Chilean Medicine

Latin Trade, Nov, 1998 by Greg Brown

From a strong home base, LabChile expands throughout South America.

IN THE BIBLE STORY, A SKINNY teenager named David proved a well-flung stone can fell a Goliath. Does plucky Chilean drugmaker Laboratorio Chile SA. (LabChile) have the same chutzpah when it comes to deep-pocketed pharmaceutical foes?

Until the time Asia went bust, LabChile had its swinging arm limber and at the ready. Already a leader in Chile--at 12.2% of sales last year--the publicly-traded firm took on Argentina's overcrowded pharmaceutical market through its Laboratorios Armstrong unit and won a respectable 3.1% of the pie, seventh in the field. It didn't hurt that Argentines spend heavily on medicines, reimbursed by generous insurance policies.

LabChile, which has traditionally forged its strong presence in Chile through sales of generics, was equally successful in Argentina, where such no-name brands are virtually unknown. They did this by diversifying from its generics base. Over the past five years the company introduced a host of off-patent branded products that now represent 40% of sales. LabChile also favors less restriction on over-the-counter sales in Chile, an area where a branded product with plenty of advertising could become a cash cow.

In the first quarter of this year, foreign operating profits beat in-country operating profits for the first time, while Argentine sales alone brought in 44.1% of revenues. LabChile has advanced, too, in Peru's retail drug market through its Newpharm S.A. unit, and it has begun institutional sales in Colombia and Brazil, two key future retail markets.

Buoyed by this success, LabChile last year was on the brink of floating stock in its Argentine subsidiary when the bubble burst across the Pacific, sending potential investors hightailing to safe havens. Saddled with debt from its purchases in Argentina but reporting record-breaking sales, the company now faces a somewhat rockier road to the top. Board Vice President Jorge Uauy Salvador, however, says Laboratorio Chile can--and eventually will--extend its reach abroad. "LabChile's mission is to be a fundamental force in the Latin American pharmaceutical market, and at the same time, provide returns for our investors," he says.

Consolidated sales totaled US$179.9 million last year, up 61.9% from 1996. In the first quarter this year, sales were $46.7 million, up 57.7% compared with the same period last year.

LabChile's four plants in the Southern Cone, including the 1993 buyout of the Chile operations of U.S. drugmaker Pfizer, employ 1,450 workers whose output is sold in 18 countries.

The company's recent stellar growth has come despite all kinds of rumblings abroad, from Mexico's Tequila effect through the Asian storm, Uauy says. Four years ago, LabChile had no more than $25 million in capital, some 8% or 9% of the market in Chile, and exports that were one-tenth of what they are today, he notes. "Today, LabChile capital exceeds $100 million: we have 3% of the Argentina market, whose retail market is seven times the size of the Chilean market: and $12 million in exports. We have demonstrated in those four years, during very difficult times, that we have the capacity to grow.

Analysts agree with Uauy to a point: Optimism is great, but LabChile's ability to secure new markets could be hobbled by slower growth across Latin America. However strong LabChile's efforts in the bigger markets like Brazil. much will depend on finding new customers with money to spend.

"They are perfectly capable of doing this in a slightly longer period of time." says Manuel Camiruaga. an analyst at Santander Investment in Chile. "But if they' are betting on growth in Latin American countries, they will have to wait for those markets to grow."

LabChile is putting its chips on chutzpah. Making the drugs isn't the tough part; selling them well is the key to unlocking profits, no matter what size your balance sheet, says Uauy. "Our great success has been the result of not attacking each market with a single plan. We've gone to each market with what that market needs." In short, a well-flung stone. The big guys better learn to duck.