P-1119-E

September 2012

Bioco
This document is an authorized copy for the personal use of Mr./Mrs. Mariana Almeida, 2021-04-06

Eduard Calvo
Frederic Sabrià

“A year ago we received a puzzling call. One of our patients had died after a long illness and his
landlord called us to ask what he should do with all the drugs he found in the fridge. They were
worth over €20,000…. We cannot let this happen again.”

Monteagudo, Head of the Pharmacy Department, Saint Gabriel’s Hospital

“Are you crazy? I don’t believe anyone sitting at this table thinks that our business is just selling
drugs and that we don’t care what people do with them. Let me be crystal clear: we are in
business to serve our patients. Everything else is meaningless.”

Moisés Arteaga, CEO, Bioco Spain

Sitting at his office in Saint Gabriel’s Hospital, Monteagudo, the head of the Pharmacy
Department, wondered what else could be done to cut costs:
“It’s the first week of February and the hospital’s general manager has already given me an
ultimatum. I have no clue how we will be able to free up resources and achieve the savings
we’ll need to adjust to the budget cuts that the Ministry of Health has made for 2011.”
Having to comply with draconian budgeting was not Monteagudo’s only concern. He was also
facing some operational challenges that required prompt action, such as the problem of the
embarrassingly long lines at the hospital’s pharmacy. The lines had been getting longer and more
frequent for months and some outpatients had complained that they had had to wait for more
than 45 minutes to pick up their medication. The issue was so evident that other department
heads even made jokes while chatting over coffee:
“Monteagudo, what’s going on at your pharmacy? Are you selling soccer tickets?”

This case was prepared by Professors Eduard Calvo and Frederic Sabrià. September 2012.
IESE cases are designed to promote class discussion rather than to illustrate effective or ineffective management of a given
situation.

Copyright © 2012 IESE. This translation copyright © 2012 IESE. To order copies contact IESE Publishing via
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Last edited: 26/10/20

 P-1119-E Bioco

Monteagudo and his team had tried everything to cut back on the workload at the pharmacy.
Specifically, some months back they had increased the amounts of medication they dispensed
to outpatients (“That means they won’t have to come back so often.”). Though, at first sight, it
seemed to solve the problem, it also had some serious collateral implications:
“It’s true that our outpatients are visiting us fewer times per year, which makes the lines
shorter. But we also need to consider the amount of drugs that patients will have to throw
away at home if their treatment plans change or come to an end in between their visits to
the hospital pharmacy.”
This document is an authorized copy for the personal use of Mr./Mrs. Mariana Almeida, 2021-04-06

Meanwhile, in the boardroom at Bioco Spain’s headquarters in Barcelona, the Executive

Committee was analyzing the latest proposal they had received from Saint Gabriel’s Hospital. In
mid- January 2011, Monteagudo asked Bioco to study the feasibility of implementing home
delivery for the hospital pharmacy’s Lempura outpatients. Lempura was one of the best-selling
Bioco drugs carried by the hospital pharmacy and Moisés Arteaga, the CEO of Bioco Spain, was
looking at the short-term and long-term implications that home delivery might have for the
company. Bioco had promised to have an answer for Monteagudo in a month’s time; they only
had one week left to come to a decision.

Bioco
Bioco was a U.S. biotechnology company that researched, developed, produced and distributed
innovative drugs used to fight cancer, kidney disease and certain bone diseases. The company
had steadily grown since its foundation in 1981. As a result of constant investment in R&D and
several successful acquisitions, the company had established a pipeline of new molecules, which
meant that the management team could face the near future with some degree of optimism. In
2011, the company’s largest markets were the United States, Europe, Canada and Japan; given
its size, Bioco was a relevant player in the global pharmaceutical market (Exhibit 1 summarizes
some financial data for the company).

Bioco Spain
Bioco Spain was responsible for the marketing and distribution of Bioco’s product portfolio in
Spain. It contributed 0.6% of the company’s total turnover. Bioco Spain maximized its sales
values based on fixed transfer prices with the business unit that owned the company’s
manufacturing facilities, located mainly in the United States.
Bioco Spain’s sales force, which accounted for a large number of its approximately 200
employees, was responsible for making regular visits to key doctors in the medical specialties
related to Bioco’s portfolio in order to ensure that they knew, liked and, as a result, frequently
prescribed Bioco’s products to their patients.

Lempura
Lempura, one of Bioco’s best sellers in Spain, was a prescription-only drug sold in individual, self-
injectable syringes. The Spanish National Health Service (SNS) financed Lempura for patients
with prescriptions issued by doctors in the public Social Security system. If the drug was
prescribed by a doctor from the private sector, the patient was required to pay full price. As
such, Bioco could set its own price for Lempura patients with prescriptions issued by doctors
from the private sector, but they had agreed to apply a regulated price – the so-called Laboratory

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Retail Price (LRP) – for Social Security outpatients, who were financed by the SNS. The LRP for
Lempura syringes ranged from €33 to €667 per unit, depending on the mcg dose (between 20
mcg and 500 mcg). Lempura’s best-selling format in Spain was 50 mcg, which had an LRP of €67.
Lempura was primarily used to increase red blood cell counts in order to treat anemia in patients
with chronic kidney disease or cancer. It required refrigerated storage at a temperature of
between 3ºC and 6ºC to preserve its medical properties. While Lempura was not considered a
life-saving drug, its invigorating effects improved patients’ quality of life. Additionally, a number
of studies had shown that the use of Lempura decreased the need for extremely expensive and
aggressive alternative treatments (such as blood transfusions) and increased the effectiveness
This document is an authorized copy for the personal use of Mr./Mrs. Mariana Almeida, 2021-04-06

of other treatments, such as chemotherapy.

Unfortunately, Lempura was also famous for having caused several positive tests in doping
controls performed on elite athletes. Despite its rigorous prescription-only nature, it was
relatively easy to find websites offering the drug at prices anywhere from 10 to 20 times higher
than Bioco’s LRP.

Saint Gabriel’s Hospital

Saint Gabriel’s was one of the largest reference hospitals in Spain. With more than 1,000 beds
and over 8,000 employees, the hospital was able to perform nearly 40,000 surgeries a year.
Beginning in 2009, a decline in the Spanish GDP - a consequence of the economic crisis that had
hit the country - triggered the implementation of ambitious austerity measures meant to
achieve significant cuts in public spending. Health expenditure was no exception. As a result,
total spending at Saint Gabriel’s Hospital decreased in 2010 for the first time ever, and the
Ministry of Health wanted to see the trend continue in 2011 (see Exhibit 2). In the words of the
hospital’s general manager, “All of our departments will have to find ways of doing more, and
better, with less.”

The Hospital Pharmacy at Saint Gabriel’s Hospital

As head of the Pharmacy Department at Saint Gabriel’s Hospital, Monteagudo managed all of
the hospital’s drug purchases. The purchasing process involved a sequence of tenders (organized
by active ingredient and purchasing batch) to select pharmaceutical companies to supply the
hospital’s pharmacy, based on price quotes and service offerings. Like all hospital pharmacies,
the pharmacy at Saint Gabriel’s was a cost center designed to supply drugs to inpatients.
Successive health regulations, however, had forced the pharmacy to dispense an ever-widening
variety of drugs to outpatients as well, most of which suffered from chronic illnesses. The impact
this had on the hospital budget made it necessary to separate the accounting of expenditure at
the hospital pharmacy into two different categories: inpatient and outpatient. The evolution of
expenditure at the hospital pharmacy in both categories is shown in Exhibit 2.
The unprecedented levels of demand for outpatient dispensing faced by the hospital pharmacy
led them to invest in increasing their capacity. In 2007, the facilities were renovated – and
enlarged - to accommodate a small waiting room and three dispensing counters. Two of the
counters were designed for habitual use and one of them was meant to be specialized, dedicated
to first-time visits, where patients received information on the details of their treatment
(instructions on how to self-inject the syringes, for example, in the case of Lempura) and on any

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potential side effects. In practice, however, the three counters were used indistinctly both for
first-time and subsequent visits.
Beginning in late 2009, it was common to find long lines at the hospital pharmacy, which
occupied part of the hospital’s central corridor. Because the pharmacy was flanked by Radiology
on one side and Main Reception on the other it could not be enlarged any further to
accommodate more counters. Complaints from users, doctors, and orderlies were such a source
of embarrassment for Monteagudo and his team that, as a solution, they decided to increase
the quantities they dispensed during each visit that patient’s made to the hospital pharmacy.
This served to increase the time span between outpatient visits, thus decreasing the pharmacy’s
This document is an authorized copy for the personal use of Mr./Mrs. Mariana Almeida, 2021-04-06

workload.
In 2011, the hospital pharmacy’s database included 10,000 registered outpatients. Aside from
addressing outpatients’ doubts and comments, during each visit the pharmacy assistant at the
counter had to:
1. Verify the identity of the patient and confirm the prescription;
2. Check previously-dispensed quantities; and
3. Register, prepare and deliver the current quantities. In 2011, each outpatient was given
the equivalent of a three-month supply at each visit.
The service time for attending to an outpatient at the hospital pharmacy ranged from two and
a half to seven minutes, depending on whether it was a first-time visit. Five minutes per
outpatient was a reasonable average, widely accepted by Monteagudo’s team. The pharmacy
opened Monday through Friday from 8 a.m. to 4 p.m., 50 weeks a year. Most patients would
tend to visit the pharmacy after seeing a doctor at the hospital. As a result, 90% of arrivals took
place between 10 a.m. and 1 p.m., during the outpatient clinic opening hours.

Relations with Bioco

Monteagudo coordinated Saint Gabriel’s participation in a number of innovative projects. On
one hand, there were international research projects funded by the European Union, where
Saint Gabriel’s joined with other European hospitals in investigations designed to improve the
effectiveness of pharmaceutical treatments. On the other hand, Monteagudo also coordinated
internal projects aimed at improving the hospital pharmacy’s efficiency (like the recent SAP roll-
out, or the purchase of a monodose dispensing robot to helped reduce the average dispensing
time). Several of these projects had been partially funded by pharmaceutical companies. Some
of them, like Bioco, had also provided subsidies for medical studies and research performed by
Monteagudo’s team. This was possible because Monteagudo’s innovative vision was in line with
Bioco’s philosophy.
Sales of Lempura to outpatients at Saint Gabriel’s hospital pharmacy topped €4 million in 2010.
While Spanish law did not allow pharmaceutical companies access to data on individual patients’
patterns of use, members of Bioco’s sales force estimated that their sales corresponded to
approximately 1,000 outpatients with an average treatment regimen of 50 mcg of Lempura per
week. The sales force believed that Bioco had a 60% share (in mcg) of the outpatient market
with respect to similar drugs sold at Saint Gabriel’s. The policy at the Saint Gabriel’s pharmacy
was to keep a 15-day stock of Lempura on hand.

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Pharmaceutical Services in Spain

The Spanish National Health System (SNS) was the entity responsible for all of the structures and
public services dedicated to caring for the health of its citizens. The right of every citizen to
health protection and health care was laid down in the Spanish Constitution of 1978. The SNS
covered all of the health functions and services for which public authorities were legally
responsible, including pharmaceutical services.

The Value Chain of Pharmaceutical Services in Spain

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Pharmaceutical services gave patients access to the drugs that were prescribed by SNS doctors
(which were researched, developed and produced by pharmaceutical companies), through two
main types of dispensing facilities: retail pharmacies and hospital pharmacies. Each drug
commercialized in Spain would be assigned to a specific dispensing channel by the SNS (retail
pharmacies or hospital pharmacies). Drugs could not be dispensed simultaneously in both
channels. Exhibit 3 shows the value chain of pharmaceutical services in Spain.
Both types of pharmacies can be supplied through two different distribution channels (only one
of them applies for each specific drug):
 Full-line wholesale distribution. Carried out by companies that can cater to all pharmacies,
regardless of their size or geographical location, and that can supply every single drug
commercialized in Spain (~40,000 SKUs), regardless of the price or rotation. If the distributed
drugs are financed by the SNS, the margin for wholesale distributors is a regulated percentage
(7.6%) of the selling price (equal to the LRP plus the distribution margin), with a maximum of
€7.54 per unit.1 In general, these wholesale distributors are cooperatives owned by retail
pharmacies that associate together to increase logistics and purchasing efficiencies.2 Retail
pharmacies in Spain are regarded as private health facilities of public interest. They can only
be owned by individuals who have completed a bachelor’s degree in pharmacy, and they
cannot be part of a chain. As a result, Spain has one of the most extended networks of retail
pharmacies in Europe (fewer inhabitants served per retail pharmacy). Despite this fact, Spanish
wholesale distributors provided one of the best service levels in Europe (see Exhibit 4). When
dispensing drugs that are financed by the SNS, the margin of retail pharmacies is a regulated
percentage (27.9%) of the selling price (which equals the wholesaler selling price plus the
dispensing margin), with a maximum of €38.37 per unit.3
 Direct distribution through a logistic operator. This takes place when a laboratory hires a
logistics operator to take care of the distribution of some of its products to a limited
number of dispensing facilities (usually hospital pharmacies). Laboratories compete in
public auctions for specific batches of a limited set of products requested by hospital
pharmacies. They then contract the logistics operators, at their own expense, to make
the deliveries of those orders. Because it involves distributing just a few references to a
reduced network of dispensing facilities, the logistics operators are able to quote very
competitive prices. For example, Bioco paid its logistics operator a service fee of €2.75
for each unit of Lempura delivered to Saint Gabriel’s hospital pharmacy.

1 Spanish Royal Decree 823/2008.

2Among 54 full-line wholesalers operating in Spain in 2010, 75.8% of the market share was held by the 30 that were owned
cooperatively. (“Dossier de valor de la distribución farmacéutica en España. Aportación y costes,” Antares Consulting, 2001.)
3 Spanish Royal Decree 4/2010.

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In 2011, drugs in Spain were cofinanced by the SNS and the final user as follows:
 Prescriptions. Prescriptions written by SNS doctors and dispensed through retail
pharmacies were partially covered by the SNS.
 Pensioners, accounting for 60% of the prescriptions, received their prescribed drugs
for free.
 Non-pensioners had to pay 40% of the cost of their prescription drugs.
 Certain specific groups (HIV positive individuals, for example) received their
This document is an authorized copy for the personal use of Mr./Mrs. Mariana Almeida, 2021-04-06

prescription drugs for free.

 Hospital pharmacies. Drugs were free for all patients within the hospital: both inpatients
and outpatients picking up drugs from the hospital pharmacy were fully covered by the
SNS. As such, hospital pharmacies did not collect any revenue from outpatients: they
were cost centers financed by their hospital’s budget.

The Rapid Growth of Hospital Pharmacies in Spain

Spending associated with hospital pharmacies was one of the cost items that had increased the
most in the previous decade (see Exhibit 5). This increase could be explained by the fact that the
SNS had been rerouting an ever larger number of drugs to hospital pharmacies that had
previously been dispensed through the classical channel of wholesale distribution + retail
pharmacies. These drugs typically had a high selling price. By switching them to hospital
pharmacies, prescription, dispensing, and control of the drugs was contained within the hospital
setting.
On one hand, the SNS saved on the distribution and dispensing margins. By dealing directly with
laboratories, the SNS also obtained better financing conditions than with retail pharmacies.4
Finally, going through hospital pharmacies was often the only way to make sure the latest drugs
and innovations would be distributed in the Spanish market.
Spain was not a very attractive market for laboratories because the prices of drugs were
significantly lower than in other European countries (see Exhibit 6). It was risky for laboratories
to enter the Spanish market through the wholesale distribution + retail pharmacy channel given
the low prices. Essentially, it paved the way for parallel exports: Spanish wholesalers could
perform arbitrage by taking advantage of their lower purchasing LRPs when selling to
international pharmacies. With this in mind, the fact that the SNS required that Lempura be
distributed in Spain through hospital pharmacies was crucial to obtaining a 25% price discount
from Bioco with respect to the average in the rest of the region.

The Proposal
Monteagudo wanted Bioco to study the feasibility of implementing home delivery for the
Lempura outpatients served by the Saint Gabriel’s hospital pharmacy. The idea was that, after
the initial visit to the hospital’s pharmacy, new Lempura outpatients would receive monthly

4While the SNS committed to a 90-day payment period with retail pharmacies, it was not uncommon for laboratories
dealing with the SNS to have several hundred days of sales outstanding.

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deliveries at their homes. The deliveries would be performed by a logistics operator contracted
(and paid) by Bioco, who would coordinate the information exchange between Saint Gabriel’s
and the logistics operator.
Monteagudo believed that home deliveries would improve access to the drug for patients
outside the hospital while decreasing the workload (and hopefully the associated problems) at
the hospital pharmacy. The excessive volume managed at the hospital pharmacy, the insufficient
inventory control mechanisms and the fact that some outpatients would undoubtedly play
against the system made him suspect that a certain level of over dispensing had been
institutionalized implicitly. He hoped that the new distribution model using home deliveries
This document is an authorized copy for the personal use of Mr./Mrs. Mariana Almeida, 2021-04-06

would contribute to reducing that over dispensing, freeing up financial resources and creating
significant savings, which were desperately needed given the budget cuts that the hospital had
suffered. If the project were successful, Saint Gabriel’s Hospital would also be the leaders of a
true revolution in the Spanish healthcare system.
Moisés Arteaga was not very happy with the idea. Bioco’s logistics operator had been very
skeptical:
“You want us to distribute the syringes to outpatients without breaking the cold chain? That’s
insane! I’ll have to coordinate the drop-offs for every patient, create new routes, in addition
to distributing to an extended regional area with huge capillarity. If we even manage to do it,
it will be extremely expensive; no less than €25 per delivery.”
Arteaga knew that Monteagudo had presented the same proposal to a different laboratory –
though it wasn’t one of Bioco’s direct competitors - that was in charge of distributing some high-
value products (like growth hormones) to the hospital pharmacy.

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Exhibit 1
Bioco Financial Data (€ Million)

Selected Data From the Annual Report 2008 2009 2010

Selected data from the income statement
Net revenues 11,187 10,772 11,224
Cost of goods sold 1,775 1,475 1,719
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R&D 2,319 2,121 2,144

Operational expenses 3,162 2,953 3,111
EBITDA 3,932 4,222 4,251
Net profit 2,927 3,337 3,353

Selected data from the balance sheet

Total assets 27,286 29,281 32,286
Cash and marketable securities 9,456 9,883 12,905
Inventories 1,472 1,624 1,489
Equity and retained earnings 14,855 16,716 17,727

Source: Data provided by the company.

Exhibit 2
Saint Gabriel’s Hospital (€ Million)

*Data for 2011 is taken from the budget.

Source: Data provided by the company.

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Exhibit 3
The Value Chain of Pharmaceutical Services in Spain
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Percentages represent market share of drugs in euros (2010).

Source: “La realidad económica de la farmacia en España,” Grupo Mensor; and “Medicamentos y farmacias en cifras 2010,”
http://www.portalfarma.com.

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Exhibit 4
Comparison of the Capillarity of Retail Pharmacies and Service Levels
Provided by Full-Line Wholesale Distributors in 2009
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Source: “Medicine for Full-Line Wholesalers,” Roland Berger.

Exhibit 5
Growth of Spanish Public Health Expenditure and Some of Its Main
Components (Rolling Prices)

CAGR 2000 – 2009

Public health expenditure 8.42%
Public pharmaceutical expenditure 8.26%
SNS-funded prescription expenditure 7.24%
Hospital pharmacies expenditure 12.44%

Source: Statistical site of the SNS, Spanish Ministry of Health.

10 IESE Business School-University of Navarra