PHARMA FAMILIES
By Nils Pratley (May 2004).
Reproduced from MT magazine with the permission of the copyright owner, Haymarket Business Publications Ltd.

Every entrepreneur is supposed to have a different story to tell, but it's not true in the case of the British pharmaceutical distribution industry. The astonishing fact is that six of the most successful companies supplying medicines to Britain's pharmacies and hospitals are owned and managed by Kenyan Asians in their early fifties. It's a story of enterprise overcoming adversity. Nils Pratley examines the phenomenon.

All came to Britain in the late 1960s and early '70s, having been raised in relative - and in some cases extreme - poverty in Kenya. They achieved pharmacy qualifications in Britain generally by supporting themselves through college with menial part-time jobs. All then established their own retail pharmacy businesses before building much larger wholesaling operations. Now all are multi-millionaires, some worth more than £100 million individually.

You couldn't call them a Kenyan rat pack - for a start, most are far too shy of publicity - but they do see each other socially. They are all based in or near London and in the past have traded with each other; for the most part, though, they compete for the same customers.

There is no simple explanation for the phenomenon, except a shared cultural specialism in medicine, says Bharat Shah, whose Sigma Pharmaceuticals turned over £190 million last year. 'All of us have one thing in common - we are all from Kenya. When we were young and doing our O-levels in Kenya, everybody in the Asian community tended to do the same things. So if one person went into pharmacy, everybody did. The majority of East African Asians are not engineers or teachers; they are pharmacists or accountants.'

Shah adds that 'we all learned from each other and talked about failures and mistakes', which is understandable: they are leaders of an industry that often finds itself in conflict with the big pharmaceutical giants. It deals in generics - copycat versions of a drug produced after the expiry of a patent - and in parallel imports.

PARALLEL IMPORTS

The latter is more controversial, as it includes the latest patented medicines. A British parallel importer will buy the drugs in countries such as Spain, where wholesale prices are much lower, and repackage them for the home market. It's the same chemical compound, usually produced in the same factory; only the price is different.

Both categories are not only highly regulated but officially encouraged. The Government, after all, hardly wants to deter anybody who promises to reduce the NHS's drugs bill. It's the pharmaceutical giants that complain. They defend their patents until the last possible moment and argue that parallel importing diverts cash from the British science base. But they have never succeeded in eliminating the entrepreneurial opportunities. 'If I could have my time again, this is the business I would have gone into,' confesses one executive of a British pharmaceutical giant.

Navin Engineer's story demonstrates the possibilities, even though his firm, Chemidex, is one of the few generic specialists that has not also expanded into parallel importing. He was sent to London in 1969 at the age of 16 to live with his aunt, with £75 in his pocket. He worked in the Wimpy burger restaurant on Oxford Street in the evening and at weekends to support himself through sixth form and then the London School of Pharmacy.

On graduation, he took a job as a pharmacist with Boots. Already feeling the company was 'a little bit like the civil service', he was infuriated by the demand of a visiting area manager for a cup of tea at a moment when he was busy dispensing prescriptions. 'I made the cup of tea, but that night I went home and wrote a letter of resignation,' says Engineer. 'It was the best thing that ever happened to me.'

He set up his own pharmacy in Chertsey, Surrey, on the site of a former grocery store. He opened long hours, including Sundays, on the principle that 'your body doesn't decide to be ill when the shops are open'.

He expanded the business, even buying a former Boots store in Addlestone, near Weybridge. By 1999, he had 14 pharmacies and their value had increased after the government acted to prevent a free-for-all in the market by restricting the grant of new pharmacy licences. German group GEHE - one of three companies trying to consolidate the pharmacy market - came knocking. 'They kept on increasing their offer until it was irresistible,' he says. The final price was a cool £12 million.

Engineer chose to invest much of the proceeds in his much smaller wholesale business. He bought some small branded pharmaceuticals from big pharma companies, typically medicines turning over £2 million or less, and made instant savings by switching production to established factories in eastern Europe and the Far East.

Then he moved into generics, an area that requires specialist knowledge and a willingness to take calculated risks. Engineer reckons it costs between £200,000 and £250,000 and takes two or three years to develop a generic pharmaceutical. The first step is to identify the patent that is about to expire and then to make sure you do not infringe it as you develop a copy-cat version.

A patent lawyer alone can cost £50,000. 'You have to make sure you are on firm ground,' he says. 'I would rather spend £50,000 doing that than get a writ from somebody saying: "You have infringed my patent", and then you could get into a legal battle that could cost £500,000 or £1 million.'

There is also product insurance to be paid, plus the costs of proving the efficacy of the drug. 'If it doesn't work in the biostudy, then you have to start again,' he says. 'The regulatory authorities don't have half-measures. The regulations are so controlled that generic products are of a very high standard.'

The hurdles may be high, but Chemidex now has 42 generics. They include treatments for gout and depression, an antibiotic for anthrax and even a generic version of the famous Prozac. They all contributed to profits last year of £9 million - not bad for a wholesaling business that was originally subordinate to Engineer's retail pharmacies.

FROM RETAILING TO WHOLESALING

Most of the other Kenyan Asians made the switch from retailing to wholesaling much earlier. Shah sold two of his three pharmacies in 1980 and set up Sigma two years later in the back of his remaining shop in Watford. The big boost for the generic market came in the mid-80s, he says, when the government effectively banned the NHS from prescribing famous drugs such as Valium and Benylin, and insisted that it use cheaper generic versions. General practitioners were encouraged to switch their systems to prescribe drugs by their generic medical name rather than the brand name.

The effect on prices when generics appear can be swift. A few years ago, Zocor, a statin for lowering cholesterol, was reputed to account for £250 million of the annual NHS drugs bill. In its branded, patented form, the drug cost more than £30 per prescription. When generics started to appear, the NHS immediately halved the price it was willing to pay. With the arrival of more generics, the price has at least halved again. It is an industry where the costs of production are low and getting lower.

By the mid-90s, Bharat Shah (Sigma) was moving further up the supply chain. 'It got very competitive,' he says. 'We decided not to be just a trader, but to go into manufacturing. We got licences for popular generics and got the products manufactured outside western Europe - places like Turkey, the Middle East and India, where the cost bases are very low.

'The big problem was that most of the factories were not approved for Europe, so we did a fair amount of work to get two or three approved for the UK. That was the big breakthrough - we could compete with the market.' Sigma now has access to about 100 generic licences, with products ranging from antibiotics to cardiac treatments.

After an early legal scare, Shah was wary of getting into parallel importing. 'We were taken to court by Glaxo in 1986, but we were much too small to fight a multinational like that and we backed off,' he says. 'Indeed, we backed off to such an extent that we didn't go back into parallel importing until 1993-94, when that market was expanding so much.'

It has been boom time ever since for parallel importers. It is an industry that operates on the simple principle of buying a medicine in a country where it is sold cheaply and selling it in a country where it costs much more. Spain and Greece are prime examples of cheap countries; Britain, France and Germany are expensive. Transport costs are usually tiny - most parallel importers just use an overnight freight service. Then there is the relatively straightforward process of repackaging for the British market, which usually means little more than translating the patient information into English.

PHARMACEUTICAL PRICING - A MINEFIELD

The Medicines & Healthcare Regulatory Authority, the successor to the Medicines Control Agency, acts as regulator, overseeing the licences to assemble in English. 'Prescription drugs in some European countries can be as much as 80% cheaper than they are in Britain, or as little as 15% to 20% cheaper,' explains Shah. 'Pricing is a minefield that only the multinational pharmaceutical firms understand.'

Minefield is the right word. The bottom line is probably this: the drug firms recoup their research costs where they can and from whoever can afford it. Prices of patented drugs in the US are the highest in the world. The pharma giants still lobby furiously to stop cross-border trading, but they are losing the fight.

In Britain, a trade body of the largest parallel importers called the British Association of European Pharmaceutical Distributors handles the legal battles on behalf of its members. Five of its 13 members are companies that are owned by Kenyan Asians, and Ravi Karia of Chemilines and Bhikhu Patel of Waymade sit on its council.

'Parallel imports and generics have helped the NHS,' insists Bharat Shah (Sigma). 'When the NHS talk to us, they like us and support us. They realise that the generics boys have done a sterling job in terms of reducing the NHS drugs bill. And parallel importing saves them about 10% on their drugs bill.'

For the future, Sigma plans to enter the French market - 'France is where Britain was in 1985,' he says. At Waymade Healthcare, the largest of the Kenyan Asian firms, Vijay Patel is even making a tentative push into drug development. It seems that the extraordinary growth story of these six companies has a long way to run yet. 'I don't think I ever envisaged that our family business would ever get to be this big,' confesses Shah. 'It's in the Asian blood that we would work all hours of the day if it gives us the return, so it grew by default, really.'