Two Swiss Middlemen Wage Battle for Frontier Asian Marketby
Zuellig, DKSH dominate drug distribution in emerging Asia
Frontier markets Myanmar, Vietnam pose logistical challenges
Walk into a hospital in much of Asia and chances are high that a company with Swiss roots delivered the drugs on the shelves.
Between them, Zurich-listed DKSH Holding AG and closely held Zuellig Pharma Ltd. command vast drug distribution networks in more than a dozen pharmaceutical markets spanning from Indonesia to Cambodia. For decades, the two have sought to be the distributor of choice for big drugmakers in emerging or smaller countries in the region. They have built up workforces with thousands of employees and together rake in $15 billion in sales a year from the pharma industry.
Now the two rivals are becoming key to the next big market share grab by the world’s biggest pharmaceutical companies such as Switzerland’s Roche Holding AG and France’s Sanofi. With price pressures mounting in the U.S. and China slowing, these players are pushing into frontier pharma markets from Myanmar to the heartland of rural Thailand, where demand is surging but infrastructure is still rudimentary.
With good reason: Myanmar’s middle class is expected to double over the next few years, while South East Asia as a whole offers another 600 million consumers -- a new demographic able to spend on health-care.
Some of these economies are volatile economically and politically, and drug distribution can involve braving floods or natural disasters in isolated rural areas. The task of overcoming such obstacles is increasingly falling to distributors like DKSH and Zuellig as Big Pharma outsources delivery and even marketing and sales to the two firms.
“They rely on us because we take the headache away,” said John Davison, Zuellig Pharma’s chief executive officer. Zuellig is projecting double-digit growth in revenue this year aided by a roster of clients who range from GlaxoSmithKline Plc to Novartis AG and Pfizer Inc.
Zuellig Pharma had $10 billion in sales last year generated by its 10,000 employees across 12 countries in Asia. (The company was founded in 1922 by Frederick Zuellig who moved to Manila from Switzerland. Despite the Swiss antecedents, it today has headquarters in Singapore.)
Andrew Frye, the head of DKSH’s health-care unit, which kicked in about 4.97 billion Swiss francs ($5.1 billion) in sales last year, recalls walking into his new job five years ago and being taken aback despite twenty years in the pharmaceutical industry. In 2011, he watched his team deliver medicines for customers during some of the worst flooding in Thailand. “People were delivering drugs by boat,” Frye said.
DKSH was founded as a trading house more than 150 years ago to help European companies that didn’t have the resources to staff Asian markets. The distributor’s overall businesses include marketing consumer brands and it’s had success building up skin-care products like Nivea in parts of Asia. But its health-care operations, which are mostly located in Asia, now account for about half the group’s total revenue and Frye is in charge of 9,600 people.
As incomes rise, spending on health-care is projected to grow more than 20 percent per head in markets such as Thailand and the Philippines and more than 50 percent in Vietnam and Indonesia, according to a November 2015 report from the IMS Institute on Healthcare Informatics. Reaching independent pharmacies, hospitals, clinics, and mom-and-pop shops scattered in far-flung corners is boosting DKSH’s growth in Myanmar and Vietnam, according to Frye.
Even as the two companies ramp up their presence in Asia, they are poised to face off with smaller local, and other, rivals.
In China, Zuellig sold its local unit to Ohio-based Cardinal Health for $470 million in 2010.
Growing in China required significant working capital funding and at the time, Zuellig Pharma wanted to focus its investment and resources in South East Asia, Hong Kong and Taiwan.
While the two distributors don’t operate in some of the larger Asian markets like India or Japan, they do have operations in the financial hubs of Hong Kong and Singapore.
“I don’t think growth will ever be the problem,” Davison said of Asia. “The challenge is delivering on that growth. Sometimes people can have unrealistic expectations of what emerging markets can deliver.”
In particular, there is the difficulty of distributing drugs in tropical climates. Because drugs are evolving to contain more high-value active pharmaceutical ingredients that have shorter shelf lives and strict requirements, temperature control is essential, according to Davison.
Among the products that Zuellig has developed is the eZCooler which extends the holding time of temperature-sensitive products from two days to five days by using vacuum insulation panels and other materials. In sweltering Bangkok, in one of the cold rooms in Zuellig Pharma’s warehouses, employees don ski jackets while they pack and track drugs, and put medicines into inventory. More than 90 percent of all vaccines require a temperature-controlled cold supply chain that ranges between two to eight degrees Celsius, according to Davison.
Ultimately, the idea is to be like a brick-and-mortar equivalent of Amazon.com for drugs, an all-purpose platform for distributing drugs in Asia that includes sales, marketing and product registration services, Frye said.
“The next fifty years will be about how well the global pharma companies are able to crack Asia, Latin America and Africa, ” said Davison. “That’s what we’re paving the ground for.”