Investor Presentaiton
tors. As a rule, capital is not a problem, since pharmacies are
usually small establishments, neighborhood stores, requiring
little initial capex. Brand names are also a less visible factor in
this sector, thanks to the dominant consumer perception that
drugstore products are all identical. To a certain degree, loca-
tion can be an important factor in certain towns but, again, given
the size of the stores in Brazil, this is less of a determinant than
for other retail business, such as supermarkets, for example.
After all, would the average consumer be willing to pay more
for the same aspirin at Pharmacy "X" across the street?
If the retail of pharma products seems to be a low dif-
ferentiated activity, looking like a commodity business, the cost
of sales should bring some competitive edge. And, in this case, a
lower unit cost should prevail among big players. Direct nego-
tiation under advantageous conditions with the pharmaceutical
industry, and the ability to dilute the fixed cost of the logistics
infrastructure and of the investment in the IT systems essential
to good retail operations, are the exclusive privileges of the big
chains. Accordingly, size is a competitive credential as, indeed,
the concentration movement in many countries has shown. But
the extreme fragmentation of competition in Brazil shows that,
in fact, this does not occur here. Other ingredients distort the
fine logic of pure economic calculus. Once again, the informal
economy and tax evasion explain the distortion.
As in the case of Ipiranga, an analysis of profit per unit
sold (in this case, box of medicine) confirms the benefits of
tax evasion as shown in the table below. According to data
published by Drogasil, in 2008, the company got an average
price of R$11,60 per box sold, generating a gain of R$0,56
per unit. With the level of ICMS (VAT tax) of close to 18%, i.e.,
Chart II
Revenues per Store (R$ thousand)
306
3.940
4.770
R$2,10 per box, the enormous competitive advantage of tax
evasion is obvious and is the only thing that could explain such
an atypical market profile: the existence of a so large number
of independent pharmacies.
The above table presents an additional illustration. Ac-
cording to Abrafarma data, in 2006, Drogasil's revenue per
store, was approximately 16 times greater than the average
figure for the independent drugstores. Running a store requires
substantial fixed costs (personnel, utilities and rent expenses).
So, revenue per store becomes a crucial indicator to gauge the
profitability of the business. And, given that Drogasil itself works
under low margins (approximately, 3-4% of net margin), it is
even harder to understand how the independent pharmacies
can exist with no scale gain.
In fact, a careful survey 8 revealed that approximately
23% of all taxes due along the supply chain of Brazilian
pharmaceutical sector are evaded, close to 40% of the labor
force is not registered, and 27% of sales of medications in
certain therapeutic categories occur via an illegal change of
prescriptions.
With the advent of the tax substitution system, of the
electronic invoice, of the requirement for tax filings to be elec-
tronically recorded, and of remote product tracking systems,
the tax authorities now have powerful mechanisms for com-
bating such unfair practices. Thus, we believe that the share
of independent players will lessen, leaving space for the retail
chains. The natural move to concentration in the sector should
finally accelerate, as was the case in other countries. With this,
the dynamic of the competition in the sector should become
increasingly based on legitimate business practices. And here
we regard Drogasil as being extremely well positioned.
Drogasil numbers among Brazil's five largest pharmacy
chains. It is present in five states and 73 municipalities, with
270 establishments, 68% of them in the State of São Paulo.
Since 1998, under the leadership of its CEO, Mr. Cláudio
Roberto Ely, the company has consistently invested in such a
manner as to ensure an edge over the competition. Accordingly,
throughout this difficult period, Drogasil successfully cultivated
features which would become increasingly important in the
consolidation of the sector. Highlighted among these are: i)
efficient cost and supply chain management, via the company's
own up-to-date distribution structure, of purchases made directly
from the industry, and of a technology system customized for its
particular business. In addition to the direct benefits of a lower
cost per unit sold, these infrastructure investments ensure a bet-
ter management of inventories enabling the company to attain
Independents
Abrafarma *
Drogasil
* Average of Abrafarma members excluding Drogasil
Source: Abrafarma, Drogasil, Dynamo
6
8 "The Underground Pharmaceutical Sector Economy; Barrier to the Growth of the Brazilian
Economy and Risk to Public Health", ETCO (Institute of Competition Ethics), December
2005View entire presentation