I.

CASE STATEMENT
In light of the changes within the Philippine pharmaceutical industry, how do Unilab's
research & development and innovation processes contribute to the company's market
leadership?
Accordingly, what improvements in research & development and innovation activities can
the company implement to sustain its competitive edge?

II. THE PHARMACEUTICAL INDUSTRY

Overview of the Global Scenario

The pharmaceutical industry is involved in developing, producing, and marketing drugs
licensed for use as medications. Pharmaceutical companies are allowed to deal in generic
and/or brand medications as well as medical devices. This industry is highly regulated,
capital intensive, and is driven by large research and development expenditures. Most
companies are primarily privately owned and are technologically sophisticated.

With todays dynamic and highly-regulated market, differentiation is becoming more

important. Consumers are generally concerned about two criteria: (1) health outcomes and
(2) affordability. Global industry data show that the pace of innovation remains slow: the
long-term average is merely one new remedy drug a year per company. In relation to this, a
significant factor that will fundamentally impact individual pharmaceutical companies in the
near future is patent cliff1. The revenues of drugs having patents that will expire from 2010 to
2014 are about $89.5 billion USD2. Revenues hammered by patent cliffs can only be partially
compensated by newly launched products.

Price cuts and regulatory pressures also continue to limit growth. Governments around the
world drive for solutions addressing treatments for nonlethal indications with large patient
numbers, decreasing the profit margins of drug companies. Pharmaceutical companies are
also being watched on their marketing practices, forcing them to adapt their promotional
models. Moreover, protection and enforcement of IP rights remains a difficult issue in many
emerging markets, with counterfeit and first-copy products prevalent. Consequently, the
companies have adapted their strategies in that many have altered their drug portfolios from
primary care driven blockbusters towards specialties such as oncology, immunology and
inflammation, where the medical need is so high that prices are more easily accepted by the
regulators.

1 Patent cliff describes what happens to the sales of an original drug when its protection (patent, regulatory, etc.) ceases: A
dramatic drop in sales because of declining unit numbers, and a price erosion of up to 70 % within months.
2 In 2011, Lipitor, the worlds biggest selling drug, will go off-protection. Other drugs that lose protection in 2011 are Plavix
(used to inhibit blood clots), Actos (diabetes), and Seroquel and Zyprexa (schizophrenia and bipolar disorder).
 01 SEP 2011

Philippine Pharmaceutical Industry

The Philippines is projected to be the 10th largest economy (and 9th largest pharmaceutical
market) in the Asia Pacific region by 2016. It also has one of the highest drug prices in the
world. The balance of pharmaceutical trade remains significantly negative. The Philippines is
heavily reliant on imports of finished medicaments and has little in the way of exports; thus,
the deficit will only widen in the forecast period.

The Philippine pharmaceutical industry is a monopolistically competitive market. It is

characterized by many sellers composed of both local and multinational companies, each
with a loyal set of customers and patient base depending on its product offerings. GSK, for
instance, dominates in the anti-asthma segment with patented drugs and innovative delivery
systems used in Ventolin and Seretide inhalers. Unilab, on the other hand, is at the forefront
of quality and affordable branded generics. The intensity of price competition in the local
pharmaceutical industry depends heavily on product differentiation. Products with existing
molecule or process patents can be priced at a premium since there are no substitutes for
these products. Research & development is often very costly to most multinational firms but
the patent protection provides the security of niche pricing and the guarantee of yielding
more profits in the long-run. Conversely, for off-patent molecules such as Paracetamol
(analgesic) or Carbocisteine (mucolytic), price competition is fierce. Since these products
have become highly commoditized due to the introduction of a multitude of branded
generics, their selling prices tend to drop to effectively compete with all the existing generic
counterparts in the market.

The controversial Cheaper Medicine Act has impacted the Philippines pharmaceutical
market whereby 200 drugs have seen price reductions by up to 50% since August 2009. On
June 6, 2008, former President Arroyo signed Republic Act No. 95023, known as the
Universally Accessible Cheaper and Quality Medicines Act of 2008. The law took effect on
August 15, 2009, and was intended to enhance access to generic drugs that will provide
cheaper but quality medicines to Filipinos. The law basically:
allows the parallel importation of patented medicines from other countries where they are
more affordable
bars the grant of new patents based only on newly-discovered uses of an ingredient of
an existing drug
allows generics firms to test, produce, and register their versions of patented drugs
allows the government use of patented drugs when the public interest is at stake

More importantly, the law cut in half the prices of essential medicines. The medicines
covered by price regulations are:

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drugs or medicines indicated for treatment of chronic illnesses and life threatening
conditions like diabetes, endocrine disorder, gastrointestinal disorders, peptic ulcer,
cardiovascular diseases, hypertension, among others
drugs or medicines indicated for prevention of diseases like vaccines, immunoglobulin
and anti-serums
drugs or medicines indicated for prevention of pregnancy such as oral contraceptives
anesthetic agents
intravenous fluids

Products Sold within the Industry

The total Philippine pharmaceutical market includes all products classified as:

Drugs. According to Philippine Republic Act 3720, drugs refer to medication or medicine or
other substance (either ethical or OTC) intended for use in the diagnosis, cure, mitigation,
treatment or prevention of disease in man and/or intended to affect the structure or any
function of the human body, but which does not include devices or their components, parts
and accessories. The common and widely used classification system is the Anatomical
Therapeutic Chemical Classification System or ATC system.

Ethical or prescription drugs refer to drug products which are prescribed by a medical
practitioner and are only exclusively promoted ethically by drug companies via
deployment of professional medical representatives. Consumers are not able to
purchase medicines from the drugstore or hospital pharmacy without a supporting
prescription from a licensed doctor (by Philippine law).
OTC or over-the-counter (also Proprietary) drugs refer to drug products which can be
bought by the consumer in a drugstore, pharmacy, pharmacy-licensed supermarket or
grocery even without a doctors prescription. In contrast to ethical drugs, OTC products
may be advertised via print, radio and TV media.

Both ethical and OTC products are marketed either branded or unbranded3.

Non-drug. Non-drug items refer to nutritional and infant milk preparations, baby care,
cosmetics, diagnostic and other medical devices.

Market Players
The market is composed of a host of multinational companies (MNCs) & local emerging
firms, making the competitive landscape more intense than before. There are three kinds of
pharmaceutical companies:

Innovators refer to the R&D-based multinational companies e.g. Pfizer, Glaxo

SmithKlline, AstraZeneca

3Branded drugs refer to any drug manufactured and sold under the protection of a patent, brand name or trademark.
Unbranded drugs basically refer to the generic equivalents of their original counterparts.

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Branded generics include all local companies that market off-patent products using
their own brand names e.g. Unilab, Pascual

Pure generics are companies that use a mother brand for all generics e.g. Ritemed,
Pharex

Figure 1 Top Pharmaceutical Companies in the Philippines

Figure 1 shows that the local industry has been consistently dominated by Unilab with a
commanding 22% market share. Unilab has ranked #1 in sales since 1998, and last year
attained PhP 27.3 B with a +1.7% growth. Following Unilab is Pfizer with 8.6% market share.
Pfizer, a US-based company with an extensive array of pharmaceutical products, lead the
cardiovascular, central nervous system, anti-infective, pain, urological, oncology and
ophthalmology markets but has been declining by -8.1% due to MDRP. Glaxo SmithKline
(GSK) comes in at 3rd with 8.0% market share driven by its megabrands Ventolin, Pritor and
Zantac. It has the largest MNC manufacturing facility in the country. Rounding up the list of
the leading pharmaceutical companies in the Philippines are Abbott, AstraZeneca, Novartis,
Johnson & Johnson, Sanofi-Aventis, Pascual Labs, and Boehringer Ingelheim. See Table 1
(Appendix) for further information.

Market Growth Drivers

New Prod/SKU: Growth is driven by new product launches i.e. new brands, new line
extensions.
Quantity: Growth is driven by increase in units or quantity sold.
Price: Growth is driven by the increase in selling prices of products; conversely if
negative, there is a decrease in price.
Combined Effect: Growth is driven by all three factors.

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Significant Market Movements

Figure 2 Philippine Pharmaceutical Market (Source: IMS 2010)

As seen in Figure 2, the market drastically slowed down to 2.6% growth in 2009, the first
time in the last decade. This is attributed to the full implementation of the Maximum Drug
Retail Price (MDRP) regulation, which reduced the selling price of most blockbuster drugs by
half and severely affected the sales performance of several multinational companies. Both
over-the-counter (OTC) and ethical businesses registered upbeat growths at 3.7% and 1.8%
respectively. The market has significant growths in pure and branded generics in terms of
sales. Even the multinationals are now encroaching into this market.

Figure 3 Innovators, Branded Generics and Pure Generics Growth Drivers (Source: IMS 2010)

Figure 3 shows that the OTC sector emerged as the growth driver (8.4%), despite price
increases, with new product introductions. The Ethical business declined, the first time for it
to have a negative growth in price. It had a significant drop in terms of peso sales and
growth (0.3%).

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Figure 4 Total Pharma Market: Innovators, Branded Generics and Pure Generics (Source: IMS 2010)

Figure 4 shows that branded generics and pure generics are growing, while innovators are
declining. The innovators seem to have suffered the blow of MDRP as their peso sales
declined due to price reduction which was not compensated by the increase in units. The top
MNCs such as Pfizer, GSK, Abbott, Astra Zeneca and Sanofi-Aventis are the market
decelerators due to the decline in sales of their leading brands such as Norvasc, Ventolin,
Klaricid, Plendil ER and Plavix, which are mostly MDRP-affected products.

Forecasts

The market will recover by 2011 with 7.7%, onwards to 7.8% until 2014. The market has
significant growths in pure and branded generics in terms of sales. Even the multinationals
are now encroaching into this market. Major MNCs will enter the branded generics market to
penetrate the lower middle class market. Much greater competition is anticipated in the
generics market, but still dominated by branded generics.

Industry Analysis: Porters Five Forces

Element Assessment
Competitive High
Rivalry Competition is considered aggressive with over 80 companies operating in the
Philippines vying for the much-coveted share of prescriptions. The top 50 local
pharmaceutical companies comprise 92.4% of the entire industry while the
remaining balance is divided among several regional players and grassroots
companies. For research-based multinational firms, however, there are gains
generated by the first mover advantage by maximizing the use of patents. All in all,
this makes the ever-changing business landscape competitive yet lucrative at the
same time.

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Threat of Low for patented pharmaceuticals

Potential High for generics
Entrants For patented drugs, barriers to entry restrict small players to participate in the
cutthroat business environment. Barriers to entry include high R&D costs, patent
limitations, and restrictive costs of innovating and testing new drugs through
numerous clinical trials.
For generics, it has become easier to penetrate the pharmaceutical industry via
marketing of off-patent drugs as branded generics similar to the existing business
models of Unilab and Pascual Labs. Also, the emergence of toll manufacturers
eradicated the need for an in-house manufacturing facility. These toll manufacturers
are able to produce large batches of medicines at cheaper costs.
Buyers' Low for patented pharmaceuticals
Bargaining High for generics
Power Buyers have limited power when purchasing patented drugs since there are minimal
substitutes compared to off-patent generics that proliferate in the market.
Consumers of generics are very empowered and well-informed on the different
illnesses and medications. Some would even self-medicate and purchase OTC
medicines without consulting a physician.
Moreover, there is a shift of power from producers to retailers. Trade outlets like
Mercury Drug, Watsons, The Generics Pharmacy and Generika have the power to
influence the buying habits of the public. These pharmacies can suggest to buyers
which ones are better or cheaper.

Threat of Low within the patent period

Substitutes High after patent expiration
For products under a patent, the producers are protected against threat of copycat
substitutes within the patent period. However, once patent expires, it is expected
that branded generic companies will reproduce those off-patent drugs.
Moreover, there is a drastic increase in medicinal substitutes in forms of herbals,
natural supplements, and wellness products that aim to encroach into the
pharmaceutical market. These substitutes are a lot more affordable than
chemically-made medicines and are aggressively promoted through tri-media
efforts.
Suppliers' Low
Bargaining Pharmaceutical actives are becoming cheaper through the years with a slew of low-
Power cost suppliers operating in large-scale manufacturing facilities in India and China.
Also, with globalization, importing finished goods from a network of suppliers
worldwide has become easier and more cost effective.

III. THE COMPANY

History
United Laboratories, Inc. (Unilab) was founded in 1945 by Jose Yao Campos as a small
drugstore in a street corner in the war-torn downtown Manila. The company offered quality
medicines at affordable prices. A few years later, the drugstore had quickly developed into a
pharmaceutical company, with a simple manufacturing setup and a modest marketing force
to promote and sell high quality and affordable medicines. By the end of 1950s, Unilab had
become the top pharmaceutical company in the Philippines. At about the same time, its
presence in Southeast Asia had begun to take shape, with the creation of marketing and
manufacturing tie-ups in the major countries in the region. Through the years, Unilab has
been able to solidify its position of leadership not only in the Philippines but in Southeast
Asia as well.

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Business
Unilabs core business is to develop, manufacture, and market a wide range of prescription
and consumer health products covering all major therapeutic categories. Many of these
products are now leading brands in the Philippines. The company has a strong leading
presence in the region as a major provider of healthcare goods and services in several
countries Indonesia, Thailand, Malaysia, Singapore, Hong Kong and Vietnam, among
others. Unilab operates in strategically located manufacturing facilities throughout Southeast
Asia, linked to extensive and expanding market coverage and technical support. The major
Unilab manufacturing complex is in Metro Manila, (the Philippines is the region's largest and
most significant pharmaceutical market) and has been cited by international health
organizations, as one of the finest is Asia.

UNILAB develops and markets a wide range of ethical and consumer products in the
following therapeutic segments:

Segments
Anti-infective Endocrine Metabolic
Somatics Anti-Tuberculosis
Cough-Cold Dermatological

Cardiovascular Vitamins/Minerals

Gastrointestinal (GIT) Dietetics

Anti-Asthma Women's Health

Unilabs famous brands include Alaxan, Biogesic, Ceelin, and Solmux, among others. For a
complete list, see: http://www.unilab.com.ph/about/brands.asp. See Appendix for a complete
list of Unilabs divisions and subsidiaries and their corresponding products.

Product Acquisition
There are four ways that Unilab acquires its products. First, everything is done internally
such as development and manufacturing. Examples of these products are Biogesic and
Alaxan. Second, the company imports products as completely finished goods from other
countries and just markets them in the Philippines. These products are mostly antibiotics
and injectables. Third, Unilab imports products but packages them in the Philippines.
Examples for these are antibiotics and asthma inhalers. Fourth, the company imports raw
materials and then manufactures them locally through the toll manufacturers. Toll
manufacturing is an arrangement in which a company (which has specialized equipment,
e.g., Interphil in Canlubang) processes raw materials or semi-finished goods for Unilab. The
companys toll-manufactured products include some of its Myra products and personal care
products. Unilabs existing resources and facilities as well as a projects overall
manufacturing costs are the important factors in determining its sourcing strategy.

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Performance
Unilab has been able to sustain its market leadership for the 2010. It has 22.2% market
share and has maintained leadership in both Ethical (16%) and Proprietary (36.2%) markets.
Its high performing brands include Myra E, Alaxan, Bioflu, and Diatabs. The companys
growth drivers include New Products, Combined Effect, and Price. The company is #1 in the
following product categories: cardiovascular, anti-infectives, vitamins, endometabolics,
somatics, cough-colds, and gastrointestinal. It is second in anti-asthma and anti-allergies.

Some market analysts say that price is no longer a point of differentiation for Unilab with the
implementation of MDRP and the MNCs generic participation. The proliferation of many
generic companies poses stiff competition to Unilab.

Competitive Advantage
The companys competitive advantage lies in its positioning: affordable quality products. Its
core strategy is to produce copycat or me-too products. When an innovator product is
nearing the patent expiration, this is when Unilab comes up with its own version of the said
product. Upon expiration, the company is ready to register its me-too product.

The companys mantra is We offer affordable, trusted, quality healthcare: Affordable

because its product prices are 30% to 50% lower than that of the MNCs or innovator
companies; Trusted because the companys established brands have been patronized by
consumers for more than 60 years already; and Quality because all of its products pass
through strict quality and manufacturing guidelines and procedures.

IV. UNILABS INNOVATION PROCESS

How the Company Views Innovation

According to Unilab CEO Clinton Campos-Hess, Innovation is the cornerstone of our
strategy. We aspire to be the best provider of healthcare in Asia not merely to survive as a
business organization, but continue delivering value to our customers far better than
competition. To do this, we have to innovate and innovate well.

The company defines innovation as simply creating new businesses or new ways of doing
business that generate value for the customers and for the company. Moreover, aside from
simply introducing something new, it has to be accepted by the target users before it can be
considered an innovation.

The company also views innovation as an integral component of its organization. This is
because value is what drives business. The purpose of innovation is to constantly improve
the value provided to customers. In turn, it is the customers that will help convert
opportunities into sustainable business growth.

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Innovative Activities
The following are examples of Unilabs innovative activities:

The company is one of the first Filipino companies to go overseas and tap new markets.
With innovative thinking and a lot of communication, Unilab has found ways to promote
its products overseas. Also, they are one of the first Southeast Asian companies to have
a world-class manufacturing facility. At first, the rationale was to serve migrant Filipino
workers who are accustomed to taking Unilab medicines. Later, it became another
revenue stream for the company and they were able to also maximize economies of
scale with the local manufacturing plant serving both domestic and international markets.
Back in the day when doctors were still compounding, Unilab came out with fixed-dose
combinations which are bestselling products today such as Decolgen, Neozep, Alaxan.
The company also does reverse engineering and reformulation of off-patented drugs as
a means to provide much more affordable but quality products. Below are some
examples of recent off-patent molecules which Unilab developed locally even before the
patent has lapsed in the Philippines to maximize speed-to-market.

Another good product innovation of Unilab which became very successful was pH Care
feminine wash. Lactacyd and Betadine were the first movers for this product. However,
the positioning of the product is such that consumers are to use it only during menstrual
periods or when certain infections were incurred. Unilab, on the other hand, developed a
formulation of a feminine wash for everyday use. This inflated the feminine wash market
to roughly Php 100 million from about Php 50 million annually. Betadine and Lactacyd
also followed the trend. Today, pH Care owns 46% of the feminine wash market and is
the dominant market leader.
Innovation in Unilab does not just occur in different aspects of the product but from
different sources as well. Examples of this are indicated in the table below.

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MEDICOL ADVANCE CEELIN PLUS SWISH

Fixed-Dosed
Product Drug Delivery System New Product Offering
Combination
Aspect (Ibufluid) (Mouthwash)
(Vitamin C+Zinc)
Source R&D Doctor Consumer

Innovation in Unilab is not limited to new product launches. In fact, they also implement
innovation-driven activities such as Unilab Ideas Positive which aims to transform
communities by tapping into the academe and the Filipino youth. It is a social marketing
activity that invites college students to share their innovative, exciting, and sustainable
ideas to address the health and wellness concerns of the Philippines.

Dimensions of Business Innovation in Unilab

Dimension Example

Offerings SureDose technology keeps the drug uniformly distributed in

suspension during prolonged storage periods even without shaking. It
ensures efficacy with accurate and uniform dosage.

Customers Ph Care feminine wash for everyday use.

Customer TasteRite technology significantly reduces the bitterness of medicine

Experience so that children taste the flavor and not the medicine.

ZincPlus ensures stable and good-tasting liquid compositions

containing vitamin C and minerals. The liquid composition does not
have the unpleasant taste characteristics of zinc and/or iron.

High-profile endorsers (John Lloyd Cruz, Vic Sotto and Manny

Pacquiao) and marketing activities focused on strengthening
relationship with doctors.

Supply Chain and

Options include: (1) locally developed and manufactured products (2)
Process
imported, ready-to-sell goods (3) imported but locally re-packaged
products and (4) toll-manufactured products based on the companys
existing resources and facilities and overall costs.

Brand Leveraging on trusted, quality yet affordable brands to offer product

extensions such as Myra.

Innovation Processes
A. Idea Generation

Every new product that is introduced in the market starts with a concept. Idea generation in
the company is driven both internally and externally. External drivers include:

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Fieldwork and interviews with doctors (i.e. Ceelin Plus was formulated as per the
requests and inputs from pediatricians.)
Focused group discussions with consumers (Conzace is a nutritional supplement
that contains vitamins A, C, and E, and zinc. These nutrients act as antioxidants. A
lot of consumers wanted the benefits of all these nutrients in just a single tablet.)
Competitor benchmarking (Unilab released Growee, which is a growth stimulant, to
compete with Cherifer.)
FDA and other government regulations (Disudrin was reformulated by changing an
active ingredient. This was done to conform to an FDA regulation.)
Internal drivers include:

Top management during long-range planning.

Marketing group which performs brainstorming sessions, business reviews, and
sales trend analyses.
Analytics and Business Intelligence Group which performs formal market research es
and market gap analyses.
R&D Group which is responsible for the product pipeline.

B. Product Concept Approval

Upon recognition of ideas and new business opportunities, the Corporate Product Board
(CPB) is responsible for the approval of new product candidates or ideas for product
improvements. The board will approve ideas that would help Unilab achieve its medium and
long-term sales, market share, and growth objectives.

C. Business Plan Development

A feasibility study will then be conducted by both Marketing and Analytics groups which
involves a thorough evaluation of the ff:

Market potential & pricing strategy - an in-depth analysis of the IMS sales,
prescription data, and the market survey results is conducted to fully assess the
market potential of the new product. Pricing strategy, 5-year product sales forecast,
and market share objectives are also agreed upon.
Medical usefulness - Medical Affairs prepares the Medical Position Paper (MPP) to
rate if the product is of high interest, interest, conditional interest, or of no
interest. The required technical documents are: acute and chronic toxicity studies,
reproductive and teratogenicity studies, carcinogenicity studies, bioequivalence and
bioavailability, and efficacy and safety data.
Patent situation - R&D and Legal conduct a patent check report of the new product.
A clear patent status ensures no infringement cases with any of the existing
pharmaceutical products available in the local market. In cases where there is a
process patent, R&D will consider developing or using other procedures or both, so
as not to infringe on the existing process patent.
Initial technical and manufacturing feasibility - a clearance report is conducted from
R&D, Quality Assurance & Chemistry (QA&C), and Manufacturing regarding Unilabs
capability in developing, handling, and producing the new product.

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Distribution inputs and product packaging - based on inputs from R&D, Business
Development Group (BDG), and Distribution, information regarding handling, storage
facilities, and the new product packaging system is consolidated.
Regulatory evaluation inputs is solicited from the Office of Regulatory Affairs (ORA)
regarding pertinent regulatory matters/issues concerning the new product.
Initial product costing & financial evaluation - Based on all information, Finance
computes for initial product cost and the 5-year financial evaluation. Also, the initial
financial feasibility report is conducted.

D. Business Plan Approval

The Corporate Product Board (CPB) together with Mancom is responsible for approval of the
business plan. Once approved, a cross-functional team will be convened to set up initial
timelines and firm up critical project milestones.

Based on the generated inputs from the various support areas, CPB is responsible for
approval of the business plan. The CPB-approved business plan includes product
development milestones with timelines. These are used as standard of performance for the
project teams Key Result Areas (KRAs). The same milestones and timelines also serve as
partial basis for the individual team members Performance Management System (PMS).
Upon approval of the business plan, a cross-functional project team is organized. Its first
agenda is to firm up plans for the new product. The project team then meets regularly to
pursue the critical activities for the products timely development and eventual market
launch.

E. Product Development

It is best to develop and manufacture new products locally. However, in cases where there is
a patent constraint, or Unilab lacks the necessary facilities or technology to manufacture, or
when it is not economically feasible for Unilab to manufacture locally, then importation of
non-infringing products may be considered.

R&D is responsible for locally manufactured products. On the other hand, BDG is
responsible for importing products as completely finished goods.

Corporate Culture Towards Innovation

A. Imperatives of Innovation

To further concretize the companys plans to employ innovation as a strategy, management

inculcates to the entire organization what they call The Seven Imperatives of Innovation

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Understand Common understanding of what real innovation is in the healthcare

innovation in the industry (i.e. incremental: taste, packaging, marketing campaign.
business setting. disruptive: new offering.)

Occurs anywhere w/in Innovation can come from all levels of the organization (i.e. top
the organization. management, R&D, marketing)

Innovation needs strong leadership support and relationship with

Nurture and support
internal & external partners in the value chain (i.e. CEO/top
creativity.
management support)

Innovation must be pragmatic. It must offer strong value proposition

Set reasonable limits. and make good business sense (i.e. not going into herbals and
contraceptives)

Manage innovation with clear-cut metrics (i.e. freshness index or sales

Build the right system.
of new products vis--vis total business)

Innovation is generated from risk-taking and exploring new frontiers

Manage risks.
(i.e. personal care business/dietary supplements)

Align w/ the company Innovation must be consistent with companys vision-mission-values

mission and vision to be the best provider of total healthcare in Asia

B. Reward System for Idea Generation

There is no direct monetary incentive for generating innovative ideas. However, reward
system is in the form of merits and recognitions. One of the competencies in the companys
individual merit rating system is the ability of the employee to drive innovation. This is
included in their semi-annual performance appraisal. An important criterion for promotions
and outstanding employee award also includes this merit rating.

Challenges, Bottlenecks, and Areas for Improvement

Implementation of MDRP scheme compromised Unilabs cost advantage. This is
because the law forced MNCs to lower down the costs of their products.
Given the extensive innovation process and the aggressive marketing efforts of the
company, failed innovations remain to be very costly in terms of time and money. An
example of a failed innovation is Have-It-All. The company invested heavily for the
products development and promotions. However, in retrospect, it appears that the
market was not ready for it.
Management reiterates the importance of innovation in the companys growth
prospects. However, it provides inadequate motivation for employees to generate
new ideas. Also, there are no follow-through activities to generate continuous
innovation.
There is no specific group focused on ensuring the implementation of their
imperatives for innovation. There is also no formal facilitator who would foster the
culture of innovation.
Innovation process is long and tedious. Thus, Unilab is challenged in terms of speed
to market due to internal bureaucracy which doesnt add value to the business.

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Another bottleneck pertains to hierarchy of approvers. Too many approvals are

required prior to implementation of a certain project. According to the resource
person, Unilab has this culture wherein the processes are slow even with regular
day-to-day operations. For example, if one requests to purchase a particular product,
it will usually take 3 weeks just to be approved. As per approval of budgets, projects
above Php 1M has to be approved by several managers, VP for finance, as well as
the companys president. This is a tedious process because there are a lot of Php
1M projects. Also, there is redundancy because the budget for a certain division is
already approved at the beginning of the calendar year.
Roles of cross-functional teams are not well-defined. This results in either neglect or
redundancy of responsibilities.
Corporate moral conviction also somehow hinders innovation. For example,
contraceptive industry is a growing market. However, Unilab will definitely not tap this
market because it is against the moral principles of the CEO. The marketing people
already did an extensive proposal for contraceptives, but management still
disapproved.

V. UNILABS RESEARCH AND DEVELOPMENT MANAGEMENT

Research and Development Purpose

As mentioned earlier, Unilab maintains strategically located manufacturing facilities all over
Southeast Asia. As disclosed, each regional Unilab unit with a manufacturing facility has its
own R&D group; otherwise, they only have a marketing department to handle business in
the country where they operate in. Among the countries with manufacturing and R&D units
include the Philippines, Vietnam and Indonesia.

The main purpose of having an R&D group for each regional Unilab unit is to allow each unit
to have flexibility and the autonomy in deciding what products to launch based on the market
needs, or what is applicable to the country.

In this way, specific local market needs are properly identified and henceforth, addressed;
thus, giving support and further expanding Unilabs business.

Research and Development Activities

Unlike other larger pharmaceutical companies such as Pfizer, Unilabs R&D is more focused
on improving product formulation, delivery, and format of off-patent drugs, rather than new
drug discovery.

Common and main function therefore of all regional R&D units is to facilitate the formulation,
and its improvement thereof, of off patent drugs, and ensure compliance to standards of
stability, efficacy and safety. Some of the specific tasks of the R&D Group include raw
material sourcing, development of product candidate, stability testing, and process validation
development.

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Most R&Ds projects are initiated by marketing (from generic products/basis is what is
available in the market) although it can research and develop on their own based on new
ingredient available in the scientific communities: natural products backed by clinical
evidence.

Meanwhile, activities involving development of new and innovative products are undertaken
in Shanghai, China where Unilab and an affiliate company Shanghai United Cell
Biotechnology Co. Ltd., jointly operate a biotechnology plant.

Research and Development Process

Unilab has 2 sources of new products (1) imported finished products handled by their
business development group and (2) locally developed products handled by their R&D
department. Unilab believes it is best to develop and manufacture new products locally.
However, in cases where there is a patent constraint or Unilab lacks the necessary facilities
or technology to manufacture or when it is not economically feasible for Unilab to
manufacture locally, importation of non-infringing products may be considered.

Figure 5. Unilab R&D Process

As mentioned, most new product initiatives stem from the marketing department done
through a periodic market segment review (e.g. market sales data and market survey

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results) from which Unilab form strategies (business plan) for existing business and create a
line-up of new product candidates that will fill up identified market opportunities.

The business plan includes profit and loss plan (with 5-year sales forecast, pricing strategy,
cost of goods (COG), promotional strategies, product positioning and expenses), brand-
name candidates and final divisional assignee. The plan also includes product development
milestones with timelines, which are used as standard of performance for the project teams
key result area. The same milestones and timelines also serve as partial basis for the
individual team members performance appraisal. Once business plan is approved R&D
activities start.

R&D forms part of a cross-functional project team whose first agenda is to firm-up plans for
the new product. The team involves not only the research group but also includes finance,
marketing, manufacturing and product sourcing. The project team then meets regularly to
pursue the critical activities for the products timely development and eventual market
launch. Pre-marketing activities are also initiated concurrently with product development
(brand name approval, market research study and packaging prototype development). R&D
activities end once new products passed the process validations.

Research and Development Metrics

The Research & Development team of Unilab is evaluated based on the corporate balanced
scorecard approach focusing on four key result areas:

Figure 6 Unilab Balanced Scorecard

Financials (20%)
Delivering total business (sales performance of new products) and managing cost
judiciously to improve bottom line (manage R&D spending)
Customer (30%)
Completing the development of planned products in the pipeline on time (product's
efficacy, safety, stability etc should pass internal standards)

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Process (30%)
Developing additional products/technologies through innovative processes (coming
up with incremental products/technologies not included in the original pipeline),
ensuring that all technical documentation are completed for product registration
Learning & Development (20%)
Strengthening organizational excellence through continuous training
The corporate balanced scorecard is aligned with performance appraisals, professional
upgrades and salary increases.

The table below shows the actual metrics used by Unilab and its recent performance per
metric:

Metric Current Performance of Unilab

New Sales Ratio/Percentage of Unilabs new sales ratio in 2010 is 8.4. It increased from 4.3
Sales of New Products in 2009 and is above industry standard of 6.0. Among the top
10 pharmaceutical companies, Unilab is second in terms of
new sales ratio next to Novartis. See Table 3 (Appendices)
for further information.

Number of New Products Unilab defines new products as new brands or line
Released extensions launched in the past 36 months. Unilab launched
20 new brands in 2010, 15 in 2009 and 21 in 2008. This is
only the brand count meaning one brand can have as many
as 10 SKUs (stock keeping unit). Not all new product
launches were developed by R&D. Some products were
sourced by BDG (Business Development Group) as imported
finished goods. But the big volume consumer brands like
Ceelin Plus, Skelan and Swish mouthwash were developed
by R&D locally.

Number of Products in the Approximately 30 brands per year in the product pipeline. But
Pipeline based from experience, only 15-20 brands are launched and
fully marketed. Most products in the pipeline from 2011
onwards are fixed dosed combinations for pharmaceutical
drugs and personal care products for OTC.
Market Share of Newly Among the new OTC product launches, Ceelin Plus and
Commercialized Products Skelan are now dominant challengers to the market leaders
in their respective markets. Skelan now secures 15% of the
total Systemic Analgesic-Naproxen market threatening
Flanaxs leadership. Ceelin Plus now has a commanding 78%
market share of Vitamin C + Zinc pediatric preparations.

Accounting for R&D

At Unilab, R&D expenditures are capitalized because it takes time for the benefits from R&D
to be realized. Amortization is preferred to synchronize the deductions claimed and the
revenues generated since revenues from R&D take some time to come in.

VI. ANALYSIS

AVAC (Activities, Value, Appropriability, and Change) Framework

The group used this framework to explore the profitability potential of the firms innovation
process and R&D Management: how these activities create value for the customers (value

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creation) and how the firm benefits in return (value capture). The group also determined the
areas where the firm should improve on in order to further compete and maintain its market
leadership in a highly competitive environment.

AVAC for Innovation Process

Element Comments

ACTIVITIES: Sourcing: The companys choice between internal and external sourcing
depends on the firms resources, and capabilities. This drives overall
Is the firm production costs down
performing the
right activities? Product offering: The company comes up with incremental innovation on off-
YES patent or me-too products that are 30 to 50% lower in terms of costs. At the
same time, this differentiates Unilab from other branded generics/generics
pharma companies.

Product development: Unilab engages in reverse engineering early on in order

to come up with price-competitive and quality branded generics of expensive,
high-profile medicines.

Marketing: The company makes use of high-profile celebrity endorsers as well

as activities that are focused on physician partners.

Branding: Unilab leverages on its trusted brands that are associated with
quality yet are affordable products.

Having a culture of innovation: The company has a culture of innovation that

receives full support from top management. Innovative ideas are aimed on
both product and processes. Idea generation is encouraged and gathered
internally from all stakeholders, and externally from partner physicians and
consumers.
VALUE: Products offering: Products are 30 to 50% lower in terms of costs and are
differentiated as affordable quality medicines. The lower product costs
Is the value translate to lower prices.
created preferred
by many
customers?
YES

APPROPRIABILITY: Strong brand recognition: The company leverages on its trusted, wide range of
well-known, quality yet affordable medicines, including Myra E, Alaxan, Bioflu
Does the strategy and Diatabs.
enable the firm to
make money? Sustained market leadership: Unilab is a Php 30B company in terms of sales,
YES and is the leading pharmaceutical company in the Philippines since 1988.

MDRP: Unilab has been able to sustain its market leadership in 2009 and 2010
even with the full implementation of MDRP. The company has 22.2% market
share and has maintained its leadership in both Ethical (16%) and Proprietary

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(36.2%) markets.

CHANGES: Industry changes include the full implementation of MDRP and the entry of
MNCs in the generics market.
Does the strategy
take advantage of Product and process innovations play a big factor in maintaining the
change (present companys positioning as affordable, quality me-too drugs. It also helped the
or future)? company sustain sales and market leadership despite the implementation of
YES MDRP and the entry of MNCs in the generics market.

Rigorous marketing campaign through high-profile celebrity endorsers and

partner physicians were the companys primary weapons against emerging
competitors in the branded generics market.

Company leverages on its trusted brand to get ahead of competitors.

Though expiration of high-profile patented drugs would be a welcome addition

to the companys arsenal, the companys growing consumer product segment
is insurance once the pipeline dries out.

AVAC for R&D Management

Element Comments

ACTIVITIES: Low cost & better pricing: With the help of R&D, COG ranges from 30% to
50% of Net Price, effectively enabling to price its products lower by 5% to 50%
Is the firm versus competitor brands.
performing the
right activities? Differentiation: Unilab is active in improving the formulation of existing drugs,
YES as well as their formats. It is also able to reformulate and combine medicines
i.e. Alaxan (Ibuprofen + Paracetamol). It also does research and develops
new formulation for its own based on new ingredient available in scientific
communities.

Reaching more customers: Unilabs R&D has developed and currently employs
various technologies used to cater to the unique needs of different types of
customers.

On improving position vis-a-vis coopetitor: At present, Unilabs R&D does not

form partnerships with its competitors, although, it collaborates with other
pharmaceutical or research companies from abroad.
VALUE: Many customers prefer the value created by Unilab over competition:
Unilab is able to sustain its market leadership from 2009-2010.
Is the value
created preferred Customers of Unilab are valuable:
by many Number one in most therapeutic categories i.e. cardio, antibiotics, vitamins.

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customers? See Table 4 (Appendices) for further information.

YES Its banner brands are the most prescribed products in their segments next to
generics. See Table 5 (Appendices) for further information.

Unilab is currently filling out some nearby white spaces:

For growth and economies of scope, Unilab is actively pursuing one of its long-
term strategies: related diversification. Unilab is pursuing other forms of
businesses that might not be of the pharmaceutical kind, but should be related
to the core business of healthcare and wellness. In line with this, Unilab is
developing ways to cater the unserved market for Personal Care and Dietary
Supplements.
APPROPRIABILITY: Superior position vis--vis its competitors: Unilab has been able to sustain its
market leadership. It has also maintained its leadership in both Ethical (16%)
Does the strategy and Proprietary (36.2%) markets.
enable the firm to
make money? Exploits its position vis--vis its competitors and customer benefits: Unilab is
YES the most trusted branded generic drugs. Its products are affordable, of quality
and trusted by consumers. With this, Unilab ensure to capture new and
untouched niche and market by offering new products and heightened R&D
efforts.

Have the right resources/capabilities, including complementary assets: Some

patented imported finished/bulk products are also marketed by Unilab
through a license agreement with the patent owner. These products are called
Alliance Products and usually have higher prices and cost but strategically
enhance the acceptability of the other products of Unilab. Foreign partners,
choose Unilab because it is the leader in the market and trusted by consumers.

Not difficult to imitate, in terms of R&D activities: Many players in the

Philippine pharmaceutical industries can easily imitate Unilab's strategies of
cost leadership and differentiation.

CHANGES: Takes advantage of new ways to ensure value creation and value capture:
Unilab develops new processes to be able to offer drugs at a cheaper price
Does the strategy with the same level of quality.
take advantage of
change (present Maximizes distinctive capabilities: Through its extensive experience and large
or future)? network, Unilab is able to look for products which are in demand in the
YES market, then offer these products at a lower cost while still maintaining the
level of quality that is warranted by the market.

Acts on competitors reactions: Unilab is always on a look for new drugs that
could be offered through reverse engineering and reformulating them at a
lower costing advantage.

Utterback - Abernathy (UA) Model

This model shows that product innovation, process innovation, competitive environment, and
organizational structure are all interacting and closely linked.

The group has determined that the company operates within the Specific Phase. In this
phase, competition shifted differentiation to product performance and costs after the

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appearance of a dominant design. The company has a clear picture of market segments and
has concentrated on serving specific customers. Manufacturing uses highly specialized
equipment. Commoditization has taken place such that the bargaining powers of both
suppliers and customers have increased.

Unilab, as it
Variable relates to Comments
Local Industry

Type of Specific Unilab is NOT an innovator; it focuses on incremental product

Innovation and process innovations to offer affordable, quality me-too
drugs.

Nature of Specific Branded generics: Unilab offers off-patent products but it

Products leverages on its reputation as a trusted brand.

Production Specific Efficient, capital intensive but rigid. The companys existing
Processes resources and facilities as well as overall costs are the important
factors in determining whether to source internally or externally.

R&D Specific Focuses on incremental product and process innovations to

maintain quality. This complements types of innovations being
pursued.

Plant Specific Large-scale, highly specific to particular products. Unilabs

existing resources and facilities as well as overall costs are the
main factors in determining which products to grow internally or
source externally.

Competitors Transition / There are a lot of competitors, but Unilab is the market leader
Specific since 1988.

Basis of Specific Wide range of affordable, quality products is Unilab's main

Competition competitive advantage. Upon implementation of MDRP, price
has become the basis of competition. Also, MNCs are starting to
enter the generics market. Price has become a market
decelerator in 2010 due to the reduction in prices of most big
volume brands;

Vulnerability Specific Unilab is the market leader. Threats include entry of MNC that
of Market can offer higher quality and cheap branded generic products or
Leaders substitutes. Also, with the declining number of new patented
disruptive products, product pipeline may eventually dry out.
Hence, the company has to look for new market segments to
serve.

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VII. APPENDICES

Tables
Table 1 Top 10 Leading Philippine Pharmaceutical Companies Php billion

RANKING SALES (+M) SHARE GROWTH

CORPORATIONS
2010 2009 2010 2009 2010 2009 2010 2009
TOTAL PHARMA MARKET 124,691 120,934 100.0 100.0 3.1 2.7
1 1 UNILAB 27,280 26,924 21.9 22.3 1.3 6.7
2 2 PFIZER 10,771 11,722 8.6 9.7 -8.1 -0.8
3 3 GLAXO SMITHKLINE 9,998 9,301 8.0 7.7 7.5 -8.5
4 4 ABBOTT LAB 4,987 5,158 4.0 4.3 -3.3 -6.4
5 7 ASTRAZENECA 4,487 4,054 3.6 3.4 10.7 -5.6
6 5 NOVARTIS 4,251 4,175 3.4 3.5 1.8 20.2
7 9 JOHNSON & JOHNSON 4,110 3,549 3.3 2.9 15.8 5.7
8 6 MERCK SHARP & DOHME 3,997 4,076 3.2 3.4 -1.9 11.8
9 8 SANOFI-AVENTIS 3,954 4,009 3.2 3.3 -1.4 -17.0
10 12 PASCUAL LABS 3,767 3,181 3.0 2.6 18.4 23.8
(Source: 2010 IMS Data)

Table 2 Drug Introductions made in the Philippines from 03 - 07

(Source: 2008 Philippine Pharmaceutical Industry Factbook)

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Table 3 Top 10 Leading Philippine Pharmaceutical Companies (in 000 PhP)

RANK PESOS (+000) NEW BRAND INDEX

TOTAL PHARMA MARKET NEW PRODUCTS MAT
MAT CORPORATIONS
DEC 2010
MAT DEC 2010 MAT DEC 2009 MAT DEC 2010 MAT DEC 2009 DEC 2010 DEC 2009

Total Pharma Market 124,690,636 120,934,444 7,474,457 3,591,916 6.0 3.0

1 UNITED LAB 27,279,722 26,923,693 2,288,899 1,163,900 8.4 4.3

2 PF IZ ER INC 10,770,852 11,721,786 330,723 65,978 3.1 0.6
3 GLAXO SMITHKLINE 9,998,447 9,300,694 136,530 93,055 1.4 1.0
4 ABBOTT LAB 4,986,997 5,157,830 72,768 43,410 1.5 0.8
5 ASTRAZENECA 4,486,611 4,053,961 49,280 5,318 1.1 0.1
6 NOVARTIS 4,251,368 4,174,727 767,954 330,350 18.1 7.9
7 JOHNSON 4,110,058 3,548,562 115,390 104,791 2.8 3.0
8 MERCK SHARP&DOHME 3,997,381 4,075,744 286,011 165,705 7.2 4.1
9 SANOFI-AVENTIS 3,953,615 4,008,542 246,678 252,633 6.2 6.3
10 PASCUAL LABS 3,767,433 3,180,867 229,685 97,795 6.1 3.1

Table 4 Total Pharma Market Sales Data By Product Segments (MAT March 2010)

MAT MAR 2010

SEGMENTS PHARMA MARKET UNILAB
SALES (M ) % V SHARE GROWTH SALES (M) % V SHARE % H SHARE GROWTH RANK

All Se gm e nts 121,824 100.0% 2.9 26,999 100% 22.2 4.4 1

CARDIOVASCULAR 21,161 17.4% -5.9 4,178 15.5% 19.7 -2.7 1

ANTI-INFECTIVES 15,231 12.5% -1.6 4,625 17.1% 30.4 -3.4 1
VITAMINS 14,026 11.5% 10.9 5,865 21.7% 41.8 15.2 1
ENDOMETABOLICS 11,293 9.3% 7.6 1,252 4.6% 11.1 10.5 1
SOMATICS 10,262 8.4% 2.4 3,348 12.4% 32.6 3.9 1
COUGH-COLD 6,994 5.7% 5.4 3,445 12.8% 49.2 -2.2 1
GASTROINTESTINAL 6,934 5.7% 5.7 1,112 4.1% 16.0 3.5 1
DERM ATOLOGICALS 4,996 4.1% 12.9 357 1.3% 7.1 32.2 5
ANTI-ASTHMA 4,773 3.9% 2.6 674 2.5% 14.1 5.7 2
CENTRAL NERVOUS SYS 4,055 3.3% 2.7 73 0.3% 1.8 277.8 16
ONCOLOGY 2,826 2.3% -6.9 157 0.6% 5.6 4.7 5
ANTI-ALLERGY 1,864 1.5% 13.9 467 1.7% 25.0 69.1 2
NEPHROLOGY 1,800 1.5% 20.2 145 0.5% 8.1 11.0 5
EYE EAR 1,436 1.2% 15.6 23 0.1% 1.6 29.4 10
HOSPITAL SOLUTIONS 1,352 1.1% -0.2 140 0.5% 10.3 -14.8 4
ANTI-TB 1,208 1.0% -5.1 321 1.2% 26.6 -3.7 2
GYNAECOLOGICS 1,178 1.0% 6.7 376 1.4% 31.9 9.7 1
VACCINES 1,104 0.9% 14.8 0.0
ANTI-FIBRINOLYTICS 303 0.2% -1.8 230 0.9% 75.9 -1.5 1

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Table 5 Prescription Share by Corporation.

2010
TOP CORPORATIONS
NO. OF Rx % SH
TOTAL PHARMA 179,383,421 100.00
GENERIC 30,767,619 17.15
UNITED LAB 29,587,234 16.49
GLAXO SMITHKLINE 15,315,071 8.54
PFIZER INC 11,150,744 6.22
MERCK SHARP&DOHME 5,130,037 2.86
ABBOTT LAB 4,875,147 2.72
BOE. INGELHEIM 4,806,428 2.68
NOVARTIS 3,760,788 2.10
SANOFI-AVENTIS 3,727,099 2.08
NATRAPHARM 3,433,720 1.91
* Others * 66,829,534 37.25

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Table 6 The 12 Dimensions of Business Innovation (Source: The 12 Different Ways for Companies to Innovate
by M. Sawhney, R. Wolcott and I. Arroniz. MIT Sloan Management Review. Spring 2006)

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AVAC Framework

VIII. REFERENCES

1. Unilab company website. http://www.unilab.com.ph/

2. Unilab internal materials

3. Philippine Pharmaceutical Industry Factbook 7th Edition July 2008

4. IMAP Pharmaceuticals & Biotech Industry 2011 Global Report

5. http://www.mb.com.ph/node/73659

6. http://www.manilastandardtoday.com/insideBusiness.htm?f=2009/october/24/busines
s1.isx&d=/2009/october/24

7. http://newsinfo.inquirer.net/inquirerheadlines/nation/view/20090820-221122/Cheap-
medicines-law-registers-90-compliance

8. NEDA Development Advocacy Fact Sheet. Vol. XII, no. 12 , June 30, 2008

9. Allan Afuah. 2009. Strategic Innovation: New Game Strategies for Competitive
Advantage. New York: Routledge.

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