia is the best place to do business in the region. After his beginnings in Australia, he soon decided to come sell his inventions here and established its subsidiary IEV Energy in Malaysia. “Malaysia is a very good industrial regional corporate hub, especially in the oil & gas industry. There are many advantages in being here: the industry is here, the lifestyle is easy to adapt to, the cost of living is very low compared to Singapore or Sydney.” Expatriates living in Kuala Lumpur tend to agree with Do, praising the city’s multi-cultural diversity, and the relatively well developed infrastructure compared to, for instance, Indonesia´s capital Jakarta with its interminable traffic jams. Another selling point is the relatively cheap and cheery regional flights which allow for easy traveling - as well as weekend breaks- to discover the entire region.

In view of these virtues, many foreign companies such as Aker Solutions, Technip, Cameron, or AECOM have moved their regional headquarters to Malaysia. For Baker Hughes and its Director of Marketing for the Asia Pacific region Brian C. Wiesner, it was clear that after the reorganization of the company into geo-markets, Malaysia had to play an important role in the company’s strategy: “In Malaysia, Baker Hughes has recognized the importance of the country as a strategic location to service its customers, such as PETRONAS. Malaysia is exploiting resources, while neighboring Singapore does not have any oil or gas. We view Malaysia as a valuable regional service center which expands our customer base, enables more immediate attention to our customers’ needs, and reduces overall costs.”

Talisman: Safety first.

Datuk Dr Abdul Rahim Hashim, President of MGA “If operational results and safety ever come into conflict, we all have a responsibility to choose safety first. Talisman will always support that choice.” With the tragedy of the Gulf of Mexico´s Deepwater Horizon fatal explosion making everyday newspaper headlines, the words of John A. Manzoni, President & CEO of Talisman seem ever more pertinent.

Talisman, the Canadian independent E&P company, entered Malaysia in 2001, taking over Lundin’s assets. Since then the company has established a strong presence in the region, putting a strong accent on contributing to the country’s development while ensuring the safety of its operations. As Dato Wee, Vice President of Talisman Malaysia, put it “In the relatively short presence in Malaysia, Talisman feels it has added value to Malaysia’s and PETRONAS’s goal in the development of its oil and gas resources. Talisman has successfully applied its capabilities in its Production Sharing Contracts (PSCs) assets effectively, safely and efficiently both technically and in Cost, Time and Resources.” In an industry where people’s lives are at stake, Talisman decided in 2009 to add safety to its core value, making of it a priority to the group. That is why when Dato Wee explained his ambitions for Talisman’s growth in the region, he stressed one imperative: “It will have to be done safely! “

Footnote: After this interview, Dato Wee left his position as Vice President of Talisman Malaysia and was appointed Executive Vice President for Exploration and Production in PETRONAS.

Local solutions for ambitious plans

Datuk Tiong Su Kouk, Executive Chairman of Nam Cheong Creating its Research and Technology division in 2006, PETRONAS made innovation a priority for the country, focusing especially on deep water technologies, but also developing its capabilities in terms of Enhanced Oil Recovery (EOR). The Malaysian market current trends have created a suitable playground to implement the PGS’ newest technologies, and its Country Manager Jesemee Zainal Rashid explained: “On the seismic front we match the country’s ambitions to go deeper thanks to our unique streamers.” PGS´ technology - the GeoStreamer - is a unique development that will make it possible to record deeper data, with a greater bandwidth, and beneath carbonates. As emphasized by Guillaume Cambois, President for the APAC region in PGS, “with technology like GeoStreamer, we can create better imaging of the reservoir, and through better images help the industry develop much more efficiently.”

For Keith Collins from Petrofac, this development is a great sign of Malaysia’s determination to develop its own solutions instead of importing foreign expertise. “There is - but should be more - development of new technology by Malaysian companies rather than the application of technology developed outside of Malaysia. The Malaysian service industry sees itself as an agency type of business instead of a true innovator in the world oil & gas business; but they have the potential to transform.” Petrofac however has a unique approach to the Malaysian market. As an international provider of facilities solutions to oil & gas production, the company has chosen Malaysia - and the Cendor Field - as the location of one of its four energy development offices around the world. “The opportunity that we seized was to choose technically challenging and marginal projects, using the capabilities of a wider company, a service providers approach rather than a conventional approach, and take a risk with the investment.”

Today many operators as well as service providers have established strong partnerships with the NOC, welcoming contractors – who are called “secondees” here – in their offices to ensure technology transfer. Total, a late entrant in the market, signed a production sharing contract (PSC) with PETRONAS in 2008 based on its technological expertise. For Vincent Dutel, General Manager of Total Malaysia “the added value of bringing in partners is to acquire new technology, find new concepts and new exploration plays. One example is the deep plays with high pressure and high temperature especially in the Malay Basin, below the existing producing fields. PETRONAS was interested in our experience as a possibility to find new resources, so we had direct negotiations with them.”

Ir. Rozali Ahmad, President of the Association of Malaysian Oil & Gas Engineering Consultant (MOGEC Local companies are competing fiercely and successfully to bring new technology to Malaysia. Tanjung Offshore, for example, has developed unique capabilities for the country; as Omar bin Khalid, its founder and CEO notes “Our well testing vessel is quite unique in the world. We are one of the only companies which have such a vessel in the region, and around the world only Schlumberger and a company in the Middle East have it. She started working in Thailand, and today we are coming back to our country and offering it to PETRONAS and its PSCs. Within the first five years, when we also started our marine operations fully owned and managed by Malaysians, we grew from two to 16 vessels. I hope that in the next couple of years I will have five to six more vessels. As a Malaysian company, starting from nothing, I am extremely proud of our achievements.”

In addition, Malaysia has developed a handful of flagship service companies, among them Sime Darby, Kencana, Scomi, KNM, MMC or Dialog, which are today exporting their own technology, the ultimate example of Malaysian service provider being MISC. MISC has evolved from its creation as purely a shipping line in 1968 to a fully integrated maritime, heavy engineering and logistics services provider, particularly in energy transportation. It is today one of the top five shipping companies in the world by market capitalization and the largest owner and operator of LNG fleet in the world. But its management does not want to stop there and is looking at becoming a midstream player, offering LNG technology solutions for new offshore applications. Technology will become a key area and a pillar for the transformation of the company’s portfolio.

The Norwegian experience

Ir. Rozali Ahmad, President of the Association of Malaysian Oil & Gas Engineering Consultant (MOGEC) One country in particular is benefitting from Malaysia’s ambitions to transform into a deepwater hub: Norway. It is widely acknowledged that the strongest link uniting the two countries is technology. The number of Norwegian companies in Malaysia has doubled over the past three years, standing today at 61, of which 40% are directly involved in the oil and gas sector. According to Øyvind Bjørkhaug, Chairman of Malaysia-Norway Business Council (MNBC), “more and more Norwegian companies will settle in Malaysia thanks to these deepwater developments, but also because it is where growth is available and Malaysia as a frontrunner in deepwater for Asia, will become a hub and a centre of expertise in this field”. Both nations have seen their oil and gas industry grow in the early 1970s. While Malaysia mostly gathered knowledge in shallow waters, Norway had to develop cutting edge expertise in deep waters and harsh environments. Tuan Hai Ewe, the most Norwegian of all the Malaysians involved within the oil & gas industry, now Country Manager of Innovation Norway in Malaysia and local advisor for INTSOK notes that, “Deepwater is an area where the two countries can cooperate. Norway and Malaysia started their oil and gas industry at about the same time, but Norway has gone a bit further in the development of deepwater and can lead the way for Malaysia.”

DNV, Roxar, Wilhelmsen, Jotun, SPT, and EMGS have recognized the strategic importance of Malaysia. However the Grenland Group – a leading engineering, procurement and construction (EPC) company – has made a difference by choosing Malaysia to establish its first international office and a strategic location for its 3D modeling activities. “From the first moment, our aim was to market 3D laser scanning and modeling and to establish relationships with PETRONAS. From 2010 onwards, we will focus on the local market to promote this technology. By having a subsidiary of Grenland Group in Malaysia, 100% of the group’s 3D modeling will be done here, in Kuala Lumpur. Therefore the Malaysian office is crucial for Grenland’s activities as no modeling activities will be feasible without us from now on,” highlighted Mohd Rozlan Mohamed Ali, general manager of the Grenland Group in Malaysia. Anticipating rewarding prospects in Malaysia´s deep waters, Aker solutions, a flagship Norwegian service provider, has chosen to heavily invest in Malaysia and benefit from what the country offers to strengthen its global capabilities. Dave Hutchinson, President of Aker Solutions APAC explained “Our Port Klang facility is unique in the world. It is a true one-stop shop that offers Aker’s clients the understanding and knowledge that all their products are getting done under one roof. The facility was not built purely for Malaysia or Asia Pacific, but it was built with the world in mind. When we decided to invest $100 million in Port Klang we envisioned serving the global industry.” Aker is not alone in recognizing the role of Malaysia as a global deepwater hub. Other players such as FMC, Cameron or Technip are also demonstrating their trust in the country’s potential by heavily investing in subsea facilities.

International standards: Bridging the gap

Omar Bin Khalid, Managing Director of Tanjung Offshore Berhad Transforming Malaysia into a high income nation by 2020 requires a leap in information and communication technology (ICT) in all fields, starting with its applications on the oil and gas industry. By inaugurating Cyberjaya in 1997, Tun Dr. Mahatir aspired to create the Silicon Valley of Malaysia, but today companies want to go beyond information technology (IT), and use Malaysia’s excellence in services to build a hub for information management (IM). Using the status of Multimedia Super Corridor (MSC), companies such as AVEVA, ALCIM or IBM are pushing to change the perception of the general public from “software” providers to a consultancy based type of business.

Since setting up operations in Malaysia over a decade ago, AVEVA has been a proponent of Integrated Operations (IO) within the Oil & Gas industry. According to Rozita Mohd Nor, Vice President APAC for AVEVA, “Ten years ago EPC contractors did not have any engineering design tools to deliver their engineering deliverables. By having AVEVA’s system they are now able to compete on the international market. They have accurate deliverables and can work with giants such as Shell, Exxon etc”. Internationally, the company is involved in FIATECH to accelerate the development and adoption of standardized and universal IO technologies and systems. ALCIM is also involved in this initiative and wants to educate the industry on the need to adopt international standards and on the opportunity to transform the country into a center of excellence for IM. Toralf Müller, CEO of ALCIM highlighted that “as member of the international POSC Caesar Association (PCA) and the US based FIATECH, both ALCIM and PETRONAS are promoting together the implementation of Data and Interoperability Standards like ISO 15926. PCA recognized the efforts of ALCIM and PETRONAS to bring the awareness of information inter-operability to Asia and asked ALCIM and PETRONAS to host the yearly PCA conference in Kuala Lumpur.”

Exploiting this collective push, IBM and its Managing Director Ramanathan Sathiamutty have also managed to move away from the image of a purely IT company. Under the umbrella of the “Smarter Planet” program, the company is looking at building a reputation as a solution based business, and becoming the right advisor to the government on how to implement international standards in a Malaysian context.

From blue collar to white collar workforce

For decades, Malaysia was associated with the textile and electronic goods industries, manufacturing fueled by a blue collar local workforce. Today, as the country transforms into a knowledge-based economy, its human resources are mutating at the same rate. As Omar bin Khalid, managing director of Tanjung Offshore, believes Malaysians will achieve this easily. “One thing I strongly believe is that God gave us a brain and the opportunities to use it. It is then up to us to take the opportunities and develop them into something fruitful.”

Sofiyan Yahya, President of Malaysian Oil & Gas Service Council(MOGSC) It seems, however, that even though Malaysia is able to attract foreign companies and expatriates, the country has so far failed to retain its own workers. The Deputy Foreign Minister A. Kohilan Pillay said that between March 2008 and August 2009, a total of 304,358 Malaysians had left the country, which for a population of 27 million amounts to what economists call a “brain drain” or a “talent crunch”. Sam Haggag, Country Manager of Manpower, believes there are two main reasons why Malaysians are so in demand internationally: “Malaysia has certain skills set that are sought after overseas, in particular the Middle East, largely due to its rich history in the oil & gas industry. Malaysians have also proven to be among the most able to adapt to the culture in the Middle East.” The challenge of finding enough skilled workers is a concern for the entire industry, starting with the Malaysian Gas Association (MGA), and its President Datuk Abdul Rahim Hashim. The association, which is now heading the International Gas Union (IGU), has set “Building Strategic Human Resources” and “Nurturing the Future Generation” initiatives among its top priorities. These two programs aim at reducing the gap between experienced and young engineers, as well as attracting the younger generations to the industry. “When looking at the demographics profile of the industry, with the average age of around 50 years old, and lesser new graduates entering the industry, the industry has to undertake big changes in order to address issues relating to sustainable supply of human capital. We will also engage children so as to create awareness and interest in the oil and gas sector in general.”

EPC companies that require a high amount of qualified engineers but work on a project basis and therefore cannot always guarantee a stable flow of work are especially affected by this trend. Dr. Ragunath Bharath, managing director Innovative Fluid Process, a Malaysian multi-discipline, integrated oil & gas engineering company, has had to devise a different approach to counter the situation. “We changed our strategy and tried to attract young Malaysian engineers to come and work for us, even people who do not have an oil & gas background but willing to learn. What we try to do is to expose our engineers to many works by securing as many different jobs as possible so that they feel challenged and can learn new things every time.”

To answer the industry’s human resources challenge, PETRONAS has always pushed for a “malaysianisation” of all companies working within the Malaysian borders. International companies are following suit with a constant training process to make sure that, once expats are gone, Malaysia will be able to integrate new skills and stand on its own. Graham McClelland was for long the only expatriate within Bukit Fraser Thermal, and even though he nearly feels Malaysian today, passing his experience in heat transfer technology to local employees. “We believe in training and have transferred a lot of knowledge to the young staff joining us; it has been developed to such an extent that today our local staff are conducting the training in terms of design works. I consider today some of my employees as good as anyone I know in the West working in the same field. As they have grown comfortable with their technologies, they become able to pass it on to their countrymen.”

However as Steve Abbis emphasized, every expat is the result of a localization policy in its own country. “We are products of the Cameron localization philosophy of doing business. We both would not have jobs if Cameron had not invested in the UK or France back in the 50’s. In the coming years you will see Malaysians taking the role of expats in new locations.”

Embarking on the Offshore Support Vessels (OSVs) market

According to a report from Pareto Securities Asia, Malaysian yards accounted for less than 1% of the global fleet built during the nineties. This percentage increased to approximately 6% for the period 2000-2009, thus propelling Malaysia as an OSV shipbuilding hub. Among all the domestic yards, Nam Cheong is the most “international company”, present in the Singapore, Papua New Guinea, Australia and the Middle East markets. For Datuk Tiong Su Kouk, executive chairman of Nam Cheong, “We have looked at different water depth for our vessels to operate in, and want to be the most efficient producer for each of the type of vessel that we produce. Today the world is our oyster!” Given the high price competitiveness of the region compared to Europe, and its proven track record supporting the country’s deepwater ambitions, the company’s growth is unlikely to stop there. In addition to expanding its operations internationally, Nam Cheong is determined to diversify its activities up and down the oil & gas service value chain, to become and integrated offshore company. Datuk Tiong Su Kouk believes that “With Nam Cheong, hopefully we can go up and downstream, to reduce the impact the cycles and variations that our business implies and enter the parts of the value chain that will bring us more stability in terms of revenues.” But Nam Cheong’s primary goal is not just to grow its own revenues, it is to build the country’s talents and ensure a healthy competition within the market. The group established a number of “firsts” in Malaysia: participating in Kikeh, the country’s first deepwater project, building the first high-tech Safety Standby Vessel for Sarawak Shell Berhad, or being the first shipbuilding company to manufacture the first dynamic positioning 2 (DP2) vessel in Malaysia. In its executive chairman’s words “I want my company to grow together with the country, and embody the slogan it was built on: “Malaysia Boleh!”, which in plain English can be translated as “Malaysia Can Do It!”

Islamic Finance hub or the “values” of money in Malaysia

With conventional finance recovering from losses and declining investors confidence, the world is looking for opportunities and warily eyeing the fast-growing Islamic Finance sector. Islamic banking is indeed one of the world’s fastest-growing economic sectors, formed by more than 300 institutions in over 75 countries. The largest hubs for Islamic finance are located in the Middle East and South East Asia, with Malaysia being considered as the frontrunner for the past 20 years. However competition is rising with a growing interest from Europe, Hong Kong and Singapore.

In a nutshell, Islamic finance is an activity consistent with the principles of Islamic law (Sharia), prohibiting the payment or acceptance of interest fees for the lending and accepting of money respectively, for specific terms, as well as investing in businesses that provide goods or services considered contrary to its principles.

The oil and gas industry has already demonstrated a strong interest in the matter, with several projects backed by Islamic finance, such as Dubai Dolphin Natural Gas Pipeline, Kuwait Equate Petrochemicals Company, Saudi Basic Industries Corp, and Shell Malaysia. Most recently PETRONAS issued a five--year US$1.5 billion Sukuk Al-Ijarah (Islamic bonds), the single largest US dollar issuance by an Asian entity outside Japan in 2009 as well as the largest international US dollar Sukuk since the US$1.5 billion Dubai Ports issue in 2007.

After enjoying an exceptional career of more than 35 years in the oil and gas industry, Tan Sri Megat Zaharuddin was appointed Chairman of Maybank. Thanks to this dual expertise he clearly saw that oil and gas assets were suitable for many types of Islamic financing, and that investors interested in a competitive alternative to the conventional market place would find a wide array of products and services to answer their needs. “There are several types of Islamic finance structures and applicability to oil and gas deals namely ljarah (financial lease), Musharakah, Mudarabah, Murabahah (cost plus sale), Istisna’a (commission to manufacturer contract) and Sukuk.,” he says.

“In the context of the oil and gas industry – he goes on - an ljarah could be an ideal mechanism for leveraged lease financing of large pieces of oilfield equipment, notably deepwater platforms or drill ships provided that the value of such oilfield equipment should be equal to or represent a material percentage of the offering amount. Musharakah or Mudarabah could also be used to finance upstream activities. Investors or financial institutions would provide a portion (Musharaka) or all (Mudarabah) of the capital, and the oil and gas operator would operate the oil and gas properties and provide the necessary expertise. The arrangement could be documented in a joint venture agreement, or the parties could form a limited liability company, providing for dividends to be shared in a set proportion predetermined by the parties at the outset. The successful development of the oil and gas project could provide significant upside for the investors. Given the flexibility of these types of Islamic Finance arrangements, Musharakah and Mudarabah could be used widely at all levels of the energy industry for operations of various sizes and levels of complexity.”

For Dato Yusli Mohd Yussof, CEO of Bursa Malaysia, the country in general has developed all the requirements to become an Islamic financial hub, and is now looking at strengthening its position within this market. “We are leveraging on this existing infrastructure to introduce facilitative framework, products and services to accommodate issuers’ and investors’ demands. We are also widening our reach to other markets in support of the MIFC’s initiative in facilitating Malaysia’s aim as an Islamic financial hub. In addition, we are on a quest to position Bursa Malaysia as a global platform for issuers worldwide to issue Islamic papers to raise funds.”

CONCLUSION

Malaysia´s oil and gas industry is setting its sights on going deeper and further afield to ensure that its current position as Asia´s only next oil exporter and the world´s largest LNG exporter is guaranteed in the years to come. The industry is focused is deep water drilling, enhanced recovery, and international expansion to battle oil depletion. After proving that “impossible is nothing” by creating its NOC, the Malaysian oil & gas industry believes it is destined to become against all odds the fourth deepwater hub in the world after Houston, Rio de Janeiro and Europe. “The problems of this world cannot possibly be solved by skeptics or cynics whose horizons are limited by the obvious realities. We need men who can dream of things that never were." J. F. Kennedy

Malta : A Healthy Location for the Pharmaceutical Industry

Malta : A Healthy Location for the Pharmaceutical Industry

Alan Camilleri, chairman of Malta Enterprise—the government agency responsible for facilitating and stimulating the development of Malta—recalls the words of a foreign investor, who had taken stake in Maltese business. The investor imagined what he would say to other potential promoters, if asked whether they should put their finances into some venture on the island. Camilleri remembers: “he would bluntly tell them, ‘Why aren’t you here?’”

This confidence is true of a great many foreigners that have undertaken projects in Malta. Once initially enamored by the island, they stay, and they grow. Over the past decades, the Mediterranean nation has actively positioned itself as an appealing epicenter for global interest. Its efforts have not gone unnoticed. Tonio Fenech, the Minister of Finance, notes that in 2008, Forbes Magazine ranked Malta as the fifth most tax-friendly country in the world, and the single most attractive country in the European Union in terms of taxes and social contributions paid out by companies. In that same year, the World Economic Forum named Malta the 27th most networked economy in the world; the Global Financial Centers Index (GFCI) indentified it as one of the top three financial centers likely to increase in importance over the next 3 years; and the GFCI further listed it among the financial centers where operators might think of opening in the next five years. These accolades begin to suggest why entrepreneurs relish Maltese prospects.

The Malta pharmaceutical industry is a prominent example of the international investment momentum taking hold in the country. It is an industry that already employs over 1000 people, and exports more than €150M ($205M) in products per year—to Europe, and even beyond. “Most notably,” Camilleri says, “Malta is experiencing significant expansions of current operators, and this is a sign of confidence in the local environment.”

Alan Camilleri, President of Malta Enterprise Tonio Fenech, Minister of Finance, the Economy and Investment Sergio Vella, Country Manager, Actavis This local environment is marked by an attractive legislative framework, championed by Malta Enterprise. In particular, the Business Promotion Act, and the Malta Enterprise Act, are helping to position Malta as one of the most progressive and proactive business environments in the world. Pharmaceutical players that come to the island enjoy low taxes, financial support and loan guarantees, logistical and workforce training assistance, and even ready-built factories provided by Malta Enterprise at low rates of rent. An imperative legislative point centers on the inclusion of the Bolar Exemption in Maltese law: this provision allows third-party companies to conduct clinical trials and commercial testing on patented medications—with the intention of improving on the patent or producing a cheaper generic version—before the drug patent expires. In an industry where speed to market is crucial, generics companies situated on the island can complete preparatory testing in advance, and bring their products immediately after patent termination. The Bolar Exemption is instrumental in the consequent proliferation of generics manufacturers in the country, and Malta currently has more than 15 such operators, from all over the world.

The island also prominently invests in its infrastructure and human resources. For example, the Maltese have recently invested in a €20M ($27M) Life Sciences Park, and Finance Minister Fenech notes that the government “works very closely with the University of Malta, other private universities, and the Malta College of Arts, Science, & Technology, so that, in tandem with industry, the necessary academic formation is provided" for the sciences. This academic emphasis equates to a highly skilled workforce, with a much-important English proficiency.

Malta uses its small size to its advantage: Camilleri explains that, beyond even the Bolar exemption, Malta’s small market size helps generics players because most foreigners do not bother to register additional patents uniquely for the island. Compactness also facilitates swift and efficient decision-making, according to Minister Fenech. And because of its small size, Malta enjoys well-developed infrastructure, and long-term stability.

Finally, Malta is strategically located, with easy access to Europe and North Africa. If one considers its location together with its competitive costs, it becomes quite apparent that Malta is, in the words of Camilleri, “a unique hub for combining testing, R&D, manufacturing, production, and batch release of pharmaceuticals,” a happy hunting ground for any pharma player.

Declarations of Affection

Malta investors, elucidating their operations on the island, demonstrate that commercial reality robustly corresponds with the intentions of the national government. Sergio Vella, managing director of Actavis Malta—a division of one of the largest generics manufacturers in the world—explains the rationale that his company employed in choosing the island for a large-scale facility. He concedes that the Bolar provision is a first enticement. But Vella explicates the more decisively persuasive factors: “strong fiscal and legislative incentives;” the “quality and talent of the people”; the renowned regulatory system; the “extremely supportive and proactive local authorities”; and Malta’s recent EU membership.

Other pharmaceutical companies in Malta reiterate and expand upon Actavis’s praise. Ian Restall, general manager of Metallform Malta—part of the German Metallform GmbH, a manufacturer of precision medical instruments—believes that his employees produce a superior output that is “as good as it is in Germany”—sound tribute, given the distinguished German manufacturing tradition.

Another generics company, the Spanish Corporación Medichem, has two facilities on the island, one for the manufacture of generic finished dosage forms—under the name Combino Pharm—and another for the development and manufacture of APIs, under the Medichem name. The Medichem plant manager, Dino Mangion, fondly remembers that the national administration greatly helped his company when Medichem first arrived, through direct “aid in the construction of facilities” and the supply of “professional advice and contacts.”

Mangion’s counterpart at Combino Pharm, plant manager Patrizio Allegrucci, will agree with the sentiments of his colleagues—and add that, despite the seeming labor shortage inherent in a minute population, the government dynamically works with the pharmaceutical players, doing its “utmost to shorten the gap” by partnering with companies to “embark on specific training programs.”

Malta is a focal point of the global aspirations of its pharma enterprises. Actavis’s Vella remarks, “The support and investment Actavis has received from its parent company is indicative of the faith they have in the local operations.” Indeed, over the past 6 years, Actavis headquarters has invested about €50M ($68M) to develop and amplify their presence in the country—and they certainly capitalize on their investment. The generics they develop and manufacture in Malta are exported not only regionally, but also globally. And one of Malta’s key functions is its capacity as a chief launch site for the group.

The Maltese subsidiaries of Corporación Medichem, too, accentuate Malta’s role in the global activities of their principals. Clearly, with the dual operations of two disparate plants, Corporación Medichem chose Malta as a global center to encompass a comprehensive range of services. Mangion asserts, “In 2009, the Malta site contributed about 8% of the company’s sales. In 2011, this should increase to about 35%.” These Maltese enterprises have grown, and will grow.

Metallform’s Restall declares, “My advice would be to come to Malta!” He continues: “You’ll stay—and if you stay, you will be successful.” Foreign investors have no shortage of affection for this Mediterranean polestar.

The Beautiful Surge In Research

When asked if Malta is curbing its national trajectory by favoring generics manufacturing, finance minister Fenech disagrees, and points, convincingly, to the island’s newest investment in innovation: the Life Sciences Park.

The facility will be the site of advanced research laboratories in medicine, genetics, and biotechnology. It will house offices, and common spaces for the exchange of ideas. It will accommodate a business incubation center for scientific enterprise. It will be the naissance, in Malta, of a veritable biotechnology industry.

Dino Mangion, Medichem Plant Manager Patrizio Allegrucci, Combino Pharm Plant Manager As may be expected, Malta Enterprise has a strong hand in the Park’s formulation. When chairman Camilleri extrapolates some of the intended inhabitants of the facility, he mentions research institutes, technological firms, multinational start-ups, education centers, medical training centers, and formulation and testing companies, amongst others. An ambitious list, to be sure.

According to Camilleri, the site will also “enhance the possibility of cluster investment, whereby a number of companies can be attracted through the presence of another company,” working in a similar line. Tonio Fenech advocates the Park as a setting where scientifically minded youths, and seasoned researchers, can cultivate their studies without having to leave the country.

Of course, while the Life Sciences Park may be the first aggregate, national approach to stimulate pharmaceutical advancement, it is not the only game in town. Take, for example, the Institute of Cellular Pharmacology (ICP), a research-based company that investigates plant extracts and their possible beneficence in human and animal applications. To date, their work has produced almost 30 theses and over 40 patents.

ICP chose Malta for operations because they believe that, on the island, “Small is beautiful.” To extrapolate: “Malta is a small village by global scale, yet it has all the amenities needed to undertake research found in much bigger states. All the tools needed to support research activities are found in a village square.” The group finds that the proximity of these amenities “makes progress very rapid.”

As other pharma players do, ICP invites investors to the island. In a place where small is beautiful, research, too, is experiencing a beautiful surge.

To Restore a Grand History in Healthcare

Malta boasts a celebrated medical history, from the time of the Crusades. Today, Malta aims to draw to its facilities international patients seeking adept therapy outside of their own country, as the government advocates Health Tourism.

St. James Hospital—headed by Dr. Josie Muscat, president and chairman—is leading this impetus. Muscat notes that St. James Hospital offers an inspiring range of medical services and facilities, and it is equipped with state-of-the-art equipment, including numerous advanced surgical instruments, and a superlative laboratory. “In short,” Muscat says, “anything a patient requires is available at St. James.”

Moreover, when foreign patients seek treatment at the St. James complex, they find not only cutting-edge resources, but also a wealth of comforting services. Muscat lauds the nearby hotels and Malta’s welcoming atmosphere. The small island also offers accessible cultural attractions, to compliment a patient’s rehabilitation period—“making medical tourism true to its name.”

Muscat sees immense potential in Maltese medical tourism. The facilities, certainly, are already there, and the industry is starting slowly to convalesce as foreigners become assured of Malta’s prowess in healthcare. Muscat is resolute, saying, “We are determined to make our island once again the hospital of the Mediterranean.” Already a rising global player in pharmaceuticals, Malta aspires to lead in the field of healthcare as well.

From Malta, Parting Words

When interviewed, Malta Enterprise chairman Camilleri had some closing thoughts regarding the national pharmaceuticals sector. His message is uncomplicated, and sincere: “We are a small country, but we are quick to deliver, efficient, and offer specific competitive advantages to ensure the long-term sustainability of the industry. The vast majority of our foreign projects come to Malta, and then grow and consolidate through Malta.” Maltese investors have and will attest to his words—foreigners contentedly flourish on Malta.

Malta too flourishes. It constantly advances its ambitions: already a generics hub, it will be a true research hub. Already satisfying the healthcare needs of its own, it will satisfy those of the world. Its past and prospective initiatives, under the umbrella of the government's Vision 2015, pave the way.

Small is genuinely beautiful, on this Mediterranean island. The aims of its people, certainly, are cosmic. These are Malta’s parting words.

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Netherlands: Innovation Through Collaboration

Despite its diminutive size, the Netherlands has historically carried a large weight in the world because of certain cultural endowments: small but united, entrepreneurial, innovative, and externally oriented. During the Dutch Golden Age, the “low country” monopolized international trade and commerce giving rise to tulip manias, artistic masters, and the world’s first multinational corporation. Though the sun has long set on that era, the historic imprint of the Netherlands’ open mindedness to the world defines its present industrial standing. Today the pharmaceutical industry looks to the Netherlands for a world-class medical infrastructure, new standards in innovation, and a closely-knit community of stakeholders. Like many countries, the Netherlands will need to adopt new approaches to tackle the increasing challenges of cost-containment pressures and fiscal austerity. But as history has proven, “going Dutch” has come to mean a proactive nature and ambitious attitude that makes no challenge too big.

Small is beautiful

Sandwiched in between big brothers France, Germany, and the United Kingdom a modest population of over 16.5 million Dutch inhabitants hardly drives global growth for multinationals. But it is precisely the assets derived from a small market, mixed with a unique Dutch identity that makes the Netherlands an ideal destination for international commerce, pharmaceuticals included.

Minister Edith Schippers, the Netherlands Minister of Health That the Netherlands is a country literally built on ingenuous innovation goes a long way in explaining the creative flair of the culture. Inhospitable below-sea level conditions bred infrastructural novelties in the form of iconic windmills and Amsterdam’s dizzying array of canals. Cooperation, collaboration, and coalition building were essential for survival. Furthermore, the country’s rich history as a trader nation engendered a sharp commercial instinct. Translated to today’s pharmaceutical industry, ingenuity, collaboration, and commercial prowess are embodied in a “build, bundle, and benefit” approach – the three pillar strategy of the Dutch life sciences and health sector to combine the country’s strong research talents with commercial opportunities through public private partnerships and various investment vehicles.

“We are very good at the way of doing research, clinical research predominantly,” says Dr. Michel A. Dutrée, general manager of Nefarma, the leading association for research-based pharmaceutical companies in the Netherlands. “The Netherlands has invested heavily in clinical research infrastructure that is based in universities and the country’s top hospitals. We have almost 28 top clinical hospitals whose excellent medical specialists provide valuable research for industry. Our research strength and good relationships with biotech firms and universities is a major reason why big and intermediate pharmaceutical companies are interested in the Netherlands.”

Further underpinning the attractiveness of the Netherlands for pharmaceutical and life sciences companies is a strong pipeline of top level talent. Dutch education levels are consistently ranked among the highest in the world. A 2007 Global Talent Index of the Economist Intelligence Unit placed the Netherlands third (after the US and Canada) in its ability to attract and promote talent. Similarly, in the 2008 Times Higher EducationWorldUniversity Rankings, 11 of the Netherlands’ 12 universities ranked among the world’s top 200.

“A typical and more traditional Dutch strength that comes from being a small country is to be very internationally oriented with an inclination for going all over the world,” assesses Jan Wisse, managing director of Niaba, a leading Dutch biotechnology association. Approximately 87% of Dutch over age 15 speak English, 65% speak German, and 25% speak French according to the Ministry of Economic Affairs. Strength in small numbers, ingenuous innovation, and openness to the world have indeed branded the Netherlands as a gateway to Europe. Top 50-pharmaceutical companies such as Amgen and Genzyme have chosen the country as its headquarters for European activities.

Pharma in the local context

Most pharmaceutical executives rank the Netherlands as first among the “next tier” of European markets behind France, Germany, Italy, Spain, and the UK. “The Netherlands has been for years a significant market for the international pharmaceutical industry,” states Michael Dumas, country manager of the Italian pharmaceutical giant Menarini in the Netherlands. “Not by volume and turnover, but through the innovative character, the high level of carrying out clinical studies, the level of planning and organization, and infrastructure in the country.” Translated to the bottom line, Curd Lejaegere, managing director of Daiichi-Sankyo Benelux, notes that “financial performance for pharmaceuticals in the Netherlands typically has slow uptakes, but continuous growth. Other markets have initially steep curves which eventually flatten out after two years. Initial returns and results take longer in the Netherlands, partly driven by entrance guidelines or initial market accessibility constraints, but continuous growth can be counted on.”

According to Nefarma pharmaceuticals generated $4.88 billion in total revenues in 2009. Employing over 50,000 people – 27% in R&D – and accounting for 9% of private Dutch R&D investment, a 2010 study by Roland Berger Strategy Consultants cites the high-quality, cost-effective healthcare that pharmaceuticals provide by imparting health and wealth to Dutch society. “Cost-effective” is a defining term for pharmaceuticals in the Netherlands. The same study concluded that in 2008, the Netherlands spent only €313 per person on medicines – 10% below the European average. In 2010, pharmaceutical expenditures were estimated to account for only 9% of the €60 billion total Dutch healthcare budget, similarly low for European averages. Largely driving these trends is a greater than 70% generic penetration rate, among the highest in Europe. Generic penetration, however, is just a piece of what many local executives describe as the unsustainable pressures of cost-containment in the Netherlands today.

A turning point

Despite enviable research infrastructure and a knowledge economy that are conducive for the pharmaceutical industry in the Netherlands, enormous cost-containment pressures make it difficult to bring products to market with favorable returns.

Dr. Uloff Münster, Managing Director , Merck The Netherlands underwent a major overhaul in 2006 by implementing a universal insurance mandate to curb soaring healthcare costs. Previously a public system, the Health Insurance Act of 2006 required every Dutch citizen to purchase health coverage from a private insurer, with the government establishing quality of care guidelines. The theory behind managed competition was for providers to attract as many patients as possible and allow freedom of mobility across insurers to stimulate better quality care. Successfully, compulsory insurance now covers all but approximately 1% of the Dutch population. However, a negative side-effect since 2006 has been a preponderant shift in deciding power to the health insurers who are neither equipped nor incentivized to uphold quality. A growing one-sided cost focus on reforms risks overshooting its initial objectives and jeopardizes the long term sustainability of pharmaceutical care.

Penny wise, pound foolish?

Managed competition has effectively increased the buying power of insurers without a concurrent rise in advising power by pharmaceutical companies. The generics industry has been hit particularly hard by a cost-containment “preference policy.” In 2006 “along came a new stakeholder to the table called health insurance companies, which made this business completely different,” says Kalman Petro, managing director of Actavis Benelux, #3 in the Dutch generics market. The preference policy means that when a number of medicines contain the same active agent, only the cheapest medicine – the “preferred product” – is reimbursed, as decided by the insurance companies rather than physicians or pharmacists. This has created deflationary pressures with prices being pushed to their lowest. The policy has realized noticeable returns with generics prices dropping over 53% from May 2003 to April 2010 according to Roland Berger. But the industry has reached a dangerous point in which cheaper prices are doing more harm than good.

The Merck Netherlands team Some manufacturers have stopped making certain economically unviable products, moving the picture away from healthy competition to uncertainty of supply. Petro recalls “one company that reduced the price of a product below the 5% bandwidth. Suddenly a small preferred company with less than 1% market share was responsible for supplying 80-90% of the total market. Companies are not going to order products if they are not preferred, which makes things very dangerous. The customer – the patient – is suffering.”

Offering his view of the preference policy, Drs. P.F. Bongers, chairman of Bogin, the Dutch generics association assesses that “for the generics industry, if only the lowest price possible is the guiding principle next to long periods of preference, then you are endangering the continuity and quality of supply. Our aim is for fair market competition, but the preference system is not stimulating normal market competition within generics.”

Uphill for the innovators

R&D companies are equally squeezed by price pressures between generics penetration affecting reimbursement schemes and the maximum price levels for their medicines. Introduced in 1991, the GVS system is a reimbursement price for therapeutically interchangeable drugs. Medicines with equivalent modes of action are clustered into one group with the average price calculated based on comparable doses. The first price below the average is the reimbursement price. With such high generic penetration, traditional lines for R&D companies in the Netherlands such as primary care have become relatively small. As Uloff Münster, managing director of Merck-Serono in the Netherlands explains, “the most important step is to get to the reimbursement stage. This is a market-specific issue because copayments are not well accepted in the Netherlands, unlike in other European countries. If a medicine is not reimbursed in this country, the introduction of this new medicine does not make much sense.”

The maximum price for pharmaceuticals in the Netherlands is determined by the average prices of comparable drugs from four reference countries: Belgium, France, Germany, and the UK. With a reference pricing arrangement, the tenuous macroeconomic situation sweeping Europe can have a potentially destabilizing effect on pharmaceuticals in the Netherlands. Han Brouwer, general manager of orphan drug specialist Actelion’s Dutch affiliate explains, “we have a very tight economic situation here much like the rest of Europe. European Union countries that are running into financial difficulties are now cutting healthcare costs. Because our reference pricing is based on a basket of countries we will face price cuts due to the fact that other countries have to decrease their healthcare prices for economic reasons. The price-quality phenomenon in the pharmaceutical business is eroding dramatically.”

A tricky road remains for the Dutch pharmaceutical industry and the Ministry of Health, Welfare, and Sport. They must soundly manage austerity plans in the face of ageing populations and rising healthcare costs while continuously incentivizing innovation for biopharmaceutical companies. Annual spending on healthcare is forecast to reach $76.5 billion by the end of 2010, a 12% increase from 2005. In October 2010 a new conservative government came to power to manage these challenges. The atmosphere they inherit will see total expenditure on health and welfare services rise 3.3% to reach €63 billion in 2011, according to the Ministry of Health, Welfare and Sport. Certain austerity measures in the 2011 budget will impact the reimbursement of certain drug classes and save approximately €32 million for health insurers. Erik Lommerde , General Manager , Novo Nordisk

From crisis springs opportunity

Despite cost-containment measures that have been exacerbated with the greater role that health insurance companies have come to play in the system, there are some advantages.

Most immediately, it has emboldened companies, inciting some to raise their voices in defiance of reforms and motivating them to succeed in the face of regulatory barriers. “The Dutch environment still challenges Menarini to maintain the level of investments hoping that access to new medicines will be more driven by the general opinion of Europe,” says Dumas. “Finding the right balance between the system’s sustainability and fair prices rewarding innovation is critical and far from easy.” Proudly present in over 110 countries and initially drawn to the Netherlands in 1996 because of high quality infrastructure, organization of healthcare, and top level physicians, Menarini’s commitment to a vast international presence guarantees a committed fight for its established product lines in the Netherlands.

The added layer of a payer body has also forced pharmaceutical companies to be more methodical and meticulous in presenting the pharmaco-economic value of their products. This has indeed penetrated the commercial mentality of Merck-Serono, a market leader in the Netherlands through biotechnology products in fertility, neurodegenerative disorders, and oncology. According to Münster, “The new landscape will increase the complexity of any decision-making process which already is not so easy in this country. There are lots of bodies involved and various layers to work through in order to come to a reimbursement decision. We as an industry, and Merck as a company, need to better understand what drives these decisions. We need to understand in the larger sense what will make the future pharmaceutical world tick.” He adds that as a result, “we will need to increase our effort to strongly document not only the long-term clinical value of our new products, but also the pharmaco-economic value. It will not be enough to show ‘only’ clinical data in the future.”

Ultimately, the right products in niche markets will always drive growth even in the face of cost containment, as experienced by Italian-based Chiesi. The Netherlands was one of Chiesi’s first start-up affiliates outside of Italy, according to general manager Maurits Huigen. Established in 2007, immediately after structural reforms to the healthcare system, Chiesi doubled its growth in the Netherlands in its first two years on the backs of products such as Foster for respiratory care; Bramitob, a tobramycin nebulization solution for the treatment of chronic lung infections; and Curosurf for the treatment of respiratory distress symptom in premature babies.

Dr. Bernhard Sixt, President & CEO, Agendia More importantly, such niche market opportunities will not limit themselves to pharmaceutical companies alone. Related companies that are able to provide improved outcomes in a cost-effective manner, generally carry the potential to play an increasingly important role under budget-tight regimes. An example as such is Netherlands-based Agendia, providing breast cancer patients with what CEO Bernhard Sixt describes as “pathology-on-demand”. With its breakthrough FDA-cleared MammaPrint, Agendia provides physicans with a breast cancer recurrence test that will identify those patients where chemotherapy or hormonal therapy will work. “You do not treat people who do not have the problem, you improve the quality of the treatment for those that do qualify, and you save the healthcare system on unnecessary expenditures. It’s a win-win-win situation”, Sixt explains.

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Chilean Pharma: Exploring beyond copper

Considered to be Latin America’s economic powerhouse, Chile is typically a solitary country that is forgotten, or remembered, because it is the most politically and economically stable in the region and therefore produces minimal headlines for the world—unless they involve tragic seismic events or heroic mining rescues. This loosely-populated nation of almost 17 million is ranked as the 30th most competitive country in the world (ahead of Brazil and Mexico), holds an A+ credit rating, a AA grade for investments and is the only Latin American nation accepted as a member of the OECD. With health indicators, such as life expectancy and infant mortality rates, which rival those of most developed nations surely this country’s healthcare and pharmaceutical sectors must also be thriving. Indeed Chile’s pharmaceutical industry, estimated at US$ 1.5 billion in 2010 and expected to reach US$ 2 billion by 2015, is lucrative but has not always been the most popular amongst big pharma. For decades the country has been notorious for producing the cheapest similar and generic drugs in Latin America, some of them marketed in violation of patents and without proper bioequivalence studies. With other serious issues such as the concentration of distribution channels into three main pharmacy chains that control 93% of pharmaceutical sales and the dominance of a “lowest price wins” public healthcare system, representing 80% of the population, the country’s pharmaceutical sector quickly became uninviting for innovators. This was up until 2006 when then President Bachelet saw the great need to overhaul the healthcare system of her country and began a series of reform policies that marked the beginning of the sector’s revitalization. While efforts are still ongoing, the push for a modern and efficient healthcare system is in full force today and the country is now poised to offer fresh and attractive opportunities within its own borders and beyond, for local and foreign companies alike.

Sanitizing the healthcare system

Pharmaceutical demand in Chile is focused on 80 diseases that are covered by the Regime of Explicit Health Guarantees (GES-AUGE) healthcare program enacted in 2005, which ensures government-funded coverage for patients regardless of age, class, and ability to pay. While this universal health plan covers four-fifths of the population, under Chile’s dual healthcare system the remaining 20% is entitled to pick their coverage from a number of private insurance companies known as ISAPRES. Jorge Rodriguez, CEO and general manager of Deloitte Chile explains that “the private healthcare system began operating in 1981 and since then it has been perfecting itself to offer the highest quality services. Governmental authorities have witnessed this transformation and today are aiming to improve their provision of healthcare so that it is on par with those offered by the best private providers in the country.” As a key partner to the healthcare sector, Rodriguez aims “to assist the government in their objective of providing better healthcare to a greater number of people in Chile” by providing consulting and advisory services to the government’s reform initiatives.

Jaime Mañalich, Minister of Health Leading today’s healthcare reform is Minister of Health, Jaime Mañalich, who is determined to iron out the inefficiencies of the healthcare system to reflect the rest of the country’s economic and political achievements. “A major issue for our healthcare system is related to the structure and quality of health institutions, including hospitals and regulatory entities”, he asserts. Two main entities on the Ministry’s radar are the Public Health Institute (ISP), the regulatory agency for the pharmaceutical industry, and the National Supply Center (CENABAST) that is the public purchasing entity and distributor for all public hospitals and clinics—de facto the pharmaceutical industry’s biggest purchaser. A recent audit of CENABAST conducted by advisory firm PWC, brought to light the severe inadequacies of the institution and the desperate need for a professionalization of its activities. Minister Mañalich explains that “the underlying problem is that CENABAST does not have the adequate facilities and capacity to handle the logistics required to supply the system appropriately. We are therefore proposing to delegate this responsibility to the private sector by having pharmaceutical laboratories deliver directly to hospitals and clinics”. Initiatives such as this will save the government millions of dollars in health expenditures that will allow for the coverage of higher quality treatments under the GES plan, therefore narrowing the gap between private and public healthcare options. Other proposals in the pipeline include the liberalization of OTC products that today are, paradoxically, kept behind the counters and sold only in pharmacies, as well as the creation of a National Pharmaceutical Agency (ANAMED) that will be solely charged with the registration and regulation of pharmaceutical products; a task that today is overseen by the overwhelmed and under-budgeted ISP. The director of the ISP, Maria Teresa Valenzuela, echoes the need for drastic change and stresses that “the key area for this new administration is the search for quality in all possible aspects: from administrative management up to the most detailed analysis of technical processes”. For Valenzuela this also means improving protocols and approval of clinical trials, as well as enhancing the bioequivalence capabilities of the institution by “supporting the accreditation of three new centers of bioequivalence in the country in partnership with three major academic institutions”.

Maria Teresa Valenzuela, Director of the Publich Health Institute (ISP) As regards the old tales of Chilean imitators violating patents, the National Institute of Industrial Property (INAPI) has been at the forefront in setting the record straight. Chile is one of the countries in the world that has signed on to the most free trade agreements, including one with the United States and an Association Agreement with the European Union. Maximiliano Santa Cruz, national director of INAPI, admits that Chile “committed to several obligations in these treaties, many of them impacting directly on the pharmaceutical sector, such as extending the protection of patents in case of delays which we are already running in INAPI and ISP”. Part of his institution’s efforts to optimize patent regulation includes a direct partnership with the national police’s “IP brigade” in charge of IP enforcement and national customs agencies. With such proposals already rolling, Santa Cruz is bold enough to proclaim that “INAPI is going to be the best IP agency in Latin America in the future”. Jose Manuel Cousiño, Executive Vice President of CIF

Fresh new field, let’s play ball!

As a direct consequence of healthcare optimization, international innovators are seeing greater opportunities to grow their operations in the Chilean market. Jose Manuel Cousiño, executive vicepresident of the Chamber of the Pharmaceutical Industry in Chile (CIF), representing the international innovators in Chile, explains that the country “has the advantage that it is an economy truly based on the notion of free trade and competition.” Now that the playing field has been levelled for the MNCs, due to better regulation by the authorities and greater access to innovative products within the public system, the possibilities for major growth are within grasp. As a strategic consulting partner to the Chilean pharmaceutical sector, Rodrigo Castillo, business manager for IMS Health in Chile, provides a more in-depth analysis when explaining that innovators “suffered more in Chile up until 10-15 years ago, when there was no patent protection and the competition here was very strong. At this point in time, they have managed to learn how to compete and are in a better position.” Furthermore, “multinationals are now consolidating and improving their market share and have future plans of getting their products into the GES program, which would highly benefit them”, says Castillo. This renewed momentum is also evident in the sharp increase of clinical trials that are being conducted in the country by them with the aim that innovation is valued for its worth in the local market. “Chile has great research centers and universities and a very good scientific community, which makes it attractive for this kind of studies” concludes Cousiño. The country has also updated is clinical research legislation to accelerate the work of ethics committees and the approval times for trials and is now the 4th largest market for clinical trials in the region.

Monica Zerpa, General Manager of Pfizer Rene Delsin, General Manager of Roche Leading the innovator revolution in Chile is none other than megalith Pfizer, who today is following close on the heels of the national pharma companies coming in as the #1 MNC in the country. Undoubtedly the company has benefited from its recent acquisition of Wyeth, not only in the expansion of its product portfolio and sales force, but also because Pfizer Chile general manager, Monica Zerpa, was the former general manager of Wyeth in Chile. Ever the optimist, and one of the very few top women executives in the industry, Zerpa believes that Pfizer has “many opportunities here, thanks to the solid regulatory framework for the pharmaceutical market and to the country´s economic and political stability”. She is of the opinion that MNCs brought upon their own past failures in the Chilean market because they chose to focus on the challenges of the industry. “I think multinational pharmaceutical companies in Chile have remained very static in their approach and we must become more flexible regarding the prices, services and access to products that we offer. We need to learn how to become more agile and responsive to this dynamic market, and that´s what I aim to bring to the company”, she says. This agility is exemplified by Zerpa’s decision to “create a sales structure with representatives specially trained to support our institutional clients, such as hospitals, patient programs and CENABAST. The Chilean government has been modernizing the public healthcare system over the years, and we must ensure that our services take these reforms into account so that patients have wider access to our products. I am confident that this will also make our products and services more competitive vis-à-vis low-cost generics.” Beyond their sales strategies, Pfizer has seized the advantages of Chile’s updated regulatory environment and rich scientific community for clinical research and has already completed 49 of its trials in the country. Even more impressive is sanofi aventis’ dedicated clinical research center in Santiago that in 2009 invested US$ 6.3 million into its operations.

Katia Trusich, General Manager of Genzyme Indeed Mauricio Rosas, managing director of Merck’s pharmaceutical division, also believes that the current environment is promising for innovators. “Even though we are facing tough competition from generics and private labels, we are still top-of-mind for our clients. Our sales force is exceptional because it has managed to build strong relationships with the practitioners”, he says. Their sales prowess is so impressive that they have been asked by BMS, AstraZeneca and Novartis to commercialize some of their products in the Chilean market. “If we include the BMS products that we distribute, then Chile is actually the country with the highest market share for Merck in Latin America. Moreover, Chile represents 5% of the Latin American operations in terms of sales for the group, which is a very good figure taking into consideration that the Chilean pharmaceutical market in general is only 3% of Latin American sales”, details Rosas. Riding on the company’s local excellence he foresees that “in the next years the market is expected to grow at 6% and we plan to maintain our growth rate at the actual level of 12%.” With such figures it is evident that global innovators have learnt the ways of Chilean market and are taking advantage of the opportunities being created by the optimized healthcare sector. MSD general manager, Henrik Secher, expresses this best by saying: “I wouldn’t say that we have completely resolved these issues in Chile, but we have been dealing with them for a lot more time here and this means that we have greater chances to fight back and to leverage our position.”

Public healthcare goes premium

The country’s impressive economic success over the last decade, together with the ongoing modernization of Chilean healthcare, is creating a greater demand for innovative treatments for innovative treatments. Chile’s increasing wealth is reflected by Santiago’s shiny glass skyline and luxury mega-malls, but also in the quality of healthcare and medical treatments being demanded by the population including those covered by the public healthcare system. Furthermore, As a true free-market economy, the liberalization of the industry to include private healthcare providers and insurance companies is allowing patients to pick and choose their medical treatment options causing first-class products and niche segments to become solid drivers of the industry. This trend is illustrated in the marked difference of a ranking of the top ten pharma companies in the country in terms of units sold versus one measured in terms of value. The first only includes two innovator companies, namely Merck and Bayer in the 8th and 10th positions respectively, whereas the second lists Pfizer as the 5th most important company, immediately followed by MSD, Bayer, Merck and GSK in descending order. Such figures are also indicative of the increasing consumption of innovative products by the public system, including premium and niche products. As a whole the country is slowly moving to improve the quality of treatments available to the population.

As the leader of the Chilean biotech offering, Roche is the prime example of a company benefitting from upgrades in the public healthcare system. General manager, Rene Delsin, comments on the successful implementation of pilot programs to introduce new products into the public sector: “with these programs, such as one for our HIV products, we were able to gain access to the public system serving 80% of the population.” The company already dedicates 50% of its portfolio to oncology products, most of which fall under the public healthcare plan, and is currently growing above the market driven by their biotech offering. Delsin describes the company’s strategy as one that is migrating from primary care to high-tech drugs. Lilly has been taking a comparable approach to the Chilean market by targeting therapeutic areas that are currently not addressed by the public system. Cesar Buendia, general manager for Chile, Peru, Ecuador and Bolivia, explains that “given Chile’s highly competitive environment, I would say the main challenge is indeed to continue providing new innovative treatments to address unmet medical needs, which is our main objective, in a way that is timely and cost-effective”. The company is leveraging their position in the market by specializing in neurological diseases, erectile dysfunction and diabetes that are all covered under the AUGE-GES plan. Buendia furthers that “as long as there are patients that can benefit from innovative products then we as a company will strive to provide them.”

Another unusual success story has been that of Hospira in Chile, which until very recently functioned as the headquarters for the Southern Cone region. Even though the company has not introduced new pharmaceuticals beyond their initial 8 products since they began their operation, they have managed to double their sales in the last 5 years entirely based on their high-tech medical devices. Aldo Arata Muñoz, general manager of Hospira Chile, explains that “this year my plan is to open up the market to our infusion security software and to expand our sales in this segment by convincing the hospitals that this is a very important issue for them. It won’t be an easy endeavour, but it is definitely our big chance for growth and I would like Hospira to be the first company working on this issue in Chile and differentiating our medical devices in this way.” The company is betting that their software offering will be valued by the public hospitals enough to drive their sales beyond their past performance. Similarly, Baxter has been expanding its business in Chile by focusing on its end-stage kidney disease and haemophilia products. As a matter of fact, the company is one of the few MNCs that still has production facilities in Chile and has been putting them to good use at the local level. General manager, Christian Quiroga elaborates that “today, we also export products to other Baxter facilities in Ecuador and Central America, but that only represents about 10% of our total production. The rest is entirely for the local market.” The Argentine manager has been exploring to further diversify their portfolio in the public system as a means to drive growth. “In Chile, bioscience products, which include therapies for hemophilia, are awarded on a tender basis, and represent one of our greatest growth opportunities” concludes Quiroga.

As premium and niche segments are increasingly recognized, new product offerings have been constantly sprouting throughout the country, bringing the most innovative treatments into the market. Genzyme only established itself in the country in 2008, but nevertheless has managed to introduce 15 of their products for rare diseases mostly through the use of educational initiatives. “We have done a lot of work on medical education, which is the main challenge for rare diseases, because you need to make sure that doctors are fully trained to correctly diagnose patients and have an impact in the development of the disease” says general manager, Katia Trusich. Her strategy for the company is based on the need to “create access to medicines and support the development of new policies that are more open and have higher standards of care for its patients. If we manage to make these changes then our growth and revenue will follow naturally.” The educational approach has also been essential for companies like Novo Nordisk, who aim to transmit the vast advantages of their modern insulin products to Chilean doctors. They certainly have done a fair job so far considering that they have more than 55% of the market share for insulin products and are the official providers for the State.

Article 1

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Ut sodales quam nulla, sit amet sagittis orci. Sed at libero metus. Vestibulum varius, neque eget blandit interdum, libero est molestie sem, quis accumsan tellus enim sit amet nulla. Vivamus est nisi, cursus vel eleifend ut, sodales sit amet tortor. Proin orci elit, iaculis malesuada placerat quis, dignissim ut dui. Maecenas egestas nisi id nibh euismod in congue lectus ullamcorper. Proin vitae turpis mi. Maecenas arcu nisi, pulvinar nec pharetra ac, ultrices sit amet augue. Class aptent taciti sociosqu ad litora torquent per conubia nostra, per inceptos himenaeos. Nullam commodo, dui id sagittis varius, mi sem laoreet nibh, tempor elementum justo tellus sed ligula. Mauris et lacus vitae ante cursus consequat. Etiam facilisis, velit ut iaculis aliquet, elit risus vehicula nunc, eu ornare odio metus ac est.

Nullam nibh leo, gravida et sollicitudin eu, rhoncus dapibus purus. Aenean cursus, diam scelerisque hendrerit lobortis, dui libero viverra quam, facilisis pellentesque tellus ante id odio. Fusce eu elit quis purus tempor sagittis vitae vel massa. Fusce nisi velit, rutrum ac euismod ac, aliquam eget felis. Sed ac semper enim. Donec ullamcorper condimentum massa, accumsan venenatis massa accumsan ac. Fusce feugiat fringilla mattis. Pellentesque ac ligula leo, nec mollis nunc. Suspendisse egestas elementum adipiscing. Suspendisse potenti. Sed id nisl lorem, vitae aliquet enim. Ut cursus magna id metus condimentum pulvinar. Vestibulum ac eros vel turpis luctus volutpat vitae quis lorem.

Donec sed arcu eros, sit amet molestie ligula. Cras tempus aliquam quam vitae tempus. Sed adipiscing sagittis adipiscing. Duis a enim eu felis eleifend pulvinar. Mauris nulla sem, imperdiet quis laoreet eu, congue eu libero. Duis pharetra molestie elit, quis suscipit nunc commodo vitae. Etiam gravida sagittis luctus. In non sapien quis nunc ornare rhoncus sed in tortor. Nullam ultrices, metus et faucibus sagittis, enim orci eleifend enim, eu blandit nulla odio non arcu. Nulla ut risus et justo dictum imperdiet vitae sollicitudin massa. Praesent eu erat neque, consequat cursus eros. Sed lobortis consequat eros, vel adipiscing urna imperdiet eu.

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Phasellus id imperdiet nulla. Curabitur quis elit eu enim gravida tincidunt. Maecenas ac mauris ut enim rutrum laoreet. Vestibulum tempor dapibus vestibulum. Ut commodo, dui eu egestas bibendum, nibh quam pharetra ante, ut semper magna tellus quis enim. Pellentesque luctus ante et urna vestibulum condimentum. Donec adipiscing dapibus tortor, sed vehicula velit pretium quis. Etiam accumsan mauris orci, id convallis risus. Suspendisse vitae mauris sit amet ligula adipiscing placerat a non arcu. Mauris nec tellus nec risus eleifend placerat quis sed arcu. Suspendisse laoreet posuere tristique. Fusce eget magna vel eros commodo cursus eget semper felis. Quisque non tellus diam, in consectetur sem. Donec vel tortor vitae sem tempus adipiscing vitae et metus. Quisque lacinia tincidunt mauris sit amet viverra. Suspendisse potenti. Aliquam et volutpat quam.

Cum sociis natoque penatibus et magnis dis parturient montes, nascetur ridiculus mus. Sed sagittis cursus enim. In tincidunt consequat tortor, nec ultricies sem egestas ultrices. Praesent ornare turpis vehicula nisl auctor nec gravida dui scelerisque. Aenean id tristique massa. Fusce eu metus nulla, tincidunt facilisis massa. Aenean malesuada neque erat. In ac tortor fringilla nulla consectetur molestie in ut massa. Aliquam erat volutpat. Curabitur est tortor, gravida a tincidunt eget, aliquet in neque. Praesent vitae leo id metus dictum volutpat. Proin tincidunt porta neque et congue. Donec vel turpis et nibh condimentum suscipit nec a purus. Nam massa magna, dignissim sed adipiscing sed, pulvinar eget nibh. Nunc ut nisl leo, quis laoreet lacus.

Nam quis rutrum lorem. Morbi eget nunc sit amet dolor luctus aliquet. Phasellus leo leo, ultricies vitae placerat at, scelerisque sit amet velit. In eu tellus vel velit tincidunt condimentum ac ut erat. Donec eget tortor vel felis elementum placerat. Class aptent taciti sociosqu ad litora torquent per conubia nostra, per inceptos himenaeos. Aliquam nec eros enim. Morbi massa urna, ultricies in semper at, cursus dignissim lorem. Praesent augue sem, varius non dignissim a, molestie consequat diam. Nulla vel eros euismod orci placerat eleifend. Proin consequat pulvinar orci non venenatis. Cum sociis natoque penatibus et magnis dis parturient montes, nascetur ridiculus mus. Donec quis volutpat orci. Phasellus nibh erat, aliquam eget tempus eget, aliquet eu massa. Suspendisse id tempus magna. Integer adipiscing neque rhoncus est ultricies vitae porta tellus dignissim. Mauris bibendum quam ac risus aliquam ut dictum turpis pellentesque. Pellentesque volutpat, est sit amet iaculis porttitor, nisl massa dapibus est, vel sagittis enim nisl sit amet magna. Nam sit amet nunc tellus, sed egestas metus. Phasellus id dolor dapibus nibh scelerisque adipiscing.

Aliquam erat ipsum, ornare ac mattis ut, rutrum eu neque. Phasellus adipiscing urna vitae leo interdum in tempor nibh tincidunt. Duis tincidunt diam vel metus laoreet in porta tellus blandit. Cras nibh ligula, ultrices non elementum nec, tempus id enim. Fusce vitae condimentum risus. Nam accumsan tincidunt elit, non consectetur sapien interdum eget. Fusce fringilla, quam a mollis rutrum, velit massa dapibus arcu, id accumsan tellus lorem ac lorem. Nam tortor nulla, adipiscing eget aliquet blandit, euismod sit amet nulla. Vivamus dapibus fermentum nisl tempor porta. Sed urna augue, pulvinar sit amet volutpat ac, faucibus eu leo.

In ullamcorper, est id faucibus dapibus, metus ligula sodales ipsum, ut gravida metus urna vitae leo. Duis vitae quam vitae mi suscipit scelerisque. Quisque semper augue sed arcu ornare posuere eget et sem. Nulla facilisi. Morbi a erat magna, eu commodo felis. Mauris id interdum lectus. Cras lobortis mauris mattis augue molestie in suscipit odio sagittis. Vivamus euismod accumsan dapibus. Sed consectetur tincidunt ipsum, sit amet commodo mauris bibendum at. Etiam id nunc id ante volutpat rutrum molestie vel erat.

Nulla facilisi. Suspendisse nibh orci, vehicula vitae faucibus elementum, pretium sed urna. Aliquam mattis tortor nec tortor cursus dictum. Vestibulum aliquam tortor consectetur sapien interdum sed condimentum tortor laoreet. Maecenas cursus pharetra nibh, at egestas nisi luctus sit amet. Sed blandit magna sit amet orci vestibulum non vulputate nisi aliquam. Maecenas vulputate cursus velit, eu tincidunt ante tristique et. Pellentesque euismod augue sit amet lectus bibendum semper. Morbi pretium, nisi a luctus interdum, libero erat viverra leo, vel facilisis neque ante ac augue. Maecenas vestibulum lacus quis mi rutrum convallis. Quisque vitae nulla quam. Curabitur ac leo turpis, ut facilisis eros. Donec eget dui et sem dapibus tempus eu et lacus.

Nulla eget rhoncus nisi. Nunc sed tortor vitae turpis convallis vehicula. Duis eu mauris lacus, nec volutpat sem. Praesent volutpat nunc sit amet magna malesuada vel feugiat magna euismod. Donec sapien magna, varius id blandit nec, interdum a nibh. Nunc facilisis, mi sed venenatis dapibus, ante nulla pulvinar sapien, vitae mattis erat dui a felis. Proin auctor nulla non odio viverra a pretium dolor vestibulum. Proin in purus in odio egestas feugiat quis et felis. Aliquam vel vulputate magna. Nulla sed odio est. Donec sagittis tincidunt tempor.

Ut sed enim sed lacus tempus dapibus. Phasellus iaculis odio at lectus ullamcorper egestas. Curabitur tortor mi, bibendum eget ultrices ac, lacinia in nunc. Aliquam lacinia, turpis ut convallis tristique, turpis quam ornare sapien, at placerat nisl nulla a turpis. Aenean et massa ut tellus porttitor blandit. Nunc tortor ipsum, adipiscing at luctus sit amet, pulvinar vel felis. Suspendisse pharetra iaculis viverra. Praesent egestas, lacus vitae suscipit sodales, justo magna pulvinar sapien, quis elementum ipsum magna sollicitudin tellus. Aliquam sit amet lectus id sapien tincidunt adipiscing ac a augue. Suspendisse varius placerat est et adipiscing. Nullam malesuada mattis ante sit amet lobortis. Maecenas a libero et massa rhoncus tempus sit amet id justo. In lacus felis, ornare sit amet tempor et, pharetra at ligula. Aenean venenatis nulla eu enim tincidunt pulvinar. Vivamus rutrum est nec leo adipiscing sed euismod quam accumsan.

Nam ullamcorper, nibh quis feugiat interdum, risus magna pharetra est, id euismod eros mauris at nibh. Nam eleifend mi ac orci placerat scelerisque. Sed tincidunt convallis ligula eget tempor. Praesent viverra aliquam ipsum, id egestas orci pulvinar eleifend. In facilisis ultricies risus, laoreet vulputate lorem placerat vel. Nulla consequat lectus at tortor lobortis mattis. Proin sit amet mauris at tortor convallis fermentum tincidunt et ligula. Donec ut pharetra diam. Etiam molestie volutpat urna id pulvinar. Suspendisse lacus neque, aliquam in dictum nec, ultrices ut eros. Curabitur dui sem, gravida et luctus in, molestie at metus. Donec sed lorem quam. Donec viverra faucibus massa sagittis imperdiet. Sed rutrum ullamcorper diam a adipiscing. Pellentesque eget laoreet eros. Pellentesque scelerisque magna quis felis tempor a consequat lectus cursus. In elementum mauris lobortis est pretium dapibus.

Fusce dignissim ullamcorper scelerisque. Proin vel consectetur erat. Maecenas porttitor rutrum dolor, ac lacinia ligula scelerisque vitae. In hac habitasse platea dictumst. Vivamus dolor quam, lacinia in ornare eget, malesuada vitae dui. Proin pulvinar ante sit amet lectus euismod tempor viverra sed magna. Praesent et sapien risus. Morbi at erat lorem. Duis dictum consectetur urna sed pharetra. Duis eget justo nunc. Vestibulum interdum, libero sed rhoncus scelerisque, felis magna malesuada dolor, sit amet lacinia sapien dui eu nulla. Sed massa quam, aliquet at convallis sit amet, mattis vehicula sem. Phasellus bibendum est non lectus ornare id venenatis nibh volutpat. Donec ipsum urna, molestie ut vestibulum sodales, pellentesque nec enim.

Nulla condimentum molestie turpis, at imperdiet felis fringilla vel. In massa elit, sodales quis congue quis, fermentum eu mauris. Sed luctus tempus ipsum, sed accumsan enim pulvinar ut. Ut mauris lorem, venenatis egestas rutrum vel, bibendum sed felis. Mauris feugiat tortor non nunc sagittis ac cursus dolor ullamcorper. Nulla non risus ac lacus convallis volutpat in ut odio. Suspendisse euismod fringilla metus, ut ullamcorper velit tempor scelerisque. Phasellus porta feugiat risus, ac malesuada mi posuere a. Aliquam facilisis varius ipsum eget faucibus. Donec bibendum porttitor elit, quis aliquam est lobortis vel. In condimentum neque id enim placerat accumsan. Etiam sit amet ipsum et urna molestie dictum.

Morbi in arcu id neque tristique vestibulum. Sed ultrices, augue id adipiscing molestie, massa felis porttitor sem, et luctus magna sapien eu metus. Suspendisse viverra, massa id bibendum semper, eros dolor pretium nisl, non rhoncus velit augue ac elit. Morbi non egestas neque. Integer imperdiet congue nibh nec accumsan. Fusce rhoncus ipsum a tortor luctus vitae vestibulum lorem semper. Aliquam tortor turpis, bibendum vel ornare sed, facilisis eu massa. Ut tortor enim, lacinia et interdum vel, lacinia vitae augue. Praesent sit amet erat libero, ut mollis nisl. Sed varius hendrerit sollicitudin. Ut at lectus in sapien lacinia luctus. Aliquam erat volutpat. Integer pharetra sem eget tortor tempor a congue augue consectetur. Aliquam erat volutpat.

Curabitur iaculis rhoncus eros, eu congue ipsum venenatis ac. Donec quis mauris justo, et elementum orci. Nam a nibh quam, eget imperdiet elit. In convallis aliquet commodo. Nulla vitae justo nec nulla dignissim dapibus vel a diam. Cras aliquet magna nec dolor scelerisque auctor. Nam id consectetur dui. Nam metus lectus, aliquam at luctus ut, posuere ut nunc. Vestibulum ante ipsum primis in faucibus orci luctus et ultrices posuere cubilia Curae; Donec eleifend sodales arcu, imperdiet adipiscing nisi vehicula sed. Phasellus lacus orci, ultricies eget suscipit nec, blandit porttitor mauris. Cras pulvinar, velit at consequat varius, sem risus porta lectus, sollicitudin malesuada metus libero et massa. Maecenas elementum ullamcorper sodales. Cras fermentum urna sed est cursus dignissim. Integer mauris erat, sodales in sagittis ut, tempor id ligula.

Aenean interdum ultrices pretium. Praesent eget dui id leo feugiat sollicitudin et eget nisl. Nulla diam diam, suscipit vitae varius nec, luctus in est. Vivamus eu mauris dui, ac auctor nunc. Ut a sem et turpis convallis molestie et sit amet mauris. Vestibulum ante ipsum primis in faucibus orci luctus et ultrices posuere cubilia Curae; Quisque non massa eu neque sollicitudin tempor. Nam id arcu mauris. Suspendisse ut purus orci, a aliquet quam. Donec lacinia fringilla eros, in facilisis enim tincidunt a. Suspendisse lorem nunc, placerat id sodales sit amet, lacinia in erat. Morbi erat nunc, facilisis aliquet auctor et, tincidunt quis erat. Donec ullamcorper augue non tellus consectetur tempus. In hac habitasse platea dictumst. Donec feugiat tortor quis sapien lacinia congue. Praesent rutrum vehicula ante et varius. Pellentesque ut turpis nisl.

Russian helicopter industry: a global player

“The Russian helicopter industry has recently finished its consolidation as a holding”, ran the official announcement by Dmitry Petrov, executive director of Russian Helicopters, at Helirussia 2011. At present, Russian Helicopters controls all Russian helicopter manufacturers, as well as the manufacturers of main aggregates and systems—representing the entire model range of the industry.

Russian Helicopters holding, subsidiary of UIC Oboronprom, a Russian Technologies company, was incorporated in 2007. However, the companies forming it have more than 60 years of history, and have produced some of the most globally successful rotorcraft. Their accomplishments include the Mi-8/17, the Mi-26—global leader in cargo capacity up to 20 tons—and the Mi-35M, the only dual military and transport helicopter in the world. Petrov explains that each helicopter enterprise within Russian Helicopters now acts as a production platform, while the holding oversees sales and market promotion, logistics support, and after-sale servicing.

Andrey Reus, general director of Oboronprom, explains that the production of Russian helicopters increases 20-30% annually—and such speed will allow Russia to gain at least 15% of the world helicopter market by 2015, according to Igor Korotchenko, head of the Center for World Arms Trade Analysis. Korotchenko also projects that the share of Russian Helicopters in the total balance of world deliveries will grow from 11% in 2011 to 17% in 2020.

Dmitry Petrov, executive director of Russian Helicopters “We have chosen 9 programs, and within each, we have a dedicated manager responsible for the entire value chain. Like this, we ensure that they control the entire process—from R&D to production and sales—and are focused on results”, Petrov commented in a recent interview with Kommersant.

According to Petrov, industry-wide consolidation has allowed Russian Helicopters to implement a single pricing policy by eliminating competition between manufacturers, to increase production efficiency by creating synergies, and to expand capabilities in development and manufacturing of new products. As a logical continuation of its success in consolidation, Russian Helicopters planned to run an IPO in 2011. However, the IPO never took place.

In his recent interview with Kommersant, Petrov explained, “Russian Helicopters is the first company in the Russian defense industry that decided to go public. Therefore, it was hard for investors to evaluate our singularity: there was no one to compare us with. The main problem was not the lack of demand for our shares, but the fact that they tried to quote us with a large discount to the market price. We decided not to do that: IPO was never an end in itself for us”.

Russian Helicopters dominates the markets of Russia and CIS (in 2010, it had 85% of helicopter sales in this region) and, according to its sources, leads on the booming markets of India and China. It is rapidly increasing its presence in Latin America, Middle East and Africa.

According to the organization, more than 8,500 Russian rotorcraft are operated in more than 100 countries, accounting for 13% of the world helicopter fleet. In 2010, Russian Helicopters itself accounted for about 85% of the Russian helicopter market and 17% of world sales—Russia excluded.

General overview of the Russian helicopter industry, its challenges and trends

According to experts, development of the Russian helicopter market in the mid-term will go along two main trends. Firstly, the operators will face a larger volume of aviation works; hence, they will need to increase the number of new medium helicopters. Secondly, as helicopters are more and more seen as a common means of transport, there is rising demand for light helicopters with 1.5-6 tons of takeoff weight from private and corporate clients. This trend has resulted in a need to approve new standards, rules and regulations that are reflected in international air codes.

Mikhail Kazachkov, chairman of AVI “We have managed to correct the Air Code thanks to introducing notification procedures for the use of airspace, which allows increasing the range of helicopter operation. Approval of FARs also allows increasing flight hours up to 30%—a key indicator in aviation—and operating helicopters during nighttime. This is especially important if we aim to increase the use of helicopters in winter", says Mikhail Kazachkov, chairman of Helicopter Industry Association (AVI).

Mi-171 operated by UTair In the meantime, there are positive trends in helicopter production in Russia: according to Petrov, Russian Helicopters has identified 9 production programs, where the top priority is Mi-171 - a modernized version of Mi-8 that currently accounts for about 60% of the sales volume of the organization. “Mi-171 will allow us to prolong our dominant position in the segment of mid-to-heavy helicopters for another 10-15 years. We plan to launch it on the market in 2014 with glass cabin and new avionics”, says Petrov. Interest to Mi-171 on behalf of the operators is there: in August 2011, UTair, one of the largest helicopter operators in the world, initialled the agreement for delivery of 40 Mi-171 with Russian Helicopters. Currently, UTair operates 50 Mi-171.

The Air Code is there; new Russian-made helicopters for the light niche are not. Because of that, the Russian helicopter operators are adding foreign helicopters to their current fleet.

The stress that Russian Helicopters make on Mi-171 - capable to transport up to 37 people, with flight range of 610 km, speed of 250 km/h and 4 t cargo capacity - prove that the Holding is fully aware of the need to diversify its product range due to growing demand for medium helicopters. There are things to show in the light segment as well: during MAKS-2011, Russian Helicopters presented the newest light Mi-34S1, Ka-226Т with EMS module, Ansat and the multipurpose Ka-32А11VS. The Holding is also holding on to the traditionally strong segment of heavy helicopters: MAKS-2011 saw the modernized superheavy Mi-26Т2, combat helicopters Ka-52 Alligator and Mi-28N Night Hunter. These models embody innovative solutions in avionics, lower noise level and lower impact on the environment.

According to Dmitry Petrov, the bulk of growth is expected in the military segment, where Russia is one of the strongest world leaders: the forecasted deliveries of Russian multipurpose military transport helicopters, according to the available order book and direct contracts, will be at least 252 units in 2010-2013.

Ka-52 Alligator “We have great market prospects, especially in fighter helicopters. The situation is unique—no other company in the world produces three combat machines developed by two different design bureaus: the Mi-35М, Mi-28N "Night Hunter" and the coaxial Ka-52 "Alligator". Such offer allows us to vary our supplies for different clients and thus regain world leadership in supplies of combat helicopters”, commented Petrov in his interview with Kommersant.

The Russian lead in combat helicopters on its new and traditional markets is a field of opportunities for the spare part suppliers, according to Igor Emelyanov, general director of Aviazapchast—the major independent Russian supplier of spare parts. Namely, the enterprise is closely eyeing the new contracts garnered by Russian Helicopters, such as a recent agreement with the U.S. (on behalf of Rosoboronexport, the sole Russian authority authorized for military exports) to supply Mi-17 combat helicopters for missions in Afghanistan.

The perspective high speed helicopter will be developed in parallel by Mil and Kamov design bureaus Another manifest of serious intentions in this segment is the program of perspective high speed helicopter that was launched in 2011. According to Denis Manturov, deputy minister of industry and trade of Russia—also known as the ‘Father of the new Russian helicopter industry’—the prospective high speed helicopter has serious prospects on the world market.

Denis Manturov, deputy minister of industry and trade of Russia "This is the second breath for Russian Helicopters", notes the minister. "Some time ago, I promised that the state would give active support to Russian Helicopters for development of the high speed helicopter. We have fulfilled this promise and opened this project in 2011". According to Manturov, US$14Mln is being allocated in 2011 for development of the prospective rotorcraft. Development of the helicopter should receive US$24.5Mln in 2012 and US$87.6Mln in 2013.

The Russian helicopter industry is working to expand the range of markets that buy Russian civil helicopters - not just as a seller but as a partner. According to Russian Helicopters, the European Union is one of the top priorities for the presence of Russian rotorcraft, including possible prospective deliveries and joint Russian-European projects in helicopter design and construction.

“Russian Helicopters and its intellectual and production assets are building up their presence in the international industrial cooperation system,” Petrov said at the 49th International Paris Air Show at Le Bourget. “In this context, cooperation with European partners has always been our priority. Today, we are running several international projects in rotorcraft construction with French companies, including the Ka-226T with a Turbomeca engine—a great example of effective industrial cooperation between Russia and France”. At the same time, Ukraine’s Motor Sich, the major manufacturer of engines for Russian helicopters, remains Russia’s most important partner in engine building.

Finally, organization of maintenance and after-sale servicing is an issue that directly affects the global competitiveness of the Russian industry, and national authorities officially recognize this fact. Players across various segments of the Russian helicopter landscape—manufacturing, repair, avionics and engine building—are working to better their capabilities in this sphere. As the managing company in charge of Russian helicopter manufacturers and repair companies, Russian Helicopters plans to create service centers across their main world markets by2012. Aviazapchast, the largest independent Russian company specialized in supplies of spare parts, is ready to cooperate with the holding in this program across its world markets.

Inside Russia, the issue of developing servicing infrastructure is actively being addressed: the Ulyanovsk Special Economic Zone, based in a future aviation cluster, is creating a “door to Russia” for foreign manufacturers interested in cooperating with the growing domestic market, and a “window to Europe” for Russian manufacturers that can utilize the site to acquire world competences. The unique tax regime and simplified customs procedures in the zone promise to create comfortable conditions for maintenance, repair and overhaul (MRO) companies, as well as manufacturers, in terms of the import of foreign spare parts and aircraft to Russia and export of Russian-made aviation products.

Opportunities for the Western manufacturers

As newly developed and tested Russian light and medium helicopters are not yet in serial production, Russian helicopter operators, who feel the need to buy new rotorcraft, turn to the Western manufacturers such as Eurocopter, AgustaWestland, Bell and Robinson. Moreover, foreign manufacturers realize that the Russian market represents great demand and develop different commercial approaches to ensure their deeper integration into the market. For instance, both Eurocopter and AgustaWestland, the main foreign competitors offering light and medium helicopters in Russia, agree that the country is a long-term strategic partner, very experienced in helicopter construction. These organizations are there to complement the offer that Russia can currently and prospectively make.

Eurocopter's EC 135 for Gazprom Avia

“Eurocopter’s share among the Western gas turbine helicopter manufacturers in Russia and CIS is currently up to 70%, which shows that the strategy of Eurocopter has been right. Our strategy on the Russian market is focused on cooperation with the local players as we realize that we cannot develop by just selling helicopters. We have to enter into strategic partnerships, which is instrumental in our goal of keeping up good figures and developing our presence", says Laurence Rigolini, CEO of Eurocopter Vostok.

AgustaWestland (a Finmeccanica company) is the main competitor of Eurocopter in Russia. In 2007, its landing in Russia was supported by the heads of the industry: Denis Manturov, at that time general director of Oboronprom, announced that the domestic industry had identified the AW139, AgustaWestland’s bestselling helicopter, as the ideal helicopter worldwide that did not overlap with the present Russian-made multipurpose medium helicopters with 6-6.5 tons of takeoff weight. In 2008, Russian Helicopters entered into an agreement with AgustaWestland to create a joint venture for assembly of a twin engine AW139 in the Moscow region’s Tomilino. Manturov noted that a favorable historical, economic and political background will facilitate success of its production in Russia.

The Russian experts agree that although the launch of local assembly of AW139 does not yield all the benefits of national production, it is the quickest and most efficient way to get additional experience, and develop the production culture that has always been adapted to production of heavy helicopters”.

According to Dmitry Petrov, today Russian Helicopters takes on feasible challenges. "In the last years, we have reached stable and positive growth dynamics of helicopter production which witnesses more demand for our products all over the world and their better competitiveness”, notes Petrov. “With this objective, Russian Helicopters will diversify its model range towards more light helicopters, modernize the most popular medium and heavy helicopters and develop the newest civil and military helicopters—focusing on orders from traditional state operators and on global demand, where we are looking for new partners across all continents".

Article 1

Alexander Romanov, president of the Russian Union of Metal and Steel Suppliers (RUMSS), is confident that Russia has the resources, opportunities, and unique growth potential to develop value-creating downstream operations. “Aviation and aerospace represent high technologies that will drive the continued development of other industries such as machine building and composite materials. The current projects developed in the Russian aviation and defense sectors – Sukhoi Superjet, PAK FA, MS-21, and the black wing project involving composite materials for construction of civil aircraft – are witnessing the changes and growing needs of the industry which will consequently help develop the Russian economy.”

Alexander Romanov, president of RUMSS: aluminum supplies for the Russian aviation will grow

Modernization in special metallurgy (comprising the manufacturers and developers of special metals and alloys) and composite industry (the manufacturers and developers of carbon fibers, prepregs and composite materials), together with integrated solutions from industrial software and machine tool vendors, are expected to increase production capacities and product qualities while broadening the range of industries that consume aluminum and new materials. The use of carbon fiber, for example, was traditionally limited to special industries such as aerospace and defense. According to Viktor Avdeev, general director of Unichimtek, the Soviet Union was one of the top three carbon fiber consuming countries in the world alongside the U.S. and Japan. Today, the aviation industry consumes hundreds of tons of carbon fiber per annum while the automotive industry is capable of consuming dozens of millions more. “Whoever has carbon fiber and modern technologies has a unique position in special materials and special equipment,” he adds. Composite Holding Company, eager to corner the market for composite materials in Russia, is constructing and modernizing its facilities to expand carbon fiber production and offer larger volumes of civil products. “To make composites the present of Russian strategic industries, we need to increase our competencies and create strong integrated companies and technologies,” comments Vladimir Khlebnikov, Composite Holding Company’s deputy general director.

Currently, Russian aviation is developing in accordance with the approved Federal Program, “Development of Russian civil aviation for 2002-2012 and through 2015”. Specifically, United Aircraft Corporation (UAC) plans to produce approximately 360 jets by 2015 generating an income of 320 billion rubles ($10 billion). However, according to Evgeniy Kablov, general director of VIAM (the Russian Institute for Aviation Materials), in his March 22, 2010 message to the Russian Ministry of Industry and Trade, “annual consumption of aluminum roll in Russia will grow from 12,000 tons in 2010 to 19,000 tons by 2020.” Former UAC president Alexey Fedorov predicts that by 2015 the Russia’s aviation sector will consume slightly below 5,500 tons of aluminum per year.

“Unless we modernize available facilities and construct new ones, very soon we will be unable to competitively produce for Russian aircraft manufacturers who themselves are competing with Airbus and Boeing. Beyond raw materials, Russia is interested in selling aircrafts and equipment,” says Natalia Vasilenko, director of En+ Downstream, one of the top four manufacturers of aluminum products in Russia.

Natalia Vasilenko, Director of En+ Downstream

page 1

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As the global economic roller coaster continues to unfold, governments the world over have desperately been scrambling to find the right policies that will effectively clamp on the brakes to end this unnerving joyride we have witnessed over the last few months, if not years. The frontline of this battle against economic gravity involves elaborate financial schemes to salvage countries and banks alike, but inevitably it has also meant that governments and companies have been tightening their belts to cut budgets wherever possible. In the United Kingdom, the slashing has heavily hit one of the country's dearest public institutions, the National Health Service (NHS), which has been asked to whittle £20 billion ($31.5 billion) from its budget by 2014. While most have grudgingly accepted this reality, some still remain optimistic in these times of austerity and vow to make the best out of it. Prime Minister David Cameron falls within the group of enthusiasts and has rallied his citizens by telling them that "we will be tested. I will be tested. I'm ready for that and, so I believe, are the British people. So yes, there is a steep climb ahead. But I tell you this: The view from the summit will be worth it."

DESPERATE TIMES CALL FOR DRASTIC MEASURES

Mark Jones, Marketing Company President, AstraZeneca UK

But what exactly will be unveiled when the British arrive at the peak of their mount? When it comes to its healthcare system, the controversial 2011 Health and Social Care Bill provides concrete clues—but not quite certainties—as to where the country is headed in caring for its patients and how pharmaceutical companies will play a pivotal role in constructing a more efficient NHS. The overarching aim of this unprecedented reform is to improve patient outcomes by simplifying the organizational structure of health institutions, which presumably will bring down costs, while at the same time increasing the uptake of innovation through a new value-based pricing (VBP) scheme.

Sir Kent Woods, Chief Executive, Medicines and Healthcare products Regulatory Agency (MHRA)

As it stands, the procurement of healthcare services in the NHS is managed by hospital and primary care trusts (PCTs) that are allocated individual budgets for a specific geographic area. Under the proposed system, this responsibility will be delegated to smaller GP consortia that will also be able to procure services from private and third-party providers in order to allow for greater competition. The proposal has been widely criticized as an attempt to privatize the entirely free NHS, to such an extent that the government had to halt its plans in order to hold a 'listening exercise,' after which the bill was amended to incorporate input received from all relevant stakeholders. The way forward is still under discussion.

One of the loudest voices heard during the exercise was that of innovative pharmaceutical companies who are already at odds with the NHS due to the country's lethargic uptake of new medicines and increasingly low prices (both among the lowest in Europe), exacerbated by the alleged 85% penetration rate of generic drugs (one of the highest in the region). The industry fears that the proposed VBP system, which will replace the Pharmaceutical Price Regulation Scheme (PPRS), will further limit the reimbursement of new treatments by the NHS. Under the PPRS, "companies were allowed to include their assets as part of the calculation that determined the amount of profit they could make in the country. This was extremely valuable for the pharmaceutical companies who were conducting research in the UK because those investments were then rewarded by the commercial environment," explains Sanofi UK general manager Steve Oldfield. Alternatively, the VBP scheme sets out to assess the value of a medicine holistically by taking into account its benefits to the patient and wider healthcare system correlated to the overall cost burden for the NHS. In theory this is meant to reward innovation and improve the uptake of new treatments, but skepticism prevails. Mark Jones, marketing company president for AstraZeneca UK, concludes that "While VBP aims to improve the valuation of new medical technologies it does nothing to address the issue of the fragmentation of the wider healthcare system. The pricing scheme will not change the fact that products will still have to go through all these layers of approval before they reach patients."

Sir Andrew Dillon, chief executive of the National Institute for Health and Clinical Excellence (NICE), explains that "what the government wants to do is to make sure that the price the NHS pays for new pharmaceuticals properly reflects their value, which is an ambition that NICE shares." As the organization responsible for evaluating whether a new drug should be reimbursed by the NHS or not, NICE can be somewhat divisive among the pharmaceutical industry. Sir Andrew counters that "while NICE is sometimes criticized for restricting access to treatments and pharmaceuticals in particular, everything NICE has done represents a net benefit to the NHS. Contrary to some beliefs, the vast majority (83%) of NICE's recommendations are positive." The reality is that no one is yet sure what VBP will look like nor whether it will be advantageous to the pharmaceutical industry in the long run.

Stephen Whitehead, CEO, Association of the British Pharmaceutical Industry (ABPI)

Samantha Pearce, general manager of Celgene UK and Ireland, is optimistic in her interpretation of the ongoing discussions and how they will affect her company. "The reality is that the reimbursement environment in the UK will always be a challenge, but what encourages me about the VBP discussion is that the rhetoric is centered on innovation. As long as Celgene remains committed to providing truly innovative products that add value to the health of patients, then I think our aim will be parallel to that of the authorities. In our commitment to seeing this happen we are persistent and creative to engage all the relevant stakeholders that will ultimately make the decisions. It is essential for us to understand where they are coming from and vice-versa. We knew from the beginning that it would be a long journey, because the therapeutic areas that our products operate in are quite complex," she concludes. With growth at 40% for the first half of 2011, it is quite apparent that Celgene has in fact managed to communicate and find common ground with UK health authorities.

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Chapter 1

Turkey: A top twenty player growing at an exceptional rate

Turkey remainsa country between two worlds. Not only is it straddled between Asia and Europe, it also boasts a very strong and modern “western” industry and infrastructure together with a more informal economy estimated at 40% of GDP, more typical of an emerging market.

Health status does not escape this dichotomy: on the one hand, unlike many developing economies, nearly 90% of Turkey's population is covered under the national social security system; on the other hand, the health status of its population is not as good as that of other middle-income economies. Despite positive developments over the past ten years, life expectancy (68.7 years in 2004) is still ten years shorter than the average of OECD's countries. The most relevant indicator of Turkey's poor health status is the country's abnormally high maternal and infant mortality rate. Although the latter drastically decreased from 52.4 per 1,000 in 1990, to 38.3 per 1,000 in 2003, it is still nearly eight times higher than that of the US. Another example of Turkey's poor health planning is the heavy disparity in health indicators that exists between urban and rural areas.

But there are signs that the government, led by Prime Minister Recep Tayyip Erdogan, leader of the Justice and Development Party or AK, is committed to changing this situation. The budget of the Ministry of Health (MOH) was increased to 3.2% of the GDP in 2004 from 2.3% in 2002. Acknowledging the need for thorough reform of its health system, the government has embarked on a major reform program: the Healthcare Transition programme, whose goal is to modernize and rationally restructure the health system, including health services delivery and financing.

Prof. Recep Akdag, pediatric professor and Minister of Health, explains the three most important aspects of this plan: “The Health Transition Programme will enable patients to access physicians and treatments more easily.” “The most important part is spreading the family practitioners throughout the country. The second issue is to ensure that state, insurance and institutional hospitals are opened to all citizens, more disciplined and turned into autonomous institutions. The third component is to offer universal health coverage, a measure which is underway”. He adds: “Over the last three years we have shown steadfast commitment to implementing a serious healthcare transition programme. Our policy on pharmaceuticals is closely related to these issues.

Universal health coverage, which should be finalized In autumn 2005, will enable 10 million Turks previously excluded from the three existing social securities to have access to health insurance. In the process those three institutions also should be merged under a single umbrella organisation, hence ensuring homogenous coverage for the entire population.

In order to increase accessibility to medications, one of the first measures to be instituted was extending reimbursement patients for treatments purchased in non-state-hospital pharmacies, explains Prof. Akdag. “Previously, 30 million workers, pensioners and their families were trying to get their drugs from only 300 hospital pharmacies. Now they are able to get their drugs from 18,000 pharmacies.”

Patients used to line up for hours at badly stocked state hospital pharmacies and often could not get the prescribed treatment. With the new possibility of purchasing products from regular pharmacies, accessibility to medication has improved drastically. In order to finance these changes, pharmaceutical companies were asked to give extra discounts of 11% for drugs that have been available for more than six years and 4% for drugs available less than six years.

This measure was praised by most stakeholders: patients, health professionals, pharmaceutical manufacturers and pharmacists. But it also was so successful and triggered such growth in pharmaceutical sales that some fear the financial burden on an already notably cash-short government could become too heavy in a country where pharmaceutical expenditures represent 50% of the overall healthcare budget (even though drug usage per capita remains much lower than in the rest of Europe) and could lead to cuts in the currently guaranteed 80% reimbursement rates or to delay the reimbursements.

Nevertheless Prof. Akdag is confident that such outcomes are only temporary and, should be compensated for by rational drug usage and the 2004 implementation of a new pricing policy, which guarantees patients the cheapest drugs in Europe through an objective reference-pricing system.

The new system uses a reference price for an original medication that is the cheapest price available in five EU countries . Generics are automatically priced at 80% of the original drug. If the Turkish price for a drug is already the cheapest one there is no price increase. This new pricing system resulted in a 14% price decrease, and today drugs are an average 14.5% cheaper in Turkey than in the rest of Europe.

The new reference-pricing system also takes into account the the Euro/Turkish Lira exchange rates by implementing price adjustments when variations exceed 5%. This feature should protect pharmaceutical companies products and the patients against an often-devaluating Turkish Lira. In return for these efforts the government agreed to shorten the registration period for new drugs by allowing maximum of 210 days to study an application; previously this could have taken more than two years.

Another possible cost containment measure recommended by many would be the implementation of an OTC regulation that doesn't exist yet in Turkey. This seemingly very logical solution would automatically write off up to US$500 million from the government's health bill. Having the 18,000 members strong pharmacist association opposing this measure, the government doesn't seem to be going in that direction, although it doesn't reject the idea either.

The Health Transformation Programme also led to a law fixing the status and role of family practitioners. Prof. Akdag believes that increasing the systematic use of family practitioners is an essential part of the program and these practitioners also could help reduce the government's burden by promoting rational drug usage: “We believe that family practitioners will promote the rational use of drugs within the use of a regular recording system. The rational usage of drugs should compensate for the extra expenses. We will use more necessary drugs and stop using unnecessary drugs.”

The need to increase and better control primary health care is essential and must adapt to social conditions in Turkey resulting from geographic and demographic factors such as isolated rural populations in remote regions and an aging population and sociological changes resulting from a rapid and poorly planned urbanization, which led to the creation of ghettos. Another issue results from the high concentration of providers such as hospitals, pharmacies or doctors in the three largest cities Istanbul, Izmir and Ankara.

The Health system deficiencies are particularly significant in Eastern parts of Turkey. In those regions, not only is primary care very poor but long lasting security issues limit the delivery of healthcare services. “We cannot tolerate people who prevent the distribution of healthcare services, and in this context we are looking for more understanding and support from the Western world,” remarks Prof. Akdag.

But he also stretches new efforts the government is doing in these regions:

“Despite our limited resources, we Prof Recep Akdag, Minister of Health have invested and paid more attention in those areas with deficient health services; we have sent health personnel working on a contract basis with higher base salaries and are putting emphasis on family planning, infant and maternal care,” explains Prof. Akdag, “For example, we offer financial support to the lowest income under the condition that they attend regular health control encounters with doctors, and have started a distribution campaign for free protective doses of iron and vitamins for babies.”

By enforcing the Health Transformation Programme, the government of Turkey hopes to not only improve the national health care situation, but also to attract more investment in the pharmaceutical sector, explains Prof. Necdet Unuvar, the undersecretary of health at the MOH: “Our policies should ease the accessibility of drugs to 70 million Turkish people, and will turn into an advantage for producers, wholesalers and pharmacies alike.”

Turkish Delights: Unprecedented Macro-Economic Stability

With a growing population of 70 million, the implementation of universal healthcare coverage and average annual drug consumption per capita of only US$85, Turkey is one of the world's most promising pharmaceutical markets. During the past two years partially as a result of the government's Health Transformation Programme, which substantially increased access to medicine, the growth in pharmaceutical sales reached 25%, and this trend is expected to continue until 2008.

On the economic front, Turkey is experiencing unprecedented macroeconomic stability. While the country's GDP experienced an outstanding average 9%-growth in 2004, long-time plagues, such as inflation, have been racketed down to historic single-digit figures for the first time in decades. The Turkish Lira even was revaluated against the euro and the dollar in 2005.

Today Turkey is among the top-15 largest pharmaceutical markets in the world and still growing at a double-digit rate. In 2004 the total ex-factory market reached US$6.3 billion, and US$9 billion in retail sales, which makes the country a far more promising market than Russia, the other regional “giant”, or any EU newcomer.

About 300 companies (including 53 foreign owned capital) are active in a sector that employs 23,000 workers. All the big pharmaceutical companies are represented in Turkey, but the market leaders are local Abdi Ibrahim and Eczacibasi.

With 5,000 products available on the market, and one of the world's highest generic penetration (55% in volume and 40% in value), competition in Turkey is fierce. But talking about generics in Turkey can be different because the very notion of generics is not well understood by the public: generic brands are so strong and well-established that the public often sees no difference between a generic and a patented drug. As a result, the marketing and sales effort that generic companies develop to support their sales in Turkey is closer to that required for patent holders. In the past, foreign companies used to enter the Turkish market through contracting local companies and giving them licences both for manufacturing and distribution. But this now has changed and most international companies have terminated their contracts and established local subsidiaries instead. They now either manufacture their products in Turkey or import them. Imports have increased by 207% between 1999 and 2004 and represented 38% of the entire market in value and 14% in volume in 2004.

On the regulatory front, Turkey is getting significantly closer to the standards of developed countries, as important developments have occurred over the past ten years:

- In 1995 the patent legislation was approved.

- In 1996 the Customs Union Agreement with the EU was signed, and the Generics' Registration law was introduced.

- In 1997 bioequiva l enc e and bioavailability studies conducted in Turkey became mandatory for registering generics.

- In 1999 patent legislation entered its implementation phase.

- In 2001 Turkey became a member of CADREAC (Collaboration Agreement between Drug Regulatory Authorities of European Union Associated Countries).

- In 2004 reference-pricing system legislation was introduced.

- In 2005, new registration legislation and data exclusivity principles were introduced.

On October 3rd of this year, the accession talks started between Turkey and the EU. Turkey is now facing a great challenge: Turkish accession inspires little enthusiasm throughout and plenty of downright opposition among some EU member's electorate. But Turkey already has been linked to the EU for ten years through the Custom Union Agreement, which was signed in 1995. In an unique situation Turkey accepted the Agreement before becoming a full member of the Union. The Agreement actually created an exceptional situation: under it, Turkey was to implement data-exclusivity beginning January 2001. However this was never done. Two years ago disagreement about dataexclusivity emerged and resulted in the creation of the AIFD which represents the innovators in Turkey. For Altan Demirdere, the jovial president of AIFD and head of Novartis Turkey, this separation did not mean a divorce but rather the end of an odd situation that “did not reflect the global trend where on one side there are research-based companies and on the other side there are generic companies.”

“The problem being that local generic companies had the majority of seats in the board of the old association, so it was them who were representing our interest with the government. It was an awkward situation, as they were on one hand representing us, but on the other handopposed to topics such as data-exclusivity or patent, which are very important to us innovative companies,” he recalls, adding: “Obviously we still have common issues and we still work together on them with the government. But concerning the issues of patent, data exclusivity and some other topics, it was clear that we had dissensions.” Although a central concern, the issue of data-exclusivity has not hampered Novartis' business development. The

Swiss company enjoys a leading position in the market among the multinationals:

“We are among the top 10 biggest operations within the group. All of Novartis' business units and divisions are present in Turkey: Novartis Pharma exists with all its business units, so does Novartis Consumer Health. With the take over of Hexal Ilsan, there is now also Sandoz in

Turkey, which I believe is the second largest Sandoz subsidiary worldwide after Germany,” explains Demirdere.

Nevertheless, for Demirdere solving the issue of data-exclusivity is crucial forfurther developments in the industry: “If these issues were to be sorted out, this could enable us to attract more foreign investment to Turkey and R&D activities in phase II-III or IV, or even at an earlier stage. Research is not any longer done from A to Z in one country, computerized molecular modelling or animal tests could be conducted here for example. With good academicians, proper cost structure, flexibility and hard work, research programs could start in our country as well.”

Bülent Eczacibasi, one of the sector's most respected and charismatic voices, chairman of the Eczacibasi Group of companies and president of the IEIS (one of the two associations representing the l o c a l ( a n d o f t e n g e n e r i c ) manufacturers), agrees with Demirdere on the need for developing R&D: “The pressure of competition and the export drive is pushing the companies towards more intensive R&D, we need to become more innovative. The generic industry is very competitive; companies need to be l o c a l ( a n d o f t e n g e n e r i c ) manufacturers), agrees with Demirdere on the need for developing R&D: “The pressure of competition and the export drive is pushing the companies towards more intensive R&D, we need to become more innovative. The generic industry is very competitive; companies need to be dynamic, responsive, agile and good in product development. The sum of all these elements means becoming a successful international player.” He outlines the advantages for Turkey in promoting generic drug use: “Our government could follow the example of other European countries in promoting the use of generic products and actively initiating public generic purchasing campaigns. Other measures also could be considered, like reducing the delay for authorizations and the registration of products today this takes an average of 2 years; the automatic inclusion of generic medicine sintothereim bursementschemes, or implementing a compulsory generic substitution system, among others.”.

“IEIS is asking the government to focus on a systematic licensing procedure where competition in the generic industry would be enhanced. There would be some decline in prices with a positive impact on the public finances, but this needs to be complemented with a faster incorporation of generic products into the reimbursement scheme,” complements Turgut Tokgoz, general secretary of the IEIS.

Eczacibasi also notes that Turkey boasts “strong competitive advantages compared to other countries where the generic industry is in lower stages of development, mainly in terms of human capital and physical infrastructure.” Eczacibasi adds that he hopes industry players will use these advantages to increase their exports: “there is a great potential for the Turkish generic industry, far exceeding the actual figures of US$ 145 million.” Industrial capacity is in place with 96 production sites (12 foreign owned) throughout the country. Good Manufacturing Practices and Good Laboratory Practices are the universal rule.

Although very attractive, another challenge facing Turkey is its capacity to attract Foreign Direct Investment. Turkey has had very poor results in this area and for example only attracted 1% of international pharmaceutical investments in recent years. The pace of regulatory change, chronic economic instability, corruption and bureaucracy have often frightened investors away.

But a more important obstacle might be Turks themselves. Most companies are family-owned and although most have professional and institutional management and lengthy experience in cooperating with international companies, very few of these players actually consider opening up the company shareholding or selling off their company.

There are few examples of this happening in the past: notably, the takeover of Ilsan by German Hexal in 1999 and that of Fako by Iceland ago but these remain exceptions. Still, international companies are eyeing takeover opportunities in Turkey. Many actually predict that there will be a further consolidation among the many smaller Turkish players, which could result in future investment opportunities.

Chapter 1

South Africa: What Do You Expect To Achieve

Although the rise of the African continent as an exploration and production hotspot has largely bypassed South Africa, the country boasts a strong service industry and aspires to become the continent’s service hub for the whole of the oil and gas industry. “South Africa has a lot to offer to the upstream oil and gas sectors,” stated Buyelwa Sonjica, Minister for Minerals and Energy of South Africa.

Geographic proximity as well as South Africa’s supplier and service capabilities all serve as the foundation on which the South Africa Oil and Gas Alliance (SAOGA) is determined to position South Africa as the preferred supply hub and fabrication centre for the offshore oil and gas community in West Africa. SAOGA is a public-private partnership between the provincial government of the Western Cape, the city of Cape Town and the private industry. It is supported by the national government and the National Ports Authority and was founded in 2001 under the name Cape Oil and Gas Supply Initiative (COGSI).

In 2004, the Western Cape initiative was re-branded. According to Gary Schwabe, executive director of SAOGA, this strategic decision was made recognizing that there is no brand value for an international audience in ‘Cape’. This is underlined by the fact that the strongest brand value would be derived by using the ‘South Africa’ positioning. In addition to the brand value criterion, this repositioning outlined that the Western Cape alone does not have the broad spectrum of industry that is required to service the oil and gas industry. The complementary capabilities of the large industrial players from the Gauteng region are enabling SAOGA to position South Africa as a preferred supply hub and fabrication centre for the West African offshore oil and gas community.

The bottom line is focused on positioning South African capability in the West African market through the corridor of the Western Cape. At the heart of the public private partnership is the promotion of economic development, job creation, and transformation in South Africa in general and in particular the Western Cape.

Although South Africa is taking a one-stop shop approach, there is the widespread consensus that the country should not aspire to compete head-on with Houston and Aberdeen on the high-tech end. While South Africa is the most sophisticated engineering and manufacturing base in Africa, its leading companies are looking for strategic partnerships with both Houston and Aberdeen based companies to jointly fill the gaps where South Africa does not have the capability.

Being African is a key competitive advantage that is becoming an increasingly prominent factor as local content requirements and the ideals of the New Partnership for Africa’s Development (NEPAD) are climbing onto the agendas of the African nations. This is exemplified by the actions taken by the two leading players in the West African oil and gas industry: Nigeria and Angola. “Nigeria has set some very aggressive local content targets, requiring 45 percent local content by 2006, which is destined to rise to 75 percent by 2010,” stated Mr. Schwabe. “It is admirable that they want to do that, and our objective is not to try and compete with them. Our objective is to support West Africa. There is $10 billion spent on exploration and production in West Africa every year, and potentially we could support 10 percent of that.” While continuing to explain the rationale behind SAOGA’s ambitions he stated: “Of course that does make a dent in other competitors’ targets, but is it not that significant. The rest of the world keeps emphasizing that Africa should stand on its own feet and help itself, but most of the European and American majors continue to rely on suppliers from their home countries. The world has got to realize that if you want Africa to stand on its own feet then you have to give Africa the flexibility to do that.”

The current under-capacity in the international offshore fabrication, maintenance and supply markets create a unique opportunity for South Africa to enter into the market at this point in time. The challenge will be to build a reputation of quality, delivery and competitiveness.

The first piece of the puzzle

The Western Cape government has identified oil and gas as one of the key drivers of the province’s economy. “The Western Cape doesn’t have oil and we may have gas off our west coast, but we are determined to become the service hub for the West African oil and gas industry,” proclaimed Ebrahim Rasool, premier of Western Cape. “The world will be surprised, because they expect us to be a jungle, a place where lions and elephants roam the streets,” he stated before continuing that “the Western Cape offers the required skills base and infrastructure to service the oil and gas industry.”

Identifying the business potential of the Western Cape’s ambition of becoming the preferred service hub for the African oil and gas industry, MAN Ferrostaal has decided to invest Rand 1.7 billion (US$240 million) over a five-year period. The investment will be in infrastructure for the ports of Cape Town and Saldanha - the largest and deepest natural harbor in the Southern Hemisphere. The Western Cape province is committed to providing the road and rail network and, for the first time, the ambitions of the local service industry are beginning to be realized. MAN Ferrostaal announced the investment in March during Oil Africa 2006, the African equivalent of OTC in Houston.

“I think that MAN Ferrostaal is the foundation of our ambitions; it is the first piece of the puzzle that has to fit before the rest of the puzzle to come together,” realized Premier Rasool. “It is the vote of confidence that we needed.”

Before the investment

The development of the African oil and gas offshore industry is now limited by the extent to which the international market can supply new equipment. “If we could participate in the local content and become a supplier of new equipment or refurbishment, Africa’s oil producing nations could activate new fields faster,” explained Brian Blackbeard, managing director of Atlantis Marine Projects.

Atlantis Corporation and MAN Ferrostaal are the new entrants that gave South Africa the ultimate push in servicing the offshore oil and gas industry. “Back in 2003, together with MAN Ferrostaal, we identified that the establishment of infrastructure to service the offshore oil and gas industry would be very good for South Africa,” recalled Mr. Blackbeard. Although there was a lot of interest, the question was how South Africa could enter into this market. Atlantis looked at the opportunities lying beyond the entry barriers and encouraged MAN Ferrostaal to consider the investment into South African infrastructure to allow local companies entry into the business.

“In this context, in 2003, we started the feasibility studies and due diligences, and over two years developed a business plan in association with the South African industry to determine whether they were interested. Were they willing to participate, what were their entry barriers to the market and what could we facilitate as Atlantis and MAN Ferrostaal?” Mr. Blackbeard asked.

The first issue, negotiating rental structures with the National Ports Authority to put in place a soft start mechanism, has successfully been completed. The next step was putting in place the required infrastructure to start the business. The old facilities at the Port of Saldanha have been abandoned for the past 13 years and are now being rehabilitated. “Relaunching the Port of Saldanha as a viable fabrication yard for the oil and gas industry required a huge amount of investment,” Brian Blackbeard noted.

Likewise, the required upgrades for the Port of Cape Town were assessed. The port is being positioned as the preferred repair and refurbishment hub for the ageing fleet of West African offshore platforms. Currently, these have an average age of 26 years.

MAN Ferrostaal and Atlantis Corporation have formed FerroMarine Africa, which has become the local equity partner in the business. While Mr. Blackbeard believes that South Africa is in the right position geographically, politically and economically, he recognizes that the success of FerroMarine’s investment is largely dependent on its South African tenants and their international partners.

The two tenants in Saldanha, which will be operational in April 2007, are Grinaker-LTA and DCD Dorbyl Heavy Engineering. The facilities in the Port of Cape Town will be operated by DCD Dorbyl Marine, Globe Engineering and SA Five Engineering, which was recently acquired by Aberdeen-based RBG. In addition, the complete spectrum of the service providers, ranging from hydraulic equipment, electronics and marine services to IT and software, can be subcontracted from an existing base. Such a depth of industry is not available in the rest of Africa, and South Africa’s capability to offer a one-stop-shop approach is serving as its competitive edge.

Port of Saldanha: Restoring old glory

Khomotso Philela, Chief Executive of the National Ports Authority In the Port of Saldanha, located 60 nautical miles NNW of Cape Town, a fabrication site was established in the late 1980s. At the end of the apartheid era, which required the South African oil and gas industry to be self-sufficient, these facilities were used to fabricate the 14,000 tonne fixed leg platform jacket for Mossgas and the FA platform, which is still operational off the South African coast. At present, the site is being recommissioned and will be reopened in April 2007. The Port of Saldanha is not constrained by limited available space and we see a huge opportunity for construction and fabrication,” stated Khomotso Philela, CEO of the National Ports Authority. “Physical and environmental limitations will prevent major developments in the Port of Cape Town, so a smart company in the oil and gas industry will look at Saldanha,” he continued. In this context, Mr. Philela must agree that Grinaker-LTA is a smart company because it jumped on the opportunity to operate the Saldanha fabrication centre in cooperation with DCD Dorbyl Heavy Engineering Vereeniging.

Historically, the petroleum industry in South Africa is mainly a downstream industry, a field where Grinaker-LTA has been a dominant constructor for the last 20 years. On the other hand, DCD Dorbyl Heavy Engineering Vereeniging operates a large facility in Gauteng where the pre-fabrication will be carried out that cannot currently be done in Saldanha. Over the last 6 years, the company has been looking for growth opportunities in the upstream oil and gas market, both in and outside of South Africa.

In 1999, Grinaker-LTA established a facility in Port Harcourt. Serving clients such as ExxonMobil, Chevron, Total, FMC and Technip, the company has become a well recognized fabricator providing local content, which is a strong business driver in Nigeria. Although the Nigerian operation has grown significantly and is already operating close to full capacity, Grinaker-LTA has continued to evaluate opportunities to expand its involvement in upstream oil and gas from a South African base. “From the outset our aim was to compete with the established countries servicing the oil and gas industry. However, the costs associated with putting required infrastructure into place made this ambition quite a challenge,“ recalled Eddie du Rand, managing director of Grinaker-LTA Construction. Then the Saldanha opportunity came about, where there was potential to participate in the facility without actually being the developer and investor. “It was an opportunity to match our existing market know-how and client base with a new facility to suit the South African requirements,“ noted Mr. du Rand. “That has been the journey we have been on for the past five years.”

The Saldanha facility will be twice the size of Grinaker-LTA’s Port Harcourt facility and will target Southern Africa and the West Coast of Africa, but it won’t necessarily be restricted to that. However, South African companies need to be mindful that a lot of the African countries are driving their own local content programs. The brand-new facility in Saldanha will add a lot of capacity to the region. Its operators are emphasizing that they aim to complement rather than compete with existing African facilities. “One of the main challenges we have been looking at is marrying local content with more complex high specification work out of South Africa, like a sub sea manifold,” confirmed Mr. du Rand.

The Saldanha site will boost Grinaker-LTA’s capacity in the West African market by 200 percent, so the order book will have to be filled in the short term. According to Mr. du Rand, the timing is right. “We couldn’t approach the market at a better time and we need to make sure that the facility comes to the market quickly to take advantage of this opportunity,” he concluded.

Grinaker-LTA and DCD Dorbyl are not the only ones eager to see the Saldanha fabrication yard materialize. In the past, Johnson Crane Hire (JCH) was one of the main service providers during the construction of the Mossgas project and peaked at 104 cranes. While the oil and gas industry is presently at the brink of making a comeback in Saldanha Bay, Martin Bekker, managing director of Johnson Crane Hire, is actually considering closing down his operations in the Port of Saldanha. “They have fantastic plans for the Port of Saldanha, and when it happens I will go back,” he explained. “In other areas of South Africa there is a shortage of cranes. I’d rather move away today and return when eventually the Port of Saldanha lives up to the current ambitions.”

Following a management buyout in 2002, Johnson Crane Hire has spent just under Rand 200 million (US$30 million) on new equipment, underlining its position as South Africa’s leader in technological advancement. During this process, JCH’s management was brutally reminded of the international market forces that govern the natural resources sector.

Large expansion programs were taking place in the platinum mining industry and JCH decided to buy new cranes to service these projects. “We were still stupid at the time; we had lots of cash so we paid for the cranes in cash,” he recalled. Only weeks before the delivery of the new cranes the Rand strengthened sharply against the dollar and the platinum mines shelved most of their expansion projects. As JCH already owned the suddenly idle cranes, banks proved to be unwilling to provide financing. Looking back, Mr. Bekker remembers this period as a terrible time, but a good lesson. He remembers: “I saw myself sitting at the street corner with a cardboard stating ‘seven kids, no job’, and I wasn’t ready for that!” JCH got through that period, and since then strengthened its position as the main crane contractor during shutdowns at South Africa’s petrochemical plants. Currently the company’s workload is split 50-50 between mining/construction and oil and gas/petrochemicals. “You can never do without the oil and gas industry,” recognized Mr. Bekker. “When MAN Ferrostaal starts developments, we will be there.”

Cape Town: One-stop shop

Cape Town, undoubtedly the economic centre of the Western Cape, offers distinct advantages such as its strong industrial base and infrastructure. Helen Zille, Mayor of Cape Town, is confident that the city has the potential to become one of the world’s leading cities, and that the city has to use all economic opportunities to achieve this ambition.

As part of the ambition, oil rigs and FPSOs are destined to become an inseparable part of Cape Town’s skyline in the years to come. The oil and gas related workload in the Port of Cape Town is rising rapidly. A critical challenge for the port is a matter of space and the compatibility of developing the oil and gas industry, which is perceived to be a hazardous activity, alongside tourism-oriented developments such as the V&A Waterfront.

“There are about 600 globally competitive engineering companies in Cape Town that service the oil and gas industry and have experience with international projects,” boasted the mayor. “In addition, Cape Town has the largest dry dock in the Southern Hemisphere and is located on a strategic geographic position.”

While Cape Town’s leading engineering companies are gearing up to attract oil and gas projects, an international company was awarded South Africa’s first dry-docked rig project. RBG, headquartered in Aberdeen, brought the upgrade project for the Sedco 709, Transocean’s semi-submersible drilling rig, to the Western Cape. To execute this project, RBG teamed up with Cape Town’s largest ship repair and engineering companies: DCD Dorlbyl Marine, Globe Engineering and SA Five. The Sedco 709 project illustrates the Western Cape’s ambitions as it is the first joint venture project servicing the West African oil and gas industry from a Western Cape base. The project is expected to inject US$20 million into the Western Cape economy. This is instrumental in positioning this developing region as a preferred location for the future dry docking of rigs, offering a cost saving alternative for rig owners operating in West Africa.

Underlining the confidence in the Western Cape’s potential, SA Five was recently acquired by Ashley, which is 100 percent owned by Executive Chairman John Ray, also the 50 percent share-holder of RBG. As illustrated by the Sedco 709 project, SA Five is already working very closely with RBG and will become officially part of the RBG Group, effective 1 March 2007, after the completion of RBG’s due diligence and formal board approval.

Pursuing offshore opportunities from a Cape Town base

In addition to being a humanitarian milestone, the end of apartheid in 1994 exposed South Africa to the globalizing world. While foreign companies rushed into the attractive South African market, South Africa’s service providers to the oil and gas industry saw the barriers to internationalization diminish. Consequently, Anchor Industries and Cape Diving, both based in Cape Town, were quick to move into the international offshore industry.

Anchor Industries, a DNV ISO 9001 accredited supplier of mooring equipment, was started as a family business in 1994. “About eight years ago we saw an opportunity to extend our business,” explained Dale Hutcheson, managing director. Based on the good fit with Anchor Industries’ marine business, the company decided to enter the offshore industry. However, with South Africa’s limited offshore industry, Anchor Industries couldn’t really grow the business locally. Dale Hutcheson boasted: “Last year we did a job in Russia, in Sakhalin Island, for a Norwegian company and this week alone we supplied products to Angola, Australia, Uganda and America.”

Nowadays the tide is changing for the South African service industry as opportunities emerge closer to home. Every rig or FPSO that enters the Port of Cape Town for repair or maintenance brings extra business to the entire service industry. “On the back of that we also do reciprocal business with other companies within the offshore business, and the busier they get, the busier we will get as well,” Mr. Hutcheson explained. “I think that we will see the same positive spin-off from the offshore industry as they have seen in Aberdeen, Singapore, Stavanger and Houston. Anchor Industries does not aim to be the biggest supplier of mooring equipment, but aspires to be the best in its field and be recognized as a leader in our region. There is a huge opportunity to exponentially increase the business, it must be a focus,” he concluded.

Fezekile Mahlati, Chairman of Cape Diving Established in 1962, Cape Diving is South Africa’s oldest underwater services contractor and was initially servicing the marine industry. Over a decade ago, the company entered the offshore industry. Fezekile Mahlati, Cape Diving’s chairman, recalls that at that time there were few upstream developments in South African waters which meant that his company should look for opportunities elsewhere, for example, Middle East and West Africa.

In 1995, Alan Thomas was recruited as Cape Diving’s managing director to implement the strategic decision to move into the international offshore industry. That proved to be very difficult. “South Africa had just come out of the political wilderness and had limited exposure to, in particular, the offshore industry,” he recalled. The first steps towards becoming a supplier of choice were taken by obtaining ISO 9001-2000 certification and becoming contractor members of the International Marine Contractor Association. Traditionally, the industry in West Africa would hire international contractors to undertake their underwater work. At present, the industry is starting to realize that South Africa has the capability and capacity to execute the work using local resources. “There is a lot of professional expertise in the country, and we are South Africa’s only sub sea service provider that offers a full range of sub sea services in-house, which is what the oil and gas industry requires,” boasted Alan Thomas.

Cape Diving offers services which include topside and sub sea NDT services, air diving, saturation diving and ROV services and has become an African ‘niche’ service company, with sound knowledge of West, East and South Africa. Aspiring to ride the wave of the exploration and production boom in West Africa, Mr. Mahlati strongly believes that Cape Diving should be the flag bearer of South African offshore support services with a limited fleet of support vessels while acting as the preferred partner of choice for both local and international exploration and production companies.

Today South Africa has become a platform for international expansion, but over a century ago the country itself was a magnet for entrepreneurs and fortune seekers. In 1884, Lauritz H. Marthinusen arrived in South Africa from Norway and joined the gold rush. His entrepreneurial mind was quick to see the opportunity for winding electrical rotating machines locally which, in the absence of a repair facility in South Africa, were being returned to Europe. This marked the birth of LHMarthinusen in 1913, which has grown to become the leading electrical repairer in Southern Africa, operating the largest facility in the southern hemisphere.

Core businesses comprise the repair of electric rotating machines of all designs and sizes, as well as transformers up to 200 MVA. “Historically, gold was the driver of this business, but over the past five or six years we have diversified considerably,” underlined Altino da Silva, LHM’s managing director. Today, the company is very strong in the petrochemical industry, platinum mining, gold mining, paper, steel and the general industries. Although LHMartinusen’s Cape Town subsidiary is involved in oil rigs for Angola, the company is just scratching the surface in the offshore oil and gas industry at the moment. Altino da Silva is determined to capture this rising opportunity over the next 18 to 24 months, adding a new chapter to his company’s long history.

Deep water and rope access

The oil and gas industry’s gradual shift from shallow to deep water exploration and production is transforming the industry’s operating infrastructure. Floating rigs and FPSOs are replacing traditional forms of production. Challenges related to the reduced accessibility must be addressed in the inspection and maintenance strategies for these offshore installations.

Rope access companies have been emerging since the early 1990s, but their innovative approach to inspection and maintenance proved almost too revolutionary for the traditional oil and gas industry in the early days. “It took a long time for us to convince the oil industry that our service is actually safer than scaffolding,” reflected Neil Schreibe. As managing director of Ropetec, one of Cape Town’s two rope access companies, he described the service offered by his company as “any elevated work you need scaffolding for, we can do it safely, cost effectively and on time.”

Ropetec has an overall workforce of around 140 people and operates in two basic divisions: maintenance and inspection. As the company grew, it became a class-approved inspection company for Lloyds and DNV, ABS, Rina and Bureau Veritas.

On the maintenance side, the services offered include painting, grit blasting, welding, electrical maintenance and rigging. “In addition, we often work in conjunction with divers, wherein we do the topside work and the divers work sub sea, so it is quite a phenomenal way of working,” noted Mr. Schreibe.

The rig industry in West Africa is offering tremendous growth opportunities. The track record in the rope access industry is critical. “We have been operating in Angola for five years and we have yet to have a lost time incident, and that determines our growth,” he boasted. While Ropetec’s growth will be controlled growth, the company is undoubtedly gearing up to capitalize in the opportunities in its backyard: West Africa.

Daniel Bottomley, a mountain climber and construction engineer by background, felt privileged to be part of the birth of the industrial rope access industry in Africa. In 1991, he started Toprope, which immediately became involved in the oil and gas industry. Although Toprope tends to focus on work in the Port of Cape Town, the company has executed projects throughout the world, operating both in the various ports and offshore.

“At the moment we are involved in offshore work in Nigeria, we have just finished a job in Gabon and we are heading for Brazil next month,” he noted. Having built the business based on quality, sound work ethic and can-do attitude, Mr. Bottomley emphasized that Toprope’s critical success factor is the “willingness to bend over backwards for the international client base without causing a safety hazard.” Whether this is enough to realize his ambition of “establishing an office in every country pumping oil” remains to be seen, but it may prove to be invaluable in Toprope’s upcoming challenge: opening a next branch in West Africa.

South Africa will never be able to quote on the very high tech slice of the West African oil and gas procurement pie, since the country simply doesn’t have the necessary length of production runs. “However, if we look at the rest of the pie, South Africa is the source for less than 10 percent of the West African oil and gas industry’s procurement,” assessed Mr. Womersley. “We must be able to provide a lot more than 10 percent. To do so, South Africa needs to deliver on three fronts: offer reliable logistics solutions, foster a strong export mentality in the South African manufacturing industry, and strengthen the recognition of South Africa as a source of technology.”

A slightly weaker, but stable, Rand would really add the last few percentage points to South Africa’s pricing competitiveness. According to Womersley, this would enable South Africa to offer very good transit times and a highly competitive dollar landed price. Of course, Safcor Panalpina’s success on the route to West Africa is intertwined with the advancement of South African suppliers in the Gulf of Guinea. “Let’s be aggressive suppliers into that zone, go there and put your feet on the ground,” he said. “It is a little bit like a symphony, there is no point having all the brass instruments if the woodwind instruments or the strings are not there, it just doesn’t sound the same.”

Chapter 1

Spain: A "Patent" Challenge Of Innovation

Generations of Spaniards over centuries have had many reasons to be proud of their country, from renowned personalities in all artistic fields to world champions in sports like tennis, race-car driving and football (at least in club competitions). More recently, Spaniards like to highlight the collective achievements of a society that has been able to overcome the devastating legacy of a brutal civil war and decades of dictatorship, to become one of the most prosperous democracies in the world. Not to mention the economic and industrial leap taken over the last few decades, allowing Spain not only to cut distances with the most developed countries in the world but to actually surpass European heavyweights like Italy in GDP per capita.

As if all this was not enough, some maintain that Spain has one of the best healthcare systems in the world. “In less than 30 years, we have managed to build up a healthcare system which leaves little room for improvement in terms of universality, cost, and access, with a very high level of satisfaction”, boasts Jose Martinez Olmos, General Secretary of Health of Spain’s Ministry of Health (MOH). He adds that Spaniards “really value and respect our institution, in fact they consider it the second most respectable institution after the Crown”. Indeed, surveys suggest that 80% of Spaniards are satisfied with their healthcare system.

The pillars of this system, defined in the ‘General Health Law’ of 1986 are universal access and gratuity through public financing. Over the last several years, one of the main challenges has been to manage the decentralization of healthcare competences which have been transferred to the 17 Autonomous Communities which make up Spain. In this regard, one of Mr. Olmos’ main tasks during the first government of socialist President Jose Luis Rodriguez Zapatero between 2004 and 2008 was to implement cohesion among the different communities and the federal level, in order to reduce inequalities and ensure the same level of service and quality to Spaniards throughout the country.

A ‘Strategic Plan for Pharmaceutical Policy’ was promulgated in 2004 by the MOH with the main objective to rationalize the growth of public pharmaceutical spending. According to Mr. Olmos, the Plan was necessary because “before this measure was implemented we used to have an annual pharmaceutical expenditure growing at double digits. At that point in time there was a lack of criteria when prices were assigned, meaning that they were not linked to the real value of innovation”.

This governmental strategy resulted in the enactment of the “Law of Guarantees and Rational Use of Medicines and Sanitary Products” in December 2006. It stipulated, among other things, the application of a new Price Reference System (PRS) for those drugs already on the market and off patent, calculated according to the three least expensive equivalent products available in Spain. Likewise, those drugs with more than 10 years in Spain not facing generics competition, but already off patent in the European Union, underwent a 20% price reduction automatically. These price cuts which took effect starting in 2007 followed reductions in 2005 of 4.2% and 2% in 2006.

The numbers suggest that the new legislation has succeeded in its main objective which is to contain the government’s pharmaceutical spending. For the first time in years, the average price per prescription has decreased in Spain. Pharmaceutical expenditures increased only 5.54% in 2007, compared to 11-12% of previous years. Maria Teresa Pages Jimenez, Director of Pharmacy and Sanitary Products at the MOH, was one of the architects of the rationalization policy and does not hide her satisfaction with the results to date. “I am proud to say that the measures implemented have been a total success, in 4 years we have managed to increase the budget of our national healthcare system by an average of 5.22%, a growth that places us in line with other European countries”, she affirms.

In contrast to the authorities’ excitement on the effects of the 2006 Law and the Price Reference System, pharmaceutical companies consider them excessively tough on the industry and are vocal about the negative consequences they are having on their ability to grow. The slowdown in the industry is already evident when comparing the evolution of Spain’s nominal GDP over the last several years to the growth of pharmaceutical sector. While the economy as a whole grew 23% in nominal terms between 2004 and 2007, pharmaceutical turnover only saw a progression of 16%. Eurostat studies comparing pharmaceutical prices across Europe, show that Spain is at the lower end of the spectrum, coming in at 22nd among the EU 25 with price levels 23% below the average.

The price cuts are having a direct impact on the pharmaceutical companies’ bottom line, and many point out that their ability to continue investing in Spain is being negatively affected. This is no small matter considering the weight of the pharmaceutical industry in the country. The sector represents 1.5% of Spain’s GDP and employs approximately 40,000 people directly in 270 companies, and makes the biggest contribution to R&D with 18% (approximately 800 million euros) of all the industries’ investments in innovation.

According to Humbero Arnes, General Director of Farmaindustria (the association of innovative pharmaceutical companies in Spain), the main problem comes from the combined effects of the PRS and the low level of patent protection in the country. In Spain, there is a “grey zone” in terms of patents until 2012, stemming from safeguards requested by Spain when it joined the European Economic Community in 1986. The existence of this grey zone has allowed for generics of certain drugs to make an appearance on the Spanish market several years before other countries, a situation which MNCs are increasingly rebelling against by taking the generics players to local courts. “The aggressive price reduction under the new PRS is having such a negative impact on the innovative companies due to the fact that intellectual property protection is so weak in Spain”, says Arnes. He explains that “innovative companies have had to bring their prices down to the level of the cheapest generics, independently from their market share”.

Facing pressure from the combined effects of the price cuts and patent uncertainty, the innovative pharmaceutical companies are highlighting the important role they play in Spain’s R&D. Since the mid-nineties the pharmaceutical sector in Spain has been one of the main drivers of the private investments in R&D and innovation in the country. During the period 1995-2004, the sector saw an annual growth in R&D investments averaging 12.2%, well above the overall numbers for the Spanish industry. These figures have dramatically dropped since 2006, which saw a mere 3.6% increase in R&D spending, below the economy’s nominal GDP growth.

“There are actions that would allow the government to control expenditures without harming innovation, such as a better protecting patents and creating price reference systems that take into account the efforts and investment put into developing new drugs for patients”, states Arnes. Accounting for nearly 20% of the country’s investments in innovation, the pharmaceutical industry is a strategic player in the government’s aim towards increasing overall R&D expenditures to 2% of GDP in the coming years, as outlined in the ‘Plan Ingenio 2010’.

Indeed, the focus on innovation was one of the main novelties when Zapatero announced the composition of his new government after winning is re-election bid in April 2008. He created for the first time in Spain a Ministry of Science and Innovation, and named Cristina Garmendia – founder and hitherto president of local biotech company Genetrix – at the head. Needless to say, the innovative pharmaceutical and biotech companies were pleased with the news and are putting high hopes on the new Ministry to implement a policy which promotes and supports R&D efforts in Spain.

Though still lagging behind in terms of major investments in basic pharmaceutical R&D, Spain has been one of the most dynamic countries in terms of clinical trials for many of the world’s MNCs. Fernando Martin Delgado, Managing Director in Spain for the world’s leading CRO (Contract Research Organization) Quintiles, considers that the country remains attractive “thanks to the quality of the scientists, physicians and the hospital system. Spain has opinion makers in key areas such as oncology and CNS, and is also a major pharmaceutical market it itself, which is why it plays an important role in terms of clinical trials in Europe”.

Saying adiós

As Phillipa Rodriguez takes a look back at her two years at the head of AstraZeneca in Spain, the land of her ancestors, the nostalgia is palpable but also the satisfaction of a mission accomplished. Indeed, her management of the restructuring process in Spain in the midst of a challenging moment for the industry earned her the position of General Director of AstraZeneca in her home country, the United Kingdom, starting June 2008. “In Spain we have achieved a more performance-oriented culture, with a customer-centric mindset and clearer accountability at all levels”, says Rodriguez.

The restructuring process included employee reduction; a decision which Rodriguez admits is difficult to make understand, particularly in a context of positive growth for the company. AstraZeneca Spain has been performing very well when compared to subsidiaries in other developed countries, and was also one of the fastest growing MNCs in Spain in 2007. But according to Rodriguez, the restructuring was “ultimately necessary for AstraZeneca’s sustainability in the long term. We can never stop embracing external change and one has to decide whether to shape the future or be a victim of it”, she adds.

As she prepares to leave for a new challenge in the UK, Rodriguez warns about the main weakness in her view of Spain’s pharmaceutical sector: the patent issue. “We would like to see the commitment to R&D investments be recognized through better intellectual property protection, aligned to the TRIPS agreement. It is true that we have seen recent and positive court resolutions regarding patent protection, for example Lilly´s olanzapine case, but such decisions are not yet reflected in the Spanish authorities’ will to adapt legislation in this regard”, she says.

Despite the effects of early generics competition and the price cuts introduced by the new price reference system, Rodriguez remains optimistic about the possibilities of AstraZeneca’s future investments in R&D in Spain. “In Spain, AstraZeneca is already involved in 68 clinical trials in collaboration with over 570 centers and 3700 patients. We are hopeful that there will be new R&D investments in all phases of clinical trials, with increasing interest in basic research and translational science”.

MNCs: patent concern but still many bright spots

Janssen-Cilag is one of those rare MNCs which have been investing in Spain not only to be a player in the 7th largest pharmaceutical market in the world – 5th in Europe – but also to discover and develop new drugs. Since the start of its Spanish operations in 1985, Janssen-Cilag established a Basic Research Center in Toledo focused on drug discovery in CNS (depression, schizophrenia), one of only five such centers for Johnson & Johnson Pharmaceutical R&D worldwide. It is also one of the few basic research centers set up by MNCs in Spain, most of which limit their R&D activities to the development of clinical trials in the country. Janssen-Cilag also established a Clinical Research Center in Madrid, which is a part of the company’s Global Clinical Operations Group.

Spain’s differential in terms of intellectual property is of particular concern for Janssen-Cilag, as some of the company’s drugs in the country are facing generics competition several years before other European countries. Martin Selles, Managing Director for Janssen-Cilag Spain and Portugal, affirms that, “what we ask the authorities is simply to offer us the same level of protection as in the rest of Europe… This is a very crucial issue because it is becoming increasingly difficult to convince our HQ to continue betting on R&D in Spain if the local environment does not appropriately support innovation”.

“Janssen-Cilag Spain currently has more than 90 people devoted to R&D, which is a very significant part of our headcount”, boasts Selles. In total, Janssen-Cilag employs over 500 people in Spain, including a manufacturing centre in Alcalá de Henares dedicated to the production of some of Johnson & Johnson’s flagship OTC brands for all of Europe. From a commercial perspective, Janssen-Cilag has been one of the fastest growing international pharmaceutical companies in Spain. “The company has gone from being #45 in terms of sales with 40 million euros ten years ago to #7 currently with approximately 450 million euros. This has also meant going from having less than 1% market share to 3.5%”, highlights Selles. Despite this strong performance, fueled by the launch of innovative products, the last couple of years for Janssen-Cilag in Spain have seen more modest growth as the overall market slows down.

Also well aware of the harm the patent situation in Spain has on innovative companies, Schering Plough’s President and General Director Angel Fernández García is cautiously optimistic by recent rulings in Spanish courtrooms which have granted certain drugs protection from early generics competition. “Finally, our opinions and ideas are receiving the judges’ endorsement and the courts are recognizing our rights to intellectual property protection on the same level as in other countries”, Fernandez Garcia says. Though the government still falls short of implementing policies in the same direction, he sees some positive signs coming from the MOH.

Fernandez Garcia is living proof that fidelity can still exist between top executives and the pharmaceutical companies that employ them. Over thirty years have passed since joining Schering Plough in Spain, a career which began in the customer service department but eventually took him to management positions in countries such as the United States, Mexico, Argentina and Switzerland. Since 2004 he is back in his native country as President and General Director of Schering Plough Spain. In his own words, “Personally, I have been with the company since 1976 because it has continued providing me with professional opportunities and challenges”.

Schering Plough’s numbers in Spain paint a pretty nice picture in terms of sales. In 2007 Schering Plough grew at a rate between 10-11% according to IMS, several points higher than the market, thanks to the good performance of all its main lines: OTC, ambulatory and hospital products. According to Fernandez Garcia, “the key to this growth has been our commitment to innovation and the trust we have gained from our stakeholders in Spain. This is all the more remarkable considering the challenging environment the pharmaceutical industry has been dealing with”.

Schering Plough’s acquisition of biotech company Organon BioSciences, finalized in late 2007, is only likely to broaden the growth perspectives over the coming years. “Thanks to this strategic acquisition, Schering-Plough has one of the most impressive pipelines on the market, focusing on several key therapeutic areas such as cardiovascular, CNS, woman’s health, oncology, allergies and infectious diseases”, states Fernandez Garcia. According to the company’s estimations, based on IMS information, Schering-Plough will become one of the top 10 pharmaceutical players in Spain in 2008.

In terms of Schering Plough’s non-commercial activities in Spain, the company was moved up to the “Good” category in the 2007 Plan Profarma ranking, an initiative from the Ministry of Industry which rates pharmaceutical companies according to their local investments in R&D. “Although our company does not have any basic R&D facilities in Spain, we are very active in Phase II and Phase III clinical development of our drugs in the country. The main reason for this is Schering-Plough’s firm belief in the quality of Spanish researchers and in our subsidiary’s ability to absorb new investments which will go towards the development of products for the entire Group”, says Fernandez Garcia. He underlines, however, the need to improve the procedures for clinical trials implemented by Spain’s 17 different autonomous regions. “The different levels of government in Spain should realize that they are competing with many other countries for the allocation of R&D investments and simplify the approval procedures”.

When two heads are better than one…

Seeing a big pharmaceutical company such as Otsuka create a joint-managing directorship – in this case for Spain through Imma Barber and Manel Lopez – is quite a rare occurrence, just about as unusual as seeing a Japanese pharmaceutical company grow at double digits in Europe. The Spanish duo of Mrs. Barber and Mr. Lopez were named joint-managers in early 2008, and are firmly committed to continue with Spain’s outstanding performance which earned it “Best Otsuka Affilliate in Europe” award in 2005. It was a landmark year for Otsuka Spain, particularly thanks to the launch of the company’s star schizophrenia drug Abilify.

Since then, as Barber points out, Otsuka has been consolidating its leadership in its different development areas such as medical devices, in vivo diagnosis, and in pharmaceuticals with a new indication of Abilify for bipolar disorders. “Otsuka is also preparing launches in the cardiovascular field, a new focus area for the company towards the future”, states Barber.

Although Otsuka Spain was officially created only in 1998, its presence in the country dates back to 1979 when it acquired a local company. “This was a good starting point for the launch of Otsuka’s strategy in Spain”, says Lopez, since “Otsuka did not have to begin from scratch in the country, and could already count on production facilities, quality control, laboratories, and a sales force organized in specific areas”. This has helped Spain become a first-line country for Otsuka in Europe, spearheading the commercialization of a whole portfolio of products in the region. “We are actually responsible for developing the Southern European region for the company, including countries like Portugal, Greece and Italy”, he adds.

The intricate art of managing transformation

Leading an integration process is never an easy task, even less so when you come from the smaller of the two companies involved. This is precisely the mission Lide Verdugo was given as Managing Director of Nycomed Spain when the company acquired Altana Pharma AG in 2006. In Spain, Altana with 250 employees was much larger than Nycomed which had 50. Conscious of the tricky task laying ahead, Verdugo planned everything out meticulously. “I elaborated a very simple road map in order to be sharp and quick so that the business would not suffer in the process. Spain was actually one of the first countries in the Group to finalize the integration in all the logistic, administrative and commercial aspects”, she says.

The year 2007 was all the more challenging – or as she would say, interesting – for Verdugo and the new Nycomed Pharma Spain team since there were two important launches in the middle of the year to carry out successfully. “Perhaps the most satisfying part of the integration process is that we were able to deliver the sales and EBIT objectives in 2007. At the end, we jumped to a turnover of 160 million euros with over 80 million euros of EBIT. I am extremely proud of the team here which achieved extraordinary performance, even surpassing the plans”, Verdugo affirms.

On top of being one of Nycomed’s five most important markets, Spain also contributes to the Group through a young and energetic team, not afraid to challenge the traditional way of doing things. Led by the dynamic Verdugo, Nycomed Spain has become a reference point in terms of successful new launches. “In today’s pharmaceutical sector, it is very important to be creative and able to think outside of the box. You need to anticipate the changes and be quick to be the first in initiatives and seize opportunities… Drugs such as Tachosil and Preotact have achieved extraordinary performance in Spain thanks to creativity, and despite being one of the last countries to launch”, she states.

Although Verdugo recognizes the challenges with regard to patents and low prices in Spain, she is less preoccupied about them then most of her peers. “Despite all the imperfections of its system, Spain’s pharmaceutical sector is doing better than any of the other big countries in the European Union. And this is not only in volume, but also value. When I hear some of my colleagues from other companies complain, I remind them to look beyond the Pyrenees to see what is happening there”.

Nycomed Pharma Spain aspires to enter the top 20 ranking over the coming years – currently it is 23rd – based on its new products and pipeline, but also sees growth opportunities in the OTC segment and in further developing in and out licensing agreements with other companies. As for Verdugo, with a strong background and belief in research, another priority will remain to bring as many R&D projects to Spain as possible.

Another of Spain’s few but prominent women in top management positions in the pharmaceutical industry, Laura González-Molero, faced a challenge of her own in 2007 when she was in charge of building the new face of Merck in Spain, as it simultaneously integrated the biotech firm Serono and divested the generics business. “This transformation has been an incredible opportunity because it means a unique chance to be a part of the design and shaping of a new company. I feel very fortunate to have this experience, as it is not an opportunity that comes by often”, she affirms.

As head of Serono – previous to its acquisition by Merck – her Spanish team received that company’s “Best Affiliate” worldwide distinction in 2005. Not much later, and already in her role as Director of Merck, she was awarded the 2007 ‘Executive of the Year’ award by the Chamber of Commerce of Madrid, becoming the first woman ever to achieve this. “The key to turn any project into a success is to firmly believe it and to be fully committed. Of course, it is also necessary to put in a lot of hard work and effort, and to count on an equally motivated team” says Gonzalez-Molero, adding that throughout her professional career she has always tried to challenge the status quo, “in order to encourage innovation, because often people are very conservative and unwilling to take risks and make tough decisions. Avoiding risk is not a winning strategy; you have to be up to the challenge”.

Gonzalez-Molero is quick to highlight that Merck Spain’s performance in 2007 was very positive in terms of growth and higher that the Group’s overall rate. “Despite all the time and effort devoted to the restructuring, Merck Spain was able to reach the commercial and financial targets forecasted before the news of Serono’s integration and the divestment of the generics division. I am very proud of the team which was able to deliver results”, she states. As for Merck’s challenge for 2008, it is mainly to consolidate the company which has a new organization, culture and processes. “Merck’s ambition and my own are to be the best. This means continuously improving and leading the rest based on innovation, which is the cornerstone of the company”, adds Gonzalez-Molero.

Despite the recent relocation of the oncology preclinical research following Merck’s strategic decision to focus these activities in Boston and Darmstadt, which resulted in the company falling from “Excellent” to “Very Good” in the Plan Profarma ranking, Gonzalez-Molero highlights the importance of Spain in terms of clinical trials. “We participate in the majority of the Group’s clinical trials from the very early stages of R&D. Spain is recognized on a European level for the quality of its scientists and is a reference point in several pathologies. There is a clear view that Spanish hospitals can provide added value to our operations”, she says. Not least significant is Merck’s commitment to maintain a considerable manufacturing presence in Spain, at times when relocation of production is the norm in the industry.

Chapter 1

Australia: Innovation Down Under

At first glance, investors can be forgiven for overlooking Australia, a mature economy with a population accounting for just 0.3 percent of the world’s total spread out across a giant landmass. As the seventh least-densely populated country on Earth, it counts less than one third of Russia’s 8.6 inhabitants per square kilometre. Fortunately, at that point things start to look up. Sixty percent of Australia’s 21 million inhabitants are concentrated in state capitals of Sydney, Melbourne, Brisbane, Perth, and Adelaide — five large, modern cities with world class healthcare infrastructure and consumers. As for the standby measure of GDP per capita — already at just over $43,000 — Australia is projected to pass the US by the end of 2008, and overall GDP figures have nearly doubled in the past five years alone. This prosperity is largely due to the global commodities boom, providing a windfall to the world’s largest coal and iron ore exporter. However, Australia’s strength extends beyond the basics, and in the pharmaceutical sector especially, Australia’s oft-repeated claim of being a nation that “punches above its weight,” is borne out by the statistics.

The Australian pharmaceuticals industry counts over $17 billion in annual revenue, of which pharmaceutical and medicinal products are worth almost $7 billion. But far from being just a consumer market, the broader pharmaceutical industry employs over 30,000 people with 14,200 in the manufacturing sector, representing $4 billion in annual exports, and attracting significant investments of over three quarters of a billion dollars in R&D. A much-maligned “tyranny of distance” is blamed for impacts as diverse as manufacturing disinvestment to biotechnology undercapitalization, but being thousands of miles away from the West may tip the scales in Australia’s favour as world markets shift towards the Asia Pacific region. With the time zones of the East and the culture of the West, Australia’s position as the bridge between them will be increasingly appealing.

In terms of raw numbers, Australia’s advantageous positioning is clear. Its two most obvious jumping off points — the world’s up-and-coming pharmaceutical markets of India and China — are already major global API suppliers, and are slowly inching up the value chain. From 2008 until 2010, total pharma sales in China are set to double, from $14 billion to $28 billion. Over the same time period, Indian clinical trials market will explode to $1 billion from current $150 million, and contract manufacturing to $1 billion from $350 million.

In previous decades, Asian markets were set back by a lack of IP protection, infrastructure, and talent pool. But a rise in affluence, market liberalization, and foreign investments has meant the West is taking notice. Companies like Pfizer, Novartis, and AstraZeneca are investing hundreds of millions in R&D in China alone, spurred by the government’s increasing modernization in areas such as regulatory compliance. However, Australia must stand on its own if it wants to compete with those countries’ domestic markets, in addition to closer neighbors Singapore, Thailand, and South Korea, all of which are vying for a piece of the action.

Fortunately, Australia boasts world class medical research capabilities and infrastructure, strong and effective intellectual property laws, a streamlined approval system for clinical trials, and a highly skilled workforce — including six Nobel laureates in medicine, with the 2005 prize going to Drs. Barry Marshall and Robin Warren for their discovery of the bacteria responsible for stomach ulcers. But this cleverness extends beyond just lab work. In fact, Merck’s blockbuster Gardasil, the cervical cancer vaccine, originated with the scientist Ian Frazer — simultaneously awarding him Australian of the Year in 2006 for its discovery, and earning Merck Pharmaceutical Executive’s Brand of the Year distinction. This basic research excellence is a product of a country whose science “punches above its weight” in quantity and quality of research output. This fundamental strength is supported in the facts that human use pharma R&D accounts for almost 5 percent of total business expenditure R&D in Australia, as well as 14 percent of total manufacturing R&D. Continuing to exports — at $4 billion, and increasing 10 percent annually — the country seems to be excelling in all measures. However, in this latter measure, concentrated activity among a few major players leaves some vulnerability, recently brought to the fore with a recent plant closure announcement from Merck Sharpe & Dohme.

And industry insiders are quick to point out that the pharmaceutical sector is not all milk and honey. Medicines Australia is the national industry association for innovative pharmaceutical companies, and according to its Chief Executive Ian Chalmers, “the Australian pharmaceutical industry is at a crossroad. It is likely that the next few years will be critical in setting the future direction of the Australian industry for the next 20 years.”

Indeed, this crossroad was recognized in the most recent federal elections, with top cabinet positions newly dedicated to addressing the most pressing issues. If the cornerstone of Australia’s future will rely on innovation, Australia’s new Labor government headed by PM Kevin Rudd is certainly taking steps in the right direction, with new ministerial appointments inaugurating at least bureaucratic support. Most evident in this regard is the Ministry for Innovation, Industry, Science, and Research, which was created in December 2007 upon Labor’s election. Senator Kim Carr succinctly outlines the Ministry’s raison d’être: “The whole point of the department is to refocus public debate and re-establish an agenda around the issues of innovation.”

The Ministry’s goal is to push forward an integrated approach, having already created reviews to form public policy in areas as disparate as textiles, clothing, and footwear. The pharmaceutical sphere has seen the creation of the Pharmaceutical Industry Strategy Group (PISG), which according to Senator Carr is “concerned to ensure there is an effective response from industry working alongside government and the research sector to [address] the challenges currently confronting the pharmaceutical industry, which are similar to many other countries in the developed world.” These challenges are important to address, because as Senator Carr points out “the pharmaceutical sector is one of Australia’s most significant export industries, second only to the automotive industry in size of contribution,” and just ahead of wine, perhaps Australia’s most widely loved export.

Proximity to some of the world’s biggest manufacturing countries, and tax havens such as Singapore, is putting pressure on Australia to step up its dwindling industry support programs. Since the heyday of the late 1980s created an influx of manufacturing and R&D activity, support has diminished, and there is no clear sign of a reverse trend. A key role in encouraging investment in the country is Pharmaceutical Benefits Scheme (PBS), whose recent reforms have meant significant change for the industry, not least of which was a 25 percent price reduction — effective August 1, 2008 — on many of the country’s best-selling drugs, including simvastatin, naproxen, and diazepam.

Senator Carr is careful to delineate the scheme’s role in the marketplace: “The PBS is a critical part of the architecture of the Australian pharmaceutical industry. The scheme, however, has two functions. One is to provide medicines at the lowest possible cost to the Australian people, and to ensure that the Australian people get good value for money. The second function is to ensure that there are sustainable industry development processes operating, and although there may be tensions between these functions, the Australian government is highly mindful that there are two and not just one.”

The first function is the more worrisome to the pharmaceutical industry, which contends that low cost and high access do not go hand-in-hand. Still, Senator Carr recognizes that he’s not playing a zero-sum game. “We need to find mechanisms that encourage activities that are uncertain and risky, realizing that potential drugs identified through early R&D may never make it through, while remembering that there are risks but also enormous rewards and it’s a highly profitable industry,” says Carr.

Senator Carr also emphasizes that “Australia’s big strength is going to be in high-value, niche manufacturing,” as evidenced in companies like CSL, which partnered with Merck to deliver the HPV vaccine Gardasil; and IDT, which has flourished by being one of a handful of companies worldwide capable of handling the cytotoxic medicines used in chemotherapy. The country also boasts a specialization in Blow Fill Seal technology, which has recently become the FDA’s preferred aseptic processing standard. Present in AstraZeneca’s and GlaxoSmithKline’s manufacturing centers, the latter’s Boronia, Victoria, facility represents the company’s largest sterile facility worldwide.

Nicola Roxon, Minister for Health and Aging, is equally aware of striking the right chord between access and sustainability. She notes, “The Rudd Government views expenditure on pharmaceuticals as an investment in health, not simply a cost. We know that more than two thirds of PBS expenditure already relates to prevention and management of chronic disease. So, while we believe it is very important to ensure that the cost of the PBS remains sustainable into the future, we are very aware that this needs to be balanced with the need for an environment that encourages research and development of new medicines.”

Commenting on this balance, and the role she expects Australia’s future PBS to play, Minister Roxon says, “Recent reforms to the PBS are designed to put PBS expenditure onto a sustainable footing into the future. The Rudd Government will continue implementation of these reforms, and will closely monitor their impact to ensure that they do not have an adverse effect on consumers and/or the generic medicines sector.”

No pain, no gain?

Indeed, the generics sector is feeling the biggest hit from PBS reforms, whose multitude of changes aim to “recognise the importance of world class, life-enhancing drugs to patients,” according to the government. In doing so, effective August 1, 2007, the PBS was split into two formularies: F1, mainly for single brand medicines; and F2, mainly multiple-brand, generic medicines. Within this latter category are two further divisions: F2T, with most competition, experiences a 25 percent one-off price drop effective August 1, 2008; while F2A decreases at a more modest 2 percent per year for three years. Will Delaat, Chair of the Pharmaceutical Industry Council, the peak body of peak bodies Medicines Australia, Generic Medicines Industry of Australia (GMIA), and AusBiotech, explains the asymmetrical impact of the PBS reforms. “With the delinking that occurred between the F1 and F2 formularies, this provides long term benefit as new products introduced to the market are protected from price erosion over the length of patent life, which was formerly not the case, when there were formerly price linkages to out-of-patent products.” However, at the bottom line, he says, “We’ve taken some short term pain for long term gain in the innovative sector. Generics companies don’t necessarily agree, but from innovative companies’ perspective it’s short term pain for long term gain.”

Di Ford comes from the generics’ perspective. As Executive Director of the GMIA, an industry organization comprising the country’s biggest generic players Alphapharm, Apotex, Genepharm, Hospira, Sandoz, and Sigma, she is the voice of generic medicines, which account for approximately 30 percent of PBS in value terms. Ford says that, “unfortunately, unlike other comparable countries, there is no generic specific policy in Australia aimed at increasing usage of generic medicines.” Despite this lack of specificity, GMIA retains an ambitious goal: to increase generics’ market share from 30 percent to 50 percent. Without a clear government support policy, Ford will be relying on other mechanisms to achieve this objective. “As it has been shown in Europe in particular, one of the ways to increase generic usage is through public information campaigns. It is important that consumers understand that generics are safe, [high] quality, effective medicines, and that they can save money if they choose a generic as well as supporting the PBS.” And support the PBS they shall, as the government estimates $3 billion in savings over the next 10 years. Over this time, GMIA will play a central role, as Ford says the association is “pleased to be involved in the development of the generic awareness campaign which the National Prescribing Service is managing on behalf of the Department of Health and Aging.”

Alphapharm, Australia’s leading generics company — whose market share alone is twice as large as all its competitors combined — started in 1982, and now accounts for 20 percent of Australia’s prescriptions. John Montgomery, the company’s CEO, points to the PBS reform implementing a $1.50 pharmacist payout on each premium-free product dispensed as a step in the right direction. He says, “The good news is that pharmacists, for the first time, will have an incentive to dispense premium-free products, which for the most part are generics. We believe the 25 percent price cut is a very blunt instrument. But on the other hand, we now have the beginnings of a generics policy from government.”

Montgomery, himself a past head of the GMIA, also brings up the advertising campaign Ford refers to, which he believes will make consumers more aware of generics “and also to address some lingering issues around quality and sameness of generics versus branded drugs.” However, commenting on the Rudd government’s decision to reduce the program size to a more modest $5 million from an initial $20 million promise, he notes that “the industry is disappointed that, quite honestly, the government has reneged on a very important part of its commitment.”

Alphapharm has risen to pick up the slack in the form of its own commitment, a unique consumer strategy honed over the last seven years. “Alphapharm is the only company in the industry advertising our corporate name on TV radio and in print, and informing consumers about the benefits of generics,” Montgomery says. “Recently, we also started a major new campaign reinforcing the opportunity that now exists with the $1.50 pharmacy incentive to kick-start generic substitution.”

This generic substitution has seen an influx of smaller companies, from Pharmacare to Genepharm, with the latter’s recent acquisition of Indian firm Strides’ Australasian operations allowing it to gain scale and move up the rankings, chipping away at Alphapharm’s previously overwhelming 80 percent-plus market share. Although the Atlas of the Australian generics industry may be taking a substantial burden on its sizable shoulders, Montgomery seems unconcerned at the prospect of competition making significant inroads. “Having two-thirds of the market, it may look as if Alphapharm is an easy target,” he begins. “However, in the context of a market where there is a government policy on generics and an incentive to dispense generics, I would argue that it’s the smaller companies that are thinking about their reason for being. Alphapharm’s reason for being has always been to increase generic substitution, and now that the government realizes it has to do something from a financial incentive standpoint to increase generic substitution, we feel our long-held strategy is being validated by government policy. In this sense, the company certainly has a clear focus on increasing generic substitution, and is very much on the front foot.”

“The big question is how, or to what level, can we drive generic substitution?” Montgomery muses, before digging into the numbers to elucidate the corporate strategy. He continues: “About 55 percent of all prescriptions on the PBS are substitutable, yet only 33 percent are substituted. Alphapharm has 22 percent, and other companies have 11 percent, with the other 22 percent not yet being substituted. Alphapharm could significantly increase its size if it can penetrate that unsubstituted 22 percent. And this 22 percent is what we are really excited about. We’re focused on the 22 percent we don’t yet have.”

Despite Alphapharm’s focus on the up-and-coming piece of the pie, some are more than happy to sit back and chip away at the giant. Pharmacor is the newest entrant in a market where many may be more timid to try, given the shake-up and regulatory changes thinning margins all around. Explaining the rationale behind acquiring Pharmacare’s generics business some two months prior to the August 1 price reductions, Jean-Pierre Salama, Pharmacor’s CEO, explains, “Pharmacare Laboratories established Pharmacor approximately one year ago, and decided to divest the company two months ago, realizing that they preferred to stick to their core business of OTCs and nutritionals.” Salama, via his existing OTC specialist company Meditech, had for two years been undergoing registrations and filings with the TGA, and as a result, Salama says, “acquiring Pharmacor represented an opportunity to gain a valuable customer base and distribution network. It was perfect timing, and we sat down with the people from Pharmacare to negotiate a deal.”

Salama describes the company’s niche focus: “The strategy falls into two parts. Anyone looking to enter the Australian market would need a niche portfolio. Of our 16 filings, most fall into this category and are of the type that bigger companies such as Sigma or Alphapharm would disregard. Secondly, in the future Pharmacor’s niche of products ensure the big players won’t focus there. They won’t look at molecules with a market size of $5 million to $10 million per year, but rather at those with larger sales. Pharmacor’s bread and butter will be in the small niche products where it’s not worthwhile for the larger companies to focus.”

Salama highlights an important change having a ripple effect on the way pharmacies and companies interact. With product prices dropping below the government-subsidized price, pharmacies are free to price products as they wish; beforehand pharmacies were forced to maintain identical prices. Salama describes the impact as Pharmacor sees it: “Where there was no competition on the retail front, in terms of pricing, the retailers would discount generics and not follow the government-recommended prices. This now means that everyone has to keep close attention to their bottom line, and go for the most competitive offer. Previously, pharmacies and retailers were looking at the most convenient offer on the market, going with an Alphapharm which has a complete range, and sticking to them. Now, all pharmacies are being forced to play ball, and looking for more than just convenience. This will drive generics substitution, and that’s where the growth is for generics companies. The fact that the boat’s rocking now is perfect timing, and things are coming together well with reforms.”

Australian R&D and clinical trials: A viable hub in the Asian wheel?

Although generics are an important part of any pharmaceutical market, for Australia, the more innovative concerns are fueling growth and investment, and central to these is the National Health and Medical Research Council (NHMRC). Headed by Professor Warwick Anderson AM, the NHMRC is the Australian government’s principal funding body for health and medical research, investing over $600 million annually across a wide portfolio of funding vehicles. Professor Anderson says that since its establishment in 1936, “NHMRC has always been responsible for supporting the best peer-reviewed research applications. More recently, we have worked to ensure that NHMRC’s research support commitment does two things: fund the best research; and build the capacity to undertake health and medical research through some really innovative fellowship schemes.” These schemes, while admittedly not always with commercial interest at heart, or even in mind, contribute to Australian research capacity and create opportunities for spinoffs and eventual successes beyond initial predictions. In this regard, Professor Anderson notes, “For example, Professor Ian Frazer along with others in his team at the QueenslandUniversity are benefiting from NHMRC-funded support, including for some of his early groundbreaking work in the development of Gardasil, the cervical cancer vaccine.”

Although Gardasil is the best known success story, there are numerous examples of excellence. Professor Anderson boasts, “Just speaking to health and medical research, there is no question that Australian researchers are outstanding. In bibliometric analyses of our sector, 2 percent of Australian papers are found in the top 1 percent of papers worldwide. One would expect it to be the case that Australia, being ‘out of sight, out of mind’ in a sense, would not be as present there, but the fact that it’s so highly represented at this level is a recognition by the rest of the research community that the research produced in Australia is of outstanding quality.” Getting further niched in the areas of expertise, Professor Anderson points to a particular strength in public health research, representing 3 percent of the top 1 percent of the world’s literature and other areas like immunology, cell biology, and cardiology.

Less tangible than these hard numbers, however, are the tendencies underlying this output. Speculating on some of the less obvious success factors, Professor Anderson notes, “There is also something to be said for the Australian culture around collaboration.” Though this too is backed up by hard numbers: approximately 65 percent of published papers in Australia have an international component.

This collaborative spirit has extended to the private sector as well. Although Australia represents Sanofi-aventis’ second largest sales contributor in the Asia Pacific region, the company is not content to rest on its laurels, instead taking advantage of an attractive environment. Managing Director Jez Moulding puts it quite clearly: “Australia, with its science base and extensive knowledge in scientific affairs, is really a hub of excellence for the Asia Pacific region in terms of clinical trial activity.” As recently as 2007, Sanofi-aventis shored up its $34 million annual R&D commitment to bring further clinical research investments, totalling over 1,000 active research sites and 15,000 patients currently involved in the company’s trials.

From Big Pharma to Big Biotech, Australia is recognized across the board. Richard Davies, managing director of Amgen, says, “Looking at Australia’s history, as a country with 20 million people, research and development has punched above its weight statistically. Amgen reflects that [idea], with 10 percent of its clinical patients in total taken from Australia. That’s because Australian researchers have the skills to explore new chemical entities and biologics of the future. Amgen partners to help them invest in and understand new disease areas. Australia also has key positions in world thought leaders. In osteoporosis, for instance, there’s a disproportionate amount. There’s an imbalance between the country’s market potential and the potential to partner in other parts of the business.”

On the homegrown side of things, local companies are taking advantage of the fertile ground as well. Arana Therapeutics, a global player in the antibody and protein therapeutics sector, and one of Australia’s largest biotechnology companies, recently opened new facilities in Sydney, which will be dedicated to creating products and platforms for the treatment of inflammatory diseases and cancer. The facilities were opened by none other than Senator Kim Carr, who heralded Arana as “a model the whole industry can learn from.” Created in May 2007 by the mergers of Peptech and EvoGenix, Arana represents what CEO Dr. John Chiplin calls, “A combined entity which is poised to be a major player on the worldwide antibody stage,” and a company that has “genuinely built critical mass in this Australian merger to compete aggressively in the fastest growing sector of the international human therapeutic market.”

And the examples abound, from small to large. With three major sites in the country, Pfizer calls Australia home to one of only two Pfizer Biometrics centers around the world, making Sydney a global focus for clinical trial work. This centre’s $14 million investment, on top of the company’s $50 million-plus in annual commitments, provides services for clinical research undertaken by Pfizer in Australia, Asia, Africa and the Middle East. The feather in Australia’s cap was that the country location was chosen over Singapore and India — a small but notable contribution to reversing the offshoring of Australian researchers.

Eli Lilly invests $40 million annually, following the establishment of InterContinental Information Sciences (ICIS) unit for R&D in the region, one of the largest commercial trial management operations in the pharmaceutical industry. Novartis is yet another major contributor, with $30 million earmarked per year; and last but not least comes AstraZeneca, Australia’s largest private sector investor in medical R&D, with over a quarter of a billion dollars invested in the last decade alone.

CROs: Oil in the R&D engine

Although Big Pharma and its biotechnology counterparts may be known for driving R&D and innovation, oftentimes critical parts of the research value chain are outsourced. Contract Research Organizations (CROs) play an important and growing role in offering capacity to drug developers, with revenues of the nearly 1,100 providers in a fragmented global market estimated to grow from $14 billion in 2006 to $24 billion in 2010.

As sales growth outstrips research capacity, CROs have become an integral part of the R&D process, having evolved from basic preclinical services in data management or monitoring, to advanced packages covering the full spectrum of trials through commercialization and beyond, amazingly accounting for half the overall corporate R&D work force. And in biotechnology, a comparative lack of infrastructure to the Big Pharma brethren has accounted for an ever-growing drive to CROs, and along with it the positive side-effect of lower times-to-market.

As Australia’s oldest CRO, Datapharm has seen this trend develop over the past 21 years. Managing Director Helen Allars says it’s the company’s local knowledge of sites and expertise that is “attractive for overseas companies wanting to do or to extend their clinical trials in Australia. Where an American company wants to do a melanoma study in Australia, they’re better off using a local CRO like Datapharm, which knows a lot of the sites and the best way to go about doing trials. This local connection becomes an advantage in completing the work successfully.”

Pretium confirms the importance of a local advantage, especially in the company’s specialty of health economics. Munro Neville, Pretium’s director of Medical & Operations, and Joyce Lloyd, Pretium’s managing director, explain that “undoubtedly, successfully listing drugs on the PBS in Australia is becoming more difficult. The burden of proof and the height of the hurdles are becoming more challenging. The amount of data collection and work involved in preparing and presenting a convincing case to government is significantly more than it was even three years ago, and more so than in other countries, requiring a lot of customization of global approaches to funding.” Neville and Lloyd note the disadvantage of the cookie-cutter method employed by MNCs operating in Australia. “Most companies use what are called ‘global value dossiers,’ as part of an overall approach to seeking funding, but these are often of limited use in Australia. Much customization is necessary to satisfy the requirements of the PBAC (Pharmaceutical Benefits Advisory Committee), in addition to work by the local affiliates in educating the global headquarters about why they must deviate from accepted pathways.” The bottom line? Neville and Lloyd say, “This results in quite a complicated and involved process that can often be frustrating for the local affiliates, but provides an interesting opportunity for Pretium. For example, many global health economics models are not sufficiently robust to pass the highly in-depth and complicated evaluation process that the PBAC employs in its assessment of product value.”

Emeritus Professor Lloyd Sansom AO, the man behind this in-depth and complicated process, is the chair of the Pharmaceutical Benefits Advisory Committee (PBAC). He describes the organization as “a statutory committee of the Australian government which was first established in the 1940s, and which makes recommendations to the Minister of Health and Aging regarding medicines which should be considered for funding on the Pharmaceutical Benefit Scheme (PBS).” Recognized as a global opinion leader in health technology assessment and cost-effectiveness, they represent two complementary tools for evaluating government healthcare expenditures. Trying to bolster acceptance abroad, Sansom speaks of the importance of domestic buy-in. “There is a clear acceptance in the country that cost-effectiveness is the appropriate way to value medicines expenditure. It is my strong personal belief that the cost-effectiveness paradigm for subsidy consideration will become common in both developed and developing countries throughout in the world. Increasing demand, coupled with increasing cost, will direct and demand that governments and third party payers will look at value for money — they have to.” Professor Sansom looks outside Australia for an eye-opening comparison: “Simply examining the percentage of GDP spent on health in the USA, at almost 17 percent which compares to an Australian expenditure of approximately 9.8percent (and most European countries which vary from 8.5 percent to 10 to 11 percent), and comparing health outcomes and health access equity between countries strongly suggests that it is not necessarily how much you spend but the effectivenes

Chapter 1

Aberdeen: A Global Center Of Excellence For Oil & Gas

Over the last four decades, Aberdeen has experienced the ups and downs of the oil and gas industry first-hand and matured alongside the UK’s Continental Shelf (UKCS). After the early years in which foreign players dominated almost entirely the services market for the industry, a myriad of local companies slowly emerged and joined the international firms, consolidating a highly diversified and integrated supply chain concentrated in Aberdeen. Today, despite a widely unexpected revival of the ageing oil province thanks to the effects of sustained high oil prices, everyone in Aberdeen and the UK can’t help but wonder just how much longer it can maintain its position as a global centre of excellence for oil and gas, even as the UKCS moves well into a period of long-term decline.

Not that you would be likely to get any type of ‘decline’ sensation while driving down the Bentley-filled streets of the Granite City, checking out property prices or trying to get a table at one of the city’s many high-end restaurants. Indeed, in just one generation the oil and gas industry has catapulted a once economically stagnant region towards having one of the highest GDP (Gross Domestic Product) per capita in all of the UK, and an unemployment rate of less than 2%. If anything, the number one challenge for companies – from the supermajors to the small suppliers – is the lack of available skilled workforce in Aberdeen to keep up with demand deriving not only from the North Sea, but also from oil provinces around the world.

Still, numbers don’t lie and what is clear is that the main source of Aberdeen’s wealth and prosperity, the UKCS, is dwindling. After attaining a production peak of 4.7 million barrels of oil equivalent per day (boepd) in 1999, daily production in 2008 has averaged only about 2.7 million boepd, with most producing fields in their decline phase. How these figures are likely to evolve and exactly how much oil and gas can still be recovered from the UKCS is a matter for debate and the estimations vary. Professor Alex Kemp from Aberdeen University, one of the most prominent analysts on the issue, has elaborated models which indicate that between 2008 and 2035 total oil and gas output from the UKCS will amount to somewhere between 17 and 20 billion boe, depending on variables like price fluctuations and exploration activity.

Kemp’s calculations are slightly more conservative than the figure of 21 billion put forward by the government (with a potential upside of up to 30 billion) and the estimates of 25 billion used by the trade association Oil & Gas UK. However, unlike Kemp’s model, both the government and industry numbers consider production will go on beyond 2035. “We also consider that production is likely to still continue towards 2040, though at very small amounts”, says Kemp. Future projections aside, all agree that ultimately the continuity of production from the UKCS will depend on a combination of optimizing existing production, bringing on stream undeveloped fields, and continuing the exploration effort so as to add reserves.

Maturity has also meant that the average size of new discoveries has decreased considerably in the UKCS. Adding this to the fact that many of these discoveries tend to be geologically complex fields and far from existing infrastructure, it is no wonder that the average cost per barrel in the UKCS is notably higher than in other oil provinces. The high oil price environment of recent years has managed to encourage established players in the UKCS to continue investing in existing fields and rekindled the interest of new companies to enter the region, but many of the challenges facing the industry have yet to be tackled.

Keeping the window of opportunity open

It was only in 2007 that the main trade bodies in the UK representing the operators (oil companies), on one side, and the contractors, on the other, decided to come together and form Oil & Gas UK (OGUK) to jointly address the issues affecting the whole industry. Malcolm Webb, Oil & Gas UK’s Chief Executive, explains that “it had become clear that it would be of great interest for all parts of the value chain to have an association which could act as a single – though not exclusive – voice for the industry, particularly in order to raise our profile amongst the government and the general population”.

As the main spokesbody for the industry, OGUK represents the sector and interacts with policy-makers at different levels, from local governments to Brussels. OGUK has been proactive in engaging the British government, at a moment in which it is increasingly under pressure due to concerns about the cost and security of energy supplies. Webb maintains that there is a ‘window of opportunity’ to seize in the North Sea while the existing infrastructure is still operational, but there are many obstacles to overcome in order to ensure that the UKCS remains a dynamic producing region and continues contributing to the country’s energy supply and wealth.

“There is no magic switch that can change the production profile of the UKCS overnight. The only way to achieve this is through sustained capital investment, meaning billions of pounds if we are to recover the full 25 billion barrels of reserves estimated in the basin”, affirms Webb, adding that “to this end, the industry needs to have the right business climate: on one hand fiscal stability and predictability, which as not been the case in recent years. On the other hand, we need specific stimulus to capital investments in order to start seeing a more positive trend in a few years’ time”. For OGUK, the special incentives should focus particularly on promoting investment in marginal field opportunities, unlocking the reservoirs West of Shetlands, and encouraging enhanced oil recovery from existing operations.

Welcoming the new wave

As major oil companies tend to focus their resources and efforts on the big plays in regions like West Africa and the Caspian, new opportunities have been opening up for medium-sized operators in UKCS. These dynamic players have been arriving en masse over the last several years and setting up offices in Aberdeen, an encouraging sign for the city and the mature UKCS. In Prof. Kemp’s view, towards the future, “the UKCS is going to depend more and more on these types of players, so the government has been proactive in trying to attract them to continue coming and investing”.

One of the most notable entries to the UKCS was achieved by Texas-based Apache in 2003, when it acquired BP’s Forties Field – the largest field ever found in the UK North Sea, discovered in 1970 –, and has since managed to not only increase production, but also add new reserves to the ageing assets. Talisman Energy, an international oil company from Canada, is another one of the success stories regarding acquisitions and turnarounds of mature fields in the UKCS. As one of the pioneers of this trend, Talisman established a diversified UK portfolio, allowing it to become one of the biggest operators in the UKCS. Aberdeen-based Dana Petroleum and Venture Petroleum have built on their North Sea success to expand their E&P activities abroad.

An interesting aspect of the UKCS’ E&P landscape in recent years is the high number of Canadian companies investing and operating in the area. The Buzzard Field, the UKCS’ largest discovery in over a decade with over 500 million boe, was brought on stream by mid-tier Canadian operator Nexen in early 2007, following the company’s major asset acquisitions in the area in 2004. Fellow Petro-Canada also holds a significant non-operated interest in the Buzzard project. North Sea-focused Oilexco entered in 2002 and has since been one of the most prolific companies in terms of drilling in the UKCS. Yet another Canadian and UKCS-focused company, Ithaca Energy, entered in 2003 through participation in licensing rounds and has made considerable discoveries.

“Canadian oil and gas corporations are entrepreneurial in their outlook and willing to diversify overseas and internationally”, suggests Iain McKendrick, Chief Operations Officer (COO) of Ithaca, adding that in terms of the kind of reservoirs that they have been dealing with, “the North Sea is well suited for Canadian companies’ technical capabilities and risk profile”.

In 2008, Ithaca has been busy raising funds in order to finance its ambitious exploration, development and acquisition plans in the UKCS. The company’s Jacky and Athena discoveries are expected to come into production in late 2008 and 2009 respectively, while the Stella assets bought from Shell and Esso are slated to come on stream in 2010. Ithaca has also spent much of 2008 finalizing the details regarding the acquisition of Talisman’s Beatrice and Nigg facilities, in a transaction that will free Talisman of assets too small for its now larger scale, while giving Ithaca the opportunity to develop infrastructure for neighboring Jacky.

In McKendrick’s view, investors are putting their money into Ithaca for two main reasons. “The first is the quality of our portfolio, and the fact that we take high equity interest in all of our assets. Ithaca has interests of 90% on Jackie, 70% on Athena, 66% on Stella and 100% on Beatrice. The second is the quality of the people who work on our developments, some of which are recognized experts in their fields”, he says.

Ithaca does not rule out potentially making company acquisitions of its own in the future, after having rejected a non-binding offer made public by Endeavour. “The number of independent companies we see in the UKCS is unsustainable”, states McKendrick, adding that “within the current banking situation, many are going to find themselves high on ambition but short on cash.”

Though Petro-Canada is a much larger and internationalized (after the 2002 acquisition of Veba Oil & Gas’ upstream operations) player, The UKCS also represents a large chunk of the company’s overseas production, primarily through its interest in Buzzard, with the remainder coming from the company’s operated assets around Trinity and Scott. Petro-Canada inherited assets scattered over a large swath of territory in the UKCS, which, according to the company’s Northwest Europe Regional Manager, Jim Scrimgeour, required developing a ‘concentric growth approach’, based on core areas with infrastructure to which the other surrounding fields are tied back.

“The key example is the Triton core area, which receives the oil from the Western Extension, Clapham and Pict fields”, states Scrimgeour. “Pict illustrates how Petro-Canada is bringing to development fallow fields discovered almost two decades ago. These are all small fields of between 10 to 20 million barrels of oil, but we are able to make them highly profitable”, he adds, highlighting the company’s contract strategy that has allowed it to sanction first oil in 15 months in some cases, “which is exceptional”.

“The main challenge in the coming years will be to have access to acreage, and we hope that the government keeps delivering. There are licensing rounds coming up and fallow processes which could allow us to invest in exploration ideas developed by smaller companies”, states Scrimgeour, adding that “growth will probably be based more on exploration than on acquisitions, but they are not completely ruled out either”. All these dynamic Canadian players have had to share the headlines in 2008 with TAQA (Abu Dhabi National Energy Company), a fast-growing energy group based in Abu Dhabi, after acquiring six mature fields in the UKCS in July. TAQA had already set its foot in the UK initially when it acquired Talisman’s non-operating interests in the Brae assets in 2007, afterwards finalizing its ‘Big Bird’ transaction with Shell and ExxonMobil in 2008 for assets currently producing about 40 000 boepd and containing between 200 and 300 million boe in reserves, according to the company’s own numbers.

Peter Barker-Homek, CEO of TAQA worldwide, was recruited in 2006 shortly after an IPO, with the mission to turn a company essentially focused on the power generation business in the UAE into a global energy group. “They basically asked me what I would do if I had the opportunity to build a global energy company. I shared my vision with them, and they said go do it. Needless to say, it was a dream come true”, states Barker-Homek. In record time, he put together a small team to assess different opportunities around the world, and with $4.5 billion in their pockets went on to make acquisitions in Canada, Africa, Northern Europe and the Middle East.

According to Barker-Homek, the UK acquisition “is a defining moment for TAQA’s European business, creating an upstream player of a considerable size. We have gained not only a significant amount of reserves, but also the opportunity to grow them”, states Barker-Homek. “TAQA is dedicated to giving new life to mature assets, which the majors tend to keep in harvest mode. We are playing a key role in reinvigorating those assets in the North Sea, while at the same time helping fuel the prosperity of Aberdeen”. A brand new office building in the Westhill area will house TAQA’s growing staff, which is expected to reach between 400 and 600 people.

TAQA’s Managing Director for the UK, Leo Koot, explains that the company will continue to build around the existing assets as hubs, seek opportunities to acquire other mature assets, and look into the possibilities for corporate acquisitions in the area. “All of this will take us to the next level in which we will be aiming to double production”, states Koot.

Still a majors’ world after all

Major oil companies the likes of BP were the main architects of the huge developments that quickly turned the North Sea into one of the world’s main producing regions in the 1970s. Today, however, the big reservoirs and mega-projects which are material to a supermajor are located in oil provinces in Africa, South America and Asia, while most of the existing UKCS fields are in decline and the possibilities of major discoveries in the region are very slim. So, does this mean the end of the line of the supermajors in the UKCS?

Not so fast, says Roland Festor, Managing Director of Total E&P UK. “There is still a lot of potential in the UKCS, even for the major oil companies”, he affirms, adding that “it is not right to consider that the only dynamic companies are the independents. I can say that Total E&P UK, after 40 years, remains very dynamic; there is a great atmosphere and a desire to stop the decline and get production growing again”.

Although Total’s production in the UKCS is currently declining, recent discoveries are leading the company to believe that it is not only possible to stabilize production – 250 000 boepd, representing 10% of Total worldwide – but that it may actually rise again. “We have had incredible success in exploration, with our last five wells drilled turning into discoveries”, affirms Festor. Total’s achievements are illustrated by its enduring Alwyn development, which came on stream in 1987 with an initial production profile of 10 years yet is still on stream today in 2008 and looking forward to 20 more years of life.

Total is also set to play a key role in the development of the West of Shetlands, where it is operator of the two largest gas discoveries in the area, Laggan and Tormore. According to Festor, “we are looking to launch a new project there and hoping to move into the development phase in the near term. Our two discoveries are very close to each other and contain enough gas to build a stand-alone project; however, they are not big enough to support the construction of a large regional infrastructure development”.

Indeed, in order to begin developing the considerable amount of reserves sitting in the West of Shetlands to its full potential, brand new infrastructure will have to be built in the area. In order to work together to find infrastructure solutions for the West of Shetlands, government and industry have established a ‘West of Shetland Taskforce’. Along with Total, other companies with interests in the area such as BP, Chevron, ExxonMobil and Dong are part of the special taskforce.

For Rick Cohagan, President & Managing Director of Chevron Upstream Europe, the challenge of developing West of Shetlands is a prime example of why the supermajors are still crucial for the UKCS, as smaller players lack the financial strength to carry out large infrastructure projects. “Overall, the industry works very much like an ecosystem”, says Cohagan. “Every company has its place and role to play, each one making an important contribution to the big picture. In the end it is about finding a way to make all of this work for everybody’s benefit, and maximizing production from the UKCS”, he adds.

Chevron has recently contracted a new drill ship with Stena which is set to start drilling wells in the West of Shetlands in late 2008. Though Chevron’s involvement in this area is still in the early stages, and there are major economic and technical challenges to overcome, Cohagan is optimistic about the company’s strong lease position there. “The early indicators we have for our prospects in the West of Shetlands are promising, so we are excited to begin drilling and hopefully have the kind of success that could take us to further development in the coming years”.

In terms of existing production, Chevron Upstream Europe represents around 180 000 boepd, with the UK production accounting for 120 000. “The profiles of the fields vary, with some fairly large oil fields like Captain and Alba, which are in their mid-life phase, and gas developments like Britannia, co-operated with ConocoPhillips”, says Cohagan.

As for its presence in Aberdeen, not only has Chevron chosen the region as its headquarters for all European E&P operations (including the UK, Norway, Denmark, the Netherlands, the Faeroes Islands and Greenland), but it also established a new Technology Center in 2006. The center, currently employing around 60 people, carries out research, provides technology services for European operations and supports global operations.

ConocoPhillips’ UK Managing Director Archie Kennedy shares his peers’ view that there are still good opportunities for the supermajors in the UKCS and that they have a key role to play in the future of the basin. “ConocoPhillips has been one of the most active investors in recent years in the UKCS”, he says, adding that “we have reinvented ourselves several times over the many years of operations in the country. Our portfolio has evolved; we have changed our competencies, developed new technologies and a huge skills base to reflect our current scope of business in the area”. The UK is currently one of ConocoPhillip’s largest business units outside its core area, North America. “The general focus is to attempt to hold the UK’s production roughly flat, which is quite a challenging thing to do in a mature basin. In order to achieve this, we have to grow the base business every year just to keep our production at the same level. This requires considerable investment plus the need for continued success in drilling. We have to ensure that the UK is an attractive place to do business and that our projects remain competitive,” Kennedy says.

Made in China, to Western standards

Yantai, China, October 15, 2009 – In green technology, China’s former western rivals are turning into partners, reports GreenTechFocus.com. This trend is understandable. In its quest to lead, rather than be led, in the green technology industry, China needs the help of foreign entrepreneurial savvy. Ensuring quality is indeed crucial for ensuring the commercial success of Chinese green technology products.

As an example, Converteam, a worldwide specialist in power conversion engineering, has committed to bringing western quality standards to the Chinese market. With the recent inauguration of its latest rotating machines factory in Yantai, Shandong Province, China, Converteam is hoping to offer China not just a unique product, but also make a long-lasting contribution to the industry as the country strives to become a global leader. “We will manufacture medium-voltage motors and generators, a fixed-speed range of motors and generators for the wind business that are not produced in our other facilities. Moreover, as all key manufacturing processes will be handled in-house, we will provide the Chinese market with machines made to the latest Western quality standards,” said Jacques Bigot, Managing Director of the Yantai plant.

The Yantai rotating machines factory plant has been opened just one year after launching a greenfield project. The company also runs a medium-voltage drives manufacturing plant in Shanghai and a joint venture in Wuhan. This latest addition to Converteam´s Chinese mix also consolidates the company’s geographical expansion. The firm already owns three electrical machines facilities in France, in the UK and in the USA as part of a global comprehensive strategy based on providing its customers with local offering and lowering costs, without compromising standards.

“The opening of the Yantai factory is a milestone in the development of Converteam in Asia, a key area for our activities. In addition to being crucial for Converteam expansion and strengthening our leading position in the electrical machines field, this new facility will help us better serve our customers not only in the South East Asia region but also worldwide,” says Pierre Bastid, Converteam President & CEO.

About Converteam

Converteam Group is a world leader in power conversion engineering. Building on over a century of experience, it is placed at the leading edge of technology and innovation with a global reputation for excellence in the conversion of electrical energy. Converteam develops and provides solutions built around three core components: rotating machines, drives and process automation. Serving specialized sectors as well as its core markets in Marine Offshore, Oil & Gas and Offshore, Energy and Industry, its 5,300 staff members provide power conversion solutions worldwide. At year-end 2008, Converteam sales totaled €1,099,000,000.

SOURCE: FOCUS COMMUNICATION

GreenTechFocus.com is a proprietary B2B green technology website powered by Focus Communication, the B2B communications group specialized in government and strategic industries. With offices in Beijing and Paris, Focus Communication is a pioneer in launching integrated marketing communications programs to promote Western strategic sectors in the Chinese market.

Chinese investors continue to pour into Germany’s ´Little China´

Munich, Germany – 15 October 2009: Would Bavaria be Germany’s Chinatown? As specialist green technology website GreenTechFocus.com investigates, Chinese investors have continued to privilege the German state as even during the present recession.

In the first half of 2009, as many as eight investment projects were brought to successful conclusion by Chinese companies in Bavaria, in stark contrast to news of investment halts and company closures across Europe’s leading manufacturing powerhouse. Boasting a thriving 10-thousand-strong Chinese community that manages over 100 branches of Chinese companies in the area, “Bavaria scores well among Chinese companies in particular because of its central location as the gateway to Central, Eastern and South-eastern Europe. But its closeness to major customers, the two international airports at Munich and Nuremberg and the nearby Chinese community are also deciding factors for our Chinese friends when it comes to setting up a new business in Bavaria”, explains Bavaria’s Minister of Economic Affairs, Martin Zeil.

Germany’s leading green technology industry provides a special draw. The booming renewable sector has benefited most with investments by solar energy house Topray Solar, which launched its European headquarters in Munich a few days ago. Based in Shenzhen, Topray is the only company in China that has the ability to produce amorphous silicon solar cell with 50 MW capacity, and mono-crystalline & poly-crystalline solar cell with 30 MW capacity. For the layman, Topray manufactures solar cells, panels and chargers, solar light, gardening products and power systems; Full solar cycle.

Topray´s choice is indicative of Bavaria’s photovoltaic market dynamism, counting roughly half of all the photovoltaic-generated electricity in Germany. Other re-known manufacturers of solar-use silicon and photovoltaic cells based or headquartered in Bavaria are Applied Materials GmbH & Co. KG, Alzenau; AVANCIS GmbH & Co. KG, Munich; CENTROSOLAR Group AG, Munich; Konarka Technologies GmbH, Nuremberg; Schott Solar GmbH, Alzenau and Pu etc.

The People’s Republic of China is by far Bavaria’s biggest trading partner in Asia. Last year, the volume of trade came to euro 19.6 billion. Bavaria’s exports totalled euro 7.5 billion, and its imports euro 12.1 billion. It is already 22 years since the partnership was launched between Bavaria and the Chinese Province of Shandong.

Bavaria has a representative office in Shandong to lend a helping hand to Chinese newcomers willing to set up facilities in Bavaria. “Invest in Bavaria, the central contact agency for foreign investors in the Bavarian Ministry of Economic Affairs, provide comprehensive, competent and free support and assistance for Chinese firms interested in coming to Bavaria”, explained Zeil.

SOURCE: FOCUS COMMUNICATION

Offshore wind power conference calls on EU to speed up pan-European electricity grids

Stockholm - 15 October 2009 – As Europe’s major wind event this year, the European Offshore Wind 2009 conference and exhibition (EOW09) gives a taste of what is to come in China as the country prepares for “China Wind 2009” in October 21-23. As official media partner of both EOW09 and “China Wind 2009,” specialist green technology website GreenTechFocus.com predicts that the increasing scale of green technology events in Europe is, indeed, a sign of what China will be seeing in coming years.

EOW09, which took place in Stockholm between September 14-16, was closely followed by international participants, especially the Chinese. More than 140 wind power players have called on European Union (EU) decision makers and national governments to speed up the development of Europe-wide electricity grids to help develop the offshore wind energy sector. They signed a declaration during the latest urging the EU to put the right policies in place to stimulate investment and construction as offshore wind needs expanded grids to continue contributing to the energy mix, and flourishing as a business. The European Wind Energy Association (EWEA) presented the EU and governments with a 20-year offshore grid development plan to build on the 11 grids already in place and the 21 currently under study. EWEA proposes eight additional offshore grids by 2020 and six more by 2030.

The EOW09 conference, organised by EWEA, doubled in size from its previous edition in 2007 signalling the impetus and commitment of the wind energy sector. The EWEA has a target of reaching 230 GW of installed wind energy capacity in Europe by 2020, building on the 64,949 MW which were already in place by the end of 2008. This target is evidence of the industry’s confidence and the growing recognition of the benefits wind power can offer European citizens. Last year, Europe’s wind energy avoided the emission of 108 million tonnes of CO2 – equal to 31% of the EU-15’s Kyoto obligations and the equivalent of taking more than 50 million cars off the roads.

Wind is the first choice when it comes to new power installations, and the sector has cause to celebrate events such as EWEC. Over 4,800 participants saw more than 270 exhibitors from across the industry in Stockholm, and some 500 presentations covering all aspects of offshore wind.

The next wind industry forum is set to check into Warsaw, Poland next year. The European Wind Energy Conference and Exhibition (EWEC2010), will be even larger than EOW09 with over 7,000 key players in the wind industry expected to attend, and will take place from 20-23 April 2010. EWEA chose Poland as next year's destination since it is fast becoming one of the most promising wind energy markets in Europe – Poland currently has a total installed capacity of 451 MW and the sector provides some 1,200 jobs. The amount of electricity generated is expected to reach 2,000 MW by 2010 rising to 12,000 MW by 2020 – a level which is expected to meet around 12% of Poland’s energy demands, according to the Polish Wind Energy Association. Waldemar Pawlak, Polish deputy prime minister, said he hopes EWEC2010 will be a “catalyst for the dynamic development of this sector.”

SOURCE: FOCUS COMMUNICATION

China Wind Power 2009, in the eye of the storm

Beijing, China October 15, 2009 – “China Wind Power 2009,” to be held 21 - 23 October 2009 in Beijing, is expected to blow change across the world. Official media partner GreenTechFocus.com, the specialist website dedicated to green technology, will cover the event.

During the height of the global economic crisis, it looked as if renewable energy and wind power in particular were facing a perfect storm of adverse conditions. The combination of tight credit arrangements, a challenging macroeconomic environment and a sharp drop in electricity consumption threatened to cause lasting damage to an industry that had looked on the verge of making real advances. Thanks to the lowering cost of materials and low interest rates, the wind power industry emerged undeterred by the surrounding chaos, just in time for Asia’s most important wind industry event of the year.

“China Wind Power 2009,” has redoubled importance, as it will precede the UN Climate Change conference (COP15) next December in Copenhagen. The COP 15 should seal at the very least Europe’s determination to become a low-carbon economy, foreboding good times for renewable energy companies. Increased focus on climate changes is, no doubt, nourishing the sector, as evidenced by China’s government decision to give priority to reduction emission measures in its RMB4 trillion stimulus package, reports www.GreenTechfocus.com.

Already, wind power is the most rapidly growing energy source in the world. China, in particular, has vowed to reach an installation of 30 billion kW in 2020, from its current 4 billion kW, to secure continued economic growth. “The construction of wind power facilities is booming in China, and the installed capacity is increasing at a dramatic rate. This exciting growth creates enthusiasm and investment for the wind power market like never before,” says He Dexin President of the Chinese Wind Energy Association (CWEA).

Such huge needs have attracted the attention of the world’s leading players as well as a cohort of suppliers and sub-suppliers who are queuing up to participate in the three-day ´China Wind Power´ forum - at the International Exhibition Center - to make sure that business keeps growing for all. As the follow up event to Windpower Shanghai 2007 and Global WindPower 2008, China Wind Power is the only Chinese trade fair supported by leading local and foreign industry associations.

One of them, the Global Wind Energy Council believes that China is on its way to overtake Germany and Spain to reach second place in terms of total wind power capacity in 2010, as the Chinese manufacturing industry becomes increasingly mature. “For the Chinese manufacturers, 99% of their focus now is on the home market, but in the coming 5 years they will certainly be exporting overseas,” GWEC Secretary General, Steve Sawyer, predicts.

SOURCE: FOCUS COMMUNICATION

Not a one-way street from Beijing to Copenhagen

Beijing, China October 15, 2009 – In the exploding wind energy sector, special green technology website GreenTechFocus.com reports that China and Europe are requiring an increasingly reciprocal relationship, trading high tech for market share.

Market stakes are high. At the upcoming China Wind 2009 event in Oct 21-23, the Danish industry will be in Beijing in force to defend its title as the world’s wind power champion, marshalling the country’s players together in its ´Danish Pavilion´. Denmark is widely considered the world’s Wind Power Hub, expected to supply 30 percent of the country’s electricity consumption before 2012.

Other players are, however, on the footsteps of Denmark’s remarkable annual growth in turnover of 26%. In China, for instance, the boom in wind energy has prompted a downright explosion of competitors to the established wind turbine manufacturers. In just two years, 79 new local companies have been registered and are competing with the major established western manufacturers, reports GreenTechfocus.com

One of the many Danish companies eager on new Chinese opportunities is WIND CLUSTER, which presents itself as a handy “One-stop-shop” of the industry, assisting small and medium-sized enterprises with electronic and electromechanical products and services. But WIND CLUSTER has been positioning itself well ahead of competition. Having set up offices and a warehouse in the Beijing area, it is going global, while others still ponder the pros and cons of international expansion.

There is consensus that from now own low emissions are to become the mainstay of economic development, and that wind power will be the most direct beneficiary of this phenomenon. After years of playing catch-up with the West, China is hoping to finally become the driving force shaping the industry’s future. If the winds continue to be favorable, China and Europe may turn their blades in unison sooner rather than later.

SOURCE: FOCUS COMMUNICATION

Chapter 1

Mexico: A Look Into The Word's Ninth Largest Market

The ninth largest pharmaceutical market in the World

Mexico, which has over a hundred million inhabitants, has become the world’s ninth biggest pharmaceutical market and the largest in Latin America, surpassing Brazil for the first time in its history. The sector already represents 1.18% of the national GDP, generating US$9,244 million (source Canifarma). The private sector market is valued at US$7,394 million, and the governmental market, through social security, is estimated at US$1,850 million.

After years of protectionism during the 80’s, the Mexican market has gradually opened up and liberalized. Unlike in Brazil and Argentina, national laboratories have lost ground to the multinational companies that have now become the country’s largest manufacturers, with Pfizer and Roche leading the way. The country’s manufacturing infrastructure has also become one of the most modern in the world, with many factories FDA approved. Growth potential remains high with a large chunk of the population yet not integrated, increasing life expectancy resulting in the apparition of ‘developed countries’ pathologies alongside those traditionally found in developing economies, the introduction of modern medical practices and potential for exports.

Nevertheless there is increasing concern about the future, as growth in recent years has mainly been fuelled by price hikes rather than by increases in unit sales. And the model seems to be reaching its limits, for although Mexico’s macro economics have improved, the purchasing power of many Mexicans has decreased, which will directly affect the industry as for many Mexicans, medicines are “out of the pocket” expenditures that they cannot afford. In fact the Secretary of Health indicates that 20% of Mexicans postpone or renounce healthcare because of their inability to afford it.

Financing healthcare protection has become a nail biting issue for the Mexican government with an estimated 58 million Mexicans who simply have no social healthcare cover. Historically Mexico’s healthcare system has been composed of two programs: the Imss for employees of the private sector and the Isste in the public sector. A third program, the “Seguro Popular de Salud”, was launched on a national level in January 2004 to solve this issue. According to Dr. Julio Frenk Mora, Secretary of Health, this program aims to “offer financial protection to the 20% poorest Mexican families not included in any other health program.”

The program will be funded on a tripartite basis, including the federal government, the regional governments, and the beneficiaries. The Seguro Popular de Salud, hopes Dr. Frenk, will lead to “the formalization of those living in the informal economy as they have to register and pay a fee to get the health benefits, which is a step towards their integration into the formal economy.” He hopes that 14.3% of the uncovered population will be integrated annually into the Seguro Popular program. At that rate, the whole Mexican population should benefit from a healthcare program by 2010.

Jorge Lanzagorta, general manager of Canifarma[1] which brings together almost 95% of the industry’s players, sees a growth opportunity if the Government succeeds in funding the Seguro Popular: “since the objective is to reach full coverage of the population, this should result in an important market expansion in order to fulfil the new demand,” he says. To Mr. Lanzagorta another source of growth could come from Mexico’s export potential: “Another important element is the increase in exports,” he says, adding “we are observing an increase in exports of pharmaceutical products not only to our traditional markets but also to new ones.”

The Mexican pharmaceutical industry is becoming proactive so as to become one of the top quality markets reaching OECD’s standards. This should allow Mexican products to become recognized worldwide and increase their capacity to be exported to foreign countries. Nevertheless, many improvements still have to be taken care of, and health institutions are working on it. Mr. Lanzagorta points out that the development of proper regulations are at the heart of such a development, “if we achieve the harmonisation of health issues, the market should become more open and we should increase our exports,” he says, and concludes, “credibility is one of our biggest challenges, and you can only achieve that by developing regulations of world class standards.”

Eric Hagsater, president of Canifarma and of Grupo Chinoin adds “the current challenges for the industry are the agreement of a common agenda with the government as to how to develop the industry’s future, the resolution of the problems with the Free Trade Agreement and being able to discuss issues on an equal footing with US, Canadian and European health authorities.” He concludes “we need a strong regulatory authority such as Cofepris[2] that can speak on the same terms to the FDA, the Canadian and the European authorities and of course to the Latin American ones.”

Cofrepris, a newly created Federal Commission in charge of sanitary risk protection, amongst other things, is at the heart of the regulatory process. Cofepris is the highest Mexican authority in terms of production, transformation, distribution, commercialization and advertisement for health related products and services, and acts as an independent body. For Enriquez Rubio, general manager of Cofepris, the agency faces various challenges, amongst them are the establishment of a system of authorized suppliers between Mexico and the USA and Canada, to be granted recognition of mutual trust and ease the relationships between the countries, or the development of electronic transactions within the pharmaceutical industry.

But Cofepris’ largest challenge is to introduce the ‘product registry’, as in Mexico registration is granted indefinitely, resulting in the presence of outdated products on the market, which, as Mr. Rubio points out, “often don’t comply with the existing legislation”. This paradoxical situation reaches its peak, when the government, through the cost conscious social security system often buys these cheaper ‘illegal’ products.

Product registrations should be limited to five years and renewable only under strict conditions such as process control, certified supplier, bio equivalence and bio availability studies which guarantee that the formulation was not changed, absence of reports on damaging side effects of the drug etc... According to Mr. Rubio, “a direct and immediate consequence of this change will be the reduction of the number of registered medicines from 40,000 to 7,000”, “improving the overall quality of registered medicines.”

According to Mr. Rubio this should help “in the short and medium term, to clarify Mexico’s pharmaceutical market, and guarantee the improvement of the effectiveness of products available on the market.” Mr. Rubio also points out the necessity to simplify the legislation: “we are currently working with over 3200 law articles, which is hardly manageable, so we are working on a reform which would simplify the regulation by at least 70%, to make it more accurate and transparent,” he says. This change in the Mexican legislation is seen by many as a major improvement.

No doubt many in the industry will welcome those changes, although many consider that, in Mexico, enforcement of regulations is often more problematic than the lack or quality of regulation. For example, Mexico has by far one of the most modern IP and patent protection legislations in Latin America. As a result international innovators have invested heavily and prospered in Mexico.

On the other hand the lack of enforcement has resulted in a very confusing situation with generic medicines, and so far, withheld the real development of this market. As a result, drugs that have no proven efficiency track records, nor passed bio availability and bio equivalence studies, are available to the public and sold under the term of generic. In 1997 a law stipulating that only drugs that passed strict tests, could receive registration, and would be labelled GI for Generic Intercambiable (inter exchangeable) was voted. But as of today the law was never enforced, although its implementation decree is in the process of being voted on this year.

Another field of disappointment in Mexico is absence of fundamental research expenditure in a country that could boast comparative advantages in this field. The creation of the Ingemen[3] in 2004 could help change this situation, and the country’s biodiversity could also become a serious asset for companies wishing to invest in biotechnology, if Mexican authorities decide to support the activity.

First Institute of Genomic Medicines opens up in Latin America

As EU and US regulations become more and more stringent, Mexico could boasts growing advantages in order to attract clinical research. “Mexico is also very attractive for companies wanting to develop clinical research centres because international companies can find the large numbers of patients they need in order to invest” , explains Victor Manuel Miguélez, president of Amiif[4] and general manager of Roche Synthex Mexico. “In the areas of oncology, AIDS, transplants and many more, we already have world class research centres and highly trained doctors,” he adds. This trend should strengthen as every year more new medicines are being launched in the country with the development of the pathology linked to ageing populations and adapted to chronic and degenerative diseases (hypertension, diabetes, heart conditions…).

On the other hand, despite the presence of innovative companies in Mexico, the share of resources dedicated to basic research is fierce. “There is still too little basic research in comparison to the potential of the country”, laments Mr. Miguélez who blames the incapacity of the universities to collaborate with corporations: “I believe that we could also develop basic research centres, on the condition that our universities cooperate more with the industry. They have to see how universities in the US and Europe work and fight for grants. We need to have small groups of people working in specialized areas and getting their networks working between companies and with other institutions and other universities”, he says.

The country being so close to the USA where many have their research infrastructures makes it even less probable that these will transfer this activity to Mexico. Hence, so far, only a handful of national companies are involved in basic research activities. For Mexican companies, most research opportunities are within niche products: Laboratorios Silanes one of Mexico’s oldest and largest is specialized in fabotherapic (anti-venom) vaccine products. Other companies involved in basic research are Aplicaciones Farmaceuticas in gynaecology or Probiomed which specializes in the recombined DNA protein. Another laboratory, Lemery, part of the Sicor Group which was recently acquired by Teva (Isr.), is about to launch a 100% Mexican developed molecule for which it spent six years doing basic investigation which proved its effectiveness in the treatment of cervix cancer.

But another pitfall hampering the development of basic research is the lack of attraction to the sector of human resources according to Jaime Uribe de la Mora, General Manager of Probiomed: “although we are much closer to the USA, for each Mexican doing a Master or PhD in the USA, there are fifty Indians,” he laments. He further denounces the lack of national investment in human resources and highly qualified education. In fact there is no pharmacist university program in Mexico.

Nevertheless a major event in 2004 might mark a stepping stone in the area of research in Mexico with the creation of Inmegen[5]. “After the discovery of the human genome; our work at the Inmegen is to identify the genes involved in diseases and to understand their molecular mechanisms. The next step is to use this information either to prevent or cure diseases. This is where pharmaceutical companies fit in so well,” explains Dr. Gerardo Jiménez Sánchez, general manager of the Inmegen. He reckons it will take ten to fifteen years before genomic medicine becomes part of routine medical practices.

Genomic medical research could have a tremendous economic impact for developing countries, not only preventing diseases and improving the global health of work forces still affected by common diseases, but also saving costs from diagnosis all the way down to treatment. This initiative is supported by the World Health Organisation as a step to improve the health through medicine customization making them more efficient. “Apart of all the health improvement potential that can come from this research, the project will permit the development of the infrastructure and of a business incubator within the institute that will allow us to commercialise knowledge produced from our own research and interact with the industry,” hopes Dr. Guillermo Soberón, the president of the advisory committee of Ingemen. And concludes: “once a country has the knowdledge and the infrastructure regarding Genomic Medicine it will allow it to develop new businesses around it. The last step is that it will create wealth.” –For more information log on www.inmegen.org.mx

The Long Road to Generics

In Mexico, lack of law enforcement has left a cloudy situation with regards to generics. The term “generic” still means anything different from an original brand regardless of any scientific proofs of efficiency. As early as 1997, Mexico was the first Latin American country to pass a law in order to stimulate and regulate the development of quality and efficient generics, qualified as Genericos Intercambiables or GIs (for Inter Exchangeable Generic). The law was very clear in its definition: GIs are efficient products that contain the exact same amount and form of active medication as the brand ones. This needs to be demonstrated, through clinical tests and protocols, called bioequivalence, to prove the product works as well as the original and can be switched from one GI to another within a treatment.

But because of lack enforcement and of customer education and because other products boasting the name generics often offer up to a 75% discount over a GI, in a cost driven market, many patients turned to these low price medicines. This creates unfair competition, which has greatly hampered the development of the GIs and despite Mexico’s early regulation, the share of GIs in the pharmaceutical market only just reaches 2.5% which does not compare with that of countries like Brazil where they already account for more than 12% and even less to those of other OECD countries such as the USA where they account for 40% of the market.

Mauro Lara Verde, general manager of Lemery and president of Anafam[6] an association representing mainly GI manufacturers, strongly condemns this situation: “The weakness of the GIs in Mexico is a scandal. It is unbelievable that in this market the government has not yet made a stronger stand towards these products, which offer an affordable, effective and safe solution. Everybody has a right to health care in the Mexican Constitution” he claims. He hopes that the General Law for Health will further enforce the use of GI medicines, increasing its future share in the public market. At the time of this report the law had already been approved by the Federal Chamber of Deputies and was being studied by the Senate.

The costs of shifting to GIs can be high and may partially explain the reluctance of some laboratories to get involved in this trend, as Mr. Lara points out: “The costs incurred by small national laboratories, a hundred thousand dollars for each test, as well as the updating of existing manufacturing equipment, delay their will to get GI approved”, he says. Nevertheless, Socorro España, general manager of Anafam hopes that the implementation of the Seguro Popular will benefit the further development of GIs: “Without a doubt GIs will be a decisive support for the Seguro Popular by providing medical attention and cheap quality medicines to the non-covered population”, she says.

Nevertheless some national companies have chosen this trail. Laboratorios Kendrick is one of them. In 1997 it decided to switch all its production to GIs. Fernando Lombardo, the company’s president remembers that the investment was important for a middle size laboratory: “It surely had a big impact, because it involved a lot of investment. Each study costs between US$60,000 and US$120,000 dollars. We rely on government funds to finance these projects, but we still fund a big part ourselves,” he says.

In order to avoid unfair competition from so called generics which do not comply with the law, Laboratorios Kendrick’s strategy was to select about 20 products it believed still had value for the future, being “highly sensitive and expensive products, which provide an economic option to expensive high tech and often lifetime medical treatments”, explains Mr. Lombardo.

NO PAIN NO GAIN: the growth in pain relief

Understanding pain is still in its infancy in many countries including Mexico. In many cases appropriate medications are available, but doctors do not know how to handle them. A standard medication for moderate pain like Tramadol for instance is used 30 times more frequently in Western Europe on a per capita basis than in Mexico. The ratio is even more disparate for substances like Morphine. The reasons are diverse including economic, social and religious issues, but the result is that many patients suffer needlessly.

Hence, the need for educating both physicians and patients about this issue is critical, and according to Klaus Kuchen, general manager at Grunenthal de Mexico: “We also believe that being a pharmaceutical company is more than just about selling products. We want to educate physicians about all the options available for treating pain, only then can we claim to add value for patients and physicians and reduce overall costs,” he says.

Grunenthal is a family owned German company that ranks amongst the top players worldwide in relief for moderate to severe pain. Grunenthal’s business model usually focuses on countries that are too small to attract the interest of bigger multinationals. In Latin America Grunenthal is active in several countries including Ecuador, where it has been present for over 30 years and owns a FDA approved plant.

Grunenthal’s products have long been distributed in Mexico, through a commercial agreement it enjoyed with Boehringer Manhein before they were taken over by Roche. After Boehringer Manhein’s takeover the decision was taken not to abandon the average US$4 million pa sales generated in Mexico so Grunenthal Mexico was incorporated in 1998 and in 2001 plans for a factory were launched. “We plan to start production in March 2005, but the most important thing for us is to receive the registration for our products under Grunenthal Mexico’s name and to become 100% independent,” explains Mr. Kuchen.

Positioning is also very clear: “Grunenthal is amongst the top players worldwide in the relief of moderate to severe pain, so we decided on a corporate level that this should be our core business in Mexico too. Our vision is to become the preferred pain partner in this field in Mexico,” he explains. Pain relief should become the company’s main growth driver, representing 50% of its turnover, according to Mr. Kuchen. But the company will also be active in the fields of gynaecology and paediatrics. It should soon launch parent friendly medicines with innovative and convenient packaging and with easy administration for children, allowing them to take the drugs through straws.

Mexico could become a key driver for Grunenthal’s corporate growth. “We expect that in six to eight years Mexico will generate similar results for Grunenthal as Spain or Italy,” says Mr. Kuchen, who is targeting sales of US$80 million within eight to ten years. ”We know this is achievable, because our products are good, our service is excellent and our people well trained and dedicated; this is what it takes to develop your market,” he says.

But recruitment is part of the challenge, as he points out, “we need to recruit managers as our company grows. Highly educated Mexican managers are very good at their job, but they are as expensive as expatriates,” he explains. And concludes, “we know we can’t attract people purely with financial incentives because we are not billing as much as other multinationals. But Grunenthal de Mexico being a young company, it is still possible for an employee to put his ‘seal’ on it and to influence the future of the company. We can offer responsibilities and empowerment. We try to transmit an open spirit and open minded culture,” he concludes.

[1] Canifarma : The Pharmaceutical Industry National Chamber

[2] Cofepris: Federal commission for the Protection against Sanitary Risks

[3] Inmegen : National institute on genomic medicine

[4] Amiif : Mexican pharmaceutical investigation industries association

[5] Inmegen : National institute on genomic medicine

[6] Anafam : National association of medicine manufacturers

Chapter 1

Argentina: Crisis Brings Opportunity

Argentina faced a devastating economic crisis at the start of the decade, which saw sales in the pharmaceutical sector drop by as much as 26% between 2001-2002. This crisis in many ways shaped the current face of the country’s pharmaceutical industry, as many of the multinational companies present in the country scaled back their operations. The larger national companies took advantage of this situation, buying up internationally certified manufacturing facilities that were being hastily sold off by the MNCs. This goes some way to explaining today’s dominance of the market by local companies: 71% of Argentinean pharmaceutical production now takes place in national laboratories.

More Argentinean than ever, the country´s pharmaceutical industry is now at the turning point of its internationalization strategy, looking to become a producer and exporter of national drugs across both mature and emerging economies. However, in order to achieve this ambitious goal, drugmakers are having to fight preconceptions about the country, sedimented during decades of political instability.

Today, the ranks of research-oriented national laboratories are swelled by a growing number of laboratories that are looking to research as a way to develop niche areas, and distinguish themselves from their competition. Dr Eduardo Franciosi, Executive Director of CILFA (the Association of National Argentinean pharmaceutical companies), explains “our strategic plan builds upon four main pillars to stimulate investment in machinery, new industrial plants, develop export markets and increase investment in R&D. Its aim is to organize the industry and align all our efforts, focusing on the future growth of the sector. This sets future targets, gives visibility for companies to take decisions, and establishes a growth path.”

As part of its strategic plan, CILFA identified key strategic export markets for the sector: Latin America, South-East Asia, North Africa and Eastern Europe. Argentine exports have doubled in the last four years, totalling in $656 million in 2008. Dr Franciosi predicts a 15-20% annual export growth rate, and has an export target of $800 million by 2012, according to CILFA’s strategic plan. Helping the national laboratories achieve this ambitious aim is Fundacion Export.Ar, a public-private organization whose role is to connect the policy decisions of the Ministry of Foreign Affairs with the practicalities of increasing export markets at both a sector and company level. For the pharmaceutical industry, this means commercial intelligence and organising international promotional events.

These plans are the logical conclusion of a wider trend pursued by the Argentinean government in recent years, to lead the country towards a more innovative, value-added economy, less reliant on the traditional staple of primary goods.

In 2007, the Ministry of Science, Technology and Productive Innovation was created, and a well-respected Argentinean scientist and academic, Dr. Lino Barañao, was installed as its first leader. Dr Ruth Ladenheim, Secretary of Planning and Policy at the ministry, explains that the aim was “to better articulate policies for the purpose of using science, technology and innovation as engines of economic development in Argentina.” Dr Ladenheim explains that one of the largest responsibilities of the ministry is to help foster the links between basic research and industry. “The various support schemes we have in place encourage universities and research institutions to make joint ventures with companies. This policy has led to a variety of developments, from helping researchers to gain international patents, all the way through to the direct incorporation of research units into businesses.”

More than $150 million USD per year is invested in R&D in Argentina. Ernesto Felicio, Executive Director of CAEMe, the Argentinean association for research-based pharmaceutical companies, explains the importance of the investment in what is known as the ‘industry without chimneys’: “this annual investment implies the hiring of highly qualified staff, as well as the effective and clear transfer of technology, which will act as a platform for future generations of Argentinean investigators.” Mr Felicio added that in Argentina, for every 1% increase in investment in R&D, there is a 1.5% increase in the country’s employment rate.

Notwithsanding the level of and desire to invest and export, the pharmaceutical industry is faced by new regulatory restrictions. One of the problems holding the industry back is the slow regulatory timelines administered by Argentina’s National Food, Drugs, and Medical Technology Agency (ANMAT), and patent approvals through the National Institute of Industrial Property (INPI). Created in 1992 with a guiding hand from the US FDA, ANMAT was considered one of the most thorough, knowledgeable and comprehensive in Latin America, and was used as a template for the later creation of ANVISA in Brazil. Fifteen years later, the backlog has been blamed on Argentina’s acceptance as a PICS (Pharmaceutical Inspection Cooperation Scheme) member in 2008 - the first Latin American country to receive this certification. However, the agency has recognised this slowdown as a challenge, and is taking steps to regain ANMAT’s previous reputation by addressing these industry complaints.

With the introduction of Intellectual Property laws in 2002, and the increase in the level of regulation, the government is hoping to both stabilize the regulatory environment in order to attract foreign investment, and move the innovative national industries more in line with international standards. Although prices in Argentina are not officially regulated, there is currently an unofficial system in place, where prices are readjusted three times a year in consultation with the various pharmaceutical associations. It is unclear whether this system will be replaced with official pricing regulation or abolished in the years to come.

The state-run health system in Argentina is meant to provide access for the whole population, but a parallel system of pre-paid HMOs also exists, making the pharmaceutical sector highly fragmented and complex. Pharmaceutical companies sell to both state-run and private hospitals, and a vast array of small to medium sized regional pharmacies that are supplied through a chain of wholesalers and distributors. This complexity is exacerbated by the fact that whilst Argentina is the 8th largest country in the world geographically, its population is only 40 million, mainly to be found in cities spread across the country. Most of Argentina’s pharmaceutical production takes place in the Buenos Aires region, although there are some laboratories to be found in other areas of the country.

The national industry works very closely with the Argentinean HMOs in order to overcome the challenges of distribution and access in such a vast country. “We cannot leave aside the role the national industry had in securing access to quality medicines at affordable prices for the population. We play a vital role in providing medicines to the main Healthcare Plans, especially to the IOMA and PAMI. The PAMI gathers 4 million retired Argentineans, who buy and need medicines throughout the entire territory of our country. This requires an extensive logistics network, a commercial and financial structure, and a vision of securing access and better use of our medicines,” says Dr Franciosi.

Despite its complicated nature, Argentina’s pharmaceutical industry manages surprisingly well, breeding a class of manager that can cope with intricate and dynamic environments. Market growth was 21.6% between 2007-8 up to $3.2bn USD, and despite the world economic slowdown, growth of 2.5 - 3.5% is expected for 2009. With such a positive prognosis, the country is ripe for venturing overseas.

Argentina's Market: From Patagonia To The Pampas

The Latin American Market in Units, 2004 – 2008 Source: abeceb.com

Dr Javier Lombar, General Manager of IMS Health Argentina For a market the size of Argentina, this outward-looking approach makes a lot of sense. With a population of 40 million, Argentina is much smaller than the other major Latin American pharmaceutical markets of Brazil and Mexico, with 191 million and 111 million inhabitants respectively. Whilst the large population size in these countries demands that a lot of production is inward-facing, Argentina is perfectly positioned, both in terms of size and geographically, to serve as a production and administration gateway to the smaller countries of Latin America: Paraguay, Uruguay, Chile, Bolivia, and Peru. As Javier Lombar, General Manager of IMS Health Argentina explains, “Multinationals tend to take a very large view when it comes to their operations in Latin America, and so one manager can be in charge of the whole region, not just a country. Brazil and Mexico are both fairly autonomous, but when it comes to the rest of Latin America, you need to think in terms of the region, not just particular countries.”

Having had a presence in Argentina country for 55 years, MSD decided recently to make Argentina the centre of operations for the Southern Cone of South America. Federico Wintour, head of this new region, predicts that the recent acquisition of Schering Plough will position Merck as the pharmaceutical leader in Latin America, given that the company is able to access even the smaller markets in the region using this regional approach.

Shaking Off Former Prejudices

After decades marked by struggle with military dictatorship, a defeat in the Falklands war, and severe economic difficulties, Argentinean companies have a lot of work ahead to build a reputation abroad beyond the country´s extraordinary tennis players and tango dancers. Silvia Macchiavello, President of Temis Lostaló, says that the changing nature of the political and economic situation in Argentina has made establishing such a name internationally very difficult, but that the pharmaceutical sector is one industry that has worked very hard to change this paradigm. Her sister Lucila, Vice President of the company, explains how companies such as Temis Lostaló have achieved this “by being constant, always having the best quality, and keeping our word. Keeping promises is the only way for a company to become credible in another market: more than any other contract. It is also important to foster long-term relationships, both for our partners and for our company.”

After satisfying demand in the local market, Argentinean companies are looking to explore foreign markets. National companies seem to be split into two rough categories: there are the companies that are looking to gain access to the highly developed markets of Europe and the US, such as Eriochem, Amega Biotech and Sidus, and companies like Roemmers, Bagó and Phoenix, who are looking towards other emerging countries. Many Argentine companies, following the strategic plan of CILFA as well as their own tactics, have selected markets in South East Asia, North Africa and Eastern Europe as the most promising regions for success.

Carlos Mayotti, Commercial Director of Phoenix, currently ranked 8th in Argentina, adds that reputation is also crucial in obtaining licenses and partnerships with international companies. Phoenix has succeeded in entering new therapeutic areas such as cardiology and neurology, building on their excellent business in respiratory disease, by licensing and co-marketing products from third parties, and then building their own product lines around these internationally respected brands. Mayotti explains, “This type of reputation is not easy to maintain, especially for an Argentinean company, that has had to deal with the extra challenge of economic instability throughout its history.” Evidence for the efficacy of this strategy can be seen in the fact that today, cardiology is Phoenix’s most successful line.

However, for Phoenix, achieving respectability to work with partners such as Pfizer has always come through building a solid position in the home market: “Phoenix’s most important business will always be done in the local market, where the company is known for providing high quality scientific services.” Phoenix has achieved this standing through a dedicated, highly trained sales force, and looking for ways to compete at the highest levels of quality production. The acquisition of the Novartis manufacturing plant in 2003 is a prime example of how the company has achieved this. Mayotti explains that the acquisition “has allowed the company to stay at the cutting edge of manufacturing technology and international GMP.”

R&D: Established Quality, Now Building Speed

“Argentina is at the forefront of countries in Latin America for clinical research in terms of training, hospitals, human resources and enthusiasm, which is critical, and has been the key for the region in many ways,” explains Dr Victor Molina-Viamonte, Latin America’s Senior Medical Director for Omnicare Clinical Research, Inc. and President of CAOIC, Argentina’s CRO association.

Alluding to the problems that have been recently faced by those looking to carry out clinical research in Argentina, such as slow regulatory timelines, Osvaldo de la Fuente, General Director of Roche Argentina, explains the importance of Argentina for Roche’s R&D network: “Our country has a great potential for clinical trials because of the excellent professional level, the patient’s characteristics, and the fact that research is done with the same quality standards as in Europe or the USA. We are optimistic that the approval times will improve in Argentina and the region, in order to conduct processes in the same time frame as Europe or USA.” Roche Argentina’s R&D department has grown from one person to 35 over the last four years, indicating that these slow regulatory timelines have not discouraged the company from investing in clinical research in Argentina. The direct and indirect pharmaceutical labour force stands today at 27,000 and 100,000 employees, respectively.

Although the slow regulatory timelines in Argentina are usually compensated for by very quick patient registration times, Dr Molina-Viamonte believes that the industry needs to work together to improve the regulatory situation in the country: “To some extent, clinical research is being threatened in the country by ideology, politics and ignorance… What the CRO industry needs is regulatory officials who fully understand their job, who have received sufficient training, and have a reasonable attitude, in order to help CROs do a job that is very important for the country.” Through the CAOIC, this is being resolved through cooperation at a provincial, regional and national level, and all parties are optimistic of a change for the better in the near future.

Integrate And Conquer: Cooperation And Co-Marketing

Osvaldo de la Fuente, General Director of Roche Argentina For many MNCs, the market influence that they enjoy in other countries is elusive in Argentina, due to the dominance of the national laboratories. Novartis has bucked this trend by making integration with national companies a priority. Jim Harold, CPO Head and Country President of Novartis Argentina, explains that Novartis sold their plant to Phoenix, with whom they now have a manufacturing agreement. This partnership has worked very well, and now the company manufactures only niche products in Argentina for global distribution, as dictated by global trends. Sandoz, a company that now comes under the Novartis umbrella, has really taken advantage of Argentinean production: “Where exportation is more of a focus is at Sandoz, where we have a state-of-the-art plant for oncology products. Argentina is the worldwide production site for some of Sandoz’s key oncology products. Three years ago, the plant was the first to be approved by the FDA for the exportation of oncology products to the USA. As a group, we’re very proud of that.” says Harold.

Mr Harold believes that one of Novartis’ most successful strategies in Argentina has been to work together with the national companies in order to better integrate into the market. “Where Novartis Argentina has slight differences to Novartis Worldwide is the way we relate to the national companies. We currently have a number of marketing agreements with different national companies. These range from exclusive marketing deals to co-marketing. For example, we have a co-marketing agreement with Montpellier, a division of Bagó, for Galvus, Novartis’ oral diabetic that was launched at the end of 2008. This means that we have two brands of the same drug in the market, and gives us an additional voice in the market that only a national company can provide.” Mr Harold sees this as an important element of brand strategy in a country like Argentina, where, because of the number of branded product copies on the market, partnering with a large national company is an important tactic to be considered, and a way to succeed despite the idiosyncrasies of the Argentinean market.

Partnering strategies do not just help MNCs to gain market share, but can also help national companies to reach export levels that would not be possible otherwise. Massone is a local company that has also found partnering to be an indispensible part of their strategy. Massone is a very niche company: their sole product is Gonadotropin, and as one of the very few companies in the world that manufacture this infertility treatment, they have been able to export the product globally: today, 95% of Massone’s production is exported. This accomplishment has been made possible by a very productive partnership with Ferring, who distribute Massone’s product worldwide. Raul Massone, President and son of the founder of the laboratory, explained that the company had initially had an unsuccessful partnership with an Italian company, but that the new partnership had turned his fortunes around: in 2001, he was able to by back the shares and become the sole owner of Instituto Massone. “Although our past experience working with a sole company was not successful, this relationship is excellent. Massone realizes that only one company is needed: the right company,” Massone retorts.

Looking For More Leloirs

Argentina prides itsefl in having had the first Spanish-speaking scientist to ever receive the Nobel Price in Chemistry in 1970, Luis Federico Leloir. Over 30 years later, his legacy is finally being understood by all relevant stakeholders and the possibilities resonate in the ears of the pharmaceutical business community. The Argentinean government has recently begun undertaking efforts to link businesses with Argentina’s famed research institutions, for mutual profit. Pfizer Argentina recently announced that it would be collaborating with the Leloir Institute on research into Parkinson’s disease. Jesús Loreto, Pfizer’s General Manager in Argentina, explains the reasoning behind this collaboration was “to work on something that might be commercially successful: obtain the patents, get funding, and generate more money to invest in other research areas. That’s something that Pfizer believes in, and other multinationals are now following our lead.”

Jesus Loreto, General Manager of Pfizer Argentina The fact that Pfizer was the first multinational company to engage in this type of PPP will doubtless improve their frequency in the years to come. Fernando Pitossi, Treasurer of the Leloir Institute and project leader of the collaboration with Pfizer, explains that it has not only opened the minds of big pharma, but also researchers who may have been reluctant to enter into projects with large companies: “The partnership has broken preconceptions. Pfizer is a huge multinational pharmaceutical company, and the Leloir Institute is based in Argentina, a developing country. Although the institute is renowned, the scale of our two operations is completely different. The alliance has helped to change the vision of how possible it is to interact with a multinational company without being hurt in any sense.”

He also explains how much this collaboration has started to change the nature of the pharmaceutical industry in Argentina: “As a result of this alliance becoming public knowledge, the national pharmaceutical companies are looking at research, and also talking with multinationals, discussing possible synergies and partnerships. The national companies tend to do most of their research in-house, and when they want new skills and resources they would rather buy a company than collaborate. This is beginning to change, because when research reaches a certain scale, companies need to collaborate. This is true even for companies like Pfizer.”

Elea is a national company that is investigating other forms of PPP available in Argentina, and capitalizing on them to great effect. The company has an agreement with CIPEIN, an army-related institution, in order to research and develop solutions for lice. As a result of the collaboration, Elea today has 70% of the market in this area. Abel Guillermo Di Gilio, Business Director of Elea, tells us “Elea would not be able to proceed at various stages of research without these partnerships. We provide both scientific and economic support for the progress of these researches.” These high levels of scientific dedication have showed in other areas of Elea’s achievements, and combined with the rest of their business model, have allowed them to reach very high levels of growth and product release: “Elea’s strategic planning, focus, and targeting is very sophisticated; it’s the only way that a company could have fifty products in promotion like we have at the moment.”

The Common Good

The presence of multinational pharma companies in a developing market like Argentina does not only serve to bring innovation into the country and service previously unmet medical needs, but can also provide vital help when a country needs it most. This was shown during the Argentine economic crisis at the turn of the decade, when Novartis was inundated with requests for pharmaceutical donations. It set up a programme called Novartis Comunidad, in collaboration with two NGOs, Caritas and Tzedaká, in order to ensure that the sections of the population that were the most at risk during the crisis were provided free access to the medicines they needed. Although the crisis is now over, the programme still exists, and complements a range of projects that Novartis Argentina has undertaken in the community.

Flavio Devoto, Managing Director of Novo Nordisk Argentina Another way in which companies here are helping the community and their business alike is through setting up educational programs. This is the case of Novo Nordisk, which is acutely aware of the diagnosis problem related to diabetes in Latin America. Although 70% of the company’s sales in Argentina come from diabetes, 50% of sufferers remain undiagnosed. Flavio Devoto, General Manager of Novo Nordisk in Argentina, explains that the company is involved in numerous projects dedicated to the education of patients, physicians and the general population about diabetes, hoping to increase diagnosis rates. Some of these projects have been suggested by employees within the affiliate; indeed, the company encourages all who work there to participate in the development of the business: perhaps one of the reasons that it was declared the ‘best place to work’ in Argentina last year, and has been in the top ten of the list for the last six years.

Education definitely helps companies like Novo Nordisk to gain market share in developing countries like Argentina, but within such a niche it is equally, if not more important to have high quality products. “In the diabetes market, both patients and doctors want to have products with very high quality, and very good delivery devices. This is important, because in the insulin market, it is not simply about drugs, also having good devices in order to ensure that the patient follows the treatment. Good compliance rates is one reason why Novo Nordisk is the market leader here in Argentina,” explains Devoto.

Staying On Track Pays Off

As in many countries, Argentina’s top producers are the laboratories that produce in high volumes in many therapeutic areas. As a result, many laboratories in the country have had to find niche therapeutic areas in order to compete, with their own brand of speciality products. Poen is an excellent example of a company that has succeeded in a niche segment of the Argentinean market. Dedicated to the production of ophthalmologic products for over 80 years, the company today enjoys a 27% market share, placing it second in the rankings of ophthalmologic units sold. By concentrating on the local market initially, Poen was able to release between four and five products a year. Alejandro Serafino, Administration and Finance Manager, explains that “today, Poen has a broad product line, complete and updated, covering all known diseases in ophthalmology.” This strategy of concentrating on a niche segment has been very successful for Poen, and allows them to compete with multinational companies in their home market.

Catalina Massa, Executive Director of UNC-Hemoderivados The habit of staying on track has proven extremely worth it, so the next stage in the evolution of this strategy won´t be to diversify product lines, but to expand into international markets. Serafino says that the next goals for the company are to stabilize their product sales in Latin America, and attempt to expand their operations in both Brazil and Mexico. He believes that Poen’s brand and reputation will easily translate to these markets: “Argentine physicians frequently travel abroad to receive training or work in different clinics, and use our products as they do here in Argentina. Thus, we maintain an identity as a company and brand.”

This niche approach has also worked for Marcelo Figueiras, President of Laboratorios Richmond, a local company specializing in HIV, oncology and CNS products. The lab was the first in the world to produce branded oncological generics, and today is one of the four labs chosen by the Argentine government to produce Oseltamivir to cope with the H1N1 crisis. The specificity of their product lines means that a lot of Richmond’s production is aimed towards the Argentinean government. Figueiras acknowledges the importance balance between being partner of choice for the government, whilst at the same time diversifying the business: “The fact that we sell our products not only to the Ministry of Health but also as prescribed medicines is a unique position in the country. We have to recognize that the government health plan is very good, in the sense that the program gives all patients free access to medication, which directly affects the HIV market and is in turn beneficial for Richmond. Today however, Richmond’s focus is towards the international development of non-infringing processes, bioequivalence studies and production; and directing these assets to higher regulated markets like Europe.” By 2010, Richmond expects to be directing 50% of its production to foreign markets. “It is crucial for Richmond’s objective to always be first to market with our generics: every time a patent goes off we have to be ready to be the first to react and enter this particular market. We can now challenge the originator more effectively as we have developed the expertise of supporting our own non-infringing processes. This gives Richmond an edge.”

Almost all of the pharmaceutical laboratories in Argentina are privately owned, which makes UNC Hemoderivados stand out, as it is state funded: part of the University of Cordoba, it functions as a distinct business unit. One of the few Argentinean production facilities to be found outside of the Buenos Aires region, UNC Hemoderivados is focused on the production and development of blood derivative products. Catalina Massa, the Executive Director of the business, stresses the unique role that the company plays in both Argentina and Latin America. Through toll fractioning agreements with other Latin American countries, UNC Hemoderivados produces blood derivative products both for Argentina and other countries in the region.

As well as looking at this production from a business perspective, Massa is keen to stress the social role that the laboratory plays: upon its creation, it was the first blood derivative plant in the region, and today works hard to create self-sufficiency across the continent. This is frequently encouraged through technology transfers. “An example of proposed exchange of technology or biotechnology is the signing of a framework agreement with Cuba. UNC Hemoderivados will transfer some technologies currently in use in our production process, but cannot fund the project with money. To find a solution that benefits both countries, it was proposed that this be done through a technology exchange agreement, as Cuba has extensive experience in biotechnology and UNC Hemoderivados has a need for implementation of future projects.” Through cooperation across the region, the laboratory is working both to improve access to vital blood derivative products, and increase its own capacity to develop new processes and medicines. The state-run model has been applied in Chile, Uruguay and Ecuador to date, showing that the project is both scalable and valuable.

Chapter 1

Mexico: Climbing To The Top Of The Pyramid

“In Sanofi-Aventis we do not talk about BRIC, but about BRICMEX. This country is key in terms of sales potential, industrial investments and clinical research” explains Nicolas Cartier, General Manager of Sanofi-Aventis Mexico, the leading company in this market in terms of sales. With the developing world being the main driver for growth in drug sales, pharmaceutical companies are focusing much of their attention on large emerging markets and Mexico, one of the largest pharmaceutical markets in the world, is at the top of the agenda for most of the industry players.

Already being ranked as one of the largest markets in the world (between the 10th and the 13th position depending on the measurement method) Mexico’s true size might actually be underestimated. Audit firms “are not able to correctly measure the government market which is huge and is one of the main growth drivers” explains Carlos Abelleyra, President of CANIFARMA, the largest pharmaceutical association in Mexico, and Managing Director for Mexico & Central America of Wyeth.

Mexico’s attractiveness relies not only in its current size, but also in its significant potential for growth. With healthcare spending representing 6.6% of GDP in 2007, Mexico still has a long way to catch up, not only with fellow OECD countries (where the average is 8.9%), but also with most other large Latin American countries (7.6% in Colombia and Brazil, and 8.9% in Argentina). Furthermore, the continuous growth of the Mexican population’s purchasing power, together with the ongoing changes in its demographic pyramid, paint a promising picture for the almost 300 pharmaceutical companies present in the country. In addition, the industry is experiencing a boost in its exports thanks to Mexico’s robust network of free-trade agreements.

Probably the most promising aspect of all is that the Mexican government seems to have finally realized the importance and potential of the country’s pharmaceutical industry. Since the year 2000, the Mexican government has been putting in place innovative regulatory changes that aim to enhance the quality of both its pharmaceutical industry and its healthcare system. If these policies achieve their intended results, expect the global pharmaceutical industry to keep its eye on this market for many years to come, as clearly in Mexico, the best is still to come.

Mind the waves

According to Abelleyra, for many years the Mexican pharmaceutical industry could have been compared to a very calm lake. Multi-national companies (MNCs) were fully devoted to the private sector, while local players fought between themselves for a share in the government market. “Nothing really happened. Nobody cared about IP protection or patents. Today, everything has changed and the lake is now full of large waves!”

The most significant of the recent transformational changes is probably the government’s plan to universalize healthcare. Currently, only around 50% of Mexicans have access to a healthcare system which is directly linked to formal employment. Nevertheless, since 2004 the government has been expanding its flagship program called Seguro Popular (People’s Insurance), which offers free basic healthcare to the uninsured population. Today, the Seguro Popular counts with more than 20 million affiliates and according to Secretary José Ángel Córdova Villalobos it should cover all uninsured Mexicans by 2012.

The Mexican government has also been paying close attention to how it spends every peso, through a commission in charge of centralizing all institutional purchases of innovative drugs. Although some companies initially perceived it as a move towards price regulation, there is a now a consensus that the government’s real intention is to maximize the efficiency of its spending. As Abelleyra explains, “today, the government agencies which are part of the healthcare sector pay different prices for the same medicines. Just as I want to get the best possible price from my suppliers, so does the government”.

Cost efficiency will also be applied in the purchase of generics. The Mexican Secretariat of Health is currently considering using a system of reverse auction for its purchases. Many local players that have long subsisted on sales to the government - and an increasing number of international companies that have started to tap into this lucrative market - consider this a negative step towards a system that would only take into consideration price, leaving aside other key variables such as quality.

Nevertheless, Secretary Córdova Villalobos considers this should not be an issue as “…by 2010, quality will not be variable in the Mexican market anymore”. The Secretary is referring to what will certainly be a historic turning point for Mexico’s pharmaceutical industry. Today, the Mexican market is composed of innovative products, generics (both branded and interchangeable generics) and similares, which are drugs that have not demonstrated bioequivalence. From 2010, all drugs will have to be re-registered every five years. As part of the new registry process, drugs will have to meet bioequivalence standards in order to be allowed for commercialization. This means that by February 25TH 2010, all similares will have to either become generics or leave the market.

The Mexican regulatory agency, COFEPRIS, expects about 10,000 drugs registers to be renewed before this date, but many companies are concerned this agency will not be able to meet the deadline. However, the recently appointed COFEPRIS Federal Commissioner, Miguel Angel Toscano, considers that the agency is up to the task and assures that the date of February 2010 is plainly “non-negotiable”.

Most players in the industry agree that this will be a historic benchmark that will have the Mexican consumer as its main beneficiary. Nevertheless, there is some debate on the form in which the change is being implemented, particularly regarding Toscano’s lack of flexibility. The root of the issue is that, while the regulatory change was approved in 2005, only last February were industry players informed on how exactly to proceed with the renewal. According to Roberto Rosas Puente, General Manager of Streger “this means that companies now have less than 15 months to finance a cost that should have been absorbed in a period of 60 months. On top of this, today we face a scenario in which the 15 companies that conduct bioequivalence tests in Mexico face a demand for 10,000 products which has resulted in the prices for these tests skyrocketing”. Rosas Puente argues that given the financial burden of these tests a large number of companies manufacturing high quality low-cost products will have to sell, close their operations or choose a limited number of their products to continue in business. According to him, unless the deadline is extended, the main beneficiaries of this process will be the large pharmaceutical companies and the process will finally result in less competition in the market.

Dagoberto Cortés Cervantes, general director of Hormona and President of AMEGI, the association that groups the main manufacturers of interchangeable generics, does not necessarily see the reduction in the number of players as a negative thing in itself. “The market is undergoing a process of natural cleaning and the main beneficiary of this process is the consumer. Only those companies with quality products will be left in the market, making Mexico a more competitive country,” he claims.

This debate will certainly continue up to the Februrary 2010 deadline. What is not being contended anymore is that Mexico is today seriously pursuing an upgrade of its quality standards with the intention of taking a more important role in the pharmaceutical world. Certainly, the players that will benefit from these changes will be those better prepared to ride the new waves in the lake.

Biotechnology: The Waiting game

As in most other emerging countries, biotech companies working in Mexico have to overcome big challenges. One of the main reasons for this is that it usually takes longer time for these countries’ legislation to catch up with the latest trends and technologies. Alejandra Mendoza General Manager of Genzyme Mexico claims that regulation has been the main challenge that this leading biotech firm has had to face when launching operations in Mexico. “We were pioneers in the area of biotech in Mexico, so we had to approach the health authorities with a group of therapeutic solutions that did not fit in Mexico’s regulatory framework! It took us 3 years, from 2002 to 2005, to finally be allowed to bring the drugs into Mexico under the category of orphan drug, a category which did not previously exist here”.

Since then, Mendoza explains, there has not been one year in which the company has not introduced a new product into the Mexican market. “Different to other pharma companies, what really keeps us busy is keeping up with the launching of our new products” she claims proudly. For Mendoza, despite the many challenges, launching operations in Mexico was the right decision. “Genzyme is here to stay and to continue bringing the best therapies. We have a long-term commitment to the country and to our Mexican patients.”

The Mexican government is making efforts to adapt the regulatory framework to biotech products. In this sense the country’s Congress is currently discussing legislation on biosimilars. This draft legislation can be seen as a step in the right direction, but some are skeptical about how long it will take the authorities to act on it, as for the last few months the legislative agenda has been monopolised by a controversial energy reform.

According to Esther Lucero Zarate Villa, Regulatory Affairs & Safety Director for Amgen in Latin America, the main challenge biotech firms find in emerging markets such as Mexico, is the fact that, unlike developed markets, these countries have no reimbursement schemes. Thus, in Mexico, only a very small part of the population can afford this kind of treatments. “We will sell to the private market, but we will not succeed in these markets if we are not able to work closely with the government” she argues.

During the last years, Amgen has analyzed the potential of Asia Pacific, the Middle East and Latin America, evaluating the complexity of these regions from different points of view such as regulation and pricing, so as to put in place a tailor-made business plan for each market. “In the case of Latin America, at present we are focusing in the biggest countries, Brazil and Mexico, because together they make up 80% of sales in this region. These are countries with good regulatory frameworks; well defined markets; and governments that aim to promote companies with high levels of research in the country. Amgen conducts R&D activities in those countries. We have around 3,500 patients participating in clinical trials in Latin America”, says Zarate Villa.

Amgen has huge expectations for Latin America. “We have great hopes because Amgen has excellent products, a uniquely robust pipeline and is very well structured and organized. Now the challenge is to extend this corporate structure to these markets” Zarate Villa explains.

Thanks to their size and fast economic development rates, large emerging markets are resulting more and more attractive for biotechnology firms. Nevertheless, these companies will have to be highly innovative in their strategies to engage patients, doctors and governments; as their main strength, their strong pipelines, will not be enough on its own to guarantee them success.

A question of flexibility

As any other large emerging country, the Mexican market poses unique challenges and responds to a particular logic. Despite their very different strategies, most MNCs agree that any recipe for success here must have as its main ingredient a flexible organization that allows talented managers to maneuver according to each market’s idiosyncrasies.

Astra Zeneca Mexico went back to the fundamentals to jump in the sales ranking from the 18th to the 4th position. “We basically built our growth on the basis of increased loyalty from physicians towards our brands,” President Ricardo Alvarez-Tostado explains. He considers that given the increasing importance of E7 countries (Brazil, Russia, India, China, Mexico, Turkey and Indonesia) one of the biggest challenges for the industry in the coming years will be to reconcile the need for funding innovation with the access limitations of emerging markets. “We need to break the taboo that if we have differential pricing across the world it will have consequences on the developed markets. That is simply not true. There is not one wealthy individual who will criticize a company for giving the poor access to the same quality drugs they themselves have access to”.

Wyeth Mexico has also been out-growing the local market (26% vs 8% in 2007) and it was the first country office from a developing market to succeed in having a vaccine (Prevenar) included in a national program. As the company’s headquarters intended to maintain international prices, the Mexico office designed a donation program to make sure the vaccines could reach the poorest sectors of society.

Cartier from Sanofi-Aventis, the market leader, sums up the general feeling: “Basically, if you try to manage Mexico the way you manage the US or France you will forget about a large chunk of the market.”

CNS: breaking taboos and teaming up.

“Our product for Alzheimer is a blockbuster worldwide, with sales over US$ 1 billion. However, it is obviously not a product of great volume for Latin American countries” explains Nicolas Freudenberger, General Manager of Merz Mexico. The difficulties that pharmaceutical companies face in large emerging markets are also related to their therapeutic area of specialization. When it comes to Central Nervous System (CNS) pharmaceuticals, Mexico’s young population can prove challenging for companies working in this area. “In order to succeed we need to be flexible in choosing which products of our portfolio in Germany are more promising or which products we can get through strategic alliances and licensing agreements that can be a perfect fit for our business in each market. For example, in Brazil we have products that are very successful in that country, but are not significantly important for our European operations” argues Freudenberger.

Furthermore, as Herman Santoni Ramos, Managing Director of Lundbeck Mexico explains, the social perception on CNS disorders can also prove to be a challenge. “Some conditions such as Schizophrenia or Obsessive Compulsive Disorder continue to be a taboo. However, we have come a long way and people today are more comfortable talking about Depression or Anxiety. We also see a significant amount of general practitioners, treating the less complex cases of depressed patients themselves. Since Depression is such a common disease we need to continue to create awareness of this illness and make sure that patients have access to the right treatment and medication”.

Lundbeck focuses large parts of its efforts in raising awareness on these diseases across the markets in which it is present, through organizing events with psychiatric hospitals, universities and specialists. “We also offer support to patients and family members. For example, here in Mexico we have implemented workshops for family members and caregivers of patients suffering from Alzheimer. It is very fulfilling to know that you can make a difference in the quality of life of those who suffer of these diseases. Every time that I receive a letter from a patient or family member sharing how their lives have changed for the better; I know that I am in the right industry” claims Santoni Ramos.

Both Merz and Lundbeck have launched operations in Mexico in the last decade and in a short period of time have rapidly positioned themselves as leaders in the CNS field. Furthermore, as Santoni Ramos explains, the CNS segment is growing in a healthy manner in this market as more and more, the physicians as well as the general population are getting familiarized with these diseases. In this sense he sees a very positive horizon for the company in the country. Freudenberger agrees, and he has strong reasons to do so as in the last 5 years Merz has shown average annual growth of between 25-30% in this market.

Looking into the future, both firms consider that in order to sustain their success they need to continue finding new compounds that meet the patients’ needs, not only through their own R&D structures, but also by accurately identifying opportunities for partnering with other companies which might not have the core capability in CNS and are looking for a partner to maximize the potential of their products in Mexico. At present, both companies have local agreements for their Mexican operations, as well as global agreements, such as the one Lundbeck and Merz actually maintain at the global level.

Big Ambitions: Mexico’s generic players want to change history.

These days it is not difficult to come up with the names of several Indian, Chinese or Brazilian pharmaceutical companies that have leveraged on their success in their local markets to become global players. However, the same can not be said about Mexican players.

One of the reasons for this is that Mexican generic companies have traditionally invested scarcely in R&D. The roots of this phenomenon can be found in Mexico’s unstable track record in terms of patent legislation. In 1976 the law on Invenciones y Marcas identified three areas as strategic for the country’s development: national security, food and healthcare. According to this legislation, patents could not be obtained in any of these areas. Thus, drugs and Active Pharmaceutical Ingredients (API) could not be patented. In 1987, with the objective of developing strong local industries, the government published a decree by which patents could be obtained in the three aforementioned areas, but only after January 1st 1997. “Many companies increased their expenditures in R&D, and at PROBIOMED we started investing significantly on biotechnology” explains Jaime Uribe, President of ANAFAM, the association that groups the largest generic players in Mexico, and general manager of PROBIOMED.

Nevertheless, in 1991, in order to join NAFTA, Mexico passed a new patent law which had a retroactive article, allowing for products that were of public knowledge to be patented. According to Uribe “this had a significantly negative impact on the development of the local industry. Just as an example, we were ready to launch our first biotech product, IFN alfa 2a to the market in 1995. We had developed this product under the protection of the 1987 decree that said that this product could not be patented. However, when we wanted to commercialize it, we found out that Roche had been given a patent! We were not able to launch the product in the Mexican market until the year 2000”.

A second explanation why we still do not see a Mexican Ranbaxy, Dr Reddy’s or EMS is the low penetration of generics in the Mexican market. According to Rodrigo Iturralde, General Manager of Randall Laboratories, the main reason for this is that the generic concept is still very young in the country. This concept was introduced less than a decade ago under the name of Interchangeable Generics to differentiate it from the other generics that existed at that time which had not passed bioequivalence tests.

Hector Carrillo, President of Apotex Mexico adds that in the late 1990s, just when it looked like a generic culture was starting to grow in Mexico, Farmacias Similares appeared generating great confusion in patients and even in doctors. “People started thinking that Farmacias Similares were selling generics, when they are actually a marketing concept. The idea behind this firm is to sell drugs at the lowest possible price. This is quite different from our idea of selling quality products at accessible prices. We cannot even think of selling low quality products without hurting the whole concept of generics” he argues.

Finally, Dagoberto Cortés Cervantes, general director of Hormona, argues that scarce governmental support to the generic culture contributed to low penetration rates in Mexico’s private market.

Although for a long time generic players have taken a secondary role in Mexico’s pharmaceutical market, there have been many positive signs of change in the last years: patent legislation has been pretty stable for more than a decade; the generics penetration in the private market has been growing at annual rates of over 30%; and the February 2010 regulatory change is expected to significantly increase the awareness of Mexico’s population about the benefits of generic products. As Cortés Cervantes explains, “...fortunately the country’s current Secretary of Health, is a firm believer in the role that generics should play in a country like Mexico in which 50% of the population has no health coverage and pays for drugs through out-of-pocket expenses”.

This positive scenario for generic manufacturers has given place to significant investments in R&D and manufacturing capabilities, together with ambitious plans of internationalization. Today, there is a strong feeling amongst Mexican generic players that they are facing a historic chance to become truly global players.

Charpter 1

Climate change, the hottest issue.

Climate change is the most serious threat the planet faces and a hot potato in the hands of the world community. Scientific research has indicated that if the Earth’s temperature rises by more than 2°C above pre-industrial levels, climate change is likely to become irreversible and have long-term consequences such as rising sea levels, fresh water and food shortages, and extreme weather - heat waves, droughts and flooding - causing physical and economic damage. Since 1850, the global temperature has risen by 0.76°C, and Europe is warming even faster than the global average: temperature has increased by about 1ºC.

Global greenhouse gases emissions, the root cause of rising temperatures, increased by 70% between 1970 and 2004. The culprits were the energy supply sector with a 145% increase of emissions, transport with 120% and industry with 65%. In addition, changes in land use resulted a 40% drop in the capacity of forest to capture carbon dioxide emissions? I Unless there is a global commitment to reducing greenhouse gas emissions, a further temperature increase of 1.8–4.0°C is forecasted to take place this century while a worst case scenario could result in a 6.4°C temperature increase according to an international panel of scientists convened by the United Nations (UN).

The challenge is global as economies around the world could go into decline as a result of the cost of dealing with a different climate, regardless of their historical greenhouse gas emissions and contribution to climate change. To prevent the world reaching a 2°C increase, which is generally believed to be the tipping point, global emissions will have to be stabilised by around 2020 at the latest and then cut to around half of their 1990 levels by 2050.

The Kyoto Protocol, agreed in 1997, marked the first time that the developed world set a target for the reduction of greenhouse gas emissions: 5.2% for the period between 1990 and 2012. While the 15 European Union (EU) member countries collectively committed to an 8% reduction in their emissions, the United States did not ratify the protocol and is therefore not formally contributing to the objective. Over the past decade, the EU has successfully pursued economic growth and greenhouse gas emission reductions simultaneously. While the EU economy grew between 1990 and 2006, the overall emissions of the 27 member countries fell by 10.8%.

To meet its obligations under the Kyoto Protocol and set an example for other countries in the run up to the UN Conference on Climate Change (COP 15) next December in Copenhagen, the EU has agreed to cut its own greenhouse gas emissions by at least 20% by 2020 regardless of what other countries do. “Climate change is not the only reason but also long-term security of supply, innovation and economic growth,” says Hans Jorgen Koch from the Danish Energy Agency.

Nevertheless, the EU considers that industrialised countries should collectively cut their emissions of greenhouse gases to 30% below 1990 levels by 2020. The costs of this action are relatively limited, especially in comparison with the expected cost of damage climate, as annual economic growth would be reduced by less than 0.2%. But “the world cannot tackle climate change unless both the developed world and the developing economies are part of the solution,” says Connie Hedegaard, Danish Minister of Climate and Energy. Developing countries, such as China and India, will also need to chip in.

Europe’s “20-20-20” targets

Taking serious note of apocalyptic predictions for the future, and the need for a unified approach, Europe wants to lead the fight against climate change. In December 2008, the European Parliament voted to adopt the Climate and Energy Package, which provides a framework for Europe’s transformation into a low-carbon economy over the coming decade. The agreement sets legally binding targets to reduce greenhouse gas emissions by 20%, to increase the share of renewables in energy consumption to 20% and to improve energy efficiency by 20%, all by 2020.

European Commission President José Manuel Barroso, a strong supporter of the Climate and Energy Package, firmly stated before the vote that “The transformation of Europe into a low-carbon economy is a way to build a stronger Europe. The costs of climate change, if we don't make adjustments now, can reach up to 20% of GDP annually according to the Stern Review, but we can limit the cost of the Climate and Energy Package to 0.5% of GDP. The EU Climate and Energy Package is part of the solution both to the climate crisis and to the current economic and financial crisis.”

The adoption of the Climate and Energy Package brings big economic opportunities if the EU exploits its first mover advantage. For example, achieving a 20% share for renewable energy could mean the creation of more than a million jobs in this industry by 2020, a tempting figure especially as Europe enters a severe recession, which will cost thousands of jobs in conventional economic sectors. At the same time it raises energy security across Europe, which is dependent on imports for around 55% of its energy needs, a number that could rise to 70% by 2030. The EU could also save up to €50 billion in oil and gas imports by 2020.

The agreement positions Europe as the first region in the world to commit to such ambitious targets, and is considered to be an important contribution towards a comprehensive international climate agreement to be reached by COP15. For example, from 2013, an emissions cap will be set at EU level and greenhouse gas emissions to be cut to 21% below 2005 levels by 2020, however, the Climate and Energy Package contains a clear offer to commit to a 30% cut in greenhouse gas emissions if a fair and effective deal is reached in Copenhagen. “I can think of no clearer way of showing the world that Europe is prepared to walk the walk, as well as talk the talk,” concluded President Barroso. His perspective was strongly supported by Stavros Dimas, EU Environment Commissioner, "The adoption of the Climate and Energy Package sends a clear signal to our international partners about our determination to address climate change and should convince them to follow our example.”

Times of change for the electricity industry

Central to the successful implementation of such an ambitious EU policy is the European electricity industry. Hans ten Berge, Secretary General of EURELECTRIC, the Association of the European Electricity Industry, confirmed his industry’s support for the 20-20-20 targets outlined in the EU Climate and Energy Package on the condition that market based instruments are used rather than subsidy schemes for renewables. “The electricity industry could become a carbon neutral environment,” he confirmed. “De-carbonization is not a threat for the electricity industry, it is an opportunity that will be challenging to realize.”

Over the past decades, changes in the electricity production sector have been more evolutionary than revolutionary despite new technology introductions. Although coal and hydro power remain important energy sources for electricity generation, they have been joined by nuclear power, oil and gas, and renewable energy over the past decades. The European electricity industry is consistently looking for the most competitive generation sources and firmly believes that the availability of a complete portfolio of de-carbonized generation assets is the critical success factor.

The introduction of a price on CO2 emissions could make it more economically sensible to focus future investment on CO2 free technologies such as nuclear and renewables rather than fossil primary resources. In the long term, nuclear is one of the most economic supply technologies, however, the questions of public acceptance and the long term impact of nuclear waste material are destined to remain. On the other hand, the cost figures for renewables resources are steadily improving, and EURELECTRIC believes that it is certain that renewables will occupy an important place in future electricity supply. “Onshore wind power has already become a competitive energy source, and offshore wind will also become very profitable,” Ten Berge confirmed.

At this moment, renewables are subsidized through feed-in tariffs and the EU counts twenty-seven subsidy systems. But EURELECTRIC is saying that investment in renewables should not be driven by subsidies. “Renewables have a fair chance to compete in a market that should be driven by realistic carbon prices,” explained Ten Berge. “However, if renewables are subsidized and provide securities that are not available for any other generation source then our members will use those feed-in tariffs. Nevertheless, we question whether a twenty year price guarantee is the right way to organize your business.”

While EURELECTRIC forecasts tremendous growth for renewables, wind energy has already taken up Europe’s number one spot in terms of new power capacity. According to statistics released by the European Wind Energy Association, last year 8,454 MW of wind power capacity was installed in Europe, accounting for 43% of all new electricity generating capacity installed and positioning wind power ahead of all other power generating technologies including gas, coal and nuclear power. In response, Hans ten Berge emphasized that achievement of the wind industry should be placed into context: “Only a complete portfolio of generation assets will drive us to the lowest cost electricity generation that is completely carbon-free at the end of the day.”

Due to the global economic crisis, de-carbonization has accelerated in recent months which has resulted in a collapse of the carbon price has fully collapsed. “The question is whether it is worthwhile for the European electricity industry to be a frontrunner rather than a follower in the de-carbonization process. Politically it has been decided that we will move forward, but if only the European electricity industry is making this commitment it would be a waste of money,” warned Ten Berge. “If the money spent by the European electricity industry on de-carbonization triggers other countries and industries to join in the future then I think we are doing a good job.”

The wind industry to hit Europe with a sweeping blow

“Today, wind energy is a mainstream option, and probably the cheapest way to produce electricity,” boasted Professor Arthouros Zervos, who serves both as Chairman of the Global Wind Energy Council (GWEC) and President of the European Wind Energy Association (EWEA). Last March, at the European Wind Energy Conference, he announced that EWEA had increased its 2020 target for installed wind energy capacity in the EU from 180 GW to 230 GW, including 40 GW offshore. Currently, wind power accounts for about 4.2% of the EU’s electricity demand, but the 2020 projection will enable wind power to meet 14-18% of EU electricity demand, which equals the electricity needs of about 135 million average EU households.

Andris Piebalgs, EU Energy Commissioner, underscored the rising prominence of the wind industry when he stated that “wind energy can replace a large proportion of the polluting and finite fuels we currently rely on. Those who still think that wind energy will never be more than a "marginal" energy source are, themselves, rapidly being marginalised. It makes good sense to invest in indigenous sources of power which hedge against unpredictable fossil fuel prices and in which Europe has a real competitive advantage.”

“EU companies hold 66% of the €35 billion global market for wind power technology, and we should urgently develop, promote and export it to the best of our ability,” emphasises Professor Zervos. The European wind industry should aim to be present in as many markets as possible, and it should continue to drive the industry’s innovation process. The wind industry has globalised rapidly over the past five years, and the European wind turbine manufacturers will have to follow this trend.”

Wind industry is going global

But it is not just Europe capitalising on its fresh gales. The GWEC predicts that in 2013, global wind generating capacity will have reached 332 GW, primarily driven by tremendous growth in China and steady expansion in Europe and North America. During 2013, 56.3 GW of new capacity will be added to the global total, more than double the annual market in 2008. Moreover, wind power is on track to supply 10-12% of global electricity demand by 2020.

The GWEC’s Secretary General, Steve Sawyer, believes that China is on its way to overtake Germany and Spain to reach second place in terms of total wind power capacity in 2010. Sawyer highlights that the prospects for future growth in the Chinese market are very good as new installed capacity is expected to nearly double again in 2009. Encouraged by the booming wind power market in China, the Chinese manufacturing industry is becoming increasingly mature, stretching over the whole supply chain. “For the Chinese manufacturers, 99% of their focus now is on the home market, but in the coming 5 years they will certainly be exporting overseas,” he predicts.

Sawyer became the first Secretary General of the Global Wind Energy Council in April 2007, after having spent 30 years working for Greenpeace. Following his experience as CEO of both Greenpeace USA and Greenpeace International, for which he served as Head of Delegation to many sessions of the Kyoto Protocol negotiations, Steve Sawyer became an expert advisor to the Chinese government on the formulation of the country’s Renewable Energy Law, which entered into force in 2006.

The Global Wind Energy Council, headquartered in Brussels, Belgium, serves as the voice of the global wind energy sector and has the mission to ensure that wind power establishes itself as one of the world’s leading energy sources. Its members include the major national, regional and continental associations representing the wind power sector, as well as leading international wind energy companies and institutions. Its corporate membership covers turbine and component manufacturers, project developer, power generation companies, financial institutions and consultancy firms, as well as researchers, academics and associations. GWEC represent all the world’s major wind turbine manufacturers and 99% of the world’s installed capacity.

Also Professor Zervos, Chairman of GWEC, believes that excellent manufacturers will emerge in China in the coming years. “Perhaps three or four will become formidable competitors in the international marketplace, while other Chinese manufacturers can open new markets in Africa and Latin America where offering the turbine prices will play crucial role in doing business. We have realised that Chinese manufacturers are competing at price levels that are below those of the international manufacturers producing in China. However, if Chinese turbine manufacturers want to enter mature international markets, they will have to compete on both price and quality,” he says. This will raise prices, he reflected, but Chinese turbine manufacturers may still end up being cheaper, which could have the positive effect of lowering prices for entire sector.

Born and raised in Denmark

Denmark is undeniably the cradle of the modern wind turbine industry, but in 1975 there was no indication that the country was heading for decades of industry dominance. The main reason for this was that Danish Government stimulated the creation of a market when it passed a law that that gave direct subsidies to investment in wind energy in 1979, which was also the year when Vestas started manufacturing wind turbines.

At the time, Birger T. Madsen had been working for Vestas for seven years, and he became the head of the company’s first wind turbines production department. “Similar activities were taking place in European countries such as the UK, The Netherlands, and Germany. The difference was that the Danish government created market stimulation and established public R&D projects to develop prototypes of wind turbines. This was the key to our success,” he recollects. After fourteen years at Vestas, Mr. Madsen founded BTM Consult feeding the industry with specialist industry analysis and forecasting.

Today, Denmark is the only country in the world to have achieved a penetration of wind energy of 20%, which will be the 2020 renewable energy target for the whole of Europe. Nevertheless, Mr. Madsen emphasizes that Denmark cannot rest on its laurels as the wind industry becomes global. “It is absolutely crucial that we justify why two of the world’s leading wind turbine manufacturers, Vestas and Siemens Wind Power, should stay headquartered in Denmark in the years to come,” he recognises.

“Unfortunately, the Danish Government has not sufficiently supported the wind power market in recent years,” reckons Henrik Stiesdal, Siemens Wind Power’s Chief Technology Officer and a pioneer who also entered the Danish wind industry in the 1970s. “Today, the Danish wind industry is facing a challenging situation since its home market has disappeared. Danish turbine manufacturers are no longer able to generate their first volumes in close geographic proximity where they can properly monitor the operation of their new turbines.”

Following the demand, Denmark’s leading turbine manufacturers, Vestas and Siemens Wind Power, have internationalised their operations. Vestas is widely considered to be the only truly global player in the industry, while Siemens is rapidly developing its international presence by opening manufacturing facilities in the US and China. This leaves the highly developed Danish sub-supplier base with the challenge of chasing their long time customers in the international marketplace. Having been a first mover for three decades, the Danish wind industry is once again well positioned to set break new ground.

The end of the beginning of technological development.

Modern energy is the term that Vestas prefers to use for wind power in its efforts to put it at the top of the global energy agenda. “Basically, investing in wind power makes sense,” starts Ditlev Engel, CEO of Vestas, the world’s number 1. “Wind energy is a high-tech, innovative industry that has enormous long-term growth potential in China and around the world. The wind industry has been growing at 25% a year over many years and we continuously strive to enlighten people about the possibilities in the wind sector.”

A closer look at Vestas’ financial performance and investment plans confirms that wind investing in wind power makes sense. In 2008, Vestas posted a 24% increase in revenue, reaching a €6.0 billion turnover and a €668 million profit. Already the undisputed global market leader, Vestas is expanding capacity at breakneck speed: the company is planning increase its investment in new factories and development centres from €678 million in 2008 to €1.2 billion this year.

Specifically in China, Vestas sees great potential. “It can become a wind energy superpower because of its huge amount of untapped wind energy resources,” explains Mr. Engel. “It is also clear that wind energy has massive potential for both energy security and carbon abatement in China, as it can increasingly compete with coal in terms of cost.” In 2005, Vestas management decided to move into China. At that time, new installed capacity in the Chinese market represented no more than 311 MW of which Vestas delivered 77 MW. Only four years later, China accounts for Vestas’ largest investments outside Denmark, with five factories and 1,800 employees, a number that is forecasted to increase to 3,000 in 2009.

All Vestas suppliers in China are part of a partnership designed to increase product quality and performance. “We strongly feel that helping to build local capabilities in wind energy is vital to building a strong Chinese wind energy sector. Through programs like six sigma, we are helping suppliers to become globally competitive and capable of delivering high quality products to the entire wind power industry,” Mr. Engel states. As a result, his company’s China-produced turbines currently have more than 80% Chinese content. Vestas had the ambition to develop turbines with 100% Chinese content in the future, and the fact that Zhenshi Group Hengshi Fibreglass Fabrics Co., Ltd., won one of Vestas’ “Supplier of the Year” awards in 2008 illustrates the progress that is being made in the Chinese market.

Vestas has made the strategic decision to concentrate its R&D activities in Denmark, Singapore, India, the US and the UK. “We have chosen those areas because they are close to the main markets in North America, Europe and Asia,” justifies Ditlev Engel. “To access the best brains in the world, we have to be present in the main regions. We know that we need to increase our R&D presence in our biggest markets and that includes China. As we expand our presence in China through building more factories, we also intend to develop our China-based innovation capacity and R&D presence to contribute to the ongoing development of the Chinese wind energy industry and the localisation of Vestas China.”

Wind power industry is travelling at high speed across the globe, and yet Ditlev Engel’s view is that the wind industry is at the end of the beginning of its technological development. “Unfortunately, people have a tendency to compare the kWh cost of different energy sources without featuring the cost to society and nature,” he notes. “Governments around the world are injecting around US$ 600 billion a year to support the fossil fuel industry. “With 1400 people in R&D, Vestas is the largest R&D centre in this industry, but if you compare this with the R&D capabilities of the established fossil fuel industry we are a very small organisation. One could imagine the impact of putting the same kind of determination and resources behind wind energy and other clean energy sources. There is a clear realisation among scientists that something different must take place. It is not enough to ask governments to put money on the table; this needs to be backed up by research institutes and universities. It will be an ongoing journey because it takes time to educate people to work with this type of energy.”

Vestas’ focus on China as a key global market has resulted in a strong commitment to sharing its 30 years of industry experience and expertise with China, ranging from counselling on policy to turbine sitting, grid integration, supply chain development, human resource development and technology and R&D. “It is very important for Vestas that we play a strong role in supporting China’s efforts on sustainable development and reducing carbon emissions,” Engel stresses. “When such an important player in the world as China is supporting this agenda it means that we can reach global solutions. The solution is in the mirror. We are all responsible for the future of the planet and the health of the environment that we give to our children and grandchildren.”

Betting on one’s strengths

Like Vestas’, Spanish manufacturer Gamesa’s success story reinforces the increasingly spread belief that going with the wind is a business both financially and ethically rewarding.

Gamesa had to bet on it to become the world’s third largest wind turbine manufacturer with a global market share of around 15%. Gamesa was a multi sector company devoted to aeronautics, services, solar and wind when Guillermo Ulacia, a former executive in the automotive industry, was appointed as CEO in December 2005. Considering the shared vision of the shareholders, board of directors and employees he defined a roadmap to strengthen Gamesa’s focus on wind power and set the pace of the transformation process.

“We defined four key action strategies to execute our business case. The first one was to focus on key accounts, meaning key clients and key markets. The second was to build a very competitive supply chain worldwide. The third one was ensuring that we can bring technological breakthroughs to the market, and the final one was spinning-off all activities where we were not on a leading position,” remembers Ulacia. “The main issue was determining how to select key clients and how to define our core markets.”

Right now, Gamesa has 50% market share in its home market Spain, and its challenge is to become the leader in other markets. Going beyond the European borders, the company was a pioneer in making the decision to enter China where Gamesa sold its first wind turbines in 2001 and became the market leader in 2004. Three years ago, Gamesa selected both China and the US as top priorities and opened factories in both countries.

Guillermo Ulacia’s business case proved to be highly successful over the past few years. International markets contributed 61% of Gamesa’s total sales of 3,600 MW, and the company set a new record for deliveries in the last quarter of last year. Gamesa’s net profit rose by 45% to reach €320 million in 2008 as sales increased by 27% to €3.551 billion.

Gamesa has one of the most integrated supply chains in the wind industry. “We produce gearboxes, blades, nacelles and generators at our manufacturing centre in Tianjin, where we also have an assembly plant for main wind turbine generator components. To optimise our time to market while reducing manufacturing cost we have incorporated the Synchronous Manufacturing System in our Tianjin Manufacturing plant, which is the first time in Gamesa’s history that we implement this new production system ... transportation is not a challenge and local content is not an issue for us since components representing 45% of the total cost are manufactured in-house while the remainder is stored on site,” boasts Ulacia.

Even if others try to do the same in the future, Gamesa thinks it’s in pole position in China vis-à-vis foreign and local manufacturers. “Gamesa is not competing with Chinese suppliers. I think that we should replace the word competition by cooperation. We have worked with many clients in China, and our close relationship with Longyuan Electric Power Group Corporation is a good example of successful cooperation. We are not focussed on Chinese companies closing the gap; our challenge is to keep our competitive advantage through innovations such as the Gamesa G10x turbine with 4.5MW of unitary power, our new product platform of which we recently launched a prototype, as well as innovations in the manufacturing processes. China’s commitment to be greener is a clear advantage for all of us.”

Chapter 1

Russia: The Fall (And Rise) Of Healthcare

Denge (money) Fever

When the Russian Federation emerged from the former USSR in 1991 all the structures of the past social net that provided for the complete healthcare needs of citizens were just a memory of the past – nothing was left when the centralized distribution of medication of the former USSR stopped. No drug registry existed during the first few years of independence and foreign pharmaceutical companies were able to sell just about anything they had in stock into the newly created private distribution structure. As the production of consumer goods including pharmaceuticals had taken place in other socialist countries in Central and Eastern Europe, regional players were able to leverage name brand recognition and functioning production assets to dominate the Russian market. Multinationals entered the fray but many retreated when the economy was crushed in 1998 by the ruble meltdown which made the currency 300-400% less valuable against the US dollar almost overnight. However, the Russian economy quickly rebounded from the crisis thanks to its immense natural resources, and is now a bona fide petro-economy with net creditor status. President Vladimir Putin’s dominant United Russia party has been able to achieve budget surpluses large enough to put billions of dollars away for the future while also funding tremendous works in four national priority presidential programs, the largest being healthcare (Zdorovie), a seemingly embarrassing issue in such a prosperous country in the past.

World Health Organization (WHO) statistics speak volumes about the negative effects of more than a decade without any type of real national healthcare coverage. The health of Russia’s population has dipped to 127 out of 192 WHO member states and the public health system is even worse - #130. Communicable diseases share a substantially higher share of the disease burden than in Europe and Russia has posted the world’s highest increase in HIV incidence rates. Russian men have suffered the most severe health deterioration and now die at the average age of 59. This is principally due to cardio diseases and external causes (accidents, poisoning, and injuries), mostly attributed to unstable economic conditions, unhealthy lifestyles and widespread neglect of risk factors. Additionally, more than two thirds of the population lives in areas affected by air pollution and 63% of males smoke, so respiratory diseases have a high prevalence and cardiovascular diseases cause 56% of all Russian deaths. The two major killers, ischemic heart disease and cerebrovascular disease, both cause at least 400% more deaths per 100 000 people per year than in the EU.

Today, living standards vary widely across Russia’s 11 time zones, 89 federal entities, and 20 cities with a population greater than one million throughout the largest geography of any country in the world. Today, 80% of Russians are ethnically Russian, yet immigration from over 100 other ethnic minority groups has created a real public health challenge. A large number of children live in disadvantaged social and economic conditions and gross inequalities in personal and regional income are significant determinants of ill health. The population is aging, fertility rates have fallen to 1.3 children born per woman and mortality rates in all age groups except infants are on the rise. The former population of 150 million has been reduced to 143 million today and is steadily falling at a rate of 800 000 per year.

This declining general health coupled with an increased annual federal healthcare budget worth $5.7 billion total in 2006 – targeting improvement in medical staff compensation, facility upgrades, new equipment, and a new focus on preventative care throughout the whole country - have suddenly made Russia a hotbed of pharmaceutical industry activity. The controversial first large-scale federal social program since the creation of the Russian Federation, the DLO, was launched in the beginning of 2005 to bring greater access to modern pharmaceuticals to an entitled population of pensioners and low-income families of about 8 million people. The inaugural $1.8 billion budget has steadied at $1.2 billion in 2006 and 2007, and was the major catalyst behind the Russian pharmaceutical market’s rise to the #12 global ranking in 2005 before surpassing Mexico and Brazil to become the world’s 10th largest ready-to-use drugs market in 2006.Through world-leading 28% growth, Russia is now an $8.4 billion market.

The DLO led the state-financed sector’s 82% growth and upgraded its contribution to the overall Russian market to 39%. However, plenty of industry insiders are concerned about the hasty implementation and corruption in the unsophisticated Program which has very recently resulted in budget overruns and more than $1 billion in outstanding bills and subsequently greatly reduced or halted drug deliveries in many cases. The result is a massive ongoing scandal which in November 2006 first involved the dismissal of the leadership of the Federal Mandatory Medical Insurance Fund (FMMIF), the Ministry of Health and Social Development (Minzdrav) entity responsible for processing DLO payments, and most recently in March 2007 the dismissal of Ramil Khabriev, head of the Federal Service for Health and Social Development Supervision (Roszdravnadzor), which was created in 2004 to supervise the overall quality assurances of medicines and to run the DLO. All this could mean that while the DLO has essentially made the market it will soon be dismantled. Nonetheless, even the commercial market alone should be enough to attain 10-20% annual market growth in the next several years.

Getting back to basics

Milos Petrovic, the Serbian head of Russian representation of Roche, the #2 player in the overall Russian (ethical) prescription segment and #2 in the DLO reimbursement segment (according to preliminary 2006 data by Pharmexpert), believes that “if one can asses the success of a product launch in 3-6 months in an average European country, here we need to talk about one to two years. Two factors are responsible – the size of the country and a conservative attitude amongst many Russian physicians. But when the product is well accepted, its life cycle is longer than in Western Europe.” Nonetheless, Roche’s leading products in Russia - MabThera, NeoRecormon and Herceptin - are the same as in most other European countries and three big launches where recently conducted in three months: Bonviva, MabThera for rheumatoid arthritis, and Tarceva.

Petrovic offers a historical perspective on his product portfolio. “In the late 1990s only the City of Moscow had any type of basic healthcare which might be considered adequate. For the very first time in 2005, some regions started to seriously treat patients with oncology or virology diseases or set up proper dialysis stations. In the regions that were inexperienced in the usage of innovative products, we saw a reluctant to use them for fear that patients might die “of such strong medicines.” The massive educational efforts on physicians and nurses were left to us. Once they discovered that they could treat Non-Hodgkin’s Lymphoma with MabThera as doctors do in Germany or the USA, they then had to overcome the lack budget in hospitals for infusion pumps needed for the drug to be administered. We had to assist healthcare authorities to solve such issues, from finding where to buy infusion pumps, all the way to serious education on how to diagnose and treat.”

As a specialty drug provider it is no surprise that about 60% of Roche’s sales in Russia come from the DLO program but Petrovic sees the DLO of today as far from sufficient. Nonetheless, “we need to give healthcare policymakers a chance to work with the community to improve the system. First of all, Russia needs to gain a full understanding of epidemiology. Secondly, the Ministry of Health must continue its work to establish uniform treatment guidelines for common diseases so physicians know which drug or group of drugs to give first. Only then will it become relatively easy to define the budget required to cover the needs of a population. The current gap in the Ministry of Health budget for 2006 is simply a consequence of inadequately calculated needs of the sick in Russia. Nobody knew what to expect for the DLO because there was no history on which to base funding decisions. Somebody needs to make these calculations and feed the defined needs into the regional and federal funding mechanism. Once this happens, the potential of Russia can be unlocked. This is the key, as the cost of the reimbursement of medicines is not such big money for the #3 country in the world in foreign currency reserves, higher than the whole European Union. The issue is now if the Russian Federation really wants to bring its healthcare system to the European level,” assets Petrovic.

You must eat one less piece of cake!

Just as foreigners have been brought in to lead the Russian operations of many multinationals in the past, many believe that the tables will turn within the next 5-10 years. The Russian middle managers of today have experienced first-hand many stages of development: communism, fast-changing Perestroika, and now a more regulated market. In 2001 Sergei Smirnov became the youngest vice president at Novo Nordisk worldwide. As vice-president international operations, he is responsible the 13-market Commonwealth of Independent States (CIS) region in which a single annual tender for all critical medical products is often the norm. Nonetheless, the Russian reimbursement system which Smirnov considers “similar to what we find in Europe” is ideal. Diabetes is the #2 category in the Russian DLO program after cytostatics and receives more than the global 10% of overall healthcare expenditure. Since 70-80% of people with diabetes have the “disabled” status necessary to be included in the DLO program, it is no wonder that more than 85% of Novo Nordisk’s sales, the highest ratio of all top players, come from the program.

While many multinationals are still marketing old-generation products like 17 year-old antibiotics and ace-inhibitors that no longer exist in the West, the DLO has improved access to more modern and efficient insulin like the short-acting insulin Aspart (NovoRapid®), thus improving predictability and control. The clear advantage, according to Smirnov, “is that the majority of people do not know exactly how much or what they are going to eat, and our dosage is based on exactly what they eat. Giving treatment adequate to diet has helped us to reduce the HbA1c significantly.”

Novo Nordisk’s global medical ambition is to reduce HbA1c to 7%, the point of adequate control, but the majority of people in Russia have an HbA1c above 10%. To Smirnov, “even to reduce it by 1% can provide a significant reduction of risks such as heart attack, micro-vascular complications, cardiovascular disease and death. That’s why we have always worked very closely with specialists and healthcare authorities in order to realize this medical ambition particularly by treating patients with Type 2 diabetes better.” Despite the common view that diabetes may be the only disease which has been given special priority by the Russian authorities, only 2.3 million of the estimated 8 million people with diabetes have been diagnosed, and the average consumption of insulin per capita in Russia is 57 international units compared to 350 units in Germany.

Novo Nordisk has been working for years now to do diagnosis late complications of diabetes and screen for diabetes in different regions through specialists from the Endocrinological Scientific Centre of the RussianAcademy of Medical Sciences who work in the Novo Nordisk Mobile Diabetes Centre. “Another good outcome from this project is the creation of awareness amongst the population, general practitioners, and public policy makers. This is magic,” asserts Smirnov. He adds: “by spending a little more money earlier, we can definitely save a lot of money later on since diabetes is dangerous because of its complications.” It is for this precise reason that Novo Nordisk placed its Mobile Diabetes Centre next to the Inter-Parliamentary Assembly of CIS Countries in Saint Petersburg when parliament deputies were to discuss the Model Law on diabetes. “After they had been tested and educated about diabetes, they adopted this because they already knew what it was all about. Closing the gap between the treatment currently offered and what could be offered based on available guidelines and scientific knowledge saves both money and lives and is part of the sustainable development of healthcare systems.”

Smirnov is comfortable that Novo Nordisk’s advocacy of a more seamless system of care in which medical treatment is just one element will serve as an ample defense of his stable 50% market share from three new Russian insulin manufacturing ventures which are planned to come online with enough capacity to meet the overall demand of the Russian market. “We have very good relationships because we consider education, effective data management and clarity on roles and responsibility as equally important elements. Our stakeholders know that we are very reliable in terms of superior quality in everything we do: high quality products, security of deliveries and supporting service activities. Our aim is to encourage a more collaborative approach as part of the solution for better health outcomes. Whatever happens, we are always ready to help,” concludes Smirnov.

A double-edged sword: Zero Tolerance compliance policies in Russia Or No good deed goes unpunished

Stefan Jentzsch, Head of Representation – Russia and CIS at Eli Lilly Vostok, came from the fairly structured Saudi Arabian market in 2003 to find quite a different situation in Russia. Jentzsch believes “this country needs to transition to a better funded, insurance-based system, while strengthening outpatient care (which accounts for only 35% of public health resources versus 60% in the EU), and developing treatment standards as the main basis for reimbursement decisions in order to ensure better access to innovative medicines.”

Jentzsch’s local unit lags far behind Eli Lilly’s Pharmaceutical Executive #10 global ranking in 2005 yet he explains that unwavering global compliance standards and a disconnect between charitable acts and product inclusion in the DLO are the causes. While up to 80% of prescribed drugs are sold with prescriptions in Russia, Jentzsch claims: “We are complying with the highest ethical standards in Russia. We are not encouraging patients to buy a prescription drug in a pharmacy without having received a prescription from a physician.” Lilly has taken a leading role in the process of updating the Code of Marketing Practices of the Association of International Pharmaceutical Manufacturers (AIPM), the main industry voice of the international pharmaceutical community, in 2006. “We want every company in the Russian market to play by the same rules, in full compliance with all applicable laws and regulations,” asserts Jentzsch. However, it is clear that the entire AIPM membership does not stand behind such a vision as its last executive director, Sergei Boboshko, recently stepped down partly due to lack of consensus in its membership of both innovative and generics companies over such matters.

Despite all its frustrations with the DLO, Lilly is committed to the program because “access to innovative, often life-saving medicines is still limited in this country,” asserts Jentzsch. While Lilly has historically had a clear focus on diabetic care in Russia – which still accounts for 50% of Russian sales - it takes second seat to the leading role of his organization in Lilly’s global multi-layer philanthropic initiative on MDR-TB in partnership with the WHO. The program supports essential activities in the MDR-TB hot spots in the world – China, India, Latin America, South Africa, and Russia where the WHO states that 86 new cases of TB are recorded per 100 000 people per year, more than 6.5x the EU average. Jentzsch explains the Russian role: “we started by funding training activities in a specialized treatment center in Tomsk which have greatly decreased mortality. This now forms the basis of training conducted in specialized research centers throughout Russia. We also transfer drug-manufacturing technology for two MDR-TB antibiotics - capreomycin and cycloserine- to SIA International, one of Russia’s top two diversified distributors and pharmaceutical holdings. Their personnel will be provided with the specific training required to best utilize this technology in accordance with good manufacturing practices and to help ensure the quality and sustainability of drug-manufacturing.” Lilly could have simply imported these drugs from its UK production but instead decided to help to build local capacity at no financial gain. “The premise is that local partners know better what is right for their country and are able to optimize the supply situation of these two crucial drugs. We are in Russia for the long run and are here to improve or even save the lives of numerous patients,” concludes Jentzsch.

Taking full advantage of Russian medical manpower

Russia’s long-established tradition of solid medical and public health science has left the legacy of a health workforce that is substantial in size and has high professional qualifications. Despite poor working conditions and the general feeling of dissatisfaction that is probably linked to the fact that physicians no longer earned as much as everyone else with a similar degree of qualifications as they did in 1991, Russia still has nearly 50% more doctors per capita than in the EU. While all Russians are technically guaranteed free medical services, those that find jobs as doctors make ends meet by soliciting bribes. Others seek out substantially better compensation as medical representatives (90% of the nearly 10,000 medical representatives in Russia completed a medical specialization) or in clinical trials. This applies particularly to St. Petersburg, the unlikely epicenter of local CRO activity.

Russia has become a bona fide hot spot for clinical trials. The country participates in more global clinical trials than China and India combined. Its population of 143 million is largely treatment-naïve so, according to A.T. Kearney report Successful Clinical Trials Management, patient recruit is up to 10 times faster than in the United States. For example, a recently completed trial in Russia saved Eli Lilly an entire year in getting product to market. However, some challenges do exist: IP protection is relatively weak, complicated customs procedures can hold up clearance for trial supplies, a higher 18% VAT applies, and improvement in the ethics of patient recruitment is not coming fast enough. In fact, a criminal investigation has just been launched against GlaxoSmithKline in Volgograd following troubling symptoms in babies involved in trials of injected vaccines.

Such nightmares may be the perfect illustration of why Benjamin Munblit, Analytics and Consultancy Director at COMCON Pharma and always controversial industry pundit, states: “Russia may account for 1% of overall sales of multinationals yet it is labeled a priority market only because the ripple effect of failure in compliance issues could create a disproportionately large negative impact.” This fear does not stop most of the big companies from including Russia in their multi-center clinical trial programs.

Schering AG started its first Russian Phase 3 study just two years ago and increased its activity to three Phase 3 and six post-marketing studies in 2006. Through this experience contracting Russian centers and hospitals, Dr. Manfred Paul, General Manager - Moscow Representative Office, of Bayer Schering Pharma, shares: “they fulfill international standards like GCP 120%.”

Paul sees more than that obvious benefit. He explains: “Russian physicians have very good knowledge and are very well experienced, but they have less opportunity to participate as speakers in international congresses because they formerly were not able to participate in clinical studies. Once Russian opinion leaders have the experience, they will be able to present at international congresses and enhance their image as well as that of Russia and Bayer Schering Pharma. Also, through first-hand experience, a Russian speaker can testify that it is a top product to his Russian colleagues. This poses a big advantage in the marketing sphere.” Paul will continue in this direction as he prepares a phase 3 study for a Bayer product under the new merged Bayer Schering Pharma structure.

When Paul returned to Moscow in 2004 to manage Schering AG’s Russian business after spending 1985 to 1990 here as the representative of the East German foreign trade company for medicines, he noticed that “the equipment in some hospitals and specialized centers in Russia is now even better than the European average. Russia has specialists who are excellently trained on how to use this equipment. On the other hand, many doctors in hospitals have an average knowledge that does not fit with the latest equipment or technical news.” In Russia, specialists are still relatively more numerous than primary care physicians, so Paul has been busy offering training programs such as one designed to show radiologists the difference between investigations with and without contrast media.

This educational focus extends to MS treatment where Schering AG started to visit all main neurologists countrywide five years ago and established a one of a kind nurse system that provides patients with a wide range of free 24-hour support. As a result, Betaseron has grown quickly to become the overall Russian market leader and the #5 drug overall in the DLO program in 2006.

A focus on education is also necessary on oral contraceptives since, according to Paul, “the average Russian woman supposedly has 5 to 6 abortions in her life. This is a remnant of the past when abortion was the typical way of family planning in the USSR. Despite a shift in political systems, the acceptance rate of the use of oral contraceptives has only risen from 3-4% to 5.5% in the last 20 years, compared to 35% in Europe.” This has prompted players in the fertility control field, including Schering AG as holder of 52% market share in Russia, to invest heavily in the preparation of campaigns targeting the new generation of physicians and gynecologists about the modern style of family planning. At the same time Paul is formulating a clear response to the concern that oral contraceptives are counter-productive to President Putin’s new program to increase the birth rate. “In fact, oral contraception will not decrease birth rates: “The opposite is true: it offers the opportunity to choose the right moment to have children, to plan the family. We do in fact support the program of President Putin.” It is through such a focus on education that Bayer Schering Pharma expects to emerge as a €190 million turnover Top 10 pharmaceutical company in Russia in 2007.

Understanding the mysterious Russian psyche

The most successful foreign managers in Russia agree on some basic principles – beyond the preference for a Russian bride. A Russian proverb illustrates the Russian reality: “People know each other when they have eaten one pud (16 kg) of salt together. It would take a lot of time for the two of us to eat a pud of salt together.” It is not so easy to cultivate close relationships with the Russian people; it takes time, but if they trust you, they will trust you until the end. Thus, five to ten years is the best term to stay in Russia. This is the view of Jostein Davidsen, managing director, Russia-CIS for Denmark’s Nycomed, who has continuously worked longer than any other foreigner in the Russia pharmaceutical industry, since 1988.

Today, the leader of the consistent Top Ten market player believes that while Russia is still an emerging market with a system that is not completely transparent or in compliance, it is no longer “a jungle where you need to build your home for yourself” as it was in the early and mid 1990s. Today, “I see no difference in doing business here than in any other market, but you must be clever, have a proper business strategy, the right human resources, and brands in order to succeed in developing a Russian pharmaceutical business. The 2005 Platinum Ounce “Top-Manager of the Year" and winner of the prestigious joint Ministry of Health and Russian Orthodox Church "Profession-Life" award, advises people entering Russia to focus on long-term thinking, professionalism, awareness of the Russian language and culture, and adaptability.

The companies that historically have been the most successful in Russia - Sanofi-Aventis, Gedeon Richter, Berlin Chemie and Nycomed - have had a very mixed portfolio adapted to the market with many products not sold in the West. Nycomed, which has the largest field force in Russia, 800, still benefits from the strength of some Soviet-era products while also building on innovative, high tech hospital products, branded beta blocker, Type 2 Diabetes and pain generics, as well as a large OTC portfolio. Also, up until the Altana acquisition gave Nycomed R&D capabilities, he had been extremely successful in independently negotiating and concluding in-licensing agreements. Nycomed built up the Merck KGaA Russian business from $3 million in 2001 to more than $70 million in 2006.

The “old” Nycomed derived 26% of €750 million Group revenues from the Russia-CIS region as its biggest market. Even following the acquisition of much larger Altana, Davidsen, is confident that his region will still be the second biggest market after Germany. “While the new Nycomed will be less dependent on the Russia-CIS market I’m very doubtful that the focus will be less.” The question now is whether or not Davidsen will set up a Greenfield factory in Russia, but he believes: “from both a capacity and cost perspective it’s probably easier and cheaper to import products into Russia at the moment. Greater participation in reimbursement programs will never be the sole criterion in a decision to produce locally; however, given a strategic five or ten year plan, when I believe that Nycomed and all the Top 10 or Top 15 companies probably plan to exceed the $1 billion annual revenue mark in Russia, it might become quite beneficial from a logistics point of view.”

While there is a lot of excitement about who will be the next president and the recent indication that the value of unofficial bribes to officials nearly matches the State’s total official revenue of $250 billion, to Davidsen, “conservatively speaking, I see Russia as a Top Five European pharmaceutical market in five years and as the biggest in Europe in ten years time.” Despite the 70%+ increase in the total healthcare budget for 2007, “when compared to overall Russian GDP growth, this represents no increase at all as a percentage of GDP from 2006 as it will still account for only about 3.5-4% of GDP. Healthcare expenditure per capita in Russia, even when including the DLO, is still only around $60-$70 compared to levels as high as $300 in other Eastern European markets. By taking into account these extremely important figures we can understand the enormous potential for growth,” concludes Davidsen.

Given such expectations, it is no wonder that for Davidsen, “the #1 challenge today is to manage high corporate expectations of sustainable percentage growth that has been in the 50-100% range in the last couple of amazing years. The ‘easy years’ of 2001-2004 are now gone. We will eventually follow the Central and Eastern European path of less than 10% current growth.”

Chapter 1

Norway: A Pioneering Hydrocarbon Producer

2009 marks what many regard as the 40th anniversary of Norway’s O&G sector. With initial recoverable reserves at over 3 billion barrels, Ekofisk, Norway’s first “elephant” field and most memorable Christmas present was initially predicted to last 15-20 years – now, 40 years out, current predictions peg production past 2050. Just four decades into its history, it’s no exaggeration to say that the oil and gas industry has transformed Norway. Not that the country was still paddling around in Viking longboats in the late 1960s, but its speedy ascendance to among Europe’s richest countries is a tale to make Horatio Alger blush. Now with the world’s second-highest GDP per capita – at least in nominal terms, thanks to the strong Norwegian Krone (NOK) – of around US$95,000, Norway is over twice as rich as the United States, and ranked #1 on the UN’s Human Devlopment Index.

This latter statistic indicates the particular way Norway has shared its increased wealth, driven by a unique socioeconomic model fostering prosperity through social democratic values. A belief that the country’s resources should be used for the benefit of all is the underlying precept around many current opportunities, and challenges, facing the sector’s development.

In the context of this fall’s election, Prime Minister Jens Stoltenberg astutely acknowledges the different stakeholders within Norway’s oil and gas framework: “During the coming decades we will have to transform our societies dramatically. Our production methods will have to change. Our consumption will have to change. We will have to make the transition to a low-carbon world. And in order to make that transition, we will need to make use of all our abilities to develop and deploy new technologies. Failure is not an option.”

Stoltenberg’s transitional mindset was presaged by the creation of StatoilHydro in 2007, a historic merger from an early 1970s genesis in the trifecta of Statoil, Norsk Hydro, and Saga, established to manage the then-newfound wealth.Controlling some 80% of Norwegian Continental Shelf (NCS) production, the NOC’s importance to Norway perhaps ranks only behind its primary beneficiary, The Government Pension Fund. This global equities basket, traceable to the Petroleum Fund begun in 1990, is forecasted to hit NOK 2.794 trillion ($399 billion) by the end of 2009. Although impressive, this figure comes on the heels of its worst-ever performance in 2008, losing 23% of market value, or NOK 633bn ($92bn) – a sum greater than the GDP of Cleveland.

It’s an oft-heard refrain that the money is to secure a prosperous collective livelihood, with a goal of turning finite “petroleum assets” into long-term “financial assets.¨ And although Norway’s 4.8 million inhabitants have enjoyed an unusually equitable distribution of their natural resources’ bounty, some locations have seen a higher concentration of the spoils.

One of the most obvious beneficiaries of this wealth has been the City of Stavanger, which has arisen from post-WWII stagnation to being voted as European Culture Capital in 2008, embracing a welcoming atmosphere to sublimate its rightful reputation as Norway’s oil and gas hub, as home to 50% of the sector’s national workforce. Mayor Leif Johan Sevland, the city’s charismatic ambassador, is a well-known figure around town and familiar face internationally at events such as OTC in Houston, who emphasizes that “being in Stavanger represents long-term thinking. We have good health, welfare, international schools, and housing, and thus attract people to be part of a very important industry. When people come, they want to come back.”

And people are coming, and staying – with around 15% of the city’s population born outside Norway, UK expats make up the majority. They come for the jobs, drawn by a 1.3% unemployment rate, and stay for the fun. Mayor Sevland is striving to ensure that culture remains not just an episode, but an epoch, already evidenced by a rich variety on offer, from public art installations, 2009 World Beach Volleyball Championships, and a new NOK 1.3 billion concert hall.

Such success and thoughtful use of wealth has made Norway the economic envy of Scandinavia. As the apocryphal tale goes, once upon a time Norway offered Sweden an exchange of half its hydrocarbon potential for half of Volvo, which was declined – a decision certainly regretted now in every Starbucks and H&M from Nordkapp to Krstiansand. Looking at Volvo’s last-year profit, it would take over three centuries to reach the Pension Fund’s reserves.

Europe's O&G Safe Haven

Bernhard Krainer General Manager of OMV If Norway's wealth has been the envy of Scandinavia, a major source, namely ample gas supplies and the necessary infrastructure to fuel Europe's needs, have caused green eyes further afield. As Europe's second largest source of natural gas, Norway is seen as a safer alternative to Russia, particularly with heightened concerns over energy security following a halt in supplies due to a row over gas transit with the Ukraine in early 2009.

The Norwegian Petroleum Directorate’s (NPD) primary role is ensuring sound resource management on the NCS. Falling under the Ministry of Petroleum and Energy, the organization is involved in decisions regarding all acreage in both the ordinary and Awards in Predefined Areas (APA) rounds, as well as access of new companies to Norway.

NPD Director General Bente Nyland paints a clear picture of the situation, explaining “The fact is that oil production will decrease and gas production will increase, and in a few years Norway will turn into a majority gas-producing country.”

“Norway is the second largest supplier of natural gas to Europe, with 29% of production destined for Germany, although more and more is heading to the UK and France,” elaborates Nyland, a former Statoil geologist and 20-year NPD veteran. Nyland points to Norway’s stable and predictable framework conditions as allowing companies to calculate and predict incomes over the license lifetime. Such an environment will grow increasingly important, particularly as other governments change rules, tighten conditions, or open fewer and fewer areas.

“Since 2000, Norway has seen more than 50 newcomers on the continental shelf,” Nyland states, and says that while success varies, “there have been definite entrant trends, in particular European downstream gas companies like Wintershall, GDF Suez, Bayerngas, and PGNiG, who have seen the need to secure their own gas supplies and found Norway important in this regard.”

The fact that these companies can enter the market is due to changes in its structure, explains Brian Bjordal, Gassco’s President and CEO. “In 2001 there was a significant restructuring in Norway, where Statoil was partially privatized and listed as a company,” he says, and points to the watershed moment dissolving Statoil’s dominant position as operator of the gas transportation system. “This system was a natural monopoly, and the question was whether they should retain that position as a listed company.”

Consequently, Gassco was created to act as “the independent system operator on behalf of the owners, Gassled. This is an integrated system, which operates based on the strength of a natural monopoly.” Bjordal stresses the system’s function is “to be neutral and independent, and not to make money as such but to offer excellent services for gas producers and shippers,” which it does through four roles administering hardware, system operations, booking system management, and architect.

All this is done by a relatively lean workforce, which manages among others Langeled, the world’s largest subsea pipeline at over 750 miles long, connecting Nyhamma in Norway to Easington in the UK. “Gassco has 300 employees. This system takes about 3000-4000 to operate. We outsource most of our work, but we sit in the centre of the whole operation, managing the system. I always say that you should never count heads in an organization; you should count active brain cells,” Bjordal quips.

Taking advantage of these active brain cells are a slew of cash-rich foreign utilities, who in recent years have gained renown for snapping up assets unavailable back home.

The Austrian OMV has imported their mountainous native land expertise and familiarity with complex geological formations, operating five out of the company’s seven operational licenses. General Manager Bernhard Krainer explains that OMV’s Norway presence is driven by two factors. The first, perhaps predictably, is access to interesting exploration opportunities. On this note, Krainer says, “we are more interested in the frontier areas – mid-Norway, and further out in deep water, especially in the Barents Sea. The company now has three licenses in the Barents Sea, which fits strongly into OMV’s overall exploration strategy: going into emerging basins and deeper water, and becoming an operator there.”

The second factor, Krainer notes, is that “OMV is not just an exploration company, but for a large part also has a lot of downstream.” As an integrated organization with its own gas business, the company was “naturally interested in accessing the more mature areas with gas reserves in the North Sea and the mid Norwegian Sea.” And despite OMV in Austria receiving around 10% of its gas imports from Norway, “if the company is involved in the whole value chain from production to transport to the end consumer, it’s more interesting than just buying gas from Norway,” which Krainer points out OMV has been doing on long-term contracts from the Troll area since the early 1990s.

Nice day for Norway M&A

Kare A. Tjonneland VNG Another player moving up the value chain is German gas importer VNG, which entered Norway in 2005, because, as Managing Director Kare A. Tjonneland explains, “the company decided to be part of the upstream business, and wanted to do so in Norway because they knew Norway very well and appreciated the stable political system.” Tjonneland, who has been VNG Norge’s head since qualification in August 2006, recently presided over the $150 million acquisition of the company formerly known as Endeavour. Speaking of the deal, Tjonneland sizes up the rationale: “VNG had already partnered with the company in two licenses, and knew them fairly well. VNG examined their portfolio, with potential reserves more than 90% gas. It was a perfect match.”

Serendipity aside, navigating choppy North Sea waters for the first time is not always smooth sailing. “This is the first time VNG has gone upstream. VNG is a downstream company, with activities in pipeline distribution, storage, and selling gas bought mainly from Russia and Norway,” says Tjonneland, adding that entering in a booming 2006 also put significant pressure on G&G recruitment. Suggesting the company’s strong capital, history, and long-term orientation as success factors in starting in a small team from scratch, progress from zero to 29 licenses in three years seems to support the approach, perhaps to be duplicated as Norway is the first VNG affiliate to go upstream, with future possibilities in Russia, North Africa, Central Asia, and the UK.

Of course, for every acquirer, there must be an acquiree. Harald Vabø assumed the latter position after the company he founded, Revus Energy, was acquired by German Wintershall, where he is now Managing Director. Explaining the history behind the original company’s founding, Vabø remarks that “about 10 years ago, the Norwegian authorities realized they needed more players on the shelf, and opened it up to new competition. What they had in mind was to attract large independents: companies with large financial muscles alongside operational and technical capacity. They never considered that there would be new Norwegian companies.”

Such companies were commonplace in the UK, US, and Canada, but at “a new and wild idea in Norway at the time,” says Vabø, when only the supermajors plus Statoil, Hydro and Saga were allowed to operate on the NCS.

Contrary to many of their counterparts, Wintershall had a less flatulent urge to enter the country. Vabø explains, “Wintershall’s drive for this acquisition was that they wanted a new core area, with political stability and oil rather than gas,” to complement significant gas production in the Netherlands and Russia. To this end, Vabø hopes that “by 2015, we will have Jordbær and Luno onstream. On top of this, we hope to be taking part in 6 to 8 exploration wells per year.”

Such activity, while nothing new in oil, is a change in gas. Arne Westeng, Bayerngas Norge’s Managing Director, notes that “In the early days, everything was nice and easy in the business, with a gas monopoly in Norway,” referring to Saga Petroleum, which sold to Ruhrgas, which in turn sold to Bayerngas. “Both companies got their margins, there were no problems, and everyone was making money. This is not how it works today, which is partially the reason why shareholders of Bayerngas want to go upstream.”

Aware of the notoriety for Germanic reliance on systems and processes, Westeng is quick to pre-empt any organizational presuppositions: “When we started here, our mother company Bayerngas GmbH established a set of rules between ourselves and the shareholders, and the rule is that if we are making a proposal of small or medium size, the board has five days to give their acceptance. Big acquisitions have a maximum of 10 days. The board has always stuck to the rules, and if any deviation from the rules occurs, it’s in giving much less time than promised!”

Naturally, this attitude comes in handy on the M&A front. “This fast decision-making has been absolutely instrumental in making acquisitions, particularly in the case of PA Resources,” says Westeng, referring to the Swedish firm’s Norwegian assets acquired in late 2008. “Bayerngas Norge entered very late in the process, performed due diligence assessment, and could tell the owners of PA Resources that we would make all the necessary decisions in time. In fact, the first time the board was informed of the purchase opportunity was on the 24th of November on the regular board meeting, and the $220 million deal was signed on December 1st.”

M&A activity hasn’t been limited to E&Ps. NCA and IOS, KCA Deutag and Prosafe Drilling Services, MSS and RK Offshore; these are just some of the many names in the service sector’s growing deal activity. Add to this list Acona Wellpro, whose two namesakes are themselves the product of numerous consolidations, with the combined entity doubling the company’s size to 320 people, with some 215 falling within well engineering and drilling management, making the company’s department the second largest in Norway after StatoilHydro according to CEO Torkell Gjerstad.

“Acona doesn’t have a vision of becoming super large, but we understand the need to have a breadth of competencies, because we help oil companies become an oil company. In a sense, Acona is an integrated oil company on a microscopic scale,” says Gjerstad, with macroscopic StatoilHydro the company’s biggest client, alongside independents like Aker Exploration, Nexen and Centrica. This integrated approach has not hindered new projects such as the Barents Sea Report and Arctic Web, the latter already seeing interest from US and Canadian governmental bodies in extending the system to their territories.

“If you want to provide these kinds of services which are often integrated, particularly with environmental and safety related regulatory matters, you have to have a certain size,” notes Gjerstad, adding that it also allows the means to respond to a wider sized client base. “This ability to man up and down means that our capacity, and thus flexibility, is key.”

Chapter 1

Singapore: The Biopolis of Asia

A country with a plan

During the second half of the 20th century, Singapore succeeded in staying one step ahead of the game, becoming a competitive manufacturing hub first for electronics and then for chemicals. Today, as part of a region that has based its extraordinary growth on being a low-cost center for manufacturing, Singaporeans know they need to make a jump into a knowledge-based economy before their neighbors do if they want their economic success story to be sustainable.

The Biomedicals Sciences Initiative Philip Yeo, former chairman of Singapore’s Economic Development Board (EDB) and Singapore’s Agency for Science, Technology and Research (A*Star), played an important role in the development of the island’s electronic and chemical manufacturing capabilities. Furthermore, In the year 2000 he became part of a team of four mandated by Singapore’s prime minister to draft a plan for the development of the country’s life sciences industry. “The key to success has always been to develop the right people,” explains Yeo, who was also the brain behind Singapore’s plan to train 1,000 PhD scholars, who will eventually return to the country and work in areas such as IT, engineering, biochemistry, and medicine. In mid-2000, Singapore launched its Biomedical Sciences (BMS) initiative with the objective of becoming a leading drug discovery center and making the industry one of the island’s main economic pillars, a vision best represented by the initiative’s slogan, Singapore: The Biopolis of Asia. Since then, EDB and A*Star have worked closely to build state-of-the-art capabilities across the entire value chain of what is known as the BMS cluster: pharmaceuticals, biotech, medical technology, and healthcare services. As part of this policy, Singapore has set up world-class research institutions, built top infrastructure, attracted investment in R&D and manufacturing from MNCs, and seen the birth of a number of local biotech start-ups. Nevertheless, the BMS industry is significantly different from electronics and chemicals, and it takes more than just investments to become a competitive player in it. With no major local drug company, a limited local talent pool, few private investors to support start-ups, and bigger regional rivals such as China, India, and South Korea also focusing on this sector, this time Singapore will need to overcome unique challenges in order to stay ahead of the game and succeed in becoming the Biopolis of Asia.

Top infrastructure: Building the Mecca

When the Biomedical Sciences (BMS) initiative was launched in 2000, Singapore already had world-class infrastructure for hosting R&D and manufacturing facilities. In the late 1990s, following the same strategy of clustered development previously applied to electronics and chemicals, Singapore developed the TuasBiomedicalPark a 183- hectare world-class manufacturing hub, which attracted names such as MSD, Novartis, and GlaxoSmithKline Biologicals.

Furthermore, since the 1980s Singapore’s SciencePark has been one of Asia Pacific’s most renowned locations for R&D and technology activities. This techno-park has become a model for many science and IT parks across the region, and today hosts more than 260 MNCs, local companies, and research organizations. The SingaporeSciencePark is developed and run by Ascendas, the largest private industrial landlord in Singapore and Asia’s leading provider of business space solutions. “Our mission is to create total business environments that inspire people to excel, and the SingaporeSciencePark is a testimony to the important role Ascendas plays in this regard in the country,” explains Thomas Teo, CEO of Ascendas Land Singapore. Ascendas also played a key role in the development of Singapore’s newest, most impressive, state-of-the-art R&D facility: the Biopolis. Conceived as the cornerstone of Singapore’s vision to build up the BMS industry, Biopolis is the orld’s first integrated, purpose-built biomedical research complex, juxtaposing both public and private sector research laboratories. With shared scientific facilities and other services, the idea behind this futuristic complex is to generate interaction and collaboration between industry and public research laboratories. “Every new religion needs its Mecca,” says Philip Yeo, who was the main promoter of the Biopolis concept and chairman of A*Star when Phase 1 of the project was completed in 2003.

Ascendas developed Phase 2 of the Biopolis, which officially opened in 2006. With two buildings comprising 37,000 square meters (40,000 square feet), Biopolis II also included “soft” elements such as arts, water features, greenery, and open spaces. According to Teo, “Land is scarce in Singapore. We have always gone against the convention by creating a more open, campus-like environment with lots of greenery in our parks. We believe that creative ideas flourish best in conducive environments.”

The plan is to become an innovator

The most ambitious objective behind the BMS initiative is for Singapore to become a leading player in the drug discovery space. In this regard, the first phase of the initiative (2000–2005) focused on establishing a firm foundation for basic biomedical research.

During this period, the Singaporean government built numerous public research institutes almost from scratch, attracting top research talent from around the world. Furthermore, the Singaporean government has been highly active in developing human capital for the industry by promoting the study of life sciences and adapting academic curriculums to fit the industry’s needs. “R&D is dependent on the presence of talent,” explains Stefan Ziegler, head of Asia Pacific for Novartis. “Singapore has done a great job in shaping the local educational system so as to draw more people into life sciences, as well as in attracting more foreigners to contribute to R&D activities.” A new model for drug discovery when it comes to private-sector R&D, EDB has invested in local biotechs such as MerLion Pharmaceuticals and S*Bio, which have promising compounds in early clinical trials. It has also been active in luring multinationals to locate their drug discovery facilities in the country. EDB has established a noteworthy public-private partnership with Novartis. The Novartis Institute for Tropical Diseases (NITD) is a small-molecule drug-discovery institute dedicated to finding new drugs for the treatment of dengue fever, tuberculosis, and malaria. According to NITD director Dr. Alex Matter, Singapore is a great location for the institute—close to both top scientific infrastructure and a large patient pool. Another MNC conducting R&D in Singapore is Eli Lilly, which opened its marketing and sales office in the 1980, and was the first MNC to establish a clinical trials unit in Singapore in the 1990s. In 2002 the company established the Lilly-SingaporeCenter for Drug Discovery (LSCDD), which today drives a substantial part of Lilly’s cancer biomarker discovery and development.

The center has recently expanded its scope to include drug discovery activities in the areas of cancer and diabetes. Lilly’s vision is to use Singapore as a hub for interacting with the region’s many emerging pharmaceutical companies and contract research organizations.

As Dr. Michael Schroter, COO of LSCDD, explains, “The FIPCO [fully integrated pharmaceutical company] model is changing, and the current dynamic in the industry is to partner with other companies. It is in this context that Lilly came out with the term FIPNet [fully integrated pharmaceutical network], and Singapore will be at the forefront of this initiative.” The main difference between Lilly’s FIPNet model and a typical outsourcing model is that in the latter the activities are centralised in one place, usually the MNCs headquarter.

By contrast, in the FIPNet model the objective is to link activities between partners. The vision is that ultimately CROs or other pharma and biotech firms that are working with Lilly will also cooperate among themselves. From a financial point of view, the most innovative concept behind FIPNet is the idea of spreading the risk and reward of drug discovery among the different partners. Asked why Singapore was chosen as the location for the LSCDD, Dr. Jonathon Sedgwick, the center’s managing director and chief scientific officer explains, “Just like when buying a house, the most important factors are location, location, location. We plan to develop a very robust network of activities in the region, and Singapore is very well placed for that, being localized centrally to all of our operations and partners around Asia.” Lilly’s FIPNet model is still in its early stages, but Dr. Sedgwick is certain of its potential. “We are confident we will succeed, as we are proposing a win-win situation. Lilly wants to leverage the region’s talent, while potential regional partners are looking forward to tapping into our company’s know-how and experience,” he argues.

From bench to bedside: Clinical development in Singapore

The second phase of the BMS initiative (2006–2010) focuses on strengthening translational and clinical research. The goal is to realize the full potential of the country’s investments by taking discoveries from bench to bedside. In terms of clinical research, although Singapore has top infrastructure and professionals, growth in the number of clinical trials has been unsteady (figure 1), mainly because the island’s small population of 4.5 million people presents a ceiling for the industry. Instead, Singapore has positioned itself as a regional clinical trials management center. Pharmaceutical companies such as GlaxoSmithKline, Eli Lilly, and Eisai, together with many of the world’s leading contract research organisations (CROs) such as Quintiles, Covance, and ICON have located regional centers in the country.

Growing demand for CROs: A look at the region’s leader

In the last years, the CRO industry has been booming in the Asia Pacific region for a number of reasons. First, while the US and European clinical trial markets are getting saturated, Asia offers a large pool of treatment-naive patients. Second, in the last decades Asian data has established a track record of successful registrations with both FDA and EMEA. Third, the growing importance of the main commercial markets in the region has attracted companies to conduct clinical trial activities to best position themselves for future commercial success in those markets. Quintiles, the region’s leading CRO, decided to establish its Asian headquarters in Singapore in the early 1990s. “The reasons why it has worked well for us in the last 10 years will be the same reasons why it will work well for us over the next 10 years,” explains Dr. Anand Tharmaratnam, Head of Clinical Development Asia Pacific & CEO South East Asia for Quintiles. “Basically, most of our clients have their regional head offices in this country, and Singapore offers a best-in-world infrastructure, legal, regulatory, and corporate framework. The investigators we work with here in Singapore are global and regional key opinion leaders. It is also an excellent transportation and logistics hub allowing us to effectively manage our 24 offices in Asia. All these elements together position Singapore very nicely. While India and China will flourish and drive regional market size, Singapore will always have its place as the location of choice to manage one’s operations.”

Since Dr. Tharmaratnam joined Quintiles Asia Pacific four years ago, the company’s operations in the region have more than doubled. Furthermore, in Southeast Asia, the company is growing at 50 to 70 percent, depending on the country, while China and Korea are growing at 100 percent a year. “We hire more people in clinical development than any other pharmaceutical company or CRO in Asia,” says Tharmaratnam. “In some of the markets where we operate like Thailand and New Zealand, we actually employ over 50 percent of the entire clinical development talent pool.” Despite challenges regarding talent availability and cultural and regulatory diversity, Dr. Tharmaratnam sees a bright future for CROs in Asia Pacific. “We truly believe Asia has a very prominent role to play in drug development, and we want to be at the very front of that move” he says. According to him, Asia’s strengths lie not only in its vast patient pool but also in its excellent investigators. “Asia is not a cost place,” he stresses. “Asia is about quality and delivery!”

The local connection

GleneaglesCRC is a perfect example of how Singapore is developing local capabilities across the whole industry ‘s value-chain. Currently the only Southeast Asian CRO, GleneaglesCRC is the subsidiary of Parkway Holdings, which owns and manages hospitals across Asia—a major advantage, given the challenges CROs in the region face in finding talent.

“We have 3,000 doctors who are specialists in their areas!” explains Dr. Yap Kok Wei, CEO of GleneaglesCRC. “Any medical expertise is just a phone call away. It also means we have access to top-notch labs, diagnostics, radiology, and ancillary services.” Yap says GleneaglesCRC is uniquely positioned, thanks to the long-rooted networks the CRO and Parkway Holdings have developed. Today, the industry is reacting to the opening up of Indonesia, a country in which Gleneagles has been present since 2000. “The number of trials back in 2000 was minimal, but now it is skyrocketing,” says Yap. “Gleneagles was the first CRO to go to Indonesia, and our first comer status gives us an advantage today; if you need 10,000 patients for a trial we can get them!”

Another country showing significant growth in clinical research is Vietnam. Yap has conducted trials in Vietnam since 1992. “At that time the infrastructure was very poor,” he says. “We had to monitor trials almost every two or three days to check on the researchers. But today we can see major improvements. We have been in Vietnam for a long time conducting trials, so we have a very good network and know the stakeholders.” A bonus for Gleneagles: Parkway’s clinic in Ho Chi Minh City. Korea, after a long isolation caused by its regulatory system, is showing signs of opening up, and Gleneagles has an office in Seoul.

The Singaporean government would like to see more local players like GleneaglesCRC establish a leading presence across the value chain. Dr. Yap, a strong supporter of the country’s BMS initiative is confident such players will flourish in years to come. He also predicts GleneaglesCRC will continue its aggressive growth across the region in synergy with Parkway Holdings’ overall expansion. In the meantime, Dr. Yap expects to continue practicing his main hobby, walking through the region’s hospitals to learn from local doctors and administrators. “I have been to China for many years now and have never seen the Great Wall of China, but I have walked through many of China’s hospitals,” he says proudly.

A manufacturing hub in a region of giants

Singapore started to build its reputation for pharmaceutical manufacturing in the 1980s. “We started to manufacture in Singapore because of the stability and connectivity of the country,” explains Lawrence Siow, vice president Asia Pacific of Stiefel Laboratories. “It was not only what the government offered in terms of schemes, but the kind of country that Singapore is.”

Since the start of the BMS initiative, pharma manufacturing output has grown from S$6.4 billion in 2000 to S$24 billion (US$17.2 billion) in 2007 (See Figure 2). The companies that have chosen Singapore as a base for regional or global manufacturing include GlaxoSmithKline, Merck, Novartis, Pfizer, Sanofi-Aventis, Schering-Plough, Genentech, and GlaxoSmithKline Biologicals. Probably the main challenge for Singapore’s manufacturing success story comes from the “big kids on the block” China and India. According to Michael Khor, managing director of Pfizer (Singapore, Malaysia, and Brunei), “Whether Singapore can continue to attract new players to set up shop here will depend on its ability to compete against China and India, and what Singapore is able to put on the table.”. Singapore’s success should continue, says Andrew Howden, president of IMS Health Asia Pacific, because the country is well positioned to attract top-end manufacturing. “These are very specific plants that require large investments, and Singapore is offering good incentives together with a welleducated work force and strong IP protection,” he explains. Siow agrees with this view: “The cost of labor in Singapore is clearly higher than that in other countries in the region,” he says. “Thus, it only makes sense to be based here if we produce high-value products that require high-tech processes and have very specific requirements.” Stiefel Laboratories is today gearing up its Singapore manufacturing facility for higher value products.

Targeting the fast growing Asian markets from Singapore

Although Asia Pacific only represents 5 to 6 percent of the global pharmaceutical market, its fast growth has caught the attention of pharmaceutical companies, which in recent years have significantly expanded their operations in the region. Just like many other of these firms, Stiefel Laboratories decided to use Singapore as a commercial gateway to the region. Despite the small size of the local market, this well established dermatology player chose Singapore as a base for its Asia Pacific operation, which has grown by an average of 20 percent for the last five years. “From Singapore, we can easily access the rest of the region. Singapore will be the launch pad into new markets like Japan and China,” says Siow. Merck chose Singapore for its regional headquarters in 2007. “We chose to be in Singapore because it is at the forefront in terms of IP protection and promoting trade and investment,” explains Ramesh Subrahmanian, president of Asia Pacific for Merck Human Health. “Furthermore, as we build our business in other countries of the region, Singapore gives us the ability to move around efficiently.” Chris Lee, regional head of Asia Pacific for Bayer Schering Pharma agrees: “Our office covers South Korea to India to Australia and everything in between,” he says. “Singapore has quite a central location and the infrastructure here is very convenient in terms of air travel .

From Singapore, Lee runs Bayer Schering’s fast-growing operations in Asia Pacific, where the firm ranks seventh in sales volume according to IMS. “This impressive growth is closely related to the disease profile in Asian Pacific,” says Lee. “The presence of chronic primarycare diseases that require early detection and life-long treatment is still very significant in this region. This is one of our company’s six focus areas, and it represents both the biggest source of revenues for us in Asia and our fastest-growing segment.” Bayer Schering Pharma’s leading position in Asia Pacific is best represented by the company’s outstanding performance in the region’s main markets. Before becoming regional head, Lee ran Bayer Healthcare’s operations in China, where the company’s revenues grew by a striking 51 percent in 2006. “We have persistently shown one of the best performances in China out of all 6,000 pharmaceutical companies for the past five years,” he says. “We no longer talk about China being one of our key markets in the next 10 or 20 years. We are now looking into making China one of the leading sources of revenue for the company in the near future.”

Although a highly attractive region thanks to its fast growth, Asia Pacific poses significant challenges for pharma companies. One such challenge is related to the rapid growth itself. With 20- to 30-percent growth every year, most managers say it’s a nightmare to find, attract, and retain talent. Other challenges are related to the region’s diversity. According to Lee, who was born in Korea and has worked in the US and numerous countries across the region “This is the most complex region in the world. In Asia Pacific everyone speaks a completely different language, with different alphabets, very diverse economic realities, and different histories and religions.” The challenges, however, do not stop MNCs from being optimistic about the region. Lee expects Bayer Schering to maintain growth in the high double digits in every country where it has a presence today. “We are confident we can achieve this, which implies that five years from today we will be the leading pharmaceutical company in Asia Pacific,” he says.

The Biopolis of Asia?

Since 2000, Singapore’s BMS initiative has shown impressive achievements. By successfully developing internal capabilities and attracting investments in R&D and manufacturing, the country has turned the BMS industry into an undisputed pillar of its economy. Nevertheless, opinions will remain divided regarding the initiative’s progress toward making Singapore a leading player in drug discovery—at least until a local startup is able to take innovation from bench to bedside. Dr. Edison Liu, a former leading researcher at the National Cancer Institute in the US, who now heads the Singapore Genome Institute, argues that “the local biotech sector is like a canary in a mineshaft. You do not drive an economy by biotech, but its success is an indicator that many good things are happening.” Liu thinks that Singapore is on the right track. “If we compare were we stand versus our competition, which is San Francisco, Boston, Cambridge, Paris, and some other cities of the world, we are doing quite well,” he claims. Bearing in mind the relative youth of Singaporean biotech start-ups and the long time frame of innovation cycles, it would be wise to wait for some time before checking again on the canary, and defining whether Singapore has succeeded or not in its ambitious objective of staying one step ahead of its neighbors and becoming the Biopolis of Asia.

Chapter 1

Italy: Towards Pharmaceutical Renaissance

LEFT: Luciano Maiani, President of CNR; RIGHT: Leonardo Vingiani, Assobiotec Clearly, innovation in Italy did not die with Da Vinci. Today, the Italian pharmaceutical industry may lack the large multinationals of the past - Carlo Erba and Lepetit - but it can still play a significant role in the more innovation-driven markets.

Numbers speak for themselves. 260 biotech companies generating a turnover of Euros 5,4 million in 2008, accounting for more than 0,6% of the Italian turnover, and a 24% year-on year growth rate with respect to 2007. A pipeline of 258 products in development, of which 136 have already reached the clinical phase. Italy’s first competitive advantage –extensive tradition of research excellence- is solid enough to navigate the sea change generated by the current economic turmoil.

Going back in time, the National Research Centre (CNR) has been the main breeding ground of Italian scientific discoveries since its creation in 1982- an “originator of innovations”, in the words of current president Prof. Luciano Maiani. The last restructuring carried out in 2003 gave birth to “a network of 108 connected institutes spread over the territory, and organized in 11 departments”. CNR currently has 38 spin-offs, three of which in the pharmaceutical sector. Its role “is to act as a facilitator, connecting public and private and creating bridges between the main stakeholders”, he says, offering a gateway to Italian brains for local and international laboratories.

Multinational corporations (MNCs) themselves are well aware of the opportunities arising from the country’s research. French laboratory Servier did not casually choose Rome as home to one of the group’s 19 International Centres for Therapeutic Research (ICTR), instrumental in performing clinical research. General Manager Frederic Fasano backs up this choice: not only does the country offer considerable market opportunities, but in addition “the weight of the Italian scientific community is growing, in terms of research activities, as well as in scientific and political influence”, he explains. “In some specific fields, the network’s organization and the high frequency of territorial structures enable to perform highly specialized and sometimes lives-saving procedures”. Such a concentration of centres of excellence is a main asset for this medium-size player that proved its ability to compete with giants thanks to a steady and consistent focus on a few therapeutic areas- mostly cardiology, diabetes, hypertension and osteoporosis- and strong partnerships with the scientific community.

On the other hand, Fasano deplores the insignificance of government incentives to companies promoting and financing research. “As public projects are strongly based on cost-containment approaches and poorly considering innovation, the industry really has to perform research on its own”. For this reason, even though “the attractiveness of Italy is made of its well-trained researchers”, most of them tend to expatriate to more rewarding countries.

Theoretical physicist Prof. Luciano Maiani agrees, and points out a challenging recruitment situation. Most Italians are lured by more attractive conditions offered in other countries- including less mature markets such as Eastern Europe- and those who come back often do so only for personal reasons. Combined with declining investment in research, such deficiency could compromise the future of Italian innovation. “However”, Maiani notes, “efforts are being made from the government’s side: the budget dedicated to research increased to 2,5% in 2008, following years of steady decline. Therefore, CNR is able to start new recruitment processes and wishes to offer interesting perspectives to young Italians willing to invest in Italy”.

Looking at governmental efforts to conciliate cost-containment and innovation, Director of Farmindustria Enrica Giorgetti identifies three main measures. “First of all, the implementation of a tax credit for research that can go up to 40% for partnerships, with a sealed amount of Euros 50 million”. In addition, the “Accordi di programma” Plan “with 61 innovative projects in the pipeline for a total amount of over Euros 1 billion”.

And the last measure, raising expectations of the whole industry ,is the Industria 2015 initiative, which plans the allocation of Euros 150 million. Claudio Cavazza, founder and President of Italian laboratory Sigma Tau, has been appointed General Manager of Industria 2015’s dedicated life-sciences program "New Technologies for Life" ("Nuove Tecnologie per la Vita”), and recently declared that the only option to cope with the current healthcare crisis would be to bet on genomics and personalized medicines. However, due to the costs involved by such products “developing innovative medicines now requires pan-European research collaboration of public-private interaction”.

Not only is Italy in constant need for young talent and government incentives, it is also craving to attract more business angels and venture capital, especially to support translational research in the biotech field. Leonardo Vingiani, Director of the biotech companies’ association Assobiotec estimates that “Italy’s financial schemes include some really good investors for traditional technologies, but regarding innovative technologies there has not been an efficient strategy to foster innovation and get financial capital”. Thus, many are the opportunities for specialized investors in well-established markets - namely USA, Canada, UK, Germany and France - currently lacking good projects to finance. “The Italian environment offers a very good cost-effectiveness ratio”, reminds Vingiani. “Italian researchers earn less than in Northern Europe and USA”, which makes Italy a safe, profitable bet.

Overall, be it because the Italian bio-tech segment is still young, with more than 50% of companies created in the last ten years, or because of brain drain and weak state support, Italian entrepreneurs still find it hard to translate knowledge into business, and convert excellent research into sustainable companies. But even though public-private partnerships (PPPs) are not yet widely recognized as a best practice by Italian healthcare operators in order to open a way forward for Italian research, Giorgetti sees encouraging signs. She has already noticed that “more and more agreements are passed between small companies (mainly specialized in Biotech) and public institutions like Universities, Public Research Centres, the Superior Institute for Health (ISS) and the CNR”.

CNR is indeed supporting the creation of business projects at regional level. Recently, it signed an agreement with the Lombardia Region, providing Euros 40 million over three years for a myriad of projects, some of them based on nanotechnologies. If it proves successful, similar initiatives will follow in Italy's south, as the country gradually devolves power to regional and local administrations.

FROM RESURGENCE TO DIVERGENCE: ONE COUNTRY, 20 HEALTHCARE CITY-STATES

The ItalianPeninsula was unified amidst much struggle in the 19th and 20th centuries- in theory putting an end to the territory’s historical fragmentation and the leadership of local kings on a changing number of independent and powerful city-states. Nevertheless, it is still suffering from a historical tendency towards competition between small towns and a lack of inter-regional solidarity. Italy is now almost a textbook case of the regionalization process at work all over Europe: the constitutional reform of 2001 and the political trend of administrative federalism gave the peninsula’s 20 regions a significant level of autonomy. As a result, very few investment initiatives are launched at national level- a main point of differentiation of the Italian system.

Local clusters become global players

Cees Heiman, Country Manager of Pfi zer Most federal states claim that a decentralized structure is the best way to create a healthy competition between regions and local incentives for R&D. The structure of Italian Science Parks proves this point. Whereas it is not the case in most other countries where the national government is strongly involved in such initiatives, all the Italian research clusters are hosted by regional and local structures- the main ones being AREA Science Park in Trieste (Friuli-Venezia-Giulia), Science Park Raf in Milan (Lombardy, Bioindustry Park Canavese in Torino (Piedmont) , Parco Tecnologico Padano in Lodi (Lombardy) Toscana Life sciences in Siena (Tuscany) and Sardegna Ricerche in Pula (Sardinia).

For the General Manager of Toscana Life Sciences (TLS) Germano Carganico “such an unusual structure is a direct consequence of the lack of national policies in Italy, rather than an opportunity”. A bad starting point, however, turned into TLS' advantage. Since the creation of TLS in 2004, the organization progressively seduced both public and private investors, and for the first time in history managed to put together five academic bodies with local institutions; SienaProvince and SienaMunicipality, the Tuscany Region and private group Monte Paschi. Building on Tuscany’s long tradition of excellence in the biotech and biomedical sector, TLSPark eventually aggregated a number of successful initiatives and now counts 20 companies; 12 of which are located in the bio-incubator launched in 2006. TLS is now widely renowned and recognized, both nationally and internationally, and often seen as a reference in the Italian biotech world.

“ By combining its technology transfer role at the regional level and its focus on the specific field of orphan diseases, TLS will have the chance to really all the potential of the Tuscany region”, proudly boasts Carganico. Because of its integrated offer to biotech laboratories and its ability to attract investment in Tuscany, the Park has been appointed by the Ministry of Health as responsible for the management of technology transfer projects financed or co-financed by the Tuscany region. Therefore, “the Foundation will soon start taking part in the regional financing processes, directly working with the Tuscany authorities- bringing its knowledge to the bureaucrats, and on the other hand taking advantage of this assignment to put in place biomedical projects at the regional level”.

Clearly, constructive dialogue is now the name of the game; a game which MNCs are also playing. Global giant Pfizer converted its former country management structure into a Business Unit model in 2009, but it is still aiming to act local while keeping an eye on the company's global strategy- and does so in Italy through a series of innovative PPPs with several Italian regions.

“So far”, explains Managing Director Cees Heiman, “Pfizer Italy has established four regional PPPs all aiming at improving the healthcare system’s quality and efficiency by combining patients’ needs with the necessity to seek greater economic sustainability”.

The “Leonardo Project” is a partnership with the Puglia Region. Since 2004, it has launched several initiatives like a new Telecardiology service, a Disease and Care Management program and a Clinical Governance group for Depression. Project “Raffaelo” for Marche and Abruzzo regions has so far established a Disease and Care Management program, a Hearth failure Management program and individual HealthEconomicsUniversity courses. The “Michelangelo Project” oversees an investment of 1 million Euros in Lazio in order to sustain cardiovascular prevention initiatives; for instance, the reorganization of the region’s cardiology emergency processes and its new cardiovascular prevention model. Finally, project “Virgilio” has been developed jointly with the Lombardia region to promote and develop public health research through innovative initiatives targeting cardio-cerebrovascular pathologies with an aim to improve patient management, and the CAMUNI database for epidemiological-cardiovascular integration.

“Through these initiatives”, Heiman ensures, “Pfizer demonstrates its firm intention to act as a healthcare company; partnering with regional Governments in a responsible way, managing the system and its challenges hand in hand with them. Overall, we aim to improve local healthcare– beyond the mere production and distribution of drugs”. Such commitment is essential if Pfizer wants to become the largest company in the country by the end of 2009, once the planned Pfizer-Wyeth merger is finalized. “Our business would become extremely diversified - including pharma- and biopharmaceuticals, vaccines and nutritional products- and many synergies would be created between Pfizer and its new partner”. Building on the group’s strengths applied to the Italian context should enable the subsidiary to “remain a most important contributor to Pfizer’s global success”, Heiman concludes.

Devolution vs Evolution

Emilano Gummati of Cegedim Dendrite Unfortunately, the path towards successful regionalization is also full of hurdles- sometimes easy to leap over, and sometimes not. Amongst those is the extensive interpretation of the regions autonomy; especially regarding purchase and provision of health care services. Indeed, each of the 20 regions can decide the quantity and mix of each service to be provided, yet securing the Minimum Level of Coverage (LEA) to its population, according to budget constraints. Regional authorities have to contain the pharmaceutical expenditure at a maximum of 13% of the total healthcare expenditure, and are free to decide cost containment measures- as co-payments, limitation to hospital setting for some drugs, limitation for sub groups of patients. Pricing and reimbursement is still in theory managed at national level by AIFA, the dedicated regulatory body, guarantor of the Italian healthcare system’s unity.

But, as General Manager of AIFA Guido Rasi deplores, each Region autonomously decides the “real” reimbursement status of many drugs. Rasi considers “the limitation of access to medicines included in the LEA that has been implemented by some autonomous regions as a grave mistake, creating inequalities related to places of residence, and affecting the right of citizens to have an equal access to healthcare”. Rasi believes that regions shall understand that each of AIFA’s negotiations is the conclusion of a long, careful and rigorous assessment process conducted in accordance with European guidelines and following the best professional standards. “It is therefore irrelevant for regions to try and replicate some of AIFA’s tools and assessment bodies; as these processes are very unlikely to have better outcomes once they are multiplied by twenty”.

Such trend also affects the industry’s behaviour, as one could be tempted to focus on drugs’ distribution in the regions with better terms of price and reimbursement, and a higher purchasing power.

This particular environment provides plenty of business opportunities for Customer Relationship Management providers (CRM). According to Emilano Gummati, Cegedim Dendrite Italy’s General Manager, the importance of key account management is drastically increasing in Italy. “The recent constitutional reform enhanced the power of the regions related to market access, and the local authorities are now fully responsible for their healthcare spending- either through directive or liberal interpretations of AIFA’s central directives”, he explains. In this context, traditional drug promotion addressed to GPs is less effective. “It has been statistically proved that out of 100 products prescribed by a doctor, 46 are the direct consequence of specialist’s prescriptions, and 12 are dictated by the influence of the local health authority- this 12% rate being currently growing at a 40% pace per year”. Therefore, GPs are not fully following their own initiative, and are less influenced by promotions. “Laboratories have to take this trend into account” Gummati says, and “try to enhance their drugs’ access to the local Health Authorities reimbursement formulary.”

As Italian stakeholders evolve, Cegedim Dendrite is looking to fulfill its ambition to further bond with local players. Indeed “Cegedim Dendrite has a strong foot in the multinationals world, but there is room for improvement in the domestic environment.” The company would like to expand with new offers, more tailored to the needs of local laboratories willing to expand and professionalize their customer’s relations.In this process of finding new clients, Gummati reminds that “the One Key database’s international structure is a main competitive advantage, which allowed developing international CRM solutions- such as Mobile Intelligence, a multi-country tool covering every language and all types of business needs. This makes Cegedim Dendrite an ideal partner for companies willing to expand abroad”.

And surely, Italy’s dozens of successful local pharma are in need of such support.

Distributors Switch Into High Gear

Regardless of ever increasing inequalities between regions, the role of intermediate distributors is to ensure the right conservation, distribution and delivery of drugs in a capillary way throughout the territory - and in Italy, this function is executed with cumulative costs amongst the lowest in Europe. Despite the Financial Law of 1997 which set that 26,7% of the margins of a drug sale shall be kept by the pharmacist, leaving 6,65% to the wholesaler, and the rest to the industry, Director of ADF (the Association of Pharmaceutical Distributors) Sergio Sparacio likes to highlight how Italian distribution “really manages to fulfill its social function, by ensuring the efficiency of distribution channels not only in a quick and secure way, but also following cost-rationalization patterns”.

One example: with two warehouses in Naples and Milan, logistics provider Petrone group made the choice to make products available wherever the customer needs them and is “not willing to focus on specific regions” remarks its CEO Raffaele Petrone. It is also worth considering that the Southern part of Italy offers a less competitive environment and higher levels of understanding and availability. “Whereas pharmacies in Milan are every laboratory’s targets, a pharmacist in Reggio Calabria has more time to listen and to build long-term business relationships with sales representatives”, Petrone points out.

Givanni Recordati, Chairman and CEO of Recordati And even through the distributors’ margins have inevitably been eroded over the years, while considerable resources have been devoted to significant technological upgrades, cold chain managements, and rising insurance and transport costs, Italy still counts several wholesalers and pre-wholesalers. However, the President of pre-wholesaling company Ferlito Farmaceutici is convinced that “competition and market conditions will most likely trigger a concentration in the years to come. Such an occurrence will eventually enable the remaining players to reach a more critical mass and achieve additional economies of scale”. Founded by Sicilian entrepreneur Salvino Ferlito in 1948, the company is currently led by his daughter Carmen Ferlito and her two sons, Salvino and Antonio Benanti, and surely on track to achieve such goals. Having brought the nationwide infrastructure to a very high quality level, with three warehouses in the Milan and Rome areas at the cutting edge of technology and safety, Carmen Ferlito’s next goal is “to develop an international network, by cooperating with like-minded peers”. Salvino Benanti reveals the grounds of Ferlito Farmaceutici’s twofold strategy: “At a “horizontal” level we will establish operating ties with international peers in the pre-wholesaling arena, whereas at the “vertical” level we will maintain an open dialogue with couriers and wholesalers in order to identify the most suitable way of integrating the services each of us offers”.

Green Flag For Local Entrepreneurs

“It has always been my dream to become more than a sales representative” (…) “and my story showed that sometimes, dreams can become true- I just hope no one will wake me up”. Sicilian entrepreneur Fabio Scaccia, founder and CEO of Finderm, sums up in a few words the essence of the Italian entrepreneurial spirit. Having worked as a rep for little less than 10 years, he started his own pharmaceutical adventure when only aged 28, by “launching alone, without a cent, a pharmaceutical company specialized in gynaecology”. 13 years later, Scaccia is head of a consistent reality involving 52 collaborators with a yearly turnover surpassing Euros 10 millions, that “now claims to have one of the most diversified gynaecological portfolio- including cosmetics, medical devices, pharma specialties and integrators, constantly associated together as to create innovative solutions”.

The organization seems to have not missed a good opportunity.After having developed strong manufacturing agreements with third parts, it is now willing to achieve international expansion through partnerships- in order to “start bringing the Italian gynaecological knowledge to other countries”.

Many other Italian pharma success stories can be found, from Catania to Milan. General Manager of Farmindustria Enrica Giorgetti is proud to say that 1/3 of the pharmaceutical industry’s Association’s members are Italian companies. Some of them are growing multinational, but “the Italian market also expresses its vitality with a lot of smaller companies, important industrial players that work in network with big players and public institutions”. Most are family business, often not listed on the stock exchange, yet “flexible, specialized and innovative”- a model of micro-companies that is highly representative of the Italian industry.

Italy, however, has also been the breeding ground of a number of multinationals, like Menarini, Sigma Tau, Chiesi, Recordati, Bracco, Italfarmaco, Alfa Wassermann, Zambon, Dompé, Angelini, Rottapharm.

The Man Who Worked Round-The-Clock

Cavaliere Alberto Aleotti, President of Menarini ¨Most of my life, I worked three shifts: arrived at the office at 8:30am, went back home at 1pm, was back to work at 3pm until 7:30, and then would start again from 10 or 12pm until 3:30 the next morning.”

He certainly inspired following generations of Italian entrepreneurs. Cavaliere Alberto Aleotti, President of Menarini, might have been awarded entrepreneur of the Year in 2007 by Ernst and Young; but he prefers to look back at his whole career of 67 years dedicated to the pharmaceutical industry (of which 45 at the head of Menarini), with a subtle mixture of pride and humility.

“I consider this ability to work long hours as a critical success factor in the leadership of Menarini. Having looked at multinationals all my life, I always felt I had to do more than them in order to reach their level. Coming from a very modest family, I have been the only one from my school to fight and go to University”. Aleotti´s feat is ever so heartening as he had to work during the day at the Farmacie Comunali Riunite di Reggio Emilia, ¨thus only having the night left to study”. Getting an ¨A¨ grade in a University exam for which he did not attend class gave him “enough courage to always give a try to what seems impossible and keep following entrepreneurial ambitions”

His personal ethic has permeated the company he still leads with an iron hand at 86 years of age. “The constant appraisal of merit, excellence and hard work is part of Menarini’s DNA” he concludes. “Even though I probably should not, because of my age, I personally examine each new employee of the company”. Indeed, each of them has to be able to support the winning strategy of Menarini: “to focus on overtaking bigger players in terms of quality but also quantity of working hours”.

Chapter 1

Brazil: BigDancerTakes the Floor

With its huge market of 186 million people; its current position as the largest pharma market in Latin America, with strong growth projected; the influx of foreign and local investment into its pharma market;its reputation for conducting high-quality clinical research; and its incredible biological diversity, Brazil seems poised to become pharma's next giant. However, Brazil must overcome several challenges to assume this mantle.

“Between our business and our health, we are going to take care of our health.” Reelected President Lula da Silva, long an outspoken advocate for the welfare of Brazil's marginalized citizens, spoke unambiguously this spring about one of the most vexing problems facing his country: lack of access to healthcare and medicines for most citizens.

According to his predecessor, former President Fernando Henrique Cardoso, “Brazil is not a poor country, it is an uneven country.” Indeed, Brazil ranks tenth among the world's leading economies but 74th in terms of social development. The main reason for this discrepancy is the concentration of wealth in the hands of a small percent of the population:. “This discrepancy is what is making us lag behind. Brazil needs to improve its income distribution and its healthcare system,” says Luiz Eduardo Violland, country manager for Nycomed Pharma. A whopping 49 percent of the population have no access to medicines and another 36 percent have only limited access to pharmaceuticals. “These numbers are the evidence that we need to improve our healthcare system and put together a new healthcare model. Although these figures are not, what we could call, very motivating, the recent positive aspect is that our new Minister of Health, Jose Gomes Temporão, is very willing to work hard and improve the situation. He has already presented 22 projects aimed at reforming the healthcare system, and this really encourages us,” Violland added.

The Plea for a Universal Health System Although Brazil's constitution guarantees access to health care for all citizens, thus any patient today can go to court and ask a judge to legally force the government to pay for a certain treatment or product. But in fact this process is very inefficient in its application, inadequate from a public healthcare point of view, and probably subject to abuse. “Our industry and the Ministry of Health are working on a more efficient process to include new technologies, new products in the government's existing access programs. By doing so, we will hopefully avoid patients having to go to court in order to obtain their treatments,” says Philippe Crettex, CEO of Pfizer in Brazil. “The dialog between the authorities and our industry is not always easy but I think that at the end we both have the same objective, to improve healthcare for all,” he added. Wealthy individuals with purchasing power in cities like Sao Paulo, Rio de Janeiro, and other major urban centers may be interested in innovative products but the rest of the population craves basic medicines. “There is so much need for basic medicines that this overshadows any selling of innovation in this country,” Volker Bargon, general director of Boehringer Ingelheim Brazil commented. “It is nice to have innovation, but we still have high infant mortality. I think we are, quite honestly, a bit disconnected from the market reality, being innovators and being solely focused on innovation.” Controlling the indiscriminate dispensing of all types of medicinesat the country's more than 56,000 pharmacies is also a great challengefor Brazil's healthcare system. In response, Anvisa (Brazil’s FDA) has launched a program called Farmacias Notificadas and Hospital Sentinela. It also announced plans to conduct a survey of the country's 56,000 plus pharmacies and drug stores to deal with the sale of “black label” controlled substances and cut down on illicit trafficking. The move is significant as it represents a major effort to exert control over Brazil's sprawling retail pharmacy industry and could put poorly run players out of business. In the long run, instilling greater order in this sector would not only make statistics on sales more reliable but also help deter the illegal and unregulated trade that presently distorts the market.

Government Price Controls From 1994 until 2001, government price controls for pharmaceuticals were lifted. Then in 2001 the government reimposed a strict policy of price controls for prescription drugs. Prices are revised every year, usually with insignificant increases, by the Chamber of Drug Market Regulation or CMED. This new regulatory body, which falls under Anvisa, was established in October 2003 to regulate prices and establish regulatory guidelines for the pharmaceutical industry. This development followed a change in the law in June 2003 when the Ministry of Health and Anvisa took over full responsibility for drug pricing and industry regulation from the Ministry of Justice. The first annual price adjustment occurred in March 2004; in calculating the price adjustment, the government considered the competitive climate and prices in the domestic sector.

According to Luiz Milton, president of Cmed, from 1992 to 2000 as price controls were lifted, drug prices increased 250% in real terms. Consequently, drug sales dropped and production declined considerably. During the same period imports skyrocketed from around U$100 million to U$2.6 billion. “Such measures had an important role in monitoring the price increases and limiting the prices of new technologies arriving in the country considering that Brazil has strong issues with access to medication”, Milton says. Pharma companies maintain that price controls are not the way to increase access to medicines. “I believe that prices should be something that we need to agree with in respect to the market conditions,” says Gaetano Crupi, president and general manager of Eli Lilly do Brasil. “Regarding our own experience with the diabetes care business, we have learnt that, in a place where price controls are not in existence, competition and the market place dynamic by its own will dictate prices. Therefore, when the government talks about price controls and free market, what we need to understand is that you must allow the dynamic of the market- place to play a role. You are going to have a better price if you have a higher volume.” “I believe that price control is maybe the most delicate and difficult issue,” Ernest Egli, president of Roche Brazil added. We always argue that the government should be more flexible, giving us better prices for the private market, because if we have reasonable prices on the private market then we can give bigger discounts to the government sector.” Some important developments have taken place, though. For instance, Government purchases, are now tax-free. And, in the OTC market, which is accounts for about 15% to 20% of the total market, there is not 100 percent price control. “Nevertheless,the government argues that four years ago,when they started to give us free prices for OTC products, some companies increased their prices by 60% to 70% so this created a difficult situation. These kinds of practices by some companies make it more difficult to gain the trust of government. No doubt, the economic stability of Brazil would favor a more generous pricing policy, ” he notes.

The Market : 186 Million Strong

Despite the country's structural constraints including lack of API manufacturing, governmental price control, administrative red tape and ever-changing regulations, Brazil is the place to be for the pharmaceutical industry these days. “There is one fact about Brazil that you can never deny; we are big. 186 million people make up a huge country, and it is a huge market. That is the bottom line. No company in the world, on an international basis, can afford not to be in Brazil,” says Lilly's Crupi. For him, the Brazilian pharmaceutical industry's number-one asset is its people. “We have talented people at work and to circumvent all of the country's challenges. What amazes me is how committed and resilient the Brazilian professionals at Lilly Brazil and also those elsewhere in the industry are.”

Despite tough competition from Mexico, the Brazilian pharmaceuticals market is now the largest in Latin America, valued at U$9.2bn in 2005. In recent months, growth in US dollar terms has been strong, largely due to favorable currency rates and rising consumer demand. IMS Health's May 2006 retail market data puts the year-toyear growth rates of the Brazilian pharmaceutical industry at about 42%; however, industry sources estimate the current expansion rate at about 10.8% annually in local currency terms. The market is presently dominated by “similares” or branded generics, which continue to account for almost 89% of pharmaceutical sales, by value, despite strenuous government efforts to promote the use of non-branded generics. “Today, we have 15 companies competing in the same segment, and the only differentiation between them is the price of their products,” notes Nilton Paletta, country manager of IMS Brazil. Paletta adds: “Nowadays, the larger companies, such as EMS and Medley, have very large portfolios and have therefore been able to meet our clients' needs. Smaller companies have not been able to compete, price wise, due to the discounts and commercial situation of the larger organizations. In Brazil, there is no incentive to buy large amount of prescription drugs, due to the availability of cheap generics brands.”

The Industry and Consolidation The Brazilian pharmaceutical industry is organized around three main categories of players: multinational corporations (MNCs), often innovators; local companies that manufacture “similares” or branded generics; and local companies that produce nonbranded generics. The country also has 11 state owned laboratories-most of which are obsolete, with old manufacturing facilities and small production capacity. Five of these labs produce most of the government's drug supply; the two leading stateowned labs are FURP and Farmanguihos.

In Brazil government purchases comprise a significant portion of overall pharmaceutical purchases. Anti-AIDS is a major area for government purchases; the government has procured these drugs for free distribution to the public, which has led to a decrease in the number of AIDS-related deaths over the last three years. Other top therapeutic areas for product sales include cardiovascular, CNS, analgesics, anti-diabetic, hypertension, and anti-cancer.

Although operational conditions remain challenging, foreign direct investment is increasing. Brazil is thus becoming an attractive regional base for multina- tionals, including, most recently, US manufacturer Bristol-Myers Squibb. MNC investments in Brazil are aimed at minimizing their exposure to smaller, less well-regulated markets in the region, while also developing the country's potential as an export base. Meanwhile, Brazil's indigenous pharmaceutical industry is consolidating with the encouragement of the country's economic development agencies, and the nation's private sector is reportedly investing heavily in drug marketing and product development Nevertheless, risks remain for those investing in Brazil's pharma research sector. Although this sector is clearly a priority for foreign investment, the country's healthcare reform initiatives are focused not on innovation but on providing affordable medicines to low-income citizens through the use of government price controls

on prescription drugs and some OTC products.

Meanwhile, foreign firms continue to complain that the government is changing regulations too abruptly and too often. A Complex Regulatory System When describing the regulatory system in Brazil, many sum it up in one word: unpredictable. “Regulations change from one day to the other,” Crupi says. “Hence, the cost of doing business is very high.”

He mainly blames the structure of the country's tax system, with its many layers and taxes. In addition, he cites Brazil's complex labor laws and the Brazilian legal system, one of the world's most complex. “I spent five years as president of Eli Lilly in Canada and I don't recall

having as many labor- and tax-related cases that I needed to deal with as I have had in one year here!” “Well, you have surprises everyday,” adds Volker Bargon, director general of Boehringer Ingelheim Brazil. “The working environment changes rapidly, and you can wake up and have a new legislation on the table. Then you need to understand where this comes from and why it was promulgated. In Brazil, there is no real story line you may anticipate. Things change from one day to the other, which is something you will not see in well-established markets.”

Ciro Mortella, president of the Brazilian Pharmaceutical Industry Federation (Febrafarma), concurs: “The Brazilian industry is very moody. It could be extremely good or extremely bad.” Among its several missions, Febrafarma closely watches issues relating to the production and consumption of medicines; tries to increase access to medicines within the country; seeks fair drug prices and taxes to stabilize the country's economy; and attempts to stimulate R&D while protecting intellectual property.

Mortella adds: “Brazil is a very aggressive pharmaceutical market and therefore companies have to learn how to thrive in a market of low growth. Areal issue is that Brazil does not know where it wants to be when it grows up. There is a saying: 'Brazil is the country of the future and it will always be like that.'But the future is now and there is a lack of strategic vision for the country and its health system.” Sindusfarma, another industry association, works to improve conditions for both workers and manufacturers.

Its executive vice-president, Professor Lauro Moretto, who is also director of Febrafarma responsible for the good manufacturing practices (GMP) and quality regulations, has a different view: “We have moved upward to a considerably higher level. The most important reason for such changes was a new GMP standard issued by World Health Organisation (WHO) in 1992 and implemented in Brazil in 1995.” Moretto believes Brazil's regulations are in line with those of some of the most developed countries in the world. In fact, many manufacturing facilities in Brazil have been inspected by reliable regulatory agencies from other countries.

Generics on the Go

Despite the traditional consumer preference for branded and branded generics products, and the key role played by doctors as market gatekeepers, the non-branded generics sector remains the market's fastest-growing segment. The generics sector's share of the Brazilian market reached 10.26% in the 12 months ending May 2006, with annually adjusted growth estimated at 31.3%. The government has launched a number of high-profile initiatives to promote off-patent, bioequivalent medicines in recent years-not all of which have been successful, largely due to the continue presence of so-called 'similar' medicines (non-equivalent copies of local origin). The Hegemony of “Similares” Indeed, despite government efforts and the growth of the generics segment, sales of similares still top those of branded drugs and branded generics “Similares” sales represent almost 90% of the total market for locally manufactured drugs. Meanwhile, the branded market witnessed negative growth in 2002 but has experienced slow growth over the last few years.

Branded pharmaceuticals continue to benefit from being the first choice of medical professionals but in recent years generics manufacturers' targeting of pharmacies has affected branded pharmaceutical sales to some extent. Similares manufacturers claim that generics manufacturers use unfair competition policies that are hurting the similares industry.

Brazilian law requires generics prices to be at least 35% lower than reference drug prices, and the prices must be preapproved by CMED. However, due to market competition, generics price reductions are in fact higher-45% on average and reaching 70-80% in some cases. Such price reductions have been an important driver for consumer purchases; it's estimated that generics were responsible for saving U$1.3bn for Brazilian consumers over the last five years.

A noteworthy achievement, especially considering how most of the country's low-income population doesn't receive any reimbursements for medicine purchases. Generics have started to impact access to medicines in Brazil, especially in the treatment of chronic diseases. Market data show that the total sales for substances such as atenolol, metformin and sinvastatin-for hypertension, diabetes, and cholesterol control-have increased up to 150% over a four-year period. “The generics business is a very exciting one,” says Odinir Finotti, president of Pro Genericos. “I just regret that the Government is not doing enough work to promote it.” He says that the government had done good work in promoting generics use in earlier years but not of late. “The government should advertise more to the public as to make them understand generics are cheaper and as efficient as branded products,” Finotti notes.

According to Carlos Alexandre Geyer, president of Alanac, Brazil's oldest stateowned pharmaceutical company, and a strong supporter of “similares,” drug counterfeiting and falsification had become serious issues by the end of the 1990s, resulting in the establishment of the Federal Parliamentary Investigative Committee. The committee has had a two-fold effect; on the one hand, it has helped to identify and solve these critical problems and on the other hand, it helped draft a generics legislation .

“Nevertheless, the path chosen by the government was a wrong one. It decided to discourage the use of copy medicines (similares) in order to promote generics,” Geyer notes. “Hence, the strong Brazilian campaign for generics created a discomfort about copies.” In Geyer's view, there is no future in Brazil for small and medium-sized companies that produce nonbranded generics: “The Brazilian scale is very big and demands big companies. The only way for smaller companies to survive would be to consolidate a brand. The same phenomenon occurs in sophisticated markets where smaller companies look for business niches.

Generics: the Players Brazil's generics market is exceptionally concentrated, with 10 companies accounting for 98% of the market. And 80% of the market is dominated by only four players: EMS, Eurofarma, Medley, and Ache Biosintetica.

EMS, generics pioneer. The distinction between generics and branded medicines is of no real consequence to EMS, Brazil's number-one pharmaceutical company. “I believe that there are no issues in acting in both segments because we have bioequivalence, which proves that we produce safe and quality drugs.

Generics are very new in Brazil. At the beginning, it was difficult to position generics because there were a meaningful number of doctors that didn't want to prescribe generics. Today, resistance to prescribing generics has diminished but, still, branded generics or similares medicines are far much stronger than generics,” says Telma Salles, international affairs manager of EMS. Although generics have helped EMS achieve its position in the marketplace, their branded products have been highly successful as well.

The choice of generics, if it helped achieving this outstanding progression of EMS, was not the only key for its success. EMS is indeed increasing in both segments. One of the highlights of EMS's brand portfolio is its line of branded products from the Sigma Pharma lab, which ranks sixth in doctor preferences; in all, EMS offers a portfolio of 1,500 medicines that are very popular among doctors. Moreover, the company is considered the leading pioneer of the generics market; EMS's state-of-the-art R&D center employs approximately 200 scientists who are constantly working on drug development and allow EMS to launch five new products per month. “We bet on our position of pioneers in the generics segment.

As you know, in thegeneric segment, to be the first in is essential for success,” says Salles.

In 2007, President Lula de Silva inaugurated EMS's new facility; EMS invested U$50 million in the facility. “This new extension gives us the possibility to considerably increase our production capacity.

As the market grows and EMS continues its healthy performance, we will have the production capacity to supply the national demands and other markets,” Salles says. The technology we use to manufacture our products is exactly the same that is used in developed countries such as the US and Germany. We are able to demonstrate that our products are safe and efficient.”

Medley, a reliable partner. One company that may be able to challenge EMS's market dominance is Medley. Medley has jumped from 28 in 2000 to third place in 2006, has grown an average 25 to 30 percent annually, and has beaten production records in the generics sector. “We have a very good production capacity, an excellent portfolio and sales team. All these factors put together make us a successful company,” notes Jairo Yamamoto, CEO of Medley. “As for our last year's performance, we had very good results thanks to Sibutramine. We launched this product six months before the patent expired since we had an agreement with Abbott, and this launch was an absolute success and helped us achieve fantastic results.”

The company has just secured a comarketing agreement with Bayer to launch Vivanza, highlighting its status as a reliable partner for MNCs. Yamamoto explains: “Even though we are in the generics business, we absolutely respect patents. In our case we believe that we do a very good job at comarketing innovative products, and, at the same time, we can also perform very well in the generics segment.

Being in both businesses shouldn't be a conflict. Large pharma companies like Sandoz are recognizing that there is room for both products in the same house, and that is exactly what we are doing here.”

While Medley is currently focusing on the Brazilian market, it also seeks to penetrate other Latin American markets. For example, the company exports its products to Mexico, where some are licensed to local partners who market them there; Medley is following the same strategy in Peru. Regarding its future development, Yamamoto emphasizes the company's core values: “In our industry, it is very important to build a good image because we are looking after the health of the people.

We want to grow but at the same time, we want to be sustainable. Being sustainable summarizes our motto 'Proudly Medley'”. Eurofarma started in 1972 by producing drugs for both local and multinational companies. Then, it bought a small lab and started to produce and sell drugs. According to Maurizio Billi, president of Eurofarma: “The generics law was very beneficial for local producers like us because it forced the companies to improve the quality standards. It made us learn how to develop quality products. Moreover, the Brazilian generics law is very rigorous, therefore the companies that wanted to succeed in this segment had to force themselves to upgrade and get equipped to make generics. This was a big learning step.”

The company has moved forward: Today it is in both market segments, generics and branded, producing both types of products for the same indication. Billi says, “We see generics as a necessity. Our company needs to be present in the generics segment and do all the necessary efforts to be competitive. Nevertheless it is very important for us to be present in the branded generics segment. Our principal focus it to market our branded products to doctors.”

Determined to continue forging ahead, Eurofarma is also building a new industrial complex in Sao Paulo that is expected to be one of the most modern facilities of its kind in Latin America. Billi believes the new state-of-the-art facility will enable the company to have both a production and export hub within Brazil. And to further their research capabilities, Eurofarma haspartnered with Biolab to establish a new company, Incrementha. “We had three main objectives: join our capacities to develop new products, divide costs, and in the future get stronger,” Billi explains.

Grupo Castro Marques (Biolab). Cleiton de Castro Marques, CEO of Biolab has this take on his company's partnership with Eurofarma: “This deal was a great idea because, with this company Incrementha, we are fully focused on constant research and development.This focus has given results, and over the one-year period of time since its establishment, we have already registered three products to undergo clinical trials and we are looking forward to their approval in the near future. From 2008 onwards, we will be able to launch around 15 products per year, always improving.” Marques believes innovation is the key to success: “We believe R&D is a must to keep our growing pace because if you are not able to invest in R&D and offer the market products with aggregated value, you will certainly lag behind. Our position is to emphasize developing products with aggregated value, and we want to offer differentiated products.”

Biolab is currently the leader in 'similares' for cardiology, with more than 13 percent market share; has strong and sustainable performance in the OBGYN area, ranking sixth in Brazil in this market segment and operates one of the most modern plants in the pharmaceutical industry today. Ache Biosintetica. Number-three ranking Ache holds the distinction of having the only 100-percent-made-in-Brazil drug product, Achelan, which is made out of herbal ingredients. Ache, like Biolab, is more focused on similares than generics; however, the company bought Biosintetica in 2002 to enhance its generics business.

“The success story of the company has been built through acquisitions. Now that we are going listed, we are planning to buy more companies here in Brazil and really consolidate our success in the country,” explains Jose Ricardo, president of Ache. In Ache's case, consolidation efforts do not exclude international expansion through partnerships. Ache now ranks number one company in Mercosur (an economic community that includes Brazil, Argentina, Paraguay and Uruguay). “We have just partnered with Mexican Silanes for R&D synergies. We also have as a partner the biggest company in Argentina and one in Venezuela. We will soon try to enter the European and the US markets, always through partners,” he adds. Germany's Merck may be the only multinational to date to have succeeded in Brazil's competitive generics field. In 2002, the company decided to introduce its generics portfolio in Brazil, which proved to be a good decision. “We are very pleased at our results because today we rank seven among the overall industry, and the most important thing is that we managed to position ourselves in the generics market despite the fact the four main players are national. Our seventh position is not bad at all in a market where national players are getting very strong,” notes Gerd Bauer, president of Merck Brazil.

The Cost of Innovation

Another challenge to Brazil's pharmaceutical industry is the lack of R&D activities and the low expenditures that companies currently designate for R&D. Companies need to enhance their R&D but at the same time are under pressure to reduce costs. “Innovation is very important, the azilian people like innovation,” says Gabriel Tannus, executive president of Interfarma, the association representing pharma research-based companies.

“Usually, people look at the concept of nominal price. Sometimes, you will have a product that appears to be more expensive, but if you reduce the time of treatment it has its dvantages. If you look at the case of AntiRetroViral/ HIV drugs, they used to be a lot cheaper in the past

Chapter 1

Korea: Igniting the New Growth Engine

Though it may traditionally be known in the West as ‘The Land of the Morning Calm’ or ‘The Hermit Kingdom’, anyone even slightly familiar with contemporary Korea would make a very different choice of adjectives to describe it. One that invariably comes to mind and is cited by both locals and foreigners alike is ‘dynamic’. Edged between Japan and China, Asia’s economic powerhouses of today and tomorrow, Korea has had to struggle for centuries to not only assert its uniqueness but to simply exist. Moreover, a victim of 20th century ideological and geopolitical confrontation, Koreans underwent a brutal civil war over 50 years ago that still maintains the nation divided in communist North and capitalist South.

This backdrop makes it all the more remarkable to witness what South Korea (Korea for the rest of the article) has managed to achieve to date. In just a few decades, it went from being a poor and war-torn country to one of the most prosperous and stable places in Asia. Despite its relatively small size, population, and lack of natural resources, Koreans undertook a rapid industrialization of the country that made it part of the ‘Asian tigers’ and one of the 15 largest economies in the world by the 1990s. Based on a big focus on education and strong government support, Korea developed expertise in export-driven industries such as shipbuilding, automotive and IT (information technology). Korean companies became not only globally competitive, but often leaders in their respective fields.

“It is striking how globalization is quickly shaping local habits in a country that only 15 years ago was still closed to foreign culture influences”, says Juergen Koenig, President of Merck Korea. “Indeed, I think that if there is one distinctive feature of the Korean people it is their incredible ability to adapt to changes; this helps explain their ability to achieve fast, strong and consistent growth in the past decades”, he adds.

Ironically, this success and the country’s accelerated integration with the rest of the world have made it particularly vulnerable to the current global economic downturn. Demand for Korea’s key exports such as vessels, automobiles and electronics are highly sensitive to the economic cycles. In this context, President Myung-Bak Lee – locally nicknamed the ‘CEO President’ due to his career in the private sector and business-friendly policies – is actively looking to support the development of other knowledge-based industries. One of the strategic sectors mentioned by the government is the health industry, encompassing pharmaceutical, BT (biotechnology) and medical tourism.

“The pharmaceutical and BT industry create added value for an economy, particularly when combined with IT and NT (nanotechnology)”, states Jae Hee Jeon, Minister of Health, Welfare and Family Affairs. “Therefore, there is active support at a national level in Korea for the growth of this industry which is seen as one of the country’s future growth engines”, she adds. Indeed, many in Korea see the potential of the IT-BT-NT convergence in the health industry as one of its strongest competitive advantages, as it will build on the country’s different areas of expertise in order to develop more preventive and personalized medicine.

Healthier, but at a price

The importance given to the pharma and biotech sectors also stems from the challenges posed by Korean’s evolving lifestyles and fast-ageing process. OECD studies show that Korea saw the greatest gain in life expectancy among member countries in the past 46 years, exceeding the OECD average for the first time in 2006. According to the Korea Health Industry Development Institute (KHIDI), the country’s population over the age of 65 is expected to go from 8% in 2004 to 20% in 2020. This is naturally leading to a higher occurrence of chronic diseases and Bup-Wan Kim, President of the KHIDI, expects that “the demand for advanced medical care and e-health will increase dramatically”.

At the same time, the ageing population is putting the national health insurance system under mounting pressure as the amount of patients and the severity of the illnesses grow. As a result, the Korean government introduced the Drug Expense Rationalization Program (DERP) in 2006 with aims to stabilize public healthcare spending. Though it seems to have succeeded in this regard to some extent, the changing regulations and deep price cuts have – not surprisingly – raised many voices about the negative impact on the pharmaceutical industry, both among the domestic and foreign players on the Korean market.

The Korean market: dream or reality?

Already one of the top 15 pharmaceutical markets in the world with a value of about $10.5 billion (at 2008 consumer prices), South Korea’s continuous growth has made it one of the most prominent emerging countries for the industry, with some even considering that its mix of greater disposable income, an ageing population and lifestyle changes make it a ‘dream market’. Indeed, although multinational companies (MNCs) currently account for less than 40% of the pharmaceutical sales in Korea, they have mostly enjoyed high double-digit growth in recent years. Even in the midst of the economic slowdown, Business Monitor International (BMI) forecasts the Korean pharmaceutical market to grow at an annual rate of 8.56% through to 2012, well above global levels.

However, the sentiment among big pharma companies in Korea is notably less bullish these days. Many have seen their growth rates significantly decelerate since 2007. For most, the blame is not on the economic troubles but on the implementation of the government’s cost containment policies. According to Kyu-Hwang Lee, President of the Korean Research-based Pharmaceutical Industry Association (KRPIA), “There are specific aspects such as lack of clarity and of transparency stemming from the DERP, which give the impression of arbitrary decisions by the government in terms of reimbursement and pricing policies. The criteria for these key decisions are expressed too broadly and with a lack of scientific definitions”, he says.

Fabrice Baschiera, General Manager of Sanofi-Aventis Korea, has seen the French pharmaceutical company take the top spot in terms of market share among MNCs, but also shares the concerns over the recent policy developments. In his view, Korea is facing similar issues regarding healthcare spending as European countries with universal coverage and is trying to learn from those experiences. “The problem is that Korea is trying to accomplish in only a few years a process that took 10-15 in other countries. This is making it very difficult for the industry to change and adapt adequately”, he affirms, adding that by taking more into consideration the views of physicians and the industry, the negative effects of the DERP could be minimized.

Other leading figures in Korea’s MNC landscape, such as Urs Flueckiger, General Manager of Roche Korea, also point out the dangers of the increased uncertainty. “Products are getting stuck in the approval process due to pricing and reimbursement issues”, states Flueckiger. “Unfortunately, for patients this means a delayed access to innovative drugs”, he adds. Indeed, this has a direct impact on companies in Korea. Roche’s AVASTIN, which is #2 in its field globally, is not being reimbursed in Korea and Herceptin – a breakthrough in early breast cancer treatment – has been in reimbursement discussions for over two years.

For Flueckiger, the government’s request for prices far below international standards – in a country that has achieved GDP levels of developed economies and with high costs of doing business – is unrealistic. Notwithstanding these disagreements, Flueckiger points out that like for most MNCs Korea is one of Roche’s strategic emerging markets and is still growing at a pace above average. Moreover, the Swiss company is significantly stepping up its clinical trials activity in Korea (currently 60, up from just 5 a few years ago) and looking closely at the country’s technological offerings, particularly in drug delivery.

As for Korea’s fairly well-developed domestic pharmaceutical industry, comprising around 250 manufacturers, their traditional focus on locally high-priced generics has thus far spared them much of the pain inflicted on the sector by the implementation of the DERP. Indeed, many Korean pharmaceutical companies have continued posting double-digit growth, largely driven by their ability to quickly launch major medicines coming off patent on the local market. Of the top-tier players in Korea, with nearly 20% growth in 2008, Yuhan Corporation seems to be best capitalizing this momentum. The company’s robust sales of ATORVA, a generic of Pfizer’s LIPITOR, contributed significantly to this performance. According to Yuhan’s CEO, Joong Keun Cha, this success is thanks to “an aggressive pre-marketing campaign that lasted a year, and to Yuhan’s most invaluable asset: a staff of 600 highly skilled and motivated salespeople”.

Free trade triggers shift in paradigms

While the current situation may appear to have local companies regaining the upper hand over the MNCs in the quest for dominance of the Korean market, the mid and long term perspectives paint a more complex picture. For decades, the domestic pharmaceutical industry was able to thrive through a focus on production of generic products and in-licensing of new drugs, but the negotiations of Free Trade Agreements (FTA) with the United States – pending ratification – and the European Union – under discussion – are set to change the rules of the game.

The innovation challenge

Among the Korean pharmaceutical companies the growing consensus is that in order to survive and succeed in the era of truly global competition that is upon them, the key will be to make greater investments to enhance their R&D and manufacturing capabilities. The local industry only began full-scale R&D activities following the introduction of the product patent system in 1987, and since then 14 new drugs have attained KFDA (Korean Food and Drug Administration) approval. Global new drug status has only been reached on one occasion by a Korean company, when in 2003 the US FDA approved LG Life Science’s FACTIVE (Gemifloxacin), a novel quinolone antibacterial agent. But as the company’s CEO In-Chull Kim acknowledges, it is not enough to reach US FDA (US Federal Drug Agency) or EMEA (European Medicines Agency) approval but this “needs to be followed up with a successful marketing and sales strategy”.

Yuhan’s Cha also recognizes that the success in the Korean generics market alone is not enough to propel the company towards the future. Besides diversifying through toll-manufacturing and other health-related products, Yuhan is prioritizing R&D and focusing on four strategic therapeutic areas: CNS, oncology, circulatory and gastrointestinal system. Yuhan’s in-house digestant REVANEX is on the Korean market and will also be distributed in places such as China, Southeast Asia and Latin America. Daewoong, another top 5 player in Korea, already gets a majority of its revenues from proprietary drugs, and is also focusing on expanding its existing business in China and Southeast Asia.

The other pillar of the Korean pharmaceutical industry’s transformation is the government-fostered upgrading of manufacturing facilities. Keen to support the development of a globally competitive domestic industry but aware of the challenges set to arise from the FTAs, the Ministry of Health and the KFDA established a roadmap aiming to bring the entire Korean pharmaceutical industry up to cGMP (current Good Manufacturing Practices) by 2012. According to Jeung-Soo Kim, former Minister of Health and President of the Korea Pharmaceutical Manufacturers Association (KPMA), "over $1.9 billion have already been invested by companies to upgrade their facilities in the country, illustrating their firm commitment to making Korea one of the leading pharmaceutical industries in the world”.

Navigating uncharted waters ahead

However, not everyone in the Korean pharmaceutical industry is convinced of the need for such a massive push for cGMP. While medium-sized companies complain about the heavy financial burden this is imposing on them, others wonder about the long-term business sense of such a generalized move. Young-Jin Kim, CEO of Handok Pharmaceuticals points out that, now, “many Korean companies, regardless of their size, are pouring most of the money they have made over the last several years into new factories. The problem is that we are not sure that Korea needs so much new pharmaceutical manufacturing capacity, so if this strategy proves wrong many will suffer”.

The utility of these large investments will ultimately depend on the extent to which local companies are able to take advantage of the FTAs in order to penetrate overseas markets. Although Korea is a large and dynamic market, the leading local players will find it difficult to sustain high levels of growth if they limit themselves to it, particularly as international companies gain easier access. And the reality is that to date most Korean companies generate a very small part of their revenues from international sales, with some exceptions such as LG Life Sciences which has 40% of its business overseas, or Shinpoong Pharm which has specialized in producing medicines required by developing countries. Most analysts agree that in order to see a truly global Korean pharmaceutical company emerge, market leaders such as Dong-A, Hanmi, Choongwae and Green Cross will have to overcome the limits of their ownership model and finally allow for a long overdue wave of consolidation.

The hybrid model

In the case of Handok, one of Korea’s top 10 and fastest growing companies, the ownership structure has been its main distinguishing and competitive factor. A long-standing joint-venture with German company Hoechst, Handok underwent numerous shareholder transformations throughout Big Pharma’s M&A frenzy since the year 2000. Although it is still owned 50% by Sanofi-Aventis today, the companies formally separated their management in 2006 and Handok operates its business independently since. Despite the successive changes, Handok experienced high levels of growth in the 1990s and into the 2000s, outperforming the overall market.

“I believe that the main reason for this success was Handok’s ability to be ahead of the other local companies, and even multinationals in Korea, regarding scientific marketing practices”, states Kim. “Indeed, in 1986 we started to implement the first medical department in a Korean pharmaceutical company, eventually developing the biggest and best in the country”, he adds. This new approach contributed greatly to Handok’s most remarkable commercial success, AMARYL, an anti-diabetic developed in-house. Handok’s track record with foreign players and its MNC-style management have also made it a partner of choice in Korea for licensing collaborations with companies like Nycomed, Solvay and Actellion, as well as for co-promotion with Novartis.

Something to look forward to

When the FTAs do eventually pass ratification and come into effect, Big Pharma will have plenty to cheer about besides the lowering of import tariffs. Although the country is already well seen in terms of its IP regulations, the US FTA will further raise the level of protection by creating a new linkage system that will make it no longer possible for a generic of a patented product to receive KFDA approval. In addition, although not explicitly addressed, the research-based companies also hope that freer trade will lead to a drop in the prices of generic drugs, which in the view of Merck’s Koenig, “are considerably higher than in most other countries, generating an imbalance between the incentive to develop research-intensive products or to simply do generics”.

Voices across the KRPIA also expect the FTAs to improve the situation in terms of compliance with ethical business practices. In fact, the Ministry of Health has recently declared it a priority to eradicate unethical business practices in the industry, and the Korean Fair Trade Commission (KFTC) has already carried out investigations that resulted in fines, involving primarily locals but also some multinational companies. In this regard, Koenig, who is also the current Chairman of the EUCCK (European Union Chamber of Commerce in Korea) Pharmaceutical Committee is organizing a seminar in May 2009 aiming to improve the skills of product managers from European, American, Asian and especially local companies.

Looking at the bigger picture, Tom Keith-Roach, CEO of AstraZeneca Korea also highlights the FTA’s positive effects on patients, “who will enjoy huge benefits from more choice, better value, and from greater transparency and fairness in competitive practices”, he says.

Chapter 1

Indonesia: Demographic Dividend or Delusion

The Indonesian Pharmaceutical industry has always held tremendous potential. Yet, somehow, over the past decades, the local industry was quickly dwarfed by regional powerhouses India and China, and even surpassed in size by Thailand, a country with one quarter the population of Indonesia’s vast archipelago. Some pundits see the country destined to be the next great Asian success story, exploding to become the world’s 4th largest economy by 2050. Naysayers, however, fear that corruption, shortsighted policymaking, and insufficient infrastructure investments will doom the country to the status of perpetual underperformer. The past four years of Susilo Bambang Yudhuyono’s presidency have shifted the general consensus a shade towards the optimistic, even as opportunities for backsliding on transparency and anticorruption legislation abound.

Despite sustaining double-digit growth in recent years, Indonesia’s pharmaceutical industry is miniscule at approximately US$ 2.5 billion in a country with a population of 240 million. Anthony Sunarjo, President of the local pharmaceutical industry association, GPFarmasi, explained how in 1991 multinationals controlled over 70% market share, but now they have dropped to around 25%. Sunarjo attributed this shift to local firms moving along the learning curve and improving manufacturing and administration, in tandem with weak multinational drug development pipelines. The real market is primarily composed of the top 10% of earners; the rest of the population relies on government-subsidized generics from state- run drug companies. Minister of Health, HE Siti Fadilah Supari, has indicated that the government is supporting the state owned firms: “Since the start of the economic crisis in 2008, the government has committed to subsidize the cost of generic drugs to prevent price escalation in 2009.” The four state-owned firms, Kimia Farma, Indofarma, Biofarma, and Phapros, are run as profit-seeking enterprises that can be deployed as instruments of government policy when necessary. The government also runs a medical insurance program for the poor, restructured in 2008 under the name Jamkesmas. Dr. Willem Biantoro Wanandi, founder of Anugerah Corporation, analyzes Indonesian pharmaceutical spending. “At present, approximately 70% of health expenses are paid from out of the pocket of patients, and 15% from Jamkesmas covering approximately 76 million of the poorest population.” However, as part of the recent restructuring, an independent verification body was created to improve cost control, expedite payments and expand effective coverage of the program. These changes have been very recent, so only time will tell whether Wanandi’s analysis will hold true for the reconstituted program.

The Ministry of Health has recently issued a decree called 10/10, which began as a much-needed technical reform, but quickly erupted into a heated disagreement between the ministry and multinational corporations. The decree is a much-needed update in importing rules, but a side effect of the policy is that multinational drug companies will not be allowed to sell drugs that are not manufactured within the country. Opinions on the degree’s real impact vary. Dr. Parulian Simanjuntak is the Executive Director of the International Pharmaceutical Manufacturer Group (IPMG), the association representing multinational companies with a presence in Indonesia. Simanjuntak does not think multinationals will be eager to leave the country. “If research based companies go away, they will have to face higher entry barriers and it will be difficult for them not to lose market presence,” says Simanjuntak. “I could imagine they will not be inclined to share dossiers and know-how, especially for sophisticated drugs, because of technology spillover fears.”

Association of Southeast Asian Nations (ASEAN) harmonization is a hot topic among Pharmaceutical companies in the region, as it will liberalize a number of highly regulated markets. Lucky Slamet, Deputy Commissioner for Drugs at the food and drug regulatory agency (BPOM) says, “the harmonization process is moving in the right direction. Naturally, once you have the system completely harmonized you will find, in practice, only one system. However, a supranational agency like in the European Union still seems to be on the distant horizon.”

Navigating the Archipelago

Indonesia is one of the most complicated distribution markets in the world. The difficulties begin with the country’s geography itself comprising more than 17,000 islands. The country’s poor infrastructure further complicates this difficult task. Furthermore, the strategic landscape is complicated by the fact that the top five manufacturers, all local companies, also own distribution businesses. Thus those companies are off limits for independent distributors and the guaranteed business of the parent company subsidizes these distribution businesses allowing them to bring on external clients on the cheap. However, changes are on the horizon. A handful of independent distributors are making headway in a sector crowded with hundreds of competitors. The BPOM’s Slamet has stated that the agency is looking to create incentives to increase consolidation in the distribution sector, which is a very encouraging sign for these distributors.

APL is the largest independent distributor and was founded as part of Dr. Wanandi’s Anugerah Corporation. The company is now majority owned by Zuellig Pharma, the largest pharmaceutical distributor in Asia. President Director Santiago Garcia was brought into APL to help overcome some of Indonesia’s unique challenges. Previously, the firm was primarily focused on servicing its principals. Yet Mr. Garcia says, “Now managers are far more focused on working with customers and visiting branches. Working closely with the market is the ultimate way to please principals.” APL has also been using technology to enhance its product offering by creating new tools and delivering unique data sets such as information regarding med rep doctor visits or prescription behaviors. The company also uses cross-functional task forces to evaluate and improve branches. APL also runs a number of specialized programs such as 24/7 deliveries of lifesaving drugs and even delivers expensive oncology products to individual homes. President Director Garcia has been busy adding new principals and extending contracts with existing principals. Garcia is also looking to expand delivery to the so called ‘grey market’ by “selectively and gradually converting portions of that ‘grey market’ into a proper, licensed, normal market.” Unfortunately, there has been a slight decrease in customer satisfaction as the company was focused on integration after the merger. However, the specific channel and outlets that experienced this decrease have been isolated and are projected to return to previous levels by the end of the year.

Dos Ni Roha has the most extensive distribution network in Indonesia. This includes 48 branches with over 200,000 outlets served. Each branch has a proprietary sales force, delivery fleet and finance operation. The company has also recently invested in a new ‘MegaLogisticsDistributionCenter’ to serve branches nationwide. President Director Angela Trismitro has absolute faith in the company’s adherence to Good Distribution Standards. She gives principals free rein to inspect her facilities. “Our principals conduct regular audits, sending envoys from America, Singapore, Malaysia, Thailand, and The Philippines to inspect our processes and facilities,” says Trismitro. Dos Ni Roha is also looking to “be more aggressive in distribution of medical devices and other products directly to hospitals,” says Trismitro. This is a booming and highly competitive area due to the high margins on many medical devices. IDS Distribution’s President Director Ario Setiadi is focused on this area, particularly disposable medical devices, as they would help the company quickly build a presence in Indonesia. However, Trismitro isn’t overly concerned with such foreign distribution companies as Dos Ni Roha’s understanding of the local market and extensive distribution network provide substantial differentiating factors. She describes her vision as “to provide world class solutions for distribution and supply chain of healthcare and consumer products in the region.”

Business Confidence Survey 2009: European businesses remain confident about China,but call for more action to maintain growth

Munich July 17, 2009 - The European Union Chamber of Commerce in China today launches its sixth annual European Chamber Business Confidence Survey, which is published in partnership with Roland Berger Strategy Consultants. Drawing on the responses of more than 300 European companies active in China, the 2009 Survey highlights a European business community that remains bullish on China in most sectors and primed to back up that confidence with continued investment in the local economy provided that Chinese government is committed to creating a more free, fair and competitive market. The 2009 Survey findings show that virtually none of the European businesses in China escaped the financial crisis unscathed. But for most the impact on their operations in China was dwarfed by the fallout in their domestic markets which have been hit much harder by the crisis. As a result, companies are shifting their global strategies – and China is rising in relative importance. European companies are continuing to increase their commitment to China, and are preparing investment strategies and expansion plans to better position themselves for success. Despite the crisis, less than one-third of respondents plan to scale back or postpone their investments in China, reflecting the confidence of European business in China’s potential. But while there is optimism in the European business community, there is also concern that more needs to be done to bring the economy of the next level of maturity.

· 98% of the respondents reported that the global economic crisis had an impact on their business in China; 71% indicated that the Chinese economy has proven more resilient than Europe or other traditionally strong markets where members of the European Chamber are headquartered globally. ·Some 37% of the respondents reported that China has become a more important market for them, while only 3% say China has become less important to their overall strategy; 36% say there has been no noticeable change. ·78% of the respondents do not believe that China can drive the world to recovery in the short term. 48% of surveyed companies see China as becoming the driver of global growth in the long term, but not before. · Only 13% of the respondents indicated that they felt the stimulus package currently being rolled out is sufficient to ensure the long-term health of the economy. While 62% of respondents believe that the stimulus package has played an important role, they also believe that more is needed to drive recovery. ·More than 50% of the respondents identified the promotion of more free competition and the breaking down of existing monopolies as the primary actions needed to drive growth in the years ahead.

Joerg Wuttke, President of the European Chamber, commented, “Our members welcome the stimulus package and the Chinese government’s efforts to sustain growth. But they clearly feel that not enough has been done to unleash the potential of China’s economy. They identify the promotion of more free competition and the breaking down of existing monopolies as the key actions needed to drive growth,

and continue to caution against protectionist reactions that would hamper China’s development. In this regard, the European Chamber is not asking for priority to be given to foreign companies – we want to see equal opportunities and a level playing field for all businesses in China.”

Charles-Edouard Bouée, Regional Coordinator, Asia/President & Managing Partner of Roland Berger Strategy Consultants Greater China, said, “We are currently seeing positive signs of recovery, but there are still many challenges ahead. The financial crisis has exposed an already existing need for structural reform that is required to build a robust engine to drive China's economic growth for the next 30 years.

But this year's survey re-confirms that China is an important market for European businesses today and will continue to be in a world that is increasingly intertwined. So it is critical to understand this market's development and get prepared to maximise the opportunities ahead."

The European Chamber will present the findings from the European Chamber Business Confidence Survey 2009 to government and regulatory agencies in China, to the European Commission and EU Member State Governments, and to a wide range of business organisations and companies in China and Europe.

Roland Berger Strategy Consultants

Roland Berger Strategy Consultants, founded in 1967, is one of the world's leading strategy consultancies. With 36 offices in 25 countries, the company has successful operations in all major international markets. In 2008, it generated EUR 670 million in revenues with 2,100 employees. The strategy consultancy is an independent partnership exclusively owned by about 180 Partners.

Converteam Opens A New Rotating Machines Factory in Yantai, China

Yantai, China, 27 July 2009 - One year after launching a greenfield project, Converteam will inaugurate its new rotating machines factory in Yantai, Shandong Province, China. The company also runs a medium-voltage drives manufacturing plant in Shanghai and a joint-venture in Wuhan.

Converteam, a worldwide specialist in power conversion engineering, already owns three electrical machines facilities in France, in the UK and in the USA. As part of a global comprehensive strategy based on providing its customers with local offering and lowering costs, this new unit consolidates Converteam’s geographical expansion. Motors and generators are one of the three core components at the heart of the tailored solutions designed by Converteam. So, in line with its business model, Converteam will be able to supply its customers with an integrated offer on all continents where it is present.

This fourth unit features all modern equipment including 30-ton cranes, a 315-ton press, two VPI tanks and test benches. Converteam will produce motors and generators meeting the needs of its very demanding industrial markets, in particular the booming Renewables sector.

Pierre Bastid, Converteam President & CEO commented: “The opening of the Yantai factory is a milestone in the development of Converteam in Asia, a key area for our activities. In addition to being crucial for Converteam expansion and strengthening our leading position in the electrical machines field, this new facility will help us better serve our customers not only in the South East Asia region but also worldwide.”

Jacques Bigot, Managing Director, Converteam Rotating Machines Yantai, added: “We will manufacture medium-voltage motors and generators, a fixed-speed range of motors and generators for the wind business that are not produced in our other facilities. Moreover, as all key manufacturing processes will be handled in-house, we will provide the Chinese market with machines made to the latest Western quality standards.” About Converteam

Converteam Group is a world leader in power conversion engineering. Building on over a century of experience, it is firmly placed at the leading edge of technology and innovation with a global reputation for excellence in the conversion of electrical energy. Converteam develops and provides solutions built around three core components: rotating machines, drives and process automation. Serving specialized sectors as well as its core markets in Marine Offshore, Oil & Gas and Offshore, Energy and Industry, its 5,300 staff members provide power conversion solutions worldwide. At year-end 2008, Converteam sales totalled €1,099,000,000.

Gamesa and Huadian have reached an agreement for the joint development of 200 MW of wind farms in Inner Mongolia Autonomous Region and the supply of 300 MW of WTGs

Madrid, July 23, 2009. Gamesa Corporación Tecnológica and Huadian New Energy Development Co., Ltd. have reached an agreement for the supply of Wind Turbines totalling 300 MW in wind power. The agreement includes 200 MW to be installed at wind projects jointly developed throughout 2009-2011 by Gamesa and Huadian in the Inner Mongolia autonomous region of China.

All the wind turbine generators will be Gamesa G5x 850kW and G8x 2.0 MW, manufactured in Gamesa’s production facilities in China. Guillermo Ulacia, Gamesa´s President and Chief Executive Officer, and Fang Zheng, President of China Huadian New Energy Development Co., Ltd., formalized this agreement during Mr. Ulacia´s visit to China on July 23, 2009.

The supply of the first 58 Gamesa G5X, with a total capacity of 49.3 MW, for the Meiguiying phase I wind farm has already been formalized. Construction on the wind farm will start in the third quarter of this year, and the supply, delivery and installation of the wind turbines will take place in the fourth quarter of 2009.

In addition to the 200 MW in joint development projects, the two companies have signed a Memorandum of Understanding for the supply of 100 MW of Gamesa G5X and G8x to other wind projects developed by Huadian.

These agreements come after a successful project of 76.5 MW G58 carried out by Gamesa for Huadian in Huitengxile (Inner Mongolia) in 2007, and shows the involvement and commitment of Gamesa as a strategic partner of Chinese leading companies for the development of wind energy in China.

About Gamesa

Gamesa is a company specializing in sustainable energy technologies, mainly wind power. It is the leading company in Spain and situated among the world’s three most important wind turbine generator manufacturers. Gamesa has installed more than 16,000MW of its main product lines in 22 countries spread out over four continents. The annual equivalent of this production amounts to more than 3.45 million tons of petroleum (TPE) per year and prevents the emission into the atmosphere of over 24 million tons of CO2 a year. The company has some thirty production centers located in Spain, China and the United States with an international workforce of around 7,000 employees.

About China Huadian New Energy Development Co. Ltd.

China Huadian New Energy Development Co. Ltd. (hereafter Huadian New Energy) was founded on September 26, 2007 and is the whole owned subsidiary of China Huadian Group. The Company is mainly focused on new energy projects, which include the investment, construction, production and power sales of wind energy, small hydro, distributed energy, solar energy, biomass, geothermal energy and tide energy etc. It also manages the whole construction process of new energy projects, including installation, debugging, operation and supervision. The company is also in charge of the organization, development and settlement of CDM projects and the development and consulting on new energy technology.

At present the paid-capital of Huadian New Energy is RMB 1.5 billion, total assets are RMB 7.271 billion. The company owns 14 project companies, holding 9 companies and 3 preparatory offices.Huadian New Energy is mainly focused on wind energy. At present, the company has signed developments in Inner Mongolia, Xinjiang, Gansu, Jilin, Heilongjiang provinces with potential capacity of 16 GW. The company will set up eight wind energy bases in West Inner Mongolia, East Inner Mongolia, Xinjiang, Gansu, Jilin, Heilongjiang, Hebei and Jiangsu according to the national wind power bases set by NDRC in Xinjiang, Gansu, Inner Mongolia, Jilin, Hebei and Jiangsu. The company expects to have more than 3 GW installed capacity by the end of 2010.

As well as wind energy, the company also develops other new energies such as distributed energy, solar energy, biomass, etc. There is a 1.4 MWp solar PV farm under construction in the Industry Zone of Putuo District, Shanghai and a biogas project in Hubei province. The company has started development of distributed energy projects and Solar PV projects in many cities. Huadian New Energy will contribute more and more clean energies to the public following directions set forth in the national industry policies and renewable energy development plan.

Interview with Stefan Tenbrock, CEO of Winergy

Denmark is widely considered to be the birthplace of the wind industry and the home of numerous wind industry champions, but the country has failed to become the global centre for gearbox manufacturing. Why has Germany succeed where Denmark failed in setting international standards in the gearbox market?

The reason is in the industrial history of both countries. Denmark has no heavy metal industry while Germany is well known for its heavy metal and industrial gearbox industries. As a result, many of the world leaders in gear technology, and therefore the leading manufacturers of gearboxes for wind turbines, are located in Germany.

Many German companies in Germany with a strong tradition in industrial gearboxes manufacturing did not have the courage to enter the wind industry. Why did Winergy decide to make this move so early?

Already in the beginning we saw a good market opportunity. Even though the business was very small at that time, there were some people in our organization who believed in the development of this market. We did not expect the market growth that we have witnessed in the last years, but we saw the potential and realized that we had the right product at the time. We started with industrial gearboxes which were adapted to the specific requirements of a wind turbine. Later, when the volume of wind turbine construction increased rapidly, we started to design specialty gearboxes which are totally different from industrial gearboxes.

Developing a reliable gearbox for wind turbines continues to be a great technological challenge, and other players in the value chain often blaim the gearbox for wind turbine downtime. What is your response to this?

The gearbox is often mentioned in the discussion on technical problems, but statistics indicate that there are a lot of other components that have a much higher failure rate. The gearbox is so often mentioned in connection with problems because gearboxes failures are expensive to repair. The corrections have to be done in the workshop which means that the gearbox has to be taken out of the turbine, which is especially costly for offshore wind turbines.

Several of the world’s leading wind turbine manufacturers are constructing direct drive wind turbines or are investing in this technology. What is the main argument for relying on gearbox technology, and what are the main improvements that can be made to enhance its competitiveness?

The main argument for a gearbox is that the setup with a classical drive train, gearbox and generator is the most cost efficient design. But I also agree that gearboxes have to be very reliable; reliability is the top item in the wind turbine business. A lot of our activities in the last years have concentrated on increasing the reliability of our drive components. For example, the biggest portion of our investment has been spent on test equipment. Today, we have the world’s largest test capacity with more than 65 megawatt in test benches for gearboxes and generators. Each of our gearboxes has to undergo a thorough full load test before it leaves one of our factories. That is the normal testing procedure for gearbox production, but our prototypes undergo even more extensive testing programs in which we run long-term overload tests to figure out if there are any potential weaknesses in the gearbox before it is released for serial production.

In the past few years the supply of gearboxes has been a bottleneck for the global wind industry, and every manufacturer has been ramping up capacity as fast as possible. How successful has Winergy been in coupling a quality focus with the rapid expansion of manufacturing capacity?

Winergy has grown in step with the industry over the past few years but we have kept a very strong eye on quality so that our growth has not come at the cost of reliability. Our quality processes very tough from beginning to end including full load and water testing. We obtain all the data from gearbox noise, vibration, temperature as well as the bearings, which gives a clear indication whether there is something wrong or not.

We had an interesting discussion with Henrik Stiesdal, Chief Technology Officer at Siemens, about the future of the wind turbine; will it get bigger and bigger or should the industry focus on optimizing the existing turbine sizes. What are your priorities between optimizing gearboxes for existing smaller turbines or are you focusing most of your efforts on large turbines of 5 megawatts and more?

Its both, currently the bread and butter business is still from 1.5MW to 2.5MW. A lot of activities are focussed on optimizing our products in the lower megawatt range, but a lot of effort is spent in the development of bigger gearboxes for larger megawatt turbines.

To which extent are Winergy’s R&D activities integrated with your customers’ new product development activities?

The process is very closely linked because we are involved at a very early stage with OEM design and development activities. In recent years, much more customer data, such as detailed quality specifications, has become available compared to 15 years ago. Interacting contact starts during the development phase and continues throughout the whole design process; there are meetings at certain milestones during the design phase as well as production. During prototype testing it is quite normal that our customer join the test and we evaluate the results jointly. We also involve our sub-suppliers at a very early stage.

Do you see Winergy’s high global market share stressed by new manufacturers that are emerging in countries such as China? And where do you draw the balance between investing in the development of new markets and focussing on traditional Winergy customers?

Balancing the two is the best strategy; we are sticking to our customers but we also are looking for new customers especially in China. We see a large amount of new players coming up in the Chinese market, and it looks like more and more appear every week. It is obvious that we cannot serve all of the newcomers. Winergy is present in the Chinese market with our own organization, so we have a very good overview what is going on in China and who is involved in development of these new players.

Europe has criticized China on the fact that the formulation of the tenders for wind power projects as part of China’s economic stimulus package has favoured domestic companies. What does that mean for your strategy in China?

Our strategy has not changed because we expected that there would be a strong push for the local Chinese wind turbine manufacturers. Winergy decided a long time ago to look for local customers in the Chinese market; which is one reason why we have a production facility in China. You have to be there otherwise you do not have the opportunity to sell to Chinese companies.

What do you believe to be the critical factors for Chinese wind turbine manufacturers when the decision between using a Winergy gearbox or a gearbox manufactured by a Chinese supplier? How much of a threat to you is the local competition?

Although we are more advanced compared to our Chinese competitors, we have more than 20 years experience in wind turbine gearboxes manufacturing and development, the local competition has to be taken very seriously. Winergy has very high quality standards but the Chinese gearboxes manufacturers are quickly advancing on the same learning curve Winergy went through. They are progressing at a faster rate because they can learn a lot from the industry’s history. As the Chinese wind industry develops along the learning curve both its quality requirements and cost level will inevitably increase. Since we produce locally we will be on a level same playing field with our Chinese competitors. If we have identical quality levels to meet identical customer specification then there is no reason Winergy cannot be competitive in China. Currently, Chinese customers have to choose between just a gearbox and a gearbox with a very high reliability and quality standards at a premium price. Furtherone Winergy is the only supplier to offer complete drive train solutions including gearbox, generator, frequency inerter and couplings. Our interdisciplinary knowledge along the whole drive train is a very strong argument to decide for Winergy products and solutions. We answer the increasing wind turbine populations with our premium service offer in connection with condition monitoring and condition diagnostics systems.

Using a Winergy gearbox could be an important selling point for Chinese wind turbine manufacturers that are starting to export to the US and perhaps Europe. Is this a market opportunity for the future?

No, with our production facility in China we serve the Chinese market. This is the same as we do with the United States as well as India.

We discussed with Ivan Brems, CEO of Hansen Transmissions, his impressive future growth ambitions and expansion plans. What are your plans?

Our strategy is to grow with the global market. Stronger growth looks likely in China and the US than in Europe but the rates will be different depending on development.

What are your expectations for the next trip that you will be making to China and what are your final remarks to the readers of IBD and your partners in China?

We look forward to continuing our growth path in China. The market is developing as expected, characterized by strong growth, but it remains to be seen whether this will continue through the next couple of years. Fundamentally there are good reasons for growth, China has huge demand for electrical power and the Chinese have also recognized the importance of environmental issues that were previously ignored. Wind power is the strongest way to meet the growing energy demand without having any detrimental effects on the environment.

Steady European market for wind turbines in 2009, despite crisis

BRUSSELS -- Specialist green technology website www.greentechfocus.com reports that the European market for wind turbines is sailing well the 2009 financial storm but might face stronger blizzards in 2010.

On the basis of new research, the European Wind and Energy Association (EWEA) estimates that, in spite of the current drop in electricity consumption and tight financial conditions, 8,600 MW of new wind energy capacity will be installed in the EU-27 in 2009: an annual growth rate of 1% compared to 2008 installations. In 2008 wind energy, with 8,484 MW installed[i], was the largest source of new electricity generating capacity in the EU. This would take the EU’s cumulative installed capacity to 73,535 MW, up from 2008s cumulative capacity of 64,935 MW.

“The EWEA forecast is very reassuring, because it means that the wind power industry has so far managed to secure financing for the planned 2008 projects, something other players in the power generation sector have struggled with this year. Conventional power companies have taken a blow as electricity demand continued to decline during the year, reflecting the sharp contraction of economic activity across the world, but wind power is whirling away,” reports www.greentechfocus.com energy expert Jeroen Posma from Germany.

The industry may, however, feel the pinch in 2010. Healthy order books before the financial crisis have so far reduced the impact of the crisis on the European wind turbine manufacturers, but the EWEA expects the financial crisis to have a deeper impact in 2010, unless measures are taken rapidly to increase liquidity in the financial market. ”Although the outlook for 2009 is encouraging, the real test of the wind energy sector's ability to withstand the financial crisis will be 2010," said Christian Kjaer, EWEA Chief Executive, in a statement. It is essential that the billions of Euros provided by governments to European banks through stimulus packages reach the real economy, adds the industry group.

Inside the European Union, the emerging markets of the so-called EU-12 member states, which joined the economic block this decade, seem to be fairing better than the more established markets of the old EU-15. The EU-12 are set to install 150 MW more than in 2008, an increase of approximately 35%, while their EU-15 neighbours are expected to simply match 2008 figures.

SOURCE: FOCUS COMMUNICATION

Danish Wind Energy Group gets ready for China Wind Power exhibition next October

SILKEBORG -- Specialist green technology website www.greentechfocus.com reports that the Danish Wind Energy Group China (DWEGC) is preparing to take the Chinese wind energy business scene by a storm, for the fourth time this year.

The Group, a subsidiary of the Danish Wind Energy Group which unites over 100 Danish companies, will present yet another national pavilion with key subsuppliers for the wind industry. The exhibition will this year take place in Beijing on October 21-23, 2009. The DWEGC was founded in China earlier this year to offer its knowledge and services to the fast developing wind industry in China. With 21 Danish Wind Energy sub-suppliers, DWEGC is proving a strong and active organisation, promoting high standard technology, equipment, as well as, service from Denmark. The Group aims to bridge and strengthen cooperation within the Wind Energy Sector between Denmark and China.

DWEGC’s dynamism is reflected in its devoted participation in pivotal wind energy events in China. Since its foundation just a few months ago, the DWEGC has organised three Danish Pavilions; at the Shanghai International Wind Energy Exhibition and Conference in April, the Offshore Wind Power China in June, and the Wind Power Asia last July.

Denmark is widely considered the world’s Wind Power Hub and the leading global centre for the development of wind power technology. Wind power is the fastest growing energy form in Denmark, expected to supply 30 percent of the country’s electricity consumption before 2012.

SOURCE: FOCUS COMMUNICATION

RUSSIA IS FOLLOWING CHINA AND EUROPE’S STEPS IN GREEN ENERGY

MOSCOW -- Scheduled for Sept 23-24 in Moscow, the Energy Fresh Forum demonstrates Russia’s ambition to become a renewable energy reference, reports Focus Communication Moscow, the event’s media partner.

In the nation’s first-ever event dedicated to renewable energy, Russia is following the road paved by green technology front-runners, China and Europe. Potential investors and stakeholders will have the chance to examine how Russia´s huge renewable potential can be transformed from opportunity to reality.

With China and Europe´s energy security heavily relying on Russia´s ability and willingness to export its oil and gas, and the planet heating up at speed, the need to rebalance Russia´s energy basket is imperative, reports Focus Communication’s green technology website www.greentechfocus.com.

With China aiming for a 20 percent share of renewable energy by 2020 - the target set by the EU, Japan and other front runners - Russia is clearly trailing behind. Recent developments in Russia’s energy policy have demonstrated increased interest in renewable energy sources. On 8 January 2009, Prime Minister Vladimir Putin signed a document which confirmed the main trends of governmental policy in the development of renewable energy sources till year 2020: the increase of production and consumption of electrical power using renewable energy sources: in 2010 – by 1,5%, in 2015 – by 2,5%, in 2020 — by 4,5%. Not in the scale of China, but promising nevertheless.

In Putin’s words, ¨Russia can and must become a world alternative energy centre¨. Energy Fresh 2009 to be held in Moscow on 23-24 September will aim to demonstrate Russia´s innovative potential and perspectives of development of renewable energy sources, to facilitate enlarging international cooperation and help build new business contacts.

Russia is rich not only in oil, gas and coal, but also in wind, hydro, geothermal, biomass and solar energy. However, fossil fuels dominate Russia’s current energy mix. Just 3.5% of its total primary energy supply is currently based on renewable energy, of which two-thirds was hydro and one-third all other forms. Russian experts estimate that heat based on renewables amounts to about 4% of the country´s total.

With such bare exploitation of its clean energy sources, the challenges and opportunities of scaling-up Russia’s use of renewable energy are significant to say the least. ¨As the debate on climate change gathers momentum in the run up to December´s United Nations Conference COP15, Russia´s underuse of clean energy sources is paradoxically good news for investors as it means the sector is waiting to be unlocked,¨ says www.greentechfocus.com.

Representatives of the government of Russian Federation and foreign countries, leading Russian and international industrial companies, scientific and research and project designing organizations and institutes will participate in the Forum and paint a clear picture of the potential for profitable renewables projects, and the incentive to start undertake them, as they become a key element of the global energy sector. More than 200 companies, including big names such as Siemen and Alstom, have already signed up.

SOURCE: FOCUS COMMUNICATION

Focus Communication, the B2B communications group specialized in government and strategic industries, is the agency behind GreenTechFocus.com. With offices in Beijing and Paris, Focus Communication is a pioneer in launching integrated marketing communications programs to promote Western strategic sectors in the Chinese market.

Interview with Edelgard Bulmahn, Chairwoman of the Parliamentary Committee on Economics and Technology of Germany

In her recent, exclusive interview for www.greentechfocus.com, Edelgard Bulmahn, Chairwoman of the Parliamentary Committee on Economics and Technology of Germany, believes China has all it takes to succeed in creating a powerful green economy. She comments on China´s increasing clout in the renewable energy scene and Germany´s worldwide acclaimed green model.

The financial economic crisis is being used as an opportunity by many countries to redesign their economies, and stimulus packages give a good indication of the role that the green economy is destined to play in the future. Do you believe that China is on the road to create a green economy and a world leading renewable energy sector?

Yes, I think China will be successful because the country’s leadership know that they won’t be able to protect the environment or improve the quality of life without using green technologies in all areas. They are very well aware that this transformation will be a question of life or death for many Chinese companies. If a company does not undertake the required efforts to change its production processes then it won’t be able to succeed in the global market place in 10 or 15 years.

Germany made this strategic decision a long time ago; what are the main changes that will take place in Germany in the coming years?

In Germany we have been pursuing a twin track strategy for at least 10 years; the use of renewable energies on the one hand and increasing efficiency to reduce overall energy consumption on the other. On the one hand, the German government supports several long-term programs to increase the technological advancement and competitiveness of renewable energies. On the other hand, we support research in the field of energy efficiency to reduce energy consumption through new technology development in areas such as machine engineering. As a result, the energy consumption of new machinery has been drastically reduced over the last 10 to 15 years. The combination of these two elements is crucial, should you rely on only one track I’m convinced that you would not succeed. We have to assume this twin strategy.

While Germany has been the world’s leading exporter for seven years now; we are also the champion in export of green technologies. In 2006, Germany’s share of world trade of environmental goods was 60%. As a former Minister for Education and Research I think that it is especially important that we are performing so well in the export of solar cells and wind turbines, which are based on technologies that we have developed

very successfully since the middle of the 1990s. Also, I think that Germany is doing so well in this field because we do not only offer single technologies but also complete system solutions. We play an important role in exporting the machinery for the whole supply chain in these industries, because German companies have great expertise in designing and constructing efficient factories with very low energy consumption: each part of the production process is planned and implemented with the goal to reduce energy consumption.

When we look at the complementarities between green technology and Germany and the ambitions of China, are there shared strategic objectives in your opinion?

Yes, there are, although the hierarchy of objectives might be different. For example: In China rural regions have still a very low standard of living and quality of life contrast with regions that are highly developed and have a highly qualified workforce. This is one difference in comparison with Germany. We have a different political system, this is another one. Germany could be an example in setting up the right political framework and instruments. When I discuss these topics with Chinese politicians I get the impression they try very hard to set up a hierarchy of values which supports this transformation. Just to talk about it is not enough, you need to act.

Undoubtedly, other countries are studying how Germany developed its renewable energy sector and are eager to emulate your success and catch up. How can Germany stay ahead of the competition?

Germany has set the goal for 2020 to achieve a reduction in the emission of greenhouse gases by 40%, generate 30% of electricity from renewable sources, and double energy efficiency in comparison with 1990 levels. Also, we want to double the combined heat and power share to 25% of electricity generated by 2020. Germany has a very sophisticated and highly developed industrial sector and if we do not set up these goals then our green technology development may suffer.

In the past six months, the global discussion of climate change has increasingly become a bilateral discussion between the US and China. Is Germany being left behind in the debate on climate change?

I wouldn’t say Germany is left behind. We are not the world leading country in terms of political power; the US is the leading political power in our world and China is an increasingly important political power. Nevertheless, I don’t see the Sino-US talks as a threat. I believe that President Obama really wants to change the policy of his predecessor by pushing the transformation of the economy of his country. Of course, Chinese policy plays a very important role as well. When I went to China in the middle of the 1990s there was much less awareness of the importance of environmental policy or the transformation of industry, but there is a growing awareness and change has taken place over the past years.

What do you think should be on the top of Germany’s agenda in this context?

I think that Germany can and should be a leap market for green technologies and by doing this we do not only offer solutions but we set an example, and that is the role Germany should play.

SOURCE: FOCUS COMMUNICATION

Chapter 1

Italy: Towards Pharmaceutical Renaissance

FROM LEFT: Vice Minister of Health Ferrucio Fazio;Director of Farmindustria Enrica Giorgetti Acclaimed researchers, an expanded manufacturing base and growing investment from abroad are spurring world-class innovation and contributing to build a strong, mature and highly non-cyclical sector- which continued to develop even when growth in the Italian GDP slowed down. And such performance is usually the best guarantee of quality.

Indeed, between 1995 and 2007, production witnessed growth more than double that of the Italian economy, to reach a value of Euros 22,6 million which makes the Peninsula’s market the fourth largest in Europe- representing around 13% of the regional total. An occupational growth now on the rise for 10 years shows that the Italian pharmaceutical industry is in good health- even though a slight slowdown was noticed in 2007. A dozen of large companies and hordes of small and medium-sized businesses are ready to make the great leap to the top league of major international companies. And the future looks even rosier, given their capacity to survive on the market and anticipate it, by creating research projects with promising development potential.

Enrica Giorgetti, General Director of the industry’s main trade association Farmindustria, points out the main positive signals. Firstly, “the number of exports that has experienced a 200% growth in the last 10 years and is now reaches 53% of production. In the same way, investments in production as well as R&D together reached Euros 2,2 billion in 2007- and looking at the next there years, an “Accordi di programma” (program agreement) plans over 1 billion Euros budget to be invested. Moreover, R&D personnel have increased by about 17% in the last five years and the sector now employs 1000 more people than in 2002. Looking at the companies, Italians account for 1/3 of the Italian pharmaceutical sector, 1/3 being American companies and 1/3 European. Many of them are small and medium sized companies, but they are all working together as a network, which is another positive characteristic of the industry.”

Every year confirms the sector's ability to innovate as a result both of a highly competitive market and of the continuous arrival of new diseases that require the rapid development of new active principles, or chemical substances with a therapeutic effect.

“In fact”, Giorgetti adds, “the Italian system is also characterized by the ageing of its population, which is now the oldest in Europe”. This trend results in a continuously increasing demand for pharmaceuticals that has put pressure on the Government’s overall funding of healthcare, which stands at around 9% of Gross Domestic Product (GDP). As has been observed in many other countries, the growth in pharmaceutical spending has begun to outstrip the growth in total healthcare spending, and demographic factors will have a major impact on the make-up of the Italian pharmaceutical market in the future.

It is the changing nature of the demand for healthcare that has prompted the Italian authorities to develop a more proactive approach to their policies. The recent Italian Sanitary Program (Piano Sanitario Nazionale) for the period 2005-2008 has placed a greater emphasis on preventive medicine. This involves educating people so that they understand how changes in their lifestyle can help them avoid serious medical conditions in the future. Following the successful results of this main first step, Ferrucio Fazio, Vice Minister of Labour Health and Welfare in charge of Health, highlights that “the current Government intends to confirm and implement the necessary initiatives to ensure the maintenance of the National Healthcare System’s (NHS) characteristics: quality, appropriateness, safety and effectiveness of care, definition of the Minimal assistance Levels (LEA), evaluation of healthcare technologies and efficiency in directing healthcare companies”.

However, the success of such initiatives depends on the Government’s ability to communicate well with the public as well as to involve those who provide their healthcare. As pointed out by Daniel Lapeyre, President and CEO of the country’s leading multinational corporation (MNC), Sanofi-Aventis, “the pharmaceutical industry is still striving to enhance its image in the country. Indeed, the main stakeholders at the central and regional level used to have a prejudice towards pharmaceutical companies, considering them as costly commercial activities.”

The Italian Pharmceutical Empire: From Decadence To Rise

When analysing the fall of the Roman Empire, most historians recall its long path towards decadence- a lack of awareness and responsiveness, combined with a tendency to rest on Caesar’s laurels, which prevented political strategists from seeing the threat of the northern European tribes.

Italy has long been re-built on the heritage of the deprived Empire but, at present, many are the industry insiders who fear a similar fate for the pharmaceutical sector- which has to some extent remained one step behind some European neighbours, despite its general appearance of being immune to crisis.

A giant with dragging feet

Sergio Liberatore, who developed an in-depth knowledge of the industry through a 24 year-long career in multinational corporations (MNCs) before taking the reins of IMS Health Italy in 2008, unveils a disquieting reality: “The domestic industry developed during the last 20 years through co-marketing activities mainly applied to primary care blockbusters, like anti-hypertensive and anti-cholesterol drugs. Over this period, most of the local companies adopted co-marketing as a new business model, reducing research investment to focus on marketing processes”. Despite having been a very profitable strategy for years, the model now seems to be over as most of the blockbusters’ patents are expiring.

Patenting pharmaceutical products was prohibited in the country until 1978 which led to a lack of in-house research capabilities developed by the first generation of Italian pharmaceutical players. As a result, the most important local laboratories were swallowed by multinational counterparts. One example: Carlo Erba, created in 1853, became part of Farmitalia in 1978, which in turn was purchased by Swedish laboratory Pharmacia in 1994, itself absorbed by Pfizer in 2002. “The only survivors are the ones which developed international activities and, at the same time, bet on their own research capability”, states Liberatore.

But patent regulation did not only affect innovation. Indeed, 13 years after Italians were allowed for the first time to protect the results of their research, the Parliament extended the effective duration of the patent for up to 18 years. According to Giorgio Foresti, General Manager of Assogenerici (the Italian association of generics players) as well as Ratiopharm Italy, such an Italian exception that was aimed at “guaranteeing longer patent protections for the major blockbusters” has generated “a misalignment between Italy and the rest of Europe in terms of generics penetration. Most doctors probably forgot the active pharmaceutical ingredient’s name and, from the beginning, physicians have been reluctant to prescribe generics, even spreading false rumours about their quality, which created dramatic barriers to entry”. And here again Italy has been a latecomer; the will to protect the local pharmaceutical industry relying on licensing agreements resulted in generics being recognized by the Government as an opportunity no earlier than in 2004, when the 04-05 law introduced the possibility for pharmacists to substitute generics to brands.

However, "the Italian situation is changing a lot, yet at a different speed than in other countries”, assesses Liberatore. “For years, Italians had the feeling that no changes could be successfully implemented in their country.”

Indeed, regulatory changes do not always convert into immediate results, and the impact of specific legislations can still be hardly perceivable decades after they were implemented- an issue of which local Contract Research Organizations (CROs) are well aware of.

Oriana Zerbini, founder and Managing Director of CROM, relied on her will of iron to start up a CRO in 1997, at a time when the Italian legislation did not clearly enable to conduct research in Italy. “For this reason, CROM started developing its activities abroad- mainly in Eastern Europe-coordinating everything from the Italian headquarters.” However, one year later, the 1998 Ministerial Decree drastically changed the regulatory environment for conducting clinical research in the country, by setting the bases for the establishment and operations of ethical committees. But CROM’s research remained essentially based overseas, as Zerbini highlights that “overall, even after such a significant evolution of the legal framework, Italy remained one step behind in terms of regulatory delays and recruitment processes”. Indeed, Italian clinical research has been –and is still to a certain extent- hardly reaching its targets on time, which is “a main obstacle when it comes to be involved in international trials. Thus, in order to remain competitive and deliver results at the same pace than other European participants involved in these kinds of trials, organizations like CROM need to involve other countries”. The company established structures in Russia, Ukraine, Poland, CzechRepublic, Bulgaria andHungary, then expanded to Western Europe with more recent offices in Spain and the UK, and now has German and French affiliates in the pipeline. A strategy that has so far paid off, as it generated 30% growth in 2008.

Old habits die hard

Influencing behaviours is often more challenging than implementing new regulations. Enrico Allievi, Director of ANIFA, the national association of over the counter (OTC) medicines producers, is currently confronted with this issue. Indeed, despite the recent liberalization of OTC drugs by the Bersani law of 2006 which enabled to open more than 2200 new OTC sales in para-pharmacies and supermarkets, “the expected boom in OTC sales did not happen. The increasing number of sales points did not have any strong impact in terms of consumption, as patients obviously don’t buy drugs if they don’t have health problems”.

One cannot change an Italian’s habit overnight, and in this regard, the numbers speak from themselves: 95% of OTC consumers still purchase their treatments in pharmacies, 3% in para-pharamacies and 2% in supermarkets. There is obviously “still a clear preference for pharmacies, since most patients are used to his environment and like to follow the advice of their traditional pharmacist,” he says.

Delayed introduction of patent regulation and liberalization of the OTC segment, and a general inertia of the system did not prevent Italy from being a most strategic destination for MNCs. German based biotech Biotest never questioned the country’s attractiveness, and chose it to establish its first foreign expansion in 1968.In the words of Giuliano Tagliabue, Biotest Italy’s CEO, many were the opportunities to be caught at the time, as “before 1992, Italy was surely a most attractive country for pharmaceutical players, enjoying the highest price level in Europe.” It was especially true for the diagnostics market, which was the group’s first core focus. Even “a few years later, when the group’s strategic interest shifted from Diagnostics to Plasma proteins, there was still more unexploited potential in Italy than in other European countries. At the time, the only well-established Italian player in the field of plasma derivatives was not developing the same protectionist approach that its French, Spanish, or British counterparts adopted in their respective domestic markets”. Such a strong historical positioning within Biotest group is expected to ensure the Italian subsidiary unconditional support from headquarters. Indeed, even though the acquisition of US-based Nabi Therapeutics has now expanded the group’s ambitions from Europe to America, Tagliabue is confident that Italy will remain a main priority.

Time For More Neorealism

President of Farmindustria Sergio Dompé As Italy remained throughout the years a welcoming land for pharma and biopharmaceutical players, most of them agree with Tagliabue’s perception that the early 1990s were a major turning point for the industry.

Indeed, from 1992 onwards, the political system which had dominated Italy since World War II collapsed in a wave of corruption scandals known as "Tangentopoli” (Italian for bribeville) eventually blown out by the Mani Pulite (clean hands) investigation. While the FirstRepublic was agonizing, the police once broke into the house of Duilio Poggiolini, head of the National Committee for Drug Registration, and discovered gold bullion under his floorboards. For many Italians, the image of that gleaming bullion still resonates - an enduring symbol of a time when government officials, up to and including the Health Minister, routinely took bribes from the pharmaceutical industry to approve drugs and fix their prices. Whether things have really changed since then, or whether only the names of those involved have, is still a matter of debate- but the impact of Italy’s political turmoil on the pharmaceutical market’s dynamics is undeniable. From then on, the industry had to regain credibility and improve its image as public opinion favoured radical changes for Italy's pharmaceutical policy, starting with the enforcement of Law 537/1993 of January 1st 1994.

From pricing revolution to industry disillusion

Pricing and reimbursement guidelines are now defined by the AIFA, the dedicated regulatory agency created in 2004, under control of the Ministry of Health and Welfare. In principle it is all pretty clear and cut, but not everyone agrees.

The Italian National Healthcare System (NHS) classifies drugs in two main categories: A-band medicines targeting chronic diseases as well as H-band for hospital use are fully reimbursed, whereas the C category includes minor treatments chargeable to the patients. AIFA also defined a positive list of Class-A products in the national Pharmaceutical Handbook (PFN), updated on a one year or six months base in accordance with the evolutions of expenses ceilings set at the central level. Off-patent drugs are reimbursed by the NHS following the reference price system implemented in 2001.

Since 2004, the price of reimbursement items is no longer following the average European price, and it is determined centrally through a negotiation process involving both AIFA and the representatives of the major pharmaceutical companies. In the case of C-Class non-reimbursed drugs, or when no agreement is reached between the two parts, prices are freely determined by the pharmacists.

AIFA is also responsible for controlling healthcare expenses. The Agency’s first Director, Nello Martini, carried out a mandate to limit spiralling drug expenditure to 13% of the total health budget- incurring in the wrath of industry.

In theory, each company investing in research in Italy and developing an innovative drug should be able to enjoy a premium price, but for some industry players mechanisms are still not totally clear, as the prices still have to negotiated with AIFA at the end of the registration processes, and are not always in line with the costs and the intensity of the R&D efforts. In addition, even a laboratory enjoying a premium price on one of its products could be at risk of having to pay back part of its margins if the compound surpasses the average Cap Ex per year set by the Ministry of Health and Welfare for each specific therapeutic area.

For Vice Minister Fazio, balancing costs in times of economic slowdown and increasing demand for medicines is a priority on a global scale; "These recent political actions keep ensuring a continuous increase of the NHS’s funding, therefore paying particular attention to healthcare in a context of ever-declining resources for public expenditure."

Yet if laboratories have always been conscious of such necessities and were welcoming to the very first reforms, little did they know about the impact repeated price cuts and ever-changing regulations would have on their activities’ sustainability throughout the following years.

"The restrictive policy towards the pharmaceutical industry implemented between 2001 and 2006- with 13 successive price cuts during these six years, resulted for instance in a total price reduction of 11% in 2006”, points Massimo Di Martino, President and Managing Director of Abiogen. He is personally persuaded that the Italian industry is victim of a prejudice: “the Government is convinced that pharmaceutical companies are more focused on commercial aspect than on research, and that their profitability has to be limited by institutional tools”, Di Martino explains. After his family company Istituto Gentili was bought by MSD, he founded Abiogen in 1997. Despite complaining that governmental interventions make it difficult to stick to long-term plans, as forecasts and amortization plans can suddenly become irrelevant overnight, Di Martino has managed to keep adding value to Abiogen's R&D investments, relying on strong out-licensing agreements such as the one with BMS -to whom the exploitation of an oral anti-diabetic agent was entitled in 2000. Focusing on his late great grandfather Commendatore Alfredo Gentil's legacy and Istituto Gentili’s traditional assets -R&D know-how, and a strong portfolio in the osteoarticular, diabetes and respiratory areas- the company quickly became the first player in the world to present three biosphosphonates on the market, with a fourth still under development.

New leader, new rules, more reforms

Since August 2008, when Government prosecutors in Turin charged Martini with “causing unintentional disaster” by creating bureaucratic delays in updating the packaging information on the side effects of a few drugs - although none required more than minor rewording of existing text- all eyes are now turned to microbiologist Guido Rasi, the new General Director of AIFA.

“Upon my arrival”, Rasi says “I found a two-speed AIFA- with peaks of excellence but also many failures”. A few months later, the regulatory area has already been completely re-designed, specific task forces have been put in place and the organizational chart’s enlargement to 450 units has been approved, which will enable to catch up on the other European agencies’ headcount.

But the path is still long. “So far” Rasi explains “the main obstacle to industrial investments in Italy has been a strong lack of certainty- not only in terms of drug’s registration timeframes but also regarding the conduction of the adequate inspections for the productive sector. Both these areas are involved in quality audits and enhancing their efficiency will achieve a double result: to better ensure drug’s quality and safety on one hand, while at the same time supporting the industry and &attracting investment in the country.” For this reason, the fields that have been suffering until now will be the first to benefit from the integration of new staff resources. Indeed, improving the efficiency of regulatory inspections will enable to provide the companies with precise timelines to plan the activities, as well as to issue promptly the Commercialization Certificates allowing exports and thus providing an important contribution to industry’s development.

“Beyond these initiatives”, he adds “AIFA will also foster the implementation of the Accordi di Programma aiming at promoting research and development investments in Italy, and will work towards the establishment of specific agreements with biotech companies”.

Leonardo Vingiani, Director of the biotech companies’ association Assobiotec believes “the Government is currently creating the right environment and the good climate that can attract people willing to look at Italy and improve the conditions for doing business in the country.”“An important initiative has been the recent adoption of new measures such as tax credits for R&D activities (10% of investment), and for R&D investment in partnership with Universities (increased from 15% to 40%). Another important step forward has been taken with the 2008 Financial Law that introduced new tax incentives especially directed to young innovative companies.” However, there seems to be a long way between planning and execution, and "a decree from the Ministry of Industry is expected in order to set how these tax incentives will be realized,” Vingiani adds.

Giorgetti, on her part, explains how pharmaceutical companies have found ways to increase their industrial commitment despite the cost-containment context: "Most of them managed to be very flexible and adapt to this situation, for example by balancing the effects of the price cuts by increased exports.”

Francesco de Santis’ experience proves her point. As President of Italfarmaco Holding, he is at the head of one of the few players who really sustained the growth of the Italian pharmaceutical sector in the past 10 years by expanding overseas. “Whereas Italfarmaco’s main driver is research”, he states “the second one is surely international expansion. A consistent share of the revenues generated is reinvested to fulfil global ambitions and conquer new markets.” Having first targeted Southern European countries as a priority, the group developed in Greece, France,Portugal, Spain and Switzerland- and then established subsidiaries in Russia and Chile, as gateways to other regions. “Italfarmaco always considers each domestic market as an integrated reality made of different segments- from generics to high-tech biotech drugs. Therefore, specific strategies have been developed for each business line, and it is generally easier to grow in new markets, by focusing on a few segments”. Looking at the future, “international sales shall grow faster than domestic ones, therefore taking the company towards more international exposure”. Indeed, even if the Italian market remained stable in the past five years, Italfarmaco has been able to increase its market share in the country- mainly relying on its gynaecologic products, anti-thrombosis compounds and growing CNS portfolio- and now wants to strengthen its position overseas, both by reinforcing existing affiliates and growing organically in new markets. Amongst the opportunities recently identified, the Turkish and Russian markets come as priorities. “But overall”, explains De Santis, “international expansion will follow an opportunistic approach without pre-set rules. Organic growth shall account for an increase of 7 to 9% of the existing business over the next five years; but in addition, Italfarmaco will keep looking for in-licensing opportunities in order to complement its strong in-house portfolio and increase its volume by 3 to 4%”.

The Copenhagen Call

On Sunday, May 24th, Focus Communication joined U.N. Secretary-General Ban Ki-moon, former US Vice President Al Gore and more than 500 business leaders and politicians from around the world at the World Business Summit on Climate Change, organized by the Copenhagen Climate Council. Held six months before COP15, the world’s business leaders used this three day meeting to debate and deliver a common call for long-term climate policies, "The Copenhagen Call", at the close of the summit.

U.N. Secretary-General Ban Ki-moon opened the conference with a clear message for those lobbying against climate action: “your ideas are out of date and you are running out of time. The smart money is on the green economy”. He was succeeded by former Vice President Gore who stressed the urgency of taking action now, and the irrevocability of climate change, when stating: “It is time to act now, we have to do it this year, not next year. The clock is ticking because Mother Nature does not do bailouts." He underlined that the required knowledge and technology are available, and that the only missing ingredient is the political will. Xie Zhenhua, Vice Minsiter of China's National Development and Reform Commission, picked up on this comment when stating that he believes that “political wisdom can help us find solutions acceptable to all parties.”

Below is the statement delivered to Danish Prime Minister Lars Løkke Rasmussen and UNFCCC Secretary General Yvo de Boer which summarizes “The Copenhagen Call” from the business community to politicians around the world as they enter the final six months of negotiations leading to COP15.

“As global business leaders assembled at the World Business Summit on Climate Change, we call upon our political leaders to agree an ambitious and effective global climate treaty at COP15 in Copenhagen. Sustainable economic progress requires stabilizing and then reducing greenhouse gas emissions. Success at COP15 will remove uncertainty, unleash additional investment, and bolster current efforts to revive growth in a sustainable way.”

“By addressing the magnitude of the climate threat with urgency, a powerful global climate change treaty would help establish a firm foundation for a sustainable economic future. This would set a more predictable framework for companies to plan and invest, provide a stimulus for renewed prosperity and a more secure climate system. Economic recovery and urgent action to tackle climate change are complementary – boosting the economy and jobs through investment in the new infrastructure needed to reduce emissions.”“Business is at its best when innovating to achieve a goal and the goal of reducing greenhouse gas emissions is vital to our common social, economic and environmental future.”

The participants in the World Business Summit on Climate Change concluded by outlining the following six steps to be implemented:

1. Agreement on a science-based greenhouse gas stabilization path with 2020 and 2050 emissions reduction targets.

“An effective global climate treaty must establish an ambitious goal and set emission targets that protect us and future generations from the risks of climate destabilization. Limiting the global average temperature increase to a maximum of 2°C compared to pre-industrial levels would entail abatement of around 17Gt versus business-as-usual by 2020.This will require an immediate and substantial change in the current global greenhouse gases emission trend: it must peak and begin to reduce within the next decade. There is nothing to be gained through delay. The deepest reductions should initially be made by developed economies though global emissions reduction will require all nations to play a part.”

2. Effective measurement, reporting and verification of emissions.

“Achieving and tracking greenhouse gas emissions reduction is vital to measuring convergence towards the objectives of an effective climate treaty. As businesses we can set an example by contributing to a unified, coherent and reliable measurement, reporting and verification discipline leading to mandatory reporting. Accounting for the emissions we are responsible for will provide the basis for emissions reduction beyond what may be required by regulation and allow our performance to be properly judged and rewarded by investors and the public.”

3. Incentives for a dramatic increase in financing low emissions technologies.

“Properly established, an international carbon market framed around ambitious reduction targets can enable both cost-effective abatement and create the carbon price stability to drive the deployment of technologies that will deliver large-scale emissions reductions. The new climate treaty must "push" the development of new technologies through the use of public funds to leverage private finance in early stage demonstration and deployment. This will require policy measures that create clear, predictable, long-term incentives to stimulate private investment and enable the global diffusion of capital and technology.”

4. Deployment of existing low-emissions technologies and the development of new ones.

“The private sector is already the source of over two-thirds of the world's investments in clean technology innovation, and is the most effective source of know-how and technology dissemination. Many low-technologies already exist and can significantly reduce global emissions. Government and business must work together to ensure all nations have equitable access to new clean energy technologies. An effective global climate treaty provide the means to fund research, the deployment of new clean energy technologies. Pricing can help "pull" these technologies through the innovation chain, generate revenue and enhance the flow of investment to developing countries.”

5. Funds to make communities more resilient and able to adapt to the effects of climate change.

“We recognize that adaptation is as important as mitigation in an effective global climate treaty. Adaptation planning will require a holistic and long-term planning perspective, which will require different levels of activity at the international, national and local levels. Businesses will be responsible for building much of the infrastructure needed to protect us from climate impacts. An effective global climate treaty will mobilize funding that supports public private partnerships to enhance development, adaptive capacity, climate resilience and management of risk.”

6. Innovative means to protect forests and balance the carbon cycle.

“Because a significant proportion of the CO2 reduction required by 2020 comes from the sequestration of carbon in forests and agriculture lands, an effective climate treaty must facilitate such sequestration. If emissions reductions targets are to be met, there is an immediate need to protect forests and enhance carbon sequestration. The private sector can play an important role in reducing deforestation, particularly in developing countries, through mechanisms structured to value conservation.”

Siemens to produce wind turbines in China

New production facility in Shanghai to commence operation in 2010

Siemens is expanding its global manufacturing network for wind turbine plants and is building a new production facility in Lingang New City in Shanghai. By establishing this new rotor blade and nacelle plant, the company is further strengthening its environmental portfolio. This new facility is scheduled to take up operation in the second half of 2010, initially with 400 employees. The wind turbine plants produced in Shanghai will be for the Chinese market and for export. Siemens is investing more than EUR60 million in setting up this new location.

"Siemens is expanding its commitment to environmentally-friendly energy technology in China with this new wind turbine production facility in Shanghai,” declared Wolfgang Dehen, CEO of the Siemens Energy Sector and member of the managing board of Siemens AG on the occasion of the laying of the cornerstone in Shanghai on May 22, 2009. "China could soon become the largest wind energy market in the world and with our new production facility in Shanghai we are establishing an excellent starting position for meeting the growing demand of this exciting market. In addition, we are also rigorously advancing the internationalization of our manufacturing network for wind turbines to optimally meet the needs of our customers in Asia, Europe and America."

The new production site will have a total space of 180,000 square meters and be situated at an excellent location with regard to shipping and traffic facilities, being in the direct vicinity of the Yang Shan deep-sea harbor. Siemens will initially produce blades for 2.3 and 3.6 MW wind turbine plants. These blades will be produced using the IntegralBlade® process patented by Siemens, without any glued joints that are susceptible to damage. Wind turbine plant nacelles will also be produced at this new plant. A nacelle is mounted on the top of the tower and supports the rotor as well as encloses a wind turbine plant’s major components for electric power generation; these include the gearbox, the drive train as well as the control electronics.

The production capacity for the new facility is initially planned at 500 MW annually. The first wind turbine blades and nacelles are scheduled to leave the plant in time for the EXPO 2010 international exhibition in Shanghai. Siemens has already reserved additional space in Lingang for potential expansion of this production facility, however.

Since Siemens entered the market for wind turbine plants through the acquisition of the Danish company Bonus Energy in 2004, it has substantially expanded its worldwide fabrication capacities. Plans for building of a new facility for wind turbine plants in Hutchinson, Kansas (USA) were just recently announced by Siemens. Siemens also recently established rotor blade fabrication facilities in Fort Madison, Iowa (USA) and in Engesvang, Denmark. The Danish locations Brande and Aalborg have additionally been expanded and new research and development centers have also been set up in Germany, Holland, Great Britain, the USA and Denmark.

The number of Siemens employees involved in the wind energy business has gown from 800 in 2004 to currently over 5500. This corresponds to an increase of 650 percent. Wind turbine plants are an important component of the Siemens environmental portfolio, which earned the company revenues of nearly EUR19 billion in fiscal 2008, roughly a quarter of Siemens total revenues.

Interview with Tulsi Tanti - Founder, Chairman, and Managing Director of Suzlon Wind Energy

Biography:

In 1990, Tulsi Tanti invested in two windmills and realized its huge potential. He founded Suzlon Energy Ltd. in 1995 and was one of those first time entrepreneurs who saw potential of the wind industry. Today, he ranks among top 10 richest men of India. Mr. Tanti has been involved in Suzlon's operations since inception and serves as Chairman of Hansen Transmissions International as well as Chairman of the Supervisory Board at REPower Systems AG since June 21, 2007. He is also the President of Gujarat Chapter of Indian Wind Turbine Manufacturers Association. He was awarded the "World Wind Energy Award 2003" for his extraordinary achievements in the dissemination of the wind energy in India. Tulsi R. Tanti is a Commerce Graduate and holds a Diploma-in-Mechanical Engineering. Tulsi Tanti has the ambition to make India a wind-power export hub.

Company profile:

Suzlon is the world’s fifth largest wind turbine manufacturer, with over 10.5 % of global market share, and was founded by Tulsi Tanti in 1995. The company has been the leading manufacturer in the Indian wind turbine market for nine consecutive years, maintaining over 50% market share.

To become a highly vertically integrated wind turbine manufacturer with manufacturing capability along the full value chain, Suzlon has acquired majority share- holdings in Belgian gearbox manufacturer Hansen Transmissions and REpower, a one of Germany’s leading turbine manufacturers specialized in multi-megawat turbines. Suzlon aspires to become one of the top 3 wind turbine manufacturers in the world, a vision that is pursued in line with the company tagline: ‘powering a greener tomorrow’. Suzlon has invested $60m in a factory in Tianjin, China.

Successful new companies should be born smart, what was so smart about Suzlon when you created the company 15 years ago?

The point is that somebody has to think differently. My belief is that it is best to avoid developed commercial industries with strong competition. We started in the textile industry, but I realised that there were too many established players and decided to go a different way. Because of the energy crisis in India we began to look at ways to secure our energy supply, and I found that wind energy was the best solution for our textile business. We established two wind turbines, completed studies, and realised that this was the future.

Today, the Indian market represents 1800MW per year, making it world’s third largest market in terms of new installed capacity in 2008, after the US with 8358MW and the Chinese with 6300MW, and before Germany coming in behind with 1665MW. We have expanded the market. It was a huge challenge to initially convince the stakeholders, but now the Indian market is more stabilised and people understand the importance of wind power.

Nevertheless, we are developing wind turbines in more than 21 countries. When we began in 1995, no one recognised the potential of the wind industry, but when we introduced our company to the capital market in 2005, we had transformed the industry and our stock was sixty times oversubscribed. We have sent the message to the global economy that this is the future of the energy sector.

As a relatively young Indian based company it is tremendously challenging to successfully compete with the established players in the European wind industry and emerge as one of the world leaders in the global wind industry. What have been the advantages that you derived from being an Indian company and having had a different entry point into the market?

The first five to six years we focused on the Indian market. In 2003 we decided, because we had a 50-60% market share in India and there was no more room to expand domestically, that we would explore international markets. India represented only 10% of the world market; we wanted a share of the other 90%. We tailored our approaches to each new country, understanding the geographical needs of each market. First we entered the US market, and then decided to enter China. Finally, we entered Europe. These are the three large pockets of the wind industry.

Our US business model was based on the size of the competition there. In China, we understood the domestic needs and low cost requirements related to compete with local Chinese manufacturers.

That was the biggest challenge for us. We established a large manufacturing base in China to develop local resources and local materials, so that we can become a truly Chinese company. We transferred our technology, hired engineers and sent them to India to train and educate them, and then sent them back to China. We never send Indian engineers over there; we think it is important to develop local talent. The second priority was finding local vendors rather than continuously importing and exporting. Our third priority was building relationships with Chinese developers and utilities.

The key success factor in our international expansion is that we are the only company that can say that we are total solution providers. We provide a lot of support to our customers; our approach is to understand their applications and provide technical solutions rather than just dealing with equipment supply. We also provide maintenance and support for twenty years. We are truly custodians of our customers’ investments, and we are building such good relations that in the last five years we have been getting a lot of return business from our existing customers.

When we arrived in the global marketplace, a third of the market was the European market, which is highly mature and established. To penetrate the European market we acquired REpower, a German-based wind turbine manufacturer with great technology and engineering expertise. Suzlon and REpower have a highly complementary product portfolio and technical competences, and this acquisition allowed us to gain access to the European market. REpower is a frontrunner in large turbines which are ideal for offshore wind facilities. This is the next generation of wind turbine technology. In order to integrate our supply chain we also acquired Hansen Transmissions, which can develop the gearboxes for the multi-megawatt turbines REpower is producing.

Do you have the feeling that Suzlon, being an Indian company, receives a different treatment in the Chinese market than the European wind turbine manufacturers?

My experience in China is extremely good. We received an extremely warm welcome in China, not only from the government but also from the local people and administrations. I think this is because we are there to support their economy. Secondly, we are creating a huge number of jobs in this country, and this is very important. We are simultaneously developing the right attitude and model for the Chinese market. We receive good support from the government, from local people, from local authorities, and from our business partners. Our buyers are the state-owned utility companies: they are supporting the business by giving us orders, because without them we would not be able to operate in China.

However, we feel that the playing field is not completely level. A number of orders, around 60% of the total market volume, go to local Chinese companies based on political decisions rather than free market competition. This is different to India. Although 60% of business goes to local manufacturers in India, this is not because of a state directive, but rather decided upon by private companies. The difference is that Indian customers have a choice. They will pick the best option available, because they ultimately will look for the company that is the best value for money. We have a great model in India, which means that we get a lot of this business, and makes it very hard for our competition to gain any ground.

Your ambition is to become one of the top three turbine manufacturers in the world. What will be the role of China and the Chinese market in realising this ambition?

The first thing is that if you are not strong enough in the Chinese market, you can never be a world player. The China market will be the largest market within three years, once it overtakes the US market. I don’t think the US can exceed 10,000MW per year. In China, expansion is happening rapidly and it is very clear is that China needs more energy. China has a strong local manufacturing base, which is supporting local businesses by reducing costs, and very large wind projects are possible in China. There is a potential for 250,000MW onshore, and 750,000MW offshore.

I strongly believe that China will be the global leader in the next five years. For us, it’s extremely important not just to look at China as a market: by conquering the Chinese market, we can become a global player. Our business plan is very clear: develop our technology in the European market, train our staff in the Indian market, and take it all to China. This allows us to sell German technology at a Chinese price, and this is the Suzlon label in China. In 2007, our turbine price compared to the local Chinese price was 15% higher. In 2008, we were only 10% more expensive and this year our prices will only exceed the Chinese price level by 5%. We aim to be at par by 2010, but without losing the technology and the reliability. China is not just for the market for us, but is the key to becoming more competitive.

China will have to develop competitive wind power technology and large scale projects to meet its rapidly growing energy needs. Undoubtedly, China’s the increasing energy needs will have to be met by renewable energy. We are committed to supporting the ambitions of the Chinese government to meet the energy needs of its people in a sustainable way.

Chapter 1

Indonesia: Shaping A Competitive Indonesia

“Indonesia is strategically located between two oceans and continents that are of vital importance in today’s energy geopolitics,” says Purnomo Yusgiantoro, Indonesia’s Minister of Energy and Mineral Resources. “Oil from the Middle East must pass through Indonesia before reaching the Far East markets, and the country is also well connected to fast-growing giants China and India and energy-rich Australia. Moreover, Indonesia itself is an important energy producer, with substantial production of oil, gas and coal.”

Minister Purnomo recognizes the challenges Indonesia’s energy sector is facing but believes his country still is in a favorable position.

Production of oil and condensate in the period 2001-2004 declined year on year due to a natural maturing of its producing oil fields combined with a slower reserve replacement rate and years of decreased exploration and investments. In 2006, oil production was around 400 million barrels of oil equivalent (boe), while the domestic demand was up to 500 million boe, forcing the country to import 100 million boe to cover the deficit.

This situation has continued into 2007 and is likely to intensify in the years to come, due to booming domestic demand and a lack of significant oil and gas discoveries in the country. Considering soaring oil prices and the Indonesian government’s generous fuel subsidy –despite recent reductions – this could constitute a heavy burden on the state budget. Nevertheless, Minister Purnomo is quick to point out that investment in E&P activities has picked up over the last several years, and he believes that has a lot to do with the passing of new laws and regulations for the sector.

“Our investment estimate for the total year 2007 is of about US$18 billion in the O&G sector, and there are already US$44 billion committed for projects over the coming years” he adds. As most of Indonesia’s oil and gas production comes from aging brown fields, a good deal of the investments will have to be made in developing enhanced oil recovery (EOR) in order to maintain production levels or to avoid a rapid decline.

Achieving the government’s production objectives for the coming years will also require the exploration and development of new fields in Indonesia’s frontier regions. Most experts agree that geologically the country is still very prospective for oil and gas discoveries in its many unexplored basins. Of the estimated 60 oil basins in Indonesia only 22 have been extensively explored, and this has been carried out mostly in western parts of the country (the bulk of oil reserves are located onshore and offshore central Sumatra and Kalimantan). The government hopes that eastern Indonesia’s frontier areas, including deep-sea, may contain sizeable oil reserves, which is why it is actively encouraging exploration and development activities in regions like South Sulawesi and Papua.

Minister Purnomo recognizes the challenges Indonesia’s energy sector has been facing but affirms that in the big picture his country is in a favorable position. “Indonesia is strategically located between two oceans and continents which are of vital importance in today’s energy geopolitics. Oil from the Middle East must pass through Indonesia before reaching the Far East markets, and the country is also well connected to fast-growing giants China and India and energy-rich Australia. Moreover, Indonesia itself is an important energy producer, with substantial production of oil, gas and coal”, he states.

Towards a new energy mix

As the country’s oil production has decreased in recent years and imported fuel has become more expensive, Indonesia has attempted to shift towards using its vast natural gas resources for its own power generation needs. Gas reserves at approximately 187 trillion standard cubic feet (TSCF) are equivalent to three times the country’s oil proven and probable reserves of 8.9 billion barrels. Moreover, natural gas is becoming a more competitive source for energy generation as fuel subsidies are gradually phased out. Yusgiantoro and the Indonesian government are confident about Indonesia’s gas potential “because the reserves are there, what is essential is obtaining the massive investments necessary for the infrastructure projects that will make it all possible”.

This policy is likely to have an impact on Indonesia’s liquefied natural gas (LNG) sector, whose global leadership position is already being challenged by emerging producers such as Qatar, Australia, Malaysia and Algeria. As the government sets the priority for domestic use of natural gas, the share of gas exported (currently over 50% of the total production) is certain to decline, and towards the future there is uncertainty over country’s ability to continue supplying its major markets such as Japan, Korea and Taiwan at current levels.

For the moment, however, important new LNG projects are in development in the country. The BP-led Tangguh LNG project in Papua – Indonesia’s third LNG project after those in Bontang and Arun – is in advanced stages of construction and set to commence production by 2009. Its two trains are expected to produce at least 7.6 million metric tons of LNG per year, enabling Indonesia to service new markets like China and the United States. A fourth, though smaller, LNG project is under construction in Sulawesi, and will be operated by state-owned Pertamina and Medco, an emerging Indonesian O&G company. In light of these projects and the country’s long history and expertise in LNG, the government is considering the construction of LNG receiving terminals in Java, by far Indonesia’s most populated and industrialized island, in order to address domestic energy needs.

While oil and gas remain the primary source of energy for Indonesia’s growing population and developing economy, with 52% and 29% respectively of the total energy mix, an even more fundamental policy shift is taking place towards other forms of energy. The Indonesian government has elaborated a target scenario for the energy mix in 2025 in which oil falls to only 20% of the mix, coal more than doubles its contribution to account for 33%, gas edges up slightly to over 30% (though in absolute terms this means a substantial increase), and geothermal and biofuels each contribute with about 5% of the total energy mix. The remaining 7% would be completed by a combination of biomass, hydro, solar, coal liquefaction, and possibly nuclear energy.

These energy consumption targets were one of the main elements established by the New Energy Law issued in by the government in 2007, which constitutes Indonesia’s first effort to provide a general framework for managing the country’s energy resources. The new law also creates a National Energy Council that will be responsible for establishing a concerted energy policy among the main instances within the government. William Deertz, leader of the PricewaterhouseCoopers Indonesia Energy, Utilities and Mining (EU&M) practice, sees this development as a “positive step for the country’s resource sector as it will put into place a structure for ensuring appropriate optimization of its natural resources. The establishment of concrete energy consumption targets for the economy should provide policymakers a framework when assessing alternative policies”.

Fine-tuning the regulatory framework

The basic premise underlying the oil and gas industry in Indonesia is established in the Constitution of the Republic of Indonesia promulgated in 1945. Article 33 states that “All the natural wealth on land and in the waters is under the jurisdiction of the State and should be used for the greatest benefit and welfare of the people”. The Production Sharing Contract (PSC) originated in Indonesia in the 1960s and has been the most common type of oil and gas development contract in the country. The PSC agreement – based on the general concept that the contractor bears all risks and costs of exploration until commencement of commercial production, and is then entitled to cost recovery and a split of production revenues – has been exported to oil and gas producing countries around the world.

In late 2001 a “New Oil and Gas Law No. 22/2001” (Law No. 22) was promulgated which, although maintained the PSC model as the basis of oil and gas development, mandated the deregulation of the upstream and downstream sectors, including Pertamina’s monopoly over oil distribution and marketing of fuel products. Law No. 22 also authorized the establishment of an implementing agency called BP Migas for upstream activities and a regulatory agency called BPH Migas for downstream activities to assume Pertamina’s regulatory roles. BP Migas took over Pertamina’s upstream regulatory functions and management of oil and gas contractors. BPH Migas was charged with assuring sufficient natural gas and domestic fuel supplies and the safe operation of refining, storage, transportation, and distribution of petroleum products.

The impact of this significant restructuring of the institutional framework on the sector’s development has been mixed at best, as notes Deertz, “with the issuance of Law No. 22 expectations were high in the industry for renewed growth, however, this enthusiasm was soon tempered by the fact that it took almost three years for the related implementing regulations to be issued. During the intervening period until the implementing regulations were issued investment levels in the upstream sector dropped significantly, however, over the past several years investment levels have started to rebound”.

Making sure this rebound translates into a sustained recuperation of the oil and gas sector is one of the main tasks of Luluk Sumiarso, head of the Directorate General of Oil & Gas (MIGAS). Since his appointment to this key position by Minister Yusgiantoro in 2006, Sumiarso has focused on putting things in order and verifying that the recent developments in the oil and gas sector comply with the country’s laws. In this regard, a comprehensive investor guide has recently been edited and a new forum bringing together all of the O&G sector’s stakeholders is being created.

“When I arrived to MIGAS, I found out that each group within the oil and gas sector has been going in its own direction, like meteors in the sky or ‘broken pearls’ from the famous Indonesian drama series. It resembles an orchestra made up of good musicians, but each one playing at their own rhythm. They need a director general to facilitate and help coordinate the music”, states Sumiarso. By opening the doors of MIGAS to the stakeholders in order to listen to their concerns and suggestions, and by encouraging the creation of the Indonesian Oil & Gas Society, he is looking to “put the broken pearls back together”.

A vital partner in this enterprise is the Indonesian Petroleum Association (IPA) which is preparing its annual convention for May 2008, under the theme “Meeting Energy Challenges through Cooperation”. Roberto Lorato, President of IPA and also Managing director of Eni Indonesia, points out that this flagship event is not simply an exhibition of the association’s members, but rather “a public forum and debate on the main issues that affect the industry in Indonesia, from the business environment to corporate social responsibility”. Besides having all the main industry players present, the Convention also counts with the participation of the highest level of government officials to through speeches and other activities.

Indonesia’s investment climate: the calm after the storm?

Despite the highly globalized nature of the oil and gas industry, its development also tends to be considerably affected by local events. This has particularly been the case of Indonesia, where over the last 10 years alone the country has undergone a transformation from an authoritarian regime into a presidential democracy, battled related secessionist pressures, endured the full effects of the Asian financial crisis, been at the center of SARS and bird flu outbreaks, suffered several radical islamist terrorist attacks, and faced natural disasters such as the devastating December 2004 tsunami. Needless to say, all of these events created an image of instability and insecurity that held off investors. The Indonesian economy as a whole lagged behind as a result for several years, particularly when compared with some of its high performing neighbors.

More recently, however, there are indications that this huge economy may be bouncing back under the current reforming government of Susilo Bambang Yudhoyono, which has focused on improving the fundamentals and creating better conditions for business. Most recent macroeconomic indicators estimate growth in 2007 and 2008 at well above 6%, and both inflation and interest rates seem under control. Foreign direct investment is increasing and consumer confidence is on the rise. Major rating agencies such as Moody’s and Standard & Poor’s have been lifting the country’s credit ratings over the last several years.

James Castle, founder and director of local advisory firm Castle Asia, is a seasoned businessman and analyst who has experienced Indonesia’s booms and busts first-hand for over 30 years. In his view, “in 2008, Indonesia has finally moved beyond the 1998 financial crisis, although it remains a watershed and traumatic event in the country’s history. The economy is now looking forward, with only a few residual problems remaining”. Regarding the grey clouds over the global economy and its effects on Indonesia, Castle is reassuring. “Despite a potential global economic slowdown, forecasts still call for domestic growth of at least 6%, a good year by any standard. Indonesia is in a good situation, and is helped by the strong global commodities cycle, as an exporter in many different commodities from agricultural to mineral, not just oil and gas”, he says.

Testament to the Indonesia’s commitment to improve the business environment is the active role assumed by BKPM, the government’s investment service agency responsible for foreign investment promotion, which also has six international offices around the world. It has recently overseen the creation of a new Investment Law passed in April 2007, which addresses many of the barriers that have hitherto hindered foreign investment in the country. Keenly pursued by Muhammad Lutfi, head of BKPM, the new law allows for a reduction in bureaucratic processes, anti-corruption measures, equal treatment for overseas and local investors, and decentralization of investment through regional one-door integrated services. Responding to some of the investors’ main concerns such as enduring corruption and the added complexity arising from Indonesia’s decentralization, Lutfi affirms that “we have adopted a zero tolerance policy regarding corruption and are also making efforts to create a uniform organization all throughout Indonesia with the local investment agencies. In addition, we strive to make the investment process smoother and more efficient by eliminating bureaucracy, thus turning 30 years of red tape into a red carpet for investors”.

In reference to the oil and gas industry, Lutfi highlights the major business opportunities in Indonesia’s downstream sector, given the deregulation process, a population of over 230 million, and a growing economy. Moreover, he sustains that “whereas in the past energy would follow the industries, today the trend is going towards the industry following the energy to their source. In this context, Indonesia is ideally placed to grow substantially its business in the refining and petrochemicals sector”. In addition, and considering its geographic characteristics, Indonesia needs a variety of land and sea transportation and storage modes to meet future fuel distribution needs. This includes depots and new transit terminals as well as depots for aircraft and gas refueling stations by private companies. With regard to the upstream sector, there are many investment opportunities such as the development of unexplored oil and gas basins, using secondary recovery technology, applying enhanced oil recovery (EOR) and developing marginal oil fields.

Local eminence Dr. Subroto, a former Minister of Energy and Secretary General of OPEC, considers that things in Indonesia are moving in the right direction but acknowledges that the country has to continue cleaning up its act at home in order to become a preferred place of investment again. In his view, “once the Indonesian government truly overcomes the perception of political and legal uncertainty, there will be no need for road shows to lure investors, as they will come running by themselves to take advantage of the numerous opportunities in the energy field. They are already there on the sidelines eagerly observing and waiting for improvements on these critical issues”.

Pertamina, or the rebuilding a national champion for Indonesia

When Ari Soemarno assumed the position of President and CEO of Pertamina in 2006, his condition was that he would have his hands free to truly transform the company. He was taking the top job in Indonesia’s National Oil Company (NOC) just as its transition period was finalizing, following the fundamental changes introduced by the 2001 Oil & Gas Law. In 2003, Pertamina officially went from being a state oil and gas enterprise governed by its own law to a state owned limited liability company (Persero). In theory, this meant that Pertamina is to be treated as any other oil and gas company in Indonesia. Pertamina’s monopoly in the downstream market persisted up until early 2006, , whereas in the upstream sector the company was already immersed in the competitive E&P market since 2005.

This statutory transformation was a part of an effort by the government to establish a competitive and efficient NOC for Indonesia. For decades, Pertamina held complete control of the country’s downstream activities, and in upstream it acted on behalf of the government in the signing of PSC’s for the exploration, development and exploitation of blocks in the country. It basically became regulator and supervisor of the oil and gas industry for the Indonesian government. The company grew in size but was riddled with corruption and inefficiency, and unable of developing upstream capabilities of its own.

“Our foremost challenge today is to modify the culture, mindset and management style that are all an inheritance of the past”, says Soemarno. This is a monumental task for a company with over 18,000 employees and such a long history of its own, but it is seen as a necessary first step in order to get Pertamina moving in the right direction. In addition to changing the way the company sees itself, Pertamina is making strides to improve its image among ordinary Indonesians. To this end, the company has launched marketing campaigns and, most importantly, is revamping its retail fuel stations where it is facing competition for the first time from major foreign players such as Shell and Petronas. For Soemarno, the feedback is encouraging, “the public is already taking notice and gradually changing their perception of Pertamina”.

Of course, becoming a competitive oil and gas company involves much more than polishing your image, and Pertamina’s directors have been concentrated on transforming the business’ structure according to its new role in both upstream and downstream activities. This includes improving procedures related to transparency and financial reporting, for example, in order to have a company “that is ready and able to operate like a publicly traded company by 2009”, states Soemarno. In addition, Pertamina is taking other measures in 2008 to become more competitive such as selling non-core business units and negotiating with the government in order to be able to reinvest a greater proportion of profits.

Exploration and Production

Although Pertamina is the second largest producer of oil and gas in Indonesia , after Chevron (in oil) and Total (in gas), its production levels still dwarf those of other comparable NOCs. In order to grow in reserves and production, it is pursuing an aggressive strategy which combines tendering for new blocks, acquisitions, and implementing EOR technology in its numerous but aging fields. Well aware of both its strong points and limitations, Pertamina points out the advantage that international oil companies looking for a local player could find by partnering with a company that has a deep knowledge of the country and can facilitate the often arduous paperwork involved with doing E&P business in Indonesia.

A prime example of Pertamina’s upstream cooperation with majors is the Exxon-managed Cepu field in East Java, estimated to have reserves of 600 million barrels and projected to attain a peak production of 160,000 barrels per day. Other joint ventures in the E&P field include cooperation with companies such as Petronas, Shell and StatoilHydro. The choice of new partners and blocks reflect Pertamina’s determination to obtain offshore expertise, as stressed by Sukusen Soemarinda, Pertamina’s Upstream Director, “through these alliances, Pertamina is looking to acquire the necessary knowledge, technology, and capital to be successful in deepwater operations. Our goal is to eventually be able to run those kinds of projects by ourselves”.

Pertamina has its hands full in Indonesia with land permits covering an area of about 35 million acres and many new projects, yet the NOC is already quite active in overseas markets where it is developing 20% of its business. With interests mostly in exploration blocks in Malaysia, Libya and Qatar, Pertamina expects to see substantial growth from its overseas assets within a time frame of 10 years. Partnerships with other foreign players Lukoil and Petroecuador could also have Pertamina venturing into new markets such as South America and Russia in the near future.

Preparing for the cavalry in downstream

With respect to downstream activities, Pertamina still largely dominates the domestic market in Indonesia though it is beginning to face competition at different levels such as storage and retail. It owns and operates the country’s nine oil refineries located throughout the Indonesian archipelago, which have a total installed capacity of just over 1 million barrels per day. Even though a large majority of the refined product is allocated to the domestic market, Indonesia still has to import about 300,000 barrels per day in order to meet demand.

With tight refining margins and little incentives to build new refineries, for the time being Pertamina is focusing on revamping some of its facilities so as to produce more high-value added products. The main examples are the Balikpapan refinery which will be completely transformed to refine sour crude, and the Cilacap refinery which is being upgraded in partnership with Mitsui. In addition, Pertamina has established a U$200 million joint venture with the Korean company SK which will improve and increase the company’s lubricant output, further consolidating its position in the Asian market.

Though not interested in developing greenfield refineries at the present time, Pertamina sees itself as an ideal partner for private investors who have been showing interest in the sector. According to Pertamina’s Refining Director, Suroso Atmomartoyo, new players are “likely to turn to Pertamina for cooperation since we are the only company with deep knowledge and experience in Indonesia’s refining sector. In fact, Pertamina is open to establishing synergies with other players interested in new refining projects, and would be able to provide support in terms of operations, administrative tasks, and distribution in the domestic market”.

Regarding Pertamina’s de facto monopoly in the distribution of subsidized fuel, with about 3,000 petrol/gasoline stations, Suroso affirms that, “in the near future, once the subsidy has been phased out, BPH Migas will assume its full responsibility by tendering the market among all the interested players. For the moment, foreign companies are not able to comply with the strict requirements for subsidized fuel sale, but this is likely to change soon. In 2008 Pertamina remains the sole distributor of subsidized fuel, but we are preparing for the inevitable arrival of competition in this enormous market”.

Despite its strategy to divest non-core business units, Pertamina has decided to keep its geothermal activities and is also involved in the development of Coal Bed Methane (CBM). Many in the Indonesian government see CBM as potentially one of the country’s main alternative energy sources of the future. To attract investors, the government is offering a split which is different from oil and gas contracts, depending on the areas and particular conditions. Pertamina is working on a CBM pilot project in South Sumatra with Shell and the support of the Indonesian Research and DevelopmentCenter for Oil & Gas Technology (LEMIGAS). Moreover, Australian oil and gas company Santos, a major player in CBM in its domestic market, is engaged in high-level discussions with the Indonesian government on opportunities for cooperation on that front.

Ten years of efforts rewarded

Santos entered Indonesia in 1997, but it was not until nearly 10 years later that the company saw its exploratory efforts turn into production and revenues. In late 2006, Santos’ first production in Indonesia began flowing at the Maleo gas field, an event all the more important because it represented the company’s first offshore field operated overseas. In September 2007, Santos hit another milestone in Indonesia when its second producing field, Oyong, was inaugurated by Indonesian President Yudhoyono. Eko Lumadyo, President Director of SantosIndonesia, was visibly excited about these new times. “Our Jakarta office has now been turned into a full exploration and production operation. As a result, the organization here is forging a strong identity and the people are motivated to continue working hard for even further achievements” he said.

Santos’ core assets are its oil and gas production in Australia, where it is the country’s largest domestic gas producer and supplier. However, expansion into the Southeast Asian region has been established as one of the five key drivers of growth for the company. Indonesia plays a central role in Santos’ aspirations to become one of the leading energy companies in the region. Santos has been moving fast and is already considered an important player in Indonesia’s O&G sector, thanks not only to its growing production but also a continued interest in exploration and close cooperation with other companies.

For Lumadyo, “Santos’ size gives us a competitive advantage, in terms of being more dynamic and able to make quick decisions. This gives us an edge in evaluating and taking opportunities, in contrast with bigger companies that have to go through much longer and complex processes. At the same time we don’t have the same capacity as the super majors to take on some of the big risk projects; however Santos is ready and able to embark on frontier area exploration in Indonesia if we consider it a good opportunity”. Well aware of the vast potential lying in the deep seas of Indonesia, Santos has established partnerships with companies such as Anadarko and Petronas for deepwater exploration, and is already operator of the block in the offshore Kutei basin.

LNG is also a significant area of focus for Santos, which is currently exporting LNG from Darwin in northern Australia and progressing on a number of LNG projects abroad. Though there are no concrete plans for LNG development in Indonesia for the time being, the Kutei basin is strategically located near Indonesia’s Bontang LNG facilities and could eventually supply gas to it in the future.

Santos has already become a key partner of the Indonesian government, which is adamant on increasing the role of gas in the country’s overall energy mix. Santos is focusing its production and sales in the densely populated and industrial area of East Java, where it is supplying gas from the Maleo field to state-owned natural gas transporter and distributor PGN and will sell the gas from the second phase of Oyong directly to a local power company. “Our production has come very timely for the government, because they are facing gas shortages and increasing costs due to high oil price. Through this gas supply, Santos is contributing to cleaner and less expensive energy in Indonesia”, states Lumadyo.

Norwegian oil and gas giant StatoilHydro, which in 2007 opened an office in Jakarta, also sees significant ecologically-minded business opportunities in Indonesia. The company is looking to combine the need for reduced carbon emissions with the E&P activities through carbon capture and storage (CCS), including CO2 injection for EOR. “Indonesia has large amounts of gas flaring which could be turned into a means of meeting growing demand for gas in the domestic market. In addition, LNG and ammonium plants in the country are producing carbon emissions that can be captured, stored, and potentially used for EOR. The question marks are still numerous surrounding this technology, but our company believes that towards the future linking climate change to E&P can be a business opportunity”, says Tor Fjaeran, President Director of StatoilHydro in Indonesia.

Chapter 1

US and China race to the top of the global wind industry

February 2009 (www.greetechfocus.com ) - The United States passed Germany to become world #1 in wind power installations, and China’s total capacity doubled for the fourth year in a row, according to figures released by Global Wind Energy Council (GWEC).

Steve Sawyer - Secretary General of GWEC Over 27 GW of new wind power generation capacity came online in 2008, 36% more than in 2007, reaching total global installations of more than 120.8 GW at the end of the year. “Wind energy is the only power generation technology that can deliver the necessary cuts in CO2 in the critical period up to 2020, when greenhouse cases must peak and begin to decline to avoid dangerous climate change,” said Steve Sawyer, Secretary General of GWEC in a statement. The 120 GW of global wind capacity will produce 260 TWh (terawatt-hour) and save 158 million tons of CO2 every year.

Wind energy is now an important player in the world’s energy markets. The global wind market for turbine installations in 2008 was worth about 36.5bn EUR or 47.5bn US$.

The leading markets in terms of new installed capacity in 2008 were the US and China. New US wind energy installations totalled 8,358 MW for a total installed capacity of 25,170 MW. The US has now officially overtaken Germany (23,902 MW) as number one in wind power. Europe and North America are running neck-to-neck, with about 8.9 GW each of new installed capacity in 2008, with Asia closely following with 8.6 GW.

The growth in Asia’s markets was also breathtaking; close to a third of all new capacity in 2008 was installed on the Asian continent. In particular, the wind energy boom is continuing in China, which once again doubled its installed capacity by adding about 6.3 GW, reaching a total of 12.2 GW.

“The Chinese wind energy market is going from strength to strength, and has once again doubled in size compared to 2007, reaching over 12 GW of total installed capacity,” said Shi Pengfei, Vice President of the Chinese Wind Energy Association (CWEA).

The outlook for the coming years is also very healthy, as in its response to the financial crisis, the Chinese government has identified the development of wind energy as one of the key economic growth areas.

“In 2009, new installed capacity is expected to nearly double again, which will be one third or more of the world’s total new installed capacity for the year,” said Li Junfeng, Secretary General of the Chinese Renewable Energy Industry Association (CREIA).

At this rate, China would be well on its way to overtake Germany and Spain to reach second place in terms of total wind power capacity in 2010. China would then have met its 2020 target of 30 GW ten years ahead of time. “Now, the supply is starting to not only satisfy domestic demand, but also meet international needs, especially for components, ”said Li Junfeng.

In 2009, Chinese companies will start to enter the UK and Japanese markets, and orders for 200 blades have already been placed. There are also ambitions for exploring the US market in the coming years.

Christian Kjaer - CEO of EWEA In Europe, for the first time, wind energy was the leading technology. A total of 64,949 MW of installed wind energy capacity was operating in the EU by end 2008, 15% higher than in 2007. According to Christian Kjaer, CEO of the European Wind Energy Association(EWEA), ¡°Wind energy is an example of an intelligent investment that puts EU citizens money to work in their own economies rather than transferring it to a handful of fuel-exporting nations.

Vestas to deliver its first Chinese-made wind turbines at the end of 2009

Feb 2009 (www.greentechfocus.com) - Despite the current financial crisis, Danish wind power leader Vestas expects to continue growing in 2009 and is committed to expanding its production capacity in its principal markets. In China, where Vestas is building a new foundry, the new factory in Hohhot, Inner Mongolia, will deliver its first kW turbines in the second quarter of 2009.

The world’s N1 company in modern energy solutions, Vestas, not only posted strong results in 2008, with the biggest fourth quarter ever, but also announced it expects to continue growing this year, although at a slightly lower rate. A total revenue of EUR 6,035m in 2008 exceeded expectations by more than EUR 300m, a 24 per cent increase over 2007.

In 2008, Vestas shipped wind power systems with an aggregate capacity of 6,160 MW and handed over wind turbines with a capacity of 5,580 MW to its customers ¨C an increase of 24 per cent each in relation to 2007.

However, new market players especially from China are sharpening competition.

Vestas forecasts that the installed wind power capacity on average will experience an annual growth rate of about 20 per cent in the coming ten years mainly due to the fact that wind power neither uses water nor emit CO2 when generating electricity, while reducing the dependence on fossil fuels which are often imported. Vestas expects that wind power will account for at least 10 per cent of the world’s electricity consumption by 2020.

The company has also announced that in the coming months will launch two new turbines ¨C first a V112-3.0 MW turbine and shortly thereafter a V100-1.8 MW turbine. The first turbines will be ready for delivery in 2010.

In 2009, revenue is forecast to rise to EUR 7.2bn, and investments to amount to EUR 1.2bn at end of the year.

However, if orders do not materialise as hoped for, the investment programme will be adjusted. To date, Vestas has not experienced cancellations or postponements in its order backlog.

Vestas will produce, ship and install 10,000 MW in 2010. In Colorado, USA, Vestas blade capacity will more than double to 4,000 blades in 2010. As a parallel to the establishment of the world¡¯s largest tower factory in Colorado, Vestas is establishing its first nacelle factory in the USA ¨C also in Colorado.

At the end of 2010, Vestas in-house production capacity in the USA will amount to 3,000 MW.

Vestas has pledged to make production of wind turbines as green as its gets. By 2010 it anticipates that more than 90 per cent of its internal electricity consumption will be green, as well as half of the company’s total energy consumption. As metal extraction and processing account for about 50 per cent of the total energy consumption for turbine production, Vestas will aim to increase the turbines’ efficiency measured as MWh output per kg of wind turbine.

Novozymes and Sinopec will produce 2nd-generation bioethanol in China

February 2009 (www.greentechfocus.com) ¨C Novozymes and Chinese partner COFCO have entered a new partnership with the major Chinese oil and energy company Sinopec to develop bioethanol from agricultural waste. Together the three partners cover the entire value chain of bioethanol production and distribution. The three partners aim to develop a commercial-scale process for producing second-generation bioethanol from one type of plant crop waste: corn stover.

According to a company statement posted in the first pan-European Green Technologies website www.greentechfocus.com, Steen Riisgaard, CEO at Novozymes, said: "With this partnership Novozymes has once again demonstrated its position as the leader in developing enzymes able to convert waste to fuel.

Steen Riisgaard - President & CEO of Novozymes This puts us one step closer to being able to produce commercial quantities of bioethanol from agricultural waste. Second-generation bioethanol production in China holds vast potential for Novozymes as the technology leader, and we expect to be the first company with enzymes ready for large-scale production by 2010."

Bioethanol is currently one of few viable renewable alternatives to gasoline and is capable of replacing gasoline partially or even totally for automobiles. The transport sector is currently responsible for about 25% of global energy-related CO2 emissions, and its share is rising. Second-generation bioethanol is expected to be able to reduce greenhouse gas emissions by at least 90% compared to oil-based fuels.

Bold ambitions in China

By 2020, the number of cars in China is expected to increase significantly, which will lead to substantial growth in the demand for vehicle fuels. By 2010 China aims to more than double its bioethanol production to cover 5% of the total transport fuel used with a target of 3 million tons fuel ethanol.

At the end of 2008, Novozymes inaugurated the newest expansion of its Hongda production facility in Taicang, China, making it the largest enzyme fermentation facility in the world.

The facility, Suzhou Hongda Enzymes Co., is located in Taicang, Suzhou, Jiangsu Province, about 50 km north of Shanghai. The expanded capacity will primarily focus on products for the bioethanol industry.

According to Peder Holk Nielsen, Executive Vice President of Novozymes, The Suzhou facility is one of Novozymes¡¯ strategic manufacturing locations, and this new expansion will enable us to accomplish more.

Despite the recent downturn in the global economy, Novozymes has increased its investment in Taicang.

Europe’s top Renewable Energy Man welcomes Chinese competition

The current huge development of the wind sector, total wind turbine installations reached 20,000 MW and are forecasted to reach 80.000 to 100.000 MW in the coming years, means that there is space for everyone as more manufacturing capacity is needed, Professor Arthouros Zervos, President of the European Renewable Energy Council (EREC), told www.greentechfocus.com during an exclusive interview in December 2008.

As the growing wind power market in China encourages domestic production of wind turbines and components, and the Chinese manufacturing industry becomes increasingly mature, Prof Zervos talked about the roles that China, Europe and the United States are to play in the development of the renewable energy sector, as three powerful elements ¨C the environment, the current economic crisis and the need to secure power supplies ¨C drive the industry forward. He also dwelled on the market prospects for all players and the ways to make sure developing countries such as China and India get a fair deal in the upcoming United Nations Climate Change Conference (COP15) later this year in Copenhagen.

The EREC unites the major European industry and trade associations of RE (wind, photovoltaics (PV), biomass, solar thermal, geothermal and small hydro). Prof. Zervos is also the President of the European Wind Energy Association and, more recently, has been appointed Chairman of the Global Wind Energy Council. He has dedicated more than 20 years to renewable energies, authored two books and published more than 80 papers on the issue.

GTF.com: China is the fastest growing economy with the fastest growing energy needs. Which role do you think that China will play in the development of the Global Renewable Energy Sector, in particular in the fields of wind and solar energies?

AZ: I have been going to China for many years and I have to say that over the last 2 years I have seen great improvements and changes in their attitude towards the environment. At the beginning of this decade the environment was not one of their priorities. There has been a complete change in the mindset of policymakers.

Of course their view is different from that of the Germans, the French or the Americans but they have realized that they should work on the environment’s Pollution in China is not sustainable and has linked costs that will come afterwards such as health. Over the last few years they have realized it and that is why we see China moving towards the renewable sector.

China is quickly emerging as a major player in wind power generation. Will Europe and China will be working together or rather competing?

For me it’s a positive development that China is now not only installing capacity but also manufacturing for the wind industry. Of course, the scale would be the major difference and that is why the international companies have already established themselves in China in order to compete on the same basis. Since the international companies are present in China and they are producing there we can not enter a discussion about the costs of production. However, in terms of scale probably we will not see just one manufacturer that succeeds, as it happened in most European countries, but we will see three or four. We are experiencing a huge development in the wind sector. Last year we installed 20,000 MW and we foresee that 80.000 to 100.000 MW will be installed annually within a number of years. This means that there is space for everyone, so more manufacturing capacity is needed.

Do you expect the rise in wind turbine manufacturing capacity in China to change the dynamics of the global wind industry?

I would say partially... We have realized that Chinese manufacturers are competing with lower prices than the international manufacturers producing in China. However, we will always have to consider quality and I think that the Chinese government and the Chinese manufacturers have already realized it. Because if the Chinese manufacturers want to enter international markets they will have to compete not only in price but also in quality and this will raise the prices. I am not saying that they will not be cheaper which at the end of the day could have a positive effect in the sense that it will keep the prices lower for the sector’s What China can do in the coming years is to open the market. Africa and Latin America are markets where offering the cheapest product will play a crucial role in order to do business. China has already special relations with many of these countries which creates the ideal scenario. Most of the European manufactures do not want to enter those markets because on the one hand they are already well established in their markets and because they risk involved is higher than the benefits that they foresee.

Which role do you think that photovoltaic's (PV) will play in China?

I think that PV is already playing a major role in China and the reason why it does not yet have an internal market in China is because it is too expensive. I think the question is reducing the prices of the PV industry in order to address the internal Chinese market. If the PV has to play a role globally it has also to play a role in China. Not only manufacturing in China but installing in China and this will only happen if the prices go down.

With such huge imports from China, how do you see the development of the European PV sector?

It is much more difficult that it is for the wind industry as we already have many Chinese manufacturers¡ If the market continues to develop strongly there will be a place for everybody. If 30% are Chinese, 20% American and 50% European, the question is not the ownership but where they are manufacturing because it is there that there is investment and jobs are created. This is a critical point in terms of industrial development. The manufacturing is cheaper in China and that is why the industry has well developed there but this should be taken as a lesson for our industry because in the end this is what competition is all about.

India's Suzlon has recently acquired Belgium’s Hansen Transmission, and PUT A LINE ON GOLDWIND AND VENSYS. Do you expect Chinese turbine manufacturers to make a move towards Europe in the coming years, following Suzlon’s lead and how do you think the European industry would react? We have seen it in many other sectors so why should we not see it in ours? What could the European wind industry say about it?

They have to compete The solution for the European manufacturers is to globalize. It doesn’t make sense to produce in Europe and then having to ship the product abroad. European companies have the know-how and have been at the forefront of the wind industry for many years. Therefore the solution is to open new markets and to continue to innovate.

In the US, another important player, President Obama has pledged to promote renewable energies. How do you envision the battle between European, Indian, Chinese and American companies for the global market?

I think is already happening in the wind industry as you can find all the global players. We will see much stronger American presence that we have seen up to now. In the shorter term it is much more dangerous for the European companies than for the Chinese. Let me put it in another way. It's also a question of innovation. The Chinese are not yet up to speed in innovation and they are just copying as the Japanese and Koreans did 20years ago. The European manufacturers will have to keep innovating in the sector.

Would it be interesting to invite Chinese and American companies to participate in Upwind (the European Union-funded project, uniting over 40 companies and research institutes to design very large wind turbines)?

The Chinese are really keen to encourage technology transfer which is really understandable because they want to develop their technology. However we have to see what technology transfer means because sometimes it seems as if the Chinese have their own definition of this term. Of course you will never have Enercon, Vestas or Gamesa transferring their technology, not only to China, but elsewhere. What is necessary is to provide the framework so that other companies will be able to produce similar products¡The companies that are participating in this project do not want to share their technology with other companies of the sector but they are willing to collaborate together and share their knowledge. Upwind is trying to look forward into designing the machine of the future and the elements that need to be designed. For sure it could be part of a technology transfer between China and the EU.

The next big event in the renewable energy agenda will be will be the United Nations Conference on Climate Change in Copenhagen (COP15) this december. What will be the role of China at the negotiating table?

The expectations are really big and I think that they have become more concrete after the election of President Obama in the US. First of all, the most critical country is the US¡ Now China is also playing an important role so how can you reach and agreement without considering two of the major players? Hopefully they will collaborate but it will be difficult because their approach is different to ours, the European. Therefore, we need to find a balance, but things look positive. Firstly, because President Obama stated that renewable energy will be a priority despite the financial crisis and, secondly, because the Chinese Government has realized that renewable energy is a priority but, of course as they stated, they consider that the rules for the developing world can not be applied to them, which I have to say that I understand; China and India have not been the countries that have contributed significantly to the amount of CO2 that we have in the atmosphere today, but the US and Europe. So, there has to be a difference in the approach and, on the other hand, also and engagement from China’s That we should have a different approach for China and India it’s clear. Developed countries have to make a much better and bigger effort than China and India, but China and India need to be engaged because otherwise it is going to be an impaired agreement.

You have been in the sector for a really long time and you are really passionate about it. What is the one thing that you would like to see happening in the next 10 years?

I would like to see a good agreement in Copenhagen. I really think that it is crucial for the further development of the sector and we can not wait because things are going worst and worst in terms of climate. Therefore, I think that this agreement at a global level as well as the European directive will have a positive impact in the global development.

Chapter 1

Greece: Classical Thinking For A Modern Industry

“The Re-emergence of the Hellenic Pharmaceutical Industry”

Greece’s contributions to health are world-renowned, whether physical through its Mediterranean diet and climate, or mental as the genesis of western philosophy and mathematics. Less well-known, however, are its modern-day activities in the pharmaceutical industry, where the blossoming market is distinctive for its diversity despite a small size of 11 million people. Between innovating MNCs and fast-growing locals, catch-up policymakers and the companies and institutions helping their competitiveness, and the vertically integrated alongside the niche players – all underlain by the classic Greek entrepreneurial spirit – the re-emergence of the Hellenic pharmaceutical industry is paving the way for the country’s global recognition on an entirely different scale.

Introduction

In the global fight for pharmaceutical supremacy, Europe’s multitude of heterogeneous markets plays an understandable second-fiddle to the dominant homogeneity of North America. In the past 15 years, R&D investment grew just 2.9 times in Europe, compared to 5 times in the US. Europe accounts for some 30% of world pharmaceutical sales and generates less than one quarter of new medicines, compared to North America’s 48% and two thirds, respectively. Taking a global perspective, however, it’s evident that bigger trends are at work beyond a pan-Atlantic head-to-head. Comparing aggregate pharmaceutical plant openings and closings, the picture gains resolution: in the past five years, a net loss of 16 in Europe, one in the US – and a net gain of 13 inAsia. Although many people look to Europe’s big five for the innovation necessary to stem this changing tide, countries like Greece – with high per-capita healthcare expenditures amounting to 10% of a €250 million GDP, and a bumper crop of companies expanding internationally whose workforce exceeds 11,500 – offer an alternatively appealing opportunity.

It’s no secret that Greece is going through a strong economic upswing. Even with the investment and development frenzy from the 2004 Athens Olympics long gone, GDP growth exceeding 4% has outpaced the Eurozone average for the last decade, with the end result that the population’s prosperity is converging, with per capita income figures moving impressively from 64% to over 80% of its more developed European peers. With a strategic geographical position at the crossroads of Western & Eastern Europe, Middle East, and Africa, Greece is poised to take full advantage of the confluence of its natural and economic strengths. Whether this potential is realized, however, depends as much on the will of the Greek people as the resolve of the policymakers driving much-needed change in legislative and regulatory frameworks.

Career diplomat, former mayor of Athens, and current Minister of Health and Social Solidarity Dimitris Avramopoulos, while speaking at the AMCHAM Healthworld 2008 Conference, stated clearly that “Greeceneeds to streamline its National Health System and increase spending in the sector. These should be among the government’s top priorities.” This comes as a simple and straightforward message to a sector that is more than willing to listen. An advocate of private sector health services, which have seen a rapid growth in market share figures above 10% in the first half of 2008, Avramopoulos contends “that private health services have contributed through competition, improving service.” However, with hospital debts reaching €2 billion – despite a 2005 account reconciliation – and dec