Medicine Man

By Nikki Mandow

Tuesday 1st June 2004

In 1998, a dramatic change in the way the government purchases medicinal drugs saw Douglas Pharmaceuticals lose half of its local business. Founder and owner Graeme Douglas was down, but not out. Less than six years on, he heads a $100 million-plus company exporting 60% of its production. Nikki Mandow tracks his cure

Graeme Douglas is 75 this year, but shows no signs of bowing out of the family business he founded 37 years ago. He's still passionate about it. It could be something to do with the company's 41% growth in Europe last year, and the anticipation of soon entering the vast and lucrative US market. It could be the fact he's looking for acquisitions and is set to sign off on a $10 million-plus niche manufacturing facility to feed the growth. Or it could be continuing satisfaction at having beaten a New Zealand drugs purchasing system that's all but destroyed home-grown manufacturing.

Douglas Pharmaceuticals was founded in 1967 when Graeme Douglas's previous business, a Te Atatu retail chemist, ceased to be a challenge. An entrepreneur at heart, under New Zealand laws he couldn't own more than one pharmacy, and at a time when chemists made most of their own pills and potions, manufacturing was a logical extension. When his first product, an own-brand cough syrup, was successful against the expensive UK competitor, Douglas set about looking for niche other products to make or import under licence.

From these modest beginnings Douglas Pharmaceuticals has grown into a company with 320 employees and $100 million annual turnover - this, in a market dominated by large multinational pharmaceutical companies. The ability to be nimble and responsive against such heavy-duty competition is a common advantage for small, family-owned businesses. But Douglas Pharmaceuticals' development over nearly four decades also owes plenty to its founder's ability to see and exploit a commercial niche, capacity to inspire staff, and sheer tenacity in the face of the potentially disastrous loss of half its domestic trade in the late 1990s.

Bitter tonic
In hindsight, the upheaval in New Zealand's pharmaceutical industry was foreseeable. But at the time no one saw it coming. Certainly not Graeme Douglas. By 1998 the company was turning over $70 million a year, up from $2 million when he sold the Te Atatu chemist's shop in the late 1970s, and $25 million in 1988. At that time nearly 90% of the company's sales were domestic. Douglas, which specialised in generic drugs (copies of branded drugs whose patents have run out) was price-competitive and did well. Buoyed by its success, the company borrowed from the bank and invested in plant, opening manufacturing facilities in 1996 and 1998.

But New Zealand's pharmaceutical spend was out of control. In the years before 1993 the government subsidised just about any drug and the industry took advantage with fat margins. Then, in 1993, drug buying agency Pharmac was established with the brief to cut drug spending. Pharmac was remarkably successful, slashing annual drug budget increases from nearly 20% to under 5% in the first five years. Douglas pulled its belt tight but Graeme Douglas wasn't unduly worried. His was a good operation, and generics did well out of the price squeeze.

However, in 1998, just as Douglas was commissioning its new manufacturing facility, Pharmac embarked on a tough new buying strategy. Instead of subsidising a variety of similar drugs from different manufacturers, the agency decided each drug would be put out to tender and the cheapest seller would get the contract.

For the first time, Pharmac actually cut the annual budget, and Douglas won very little in the tenders. Competing against huge multinationals with vast production runs, or one-man-band generic importers with very low overheads, a domestic supplier with a small production base had virtually no chance. Nearly 50% of Douglas's domestic business disappeared overnight, and the rest has gradually been whittled away in the intervening years. Douglas lost its last major Pharmac contract, a $3.7 million a year morphine deal, late last year. This year New Zealand's only locally owned manufacturer has just ten drugs on the Pharmac list, worth about $10 million, out of the total $566 million Pharmac spends.

All pain
Stately, white-haired, immaculately dressed, Graeme Douglas is a gentleman. Former employees have nothing but good to say about him. Present employees love him. Competitors respect him - Alister Brown, chief executive of Merck Sharp Dohme calls him a "gentleman ... he has a fine plant and world-class procedures." He's an entrepreneur of the old school - you fought hard, but you fought fair. Trouble is, Pharmac is not legislated to fight fair. Exempted by special legislation from Commerce Act provisions to control market dominance, Pharmac has the power to buy drugs virtually how it likes. Not surprisingly, it's hated in the drug industry. Douglas, for instance, accuses Pharmac of reneging on a $10 million contract they thought was signed and sealed - and of giving their pricing information to rivals. (Pharmac says the deal was always subject to board approval and it never agreed to keep Douglas's figures confidential.)

And when Douglas brought an expensive anti-dumping case against New Zealand-based, German-owned, rival Pacific Pharmaceuticals - and won - Pharmac was still able to award the contract to Pacific at the original price.

For its part, Pharmac estimates the impact of its measures will make this year's taxpayer-funded drug bill $570 million lower than it would have been had its controls not been in place.

But its buying strategy is widely accused of virtually destroying New Zealand's pharmaceutical R&D and manufacturing base. In 1997, 15 companies researched and manufactured medicines in New Zealand. Now three do, of which Douglas is the only New Zealand-owned business. (At the same time, Australian government assistance for its drugs industry has seen pharmaceuticals grow to Australia's second largest category of exported manufactured goods, after vehicles.)

Now for the gain
Other men of 69 faced with the situation Douglas was confronted with in 1998 might have hung up the towel, sold out to a foreign competitor (and there has been no shortage of offers) and adopted a life of leisure. Douglas has always been a track and field athlete and, until a recent injury, still competed at veterans' level. But it isn't in his nature to give up. Instead, he set about transforming his company into an export success. With son Jeffrey, who joined the family business aged 19 and is now a director, head of European operations, and heir apparent, Douglas pondered where to focus. Asia (where it was already making sales) didn't have much potential for expansion (too price conscious, too many cheap competitors). So it decided to go for Europe.

It was a tough task, but it worked. Export sales, which in 1998 were about 12% of the total, rose to 22% in 2001 (though total sales were down from $70 million to $64 million over the period). But in the following three years export growth has been astonishing. Douglas, now a $100 million-plus company, is expected to grow to $125 million in the year to March 2005, and exports make up 60% of sales. Around 70% of what the company manufactures is exported. Exports grew at 41% last year and are expected to grow at 24% in the 2004-05 year. Cumulative average export growth for the 1998-2004 period was 44%. (Profit is a carefully guarded secret, but is thought to be growing considerably as the company loses its reliance on the cut-throat New Zealand market and following the introduction of more "corporate-style" accounting systems over the last year.)

This level of export success in any area is impressive; in pharmaceutical exports it is almost miraculous. The bureaucracy involved in licensing pharmaceuticals - even generics - in Europe is immense and, despite EU harmonisation, the rules in each country are different. Getting a licence to sell your product in a single European country can take between two and four years, and that's after the nearly two years it can take to get New Zealand Medsafe registration.

Douglas is now selling five products in Europe (see "Doing drugs" below). And after four years, it is well on the way to getting registration for some of its products in the world's biggest drug market, the US (where there's a different licensing system again).

So what's been the secret of success? One of Douglas's strategies has been to concentrate on hard-to-make niche generic drugs. Over the last three years it has developed particular manufacturing expertise in dangerous drugs that need careful handling during production to avoid infecting either workers or other products (see "Bakers in spacesuits"). The company keeps a close eye on which international patents are due to expire, ignores the "blockbusters" (the ones the big generic companies will seize on) and concentrates on a small number of difficult drugs. With one of the three best manufacturing facilities in Australasia, the company is also trying to move away from importing drugs and increase the amount of products it makes itself, says R&D director Andrew McLeod.

Douglas's other major advantage is its lack of bureaucratic structure. Until recently, when a board of directors was set up, all major decisions were made by Graeme and, later, Jeffrey Douglas. They are still key. And because Graeme Douglas is also the only shareholder, staff say they can present a well-researched, logical argument and, likely as not, get a decision on the spot.

Take Viagra, the Pfizer impotency pill, which Douglas brought to New Zealand under licence in 1998. Mike Siermans, at that time Viagra's marketing manager in New Zealand, had only been at Douglas about four months when he was faced with the daunting task of telling his bosses he believed their planned marketing spend was woefully inadequate. "I met them and asked to double the marketing budget from $600,000 to $1.2 million. It was a big brand name and I believed to get men to go to their doctors to talk about sex problems was going to need a big consumer campaign, including television advertising. I had done a fair bit of analysis, but because of the unknown nature of this new product there was a lot of faith and gut feeling."

There was stunned silence, Sierman remembers. Spending $1.2 million on a single marketing campaign was an enormous gamble for a family-owned business. But after two hours discussion Graeme and Jeffrey Douglas made the decision: yes, Siermans could have the money. The gamble paid off - Viagra made millions of dollars of sales in the first year.

Local hero
Business success has come from making - mostly - good decisions. But the mana of Graeme Douglas involves more than commercial nous. In particular, he has a passion for New Zealand and for Waitakere City, where he lives and is the second largest employer, after the city council. Despite decreasing domestic business and little commercial benefit from local sponsorship, Douglas is a major sponsor of, among other things, the new Waitakere Stadium, the annual Books and Writers' Festival and the Royal New Zealand Foundation of the Blind. "He's a true renaissance gentleman," says Waitakere City's arts manager Naomi McClary. "He's widely read, very well informed, interested in politics, sports and the arts. He's extraordinarily generous to the city. His premises [that would look less out of place in Silicon Valley than Henderson] are elegant, his staff are charming."

Even at 75, Graeme Douglas is still very much the lynchpin of his company. With Jeffrey often overseas dealing with the export side of the business, most staff have more contact with father than son. He still walks round the company at least once a week and talks to all the staff by name. Many still call their boss Mr Douglas and an old-fashioned calm and courtesy pervades the buildings.

"Being at Douglas is all-encompassing," says a staffer. "You are part of the family and you work extremely hard for the family. It's Graeme's culture, part of the mana of the man."

Which is why, in 2004, the company is at a crucial stage. As a large private company, Douglas is rare in New Zealand. It has grown quickly in the last couple of years and if it is to grow more, particularly in the US and Europe, it must become more corporate, staffers say - and that possibly means more impersonal. "People work for Graeme, or they work for Jeffrey," says Mike Siermans, who left the company in December 2003. "In the future they will work for Douglas."

Are the directors up to making the change? "They have had bigger challenges in the past," Siermans says, who counts himself as one of Graeme Douglas's biggest fans. In fact, the shift has started. The company established the position of chief financial officer about nine months ago, when the board felt there was a need for tighter fiscal management. Still, one feels corporate-ness goes against the grain at the top of the company. The key, says Jeffrey Douglas, will be to keep bureaucracy out. "We need to adopt more corporate disciplines as we grow and become more export-orientated. But both Dad and I are keen to avoid a rigid corporate culture and a lot of bureaucratic nonsense."

Nine months into the job, chief financial officer Rod de Spong says he has instigated more accountability over spending controls, with good effects on profitability. But de Spong says Graeme Douglas is not the sort of man to instigate short-term strategies to extract value.

Cultural change will take time, and that can be frustrating. "Eighty percent of our margins and potential are in Douglas Europe," says the company's European supply chain manager Sean Stewart. "But very little of our resources are going there. I believe we need to make structural changes."

Loyalty to markets and staff (Douglas doesn't believe in making staff redundant) may be one reason for the continuing focus in New Zealand, staff say. There's also a problem of recruitment. One side effect of Pharmac's policies is to push almost all pharmaceutical expertise overseas. Jeffrey Douglas, who's led the charge to recruit quality staff, says it's one of the company's biggest potential problems.

Another question is what happens when Graeme Douglas has to give up running the company. His are big shoes to fill. His successor isn't in question; son Jeffrey has worked for Douglas for more than 20 years and will take over. But can he lead the company? The younger man may not have the charismatic charm of his father and, staff say, he has different people management skills. Still, colleagues believe he is a shrewd, experienced businessman, prepared to take risks and with many of the same ethics as his father.

Not that Graeme Douglas has any intention of handing over control right now. He's much more interested in talking about future plans than on bowing out. On the cards for the next couple of years is a launch in the US market, a $10 million dollar-plus stand-alone containment facility for its difficult drugs, and a manufacturing acquisition, possibly in the ultra-sterile injectable drugs market.

"I have suggested to Dad he takes the odd day off," Jeffrey Douglas comments, away from his father's hearing. "He hasn't taken me up on that."

The Douglas dictum

Be conservative about debt. Money is cheap at the moment, but that can change. Douglas is debt free

Own your own buildings. It's just another bureaucratic layer if you have to ask the landlord every time you want to move a window

Don't make people redundant. If you take on a good person and they do a good job it's unpalatable to say "it's down the road for you" just because you haven't made enough money

Tell your staff what you're doing

Walk around. A lot of people like working for a family company so it's good for morale for people to see you are interested in what they are doing and who they are

Praise staff when they do a good job

Never give up, even when the solution to your problem seems particularly radical. For example, in the late 1990s Douglas found himself at a commercial disadvantage because New Zealand's intellectual property laws didn't allow companies to start development on a generic drug until the patent had expired. The answer: Douglas set up an R&D facility in Fiji

Don't get hung up on cool science and forget practicalities. Douglas's revolutionary burn membrane Zenaderm flopped because it needed changing twice a day and hospitals didn't have enough money or manpower. Douglas now spends a lot more time evaluating business opportunities

Grow. If you don't have growth, you won't keep good people. But steady growth is easier to handle than dramatic growth - and requires less cash

Copycat cures
Generics manufacturers are seen by many as the poor cousins of the pharmaceutical industry. Instead of making cool, innovative drugs, they wait until a patent has expired and just copy from the innovators. Actually it isn't as easy as that. Patents aren't like a recipe - a list of ingredients and instructions. Sometimes a drug company will simply patent the active molecule, but not detail how it's made into a tablet. At other times there's a list of ingredients but nothing about how much of each is needed. Even when you've painstakingly taken the original drug apart and made the generic drug, months of testing are needed to prove the manufacturing process is good, the drug works in the same way, and there won't be any hiccup for someone changing from one to the other. Often, regulatory requirements have changed in the time between the original drug being registered and the generic hitting the market some years later, and the authorities can insist on changes.

Take Douglas Pharmaceuticals' most successful product, the powerful acne drug isotretinoin. It took Douglas eight years to develop the drug (plus a further two to license it). For a start, the innovator, Roche, had no "formulation patent" to tell Douglas how to make it. In addition, because the final product is a soft gel capsule, the oils, waxes and fats used to make the capsule format all melt together during manufacture, making it difficult for Douglas to tell what mixture of ingredients was used and even more difficult to replicate it. Also, with isotretinoin, Douglas was working with a difficult, sensitive and unstable main compound. (Of course, the sheer difficulty of making the drug was also Douglas's marketing coup. Other drug companies shied away from the problems and even though it took Douglas ten years to get the product to market it still had a significant headstart in the European market.

Douglas is also making small steps into the so-called researched medicines (original drugs) scene in terms of working with New Zealand scientists to help them make the molecules they have developed into workable (and therefore saleable) medicines. Douglas staff point out that in the New Zealand biotech scene, there has been precious little to show for the millions pumped into "original" research companies. "So many people have a great molecule, but it fails because they don't have the expertise to turn it into a great product," says Douglas R&D director Andrew McLeod.

Now Douglas has teamed up with two New Zealand research projects (one from Lincoln University and another, Antipodean, being driven by former Roche scientist Ken Taylor). Douglas's role is to help the scientists formulate and develop their drugs. In the Antipodean case, Taylor is hoping to go to clinical trials for his neurological drug (called MS010 at present) next year, using Douglas's formulation. At Lincoln, Professor Roy Bickerstaffe is leading a team including Douglas, Canterbury University, and a Japanese company that is the second largest eyedrop manufacturer in the world to develop an eyedrop to inhibit the development of cataracts. "Douglas is a breath of fresh air," says Bickerstaffe. "He's a gentleman with an eye for the future." McLeod sees collaboration between New Zealand companies as one way to help rebuild the pharmaceticals industry in this country and attract capable staff.

Bakers in spacesuits
Making pills is not much different from making bread. You weigh the dry ingredients, mix them together in a large bowl with liquid to make a dough, and then form the dough into the different products you need.

But one difference between bread and medicines is many of the ingredients that go into making drugs are powerful, scary chemicals that could harm, or even kill, the "bakers", the customers or, potentially, the people living in the surrounding area.

However safe your operation is, dust from the dry ingredients flies about during the mixing process and every surface of the equipment gets covered. And, unlike bakers who can put a "may contain traces of nuts" disclaimer on their products, you can't put "may contain traces of really scary drug substance" on your boxes of paracetamol. You just have to make sure residues from one drug don't contaminate another. You have to make sure your manufacturing staff don't get sick from breathing in drug fumes. And you have to make sure nothing escapes from the plant.

Most of the pills Douglas Pharmaceuticals makes fall into two basic categories: drugs with scary ingredients, and drugs with really scary ingredients. What varies between the two categories is the level of protection you need to give workers, customers and locals. Walk round the Douglas plant and you see many of the manufacturing workers wearing what looks like space suits with air packs on their backs, or tubes connecting them to external air supplies through the ceiling. That's to ensure they don't get any chemicals on their skin and that their breathing air is filtered or from an external source. Douglas's airconditioning system is like something out of Star Trek (many rooms have individual systems). And to stop cross-contamination? Well basically it's a question of cleaning, cleaning and more cleaning.

Imagine if each time you used your car you had to take the whole thing apart, clean every single piece until it gleamed like new then put it together again. That's what happens at Douglas. When they move from making one drug to making another all the equipment has to be disassembled, cleaned and put together again piece by piece, down to each individual nut and bolt. Two hours of mixing might mean a full day's cleaning. And that's with the scary drugs. With the really scary ones, cleaning the equipment can take a week and a half.

Part of Douglas's expansion plans includes spending over $2 million converting one part of the factory into a second "containment suite" (where the really scary drugs are made) so as to reduce the number of drug change-overs. Later - perhaps in 2006 - the company hopes to build a stand-alone $10 million-plus containment plant where purpose-built rooms and state-of-the-art automatic self-cleaning equipment should allow Douglas to reduce cleaning times for drugs produced in containment to two days. This, combined with the additional capacity, means Douglas should be able to increase production of its ten containment drugs tenfold.

Doing drugs
Douglas's top-selling medications in Europe

isotretinoin (acne)

ethinyloestradiol/cyproterone (acne)

clozapine (anti-psychotic - schizophrenia)

budesonide (hayfever)

azathioprine (immunosuppressant)

Among its big sellers in New Zealand are a few familiar names, including the contraception pill Estelle and skin treatment Pinetarsol, as well as a range of over-the-counter medicines, nutraceuticals and skin treatments

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