President and Managing Director Germán Ramírez explains the competitive advantages and security assurances that give Farmacias Cruz Verde the edge in Latin America’s health sector, and what’s in store in the near future for the company and Colombia.
According to the IMF, Colombia is in the third place when analyzing the economies in Latin America that grew the most in 2014. This year, despite being affected by the price of oil, it is estimated that it will be the economy that will grow the most in Latin America. What is your assessment of the Colombian economy at present?
On balance, the country is experiencing good times despite the oil crisis. In Colombia, after the crisis of the late 19th century, there was a restructuring of the country model.
The new vision that was adopted is now paying off. Furthermore, we are betting on the signing of the peace process, which will allow us to increase this performance.
On a personal level, I returned to the country two years ago, after having spent 15 years abroad. From outside I always kept an eye on what was happening in the country and I chose, consciously, this great moment to return.
Colombia being a major producer and exporter of oil, its growth is obviously affected by the fall in oil prices. What sectors do you think will have to invigorate the economy?
Here, industry has developed beyond oil; Colombia is no longer a net exporter of natural resources. The oil sector has helped the economy, but not to the point of subsidizing it, as in the case of Venezuela.
There are opportunities that could be the fronts for the Colombian economy to strengthen and follow in the path of development. First, infrastructure.
The country’s geography makes it more complex to be competitive in terms of exports and development. We are behind in infrastructure development because, although as regards roads there is a process of renovation, we do not have well developed railways, or good navigability of the Magdalena River, which crosses 80% of the country and, although some works have been done, we still lack airport infrastructure.
Secondly, the financial sector. The inflation here is controlled and we have an established policy of free trade.
And finally, more education is indispensable for boosting the economy further.
One of the topics we find interesting for interviewees to develop is the fact that the OECD has invited Colombia to be a member. What do you think Colombia can bring to this organization? What can the country learn from it?
Colombia in the last 15 or 20 years has been strategically partnering with different organizations. The free trade agreement with the United States, the Pacific Alliance, and the policy of economic opening in the ‘90s have positioned Colombia as a country with a free market model.
The country can be thought of as the successor of the Asian tigers and it is part of the group of large emerging markets known under the acronym CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa).
To the OECD, we believe we can provide the experience of having followed clear guidelines and having maintained a continuity of state policies beyond the different governments that have come and gone.
I think this sets an example. Upon entering the OECD, Colombia will take another step in this process of inclusion in the radar of the world.
The Minister of Health and Social Protection, Alejandro Gaviria Uribe, said the budget for the sector should increase by at least 7 percentage points of the GDP (at this time it is 6.5), which means an increase of about 3.5 billion Colombian pesos. What is your assessment of this statement and what priorities would you point out as regards health?
In Colombia there is universal coverage, and health is a fundamental constitutional right. The Colombian health system is one of the most advanced in the world and has no reason to envy those of developed countries like the United States or Canada.
It has evolved beyond the reality of the country, which does not have the necessary infrastructure for the growing health needs of the population.
While some consequences of this are that some things go on being done manually or with systems that are not interconnected, the health system itself is good.
I was in the Pharmaceutical Forum of the National Business Association of Colombia (ANDI) and I had the opportunity to listen to the Minister.
He pointed out that the model is successful and it is being replicated in other countries. The fact that the percentage points of GDP allocated to health will be raised is very good, since it will allow maintaining and improving the coverage and attention to citizens as this is a system backed by the state.
The Minister also said that “given the current situation of devaluation we believe it deserves a review of prices” to compensate importers. What do you think?
First, we must distinguish the different links in the sector. There are importers, i.e. laboratories, insurance companies which include hospitals, clinics and all health care providers and there are retailers.
The laboratories, which are the importers, are likely to be affected by devaluations of the peso against the dollar but they have the largest margin of profit of the entire chain. Insurers and retailers, like us, have a tight business.
Our profit margins are really low compared to those of the laboratories, who, because of their competitive advantages or their possibility of premium price, have a more solid and profitable financial structure.
I think they can withstand a distortion of this type, which we hope is temporary. I’m sure it would not be desirable to move the impact to the rest of the chain, as this may end up affecting the overall model and, therefore, this can be extremely counterproductive for the laboratories themselves.
Let’s talk about your organization. Cruz Verde was created in 1984 in Chile and entered the Colombian market in 2012 through a partnership with Farmasanitas, now renamed Cruz Verde. What are the major milestones it has achieved since entering the country?
The group Socofar Cruz Verde leads the health sector in Chile. When it began to see the possibility of expanding and entering other markets, it focused on countries that had predictable and robust economies.
So it chose Colombia. The opportunity presented itself in the late 2010 early 2011. Here there was a small crisis that hit insurers and, as a consequence, the Sanitas Group began to make alliances to face the new reality of the sector.
The line of business that Farmasanitas dealt with for the Sanitas Group was exclusively dedicated to dispensing the medication of the obligatory health plan (POS) to users of the Health Promotion Entity EPS Sanitas.
They have 1,400,000 users with health and drug coverage. These users had to get all medicines needed at Farmasanitas points. Cruz Verde Chile bought 60% of that business and the Sanitas group remains our partner with 40%.
Since then, more than milestones, what has taken place is a process of constant evolution. We began to expand the portfolio, which previously was limited to POS drugs.
The drugstores were designed to provide drugs only to EPS users, so they had no business acumen and some even were in the basements of clinics.
We started to relocate the stores and change their look and feel to make them pleasant and attractive to the consumer. Cruz Verde Chile has minimum standards for the stores as regards their signs, image and service. In August, approximately, we will make an official opening of all the remodeled stores and this will be our big milestone.
This comes alongside the expansion process, the opening of approximately 40 stores next year and we are in search of a local chain of drugstores to buy.
The Colombian retail is fragmented and underdeveloped, Cruz Verde will carry out the expansion and consolidation and standardization of retail.
As you say, you are proud of your quality system that ensures sterility, biosecurity and safety of the preparations for the patient, and a strong commitment to the environment. How do you work to live up to the highest international standards of quality, safety and environmental protection?
The issue of safety and sterility of the drugs is more connected to laboratories. They produce, manufacture and package medicines. We are distributors with different lines of business.
We have rigorous protocols and standards for the same industry we are in. There are a number of products we have to make sure will maintain their integrity and that is regulated and controlled throughout the whole chain.
Therefore, although a large part of the responsibility lies with the laboratory, we have to sort and distribute the products to end users keeping international standards of sterility, biosecurity and safety of medicines.
In connection to sustainability and environmental management, actually the management and inventory control systems themselves along the chain make any kind of damage or expiration be timely detected.
We have protocols either to return products to the supplier or for controlled destruction, to prevent contamination and so that the personnel and the population stay away from risks.
Regarding your outsourcing business for hospitals, could you tell us its advantages for your customers?
When we started the Farmasanitas business, the Sanitas group had several clinics and hospitals. They managed according to their business model the delivery of drugs internally and they used Farmasanitas for that.
When Cruz Verde takes Farmasanitas, it starts controlling distribution, retail stores and also the pharmacies in the clinics. How does the control model of hospital pharmacies work?
We own the inventory, we are responsible for dispensing medicines, for having the availability of the products they require and we control the personnel in the areas of warehousing and dispensing.
The model is basically completely outsourcing this process in exchange for a fee for the management of this system. We offer clinics with previously existing pharmacies to buy their inventory at cost, taking the job of evaluating the expiration dates and the integrity of the drugs, we do the operation, lightening the costs in human resources, we offer them lower fares because the volume that we buy is much larger and our negotiations with laboratories give us better costs and we have signed a service agreement where standards of availability of medicines, care and pharmaceutical services are established.
What is sought is that they do not have to worry about that operation. It is a system that is in the hands of an expert. The idea is to keep growing and evolving in this model.
Looking at your aggressive business, growth and expansion strategy in Colombia and given that we publish in the United States, do you have any kind of partnership or cooperation agreement or are you planning on partnering locally with any US entity? Do you intend to enter the US market?
Not yet. The strategy of Cruz Verde Chile has been expanding in Latin America. In addition to Colombia, it made an acquisition in Costa Rica and we are in search of business in Peru.
Cruz Verde Chile is a financially solid, diversified group with developed specific weight. We have, besides the shops and drugstores, a laboratory, an oncology unit, a real estate unit to develop street centers and financial business that is the financing credit card for users.
Usually it is well integrated and consolidated as a group in Chile, and it has enough cash to go shopping in the region. There has been no need for another player, financially or strategically.
Still, we do not know what might happen in the future.
Given your professional experience and all the countries where you have been living, what do you think is the added value you can bring to the management of Cruz Verde?
I do not come from the pharmaceutical sector, I am a mechanical engineer. The main contribution that I can make as a professional is the management skills I have developed in these last 20 years in different countries and businesses.
I have worked in consumer companies, in multinational companies, in Multilatinas, in companies with a large presence in the country. I have been fortunate to be in different countries, cultures, organizations.
I’ve been in different areas of business such as marketing, logistics and I have been general manager of another company. I think that’s what the organization was looking for, they wanted someone with management skills besides the specific experience in the sector.
People have appreciated that I could give a clear vision of where we want to go and the possibility of expansion we are having.
In addition I have friends, acquaintances in management positions in other companies in the country and that has helped to weave important growth networks for the company.
I think those are the contributions I make and I hope to make to the company.
Finally, which of Colombia’s advantages would you like to highlight to our readers?
I think this is a country with a great future. Despite having the karma of living in civil war for 50 years or more, it has managed to have a stable economy with future projection.
We have a consolidated vision of the country that, after having been supported by several governments, it makes us have more clarity than other economies that kept changing and cannot give clarity to foreign investors.
I believe that with the signing of peace and the alliances that we are forging we will overcome many of the problems and obstacles that we must overcome to continue developing.
The only issue of concern is the tax issue for companies and investors. In the case of Cruz Verde Colombia, we always have to explain in Chile why we pay so many taxes.
Income on the profit margin is 70% and this can begin to scare away future investors. The Minister of Finance and Public Credit, Mauricio Cardenas Santamaria, has the task of making a comprehensive tax reform to decrease the tax burden on the employer.