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Publication: 12/2011

Laboratório Stiefel Brasil: rethinking the business

model

Lars Meyer Sanches

Paulo Roberto Dias1

It was a hot morning in early November 2008 in the congested megalopolis of São Paulo.

Max Ferreira, the sales and logistics director at Stiefel Brasil, had just arrived from visiting a

client and was thinking about the proposal he would give to Sandra Stefano, the company's

CEO, at the head office in three weeks. Despite its position as the leading producer of

dermatology products in Brazil, the company had been losing market share for six years. The

reports from the company’s Customer Service Center contained many complaints from

customers who couldn't find Stiefel products stocked in drugstores. To make matters worse,

three large clients had come to him complaining about problems caused by the excessive

inventories of Stiefel products they held and were threatening to stop distributing them. At

the board of directors meeting the previous week, shortly after having reported on

difficulties with meeting the budgeted levels of sales revenue, Antônio Silva, the company's

CFO, had warned of the impacts on the financial results from the high discounts offered to

clients and the very high inventories that Stiefel held in its distribution center. Antônio had

also announced across-the-board cuts in the budgets of all of departments, which would

1 This case study was developed by professor Lars Meyer Sanches, PhD and Paulo Roberto Dias, MBA. This case

study is solely for the purpose of classroom discussion and does not propose to render an opinion on managerial

effectiveness or ineffectiveness or to serve as a primary source of data.

Copyright © 2011 Insper Instituto de Ensino e Pesquisa

No part of this case study may be reproduced or transmitted by any electronic or mechanical means, including

photocopying, recording or any storage system, without the express written consent of Insper Instituto de Ensino

e Pesquisa. Violators will be subject to the sanctions set forth in articles 102, 104, 106, 107 of Federal Law 9,610 of

February 19, 1998.

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make it impossible to change the primary product packaging, a move that had long been

defended by Carlos Pereira, the company's marketing director.

Max knew the company was perfectly capable of taking advantage of the excellent

prospects for Brazil's dermatology market, but to do so the firm had to stop losing market

share. The efforts by the marketing department in recent years had led the company’s

products to enjoy an excellent reputation among dermatologists, but he knew that it was no

use to lead in prescriptions written if consumers were unable to find the products on

drugstore shelves.

The pharma market

The world pharma market ended 2007 with sales revenue of US$ 712 billion and growth

of 6.5% in relation to the previous year. The expectations for the coming years called for

annual growth in excess of 5%. The industry’s growth strategy was changing. Before

companies had sought to launch the so-called blockbusters, which consisted of innovative

products protected by patents that represented a large share of a company’s revenue. But the

extremely high investment costs, the lengthy time-to-market, the high risk that research

would not lead to the development of a revolutionary product and the impact of the patent's

expiration on results had led companies to explore new strategies. Companies began

expanding the range of their launches, which meant they had to start investments on

multiple research fronts at lower costs and to acquire the sales rights of products developed

by other laboratories.

The industry's growth had begun to be led by emerging countries, the so-called

pharmerging markets, which consisted of a group of countries whose major players were

China, Brazil, Mexico, India, Russia, South Korea and Turkey, where sales had grown by

more than 16% in 2007. This market grouping represented 13% of the world market, but

accounted for close to 23% of its total growth. This growth was leading many companies to

focus their attentions on this market, which created an investment wave and the arrival of

new laboratories in a move that became known as the pharmerging gold rush. The main driver

of this strong growth in demand for pharmaceutical products was the higher purchasing

power of the population. In Brazil, the ascension of a large contingent of the population to

the middle class, which began with the stabilization of inflation in 1994 and continued under

the Lula administration, enabled greater access to medications, driving growth in the

pharma market. Pharmaceutical products were divided into two major categories: those

available by prescription only (RX) and those freely available on pharmacy shelves known as

over-the-counter (OTC) drugs. Generic drugs, which contain the same active ingredients as

their branded counterparts, were also available (Exhibits 1 and 2).

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Stiefel

Founded in Germany in 1847 to produce medicinal soaps, the family-based business

moved to New York in 1910 and later, in 1977, to southern Florida, where its head office was

established. The company had factories in the United States, Mexico, Brazil, Singapore,

Ireland and Pakistan (Exhibit 3), over 3,000 employees and research and development

facilities in various locations. In 2007, its operations in over 30 countries on all five continents,

as well as through representatives and distributors in another 70 countries, generated global

revenue of US$ 906 million. Stiefel specialized in the dermatology market with both RX and

OTC products, selling flagship products such as Clindoxyl for acne, Olux E for dermatitis and

Soriatane for psoriasis. The company had grown consistently in recent years under the

leadership of Charles Stiefel, an executive know for his boldness and passion for the family

business. In view of its leading position in a highly profitable segment, its strong recall

among dermatologists and the drying up of the launch pipeline of major companies in the

pharma industry, the Stiefel family had to fend off several acquisition bids by larger

laboratories.

Stiefel launched its operations in Brazil in 1971, with a plant in São Paulo that produced a

line of RX products called Ethical. In 1995, it created its Consumer line of OTC products. In

1999, the company inaugurated a modern plant in the city of Guarulhos in the São Paulo

metropolitan area that had sufficient production capacity to support its sales growth over the

next ten years (Exhibit 4).

The strategy of Stiefel Brazil was to cultivate and maintain strong relationships with

dermatologists, beginning with their residencies. The company supported schools by buying

books and computers and sponsoring conferences. Reaching a leading position in Brazil's

dermatology segment was the result of many years of offering innovative, high-quality

products and cultivating these close relationships with dermatologists, who were responsible

for writing the initial prescriptions. Until 2002, Stiefel held 13% of the market in terms of

sales revenue (Exhibit 5). In contrast with many healthcare segments, the dermatology

segment did not suffer from government intervention. This allowed companies in the

segment to obtain higher returns than those operating in segments characterized by strong

governmental intervention. In other segments, already in the 1980s and resumed in 1999, the

government regulated the retail prices of medicines. To maintain its leadership in the

segment, Stiefel competed with other dermatology companies, including La Roche-Posay,

Galderma and Mantecorp. However, the arrival of major competitors such as Roche, Bayer

Schering and Procter&Gamble also represented a serious threat to its leadership.

Marketing and Innovation at Stiefel Brazil

Stiefel produced two major product lines: Ethical and Consumer (Exhibit 6). The Ethical

line of products was prescribed by dermatologists, with the most popular of these the

SunMax line of sunscreen products, the Vitanol line of retinoic acid and Clindoxyl line of acne

products. Although they did not require a prescription, sales of the Consumer product line

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were also influenced by dermatologists, with this line’s most popular products consisting of

the sunscreen lotion Spectraban, the moisturizer Hidrafil and the skincare line Clariderm.

Stiefel adopted the care package concept, which meant it offered a line of complementary

products capable of meeting all the needs of a specific treatment. Stiefel’s products were sold

in drugstores at prices around 15% above the market average. Although the percentage of

revenue it invested in R&D was similar to that of its competitors, there were internal

concerns of the company’s ability to accompany its largest competitors in terms of the launch

of innovative products at the pace required by the market. There were also complaints about

the quality of the packaging, which often were crumpled when they arrived on pharmacy

shelves. In the past few years, returns accounted for close to 1% of sales, and the main

reasons cited were damage to packaging during transport and the fact that products had

exceeded their expiration dates.

Distribution channels

Product availability at points of sale was as important as recommendations by physicians.

Initial purchases of the Consumer product line were also influenced by subjective criteria

such as brand recall, packaging design and exclusive space for products on drugstore shelves.

Pharmacy attendants were also important influencers of consumer opinions.

Drugstore chains

Stiefel directly served Brazil’s major drugstore chains, such as Droga Raia, Drogasil and

Drogaria SP, as well as many other chains. These chains sought to work with low inventory

levels (on average 30 days of consumption for all products) and valued the high level of

service offered by laboratories. Their main service criteria were reliability (on-time delivery

of quantities ordered) and delivery lead time. Other highly valued aspects were Point-of-

sales activities, such as having personnel to assist clients (dermatology consultants), offering

promotional packages, purchasing exclusive space, promoting product kits and advertising

products in pharmacy pamphlets. Although Stiefel’s products represented only a small

portion of the pharmacies’revenues, the chains benefitted from the customers with high

purchasing power attracted who purchased other products on impulse. A typical

dermatology prescription listed four products with an average cost of R$ 300.00 (around

US$ 150). However, since the purchasing decisions of Brazilian consumers were strongly

influenced by price, the chains had to offer competitive prices. For this reason, they exerted

great pressure on laboratories and had no qualms about purchasing from distributors if they

were able to obtain more competitive prices. It was common for buyers to hold “auctions” in

final days of a month to decide from which supplier they would buy. In the case of Stiefel’s

products, in unusual situations, distributors would sell to chains at even an 18% discount,

while Stiefel sold products with an 8% discount. This practice allowed pharmacy chains to

significantly increase their margins.

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Distributors

Because of the large number of drugstores in Brazil (over 60,000), Stiefel sold around 75%

of its volume through a group of distributors that were responsible for reselling products to

many independent pharmacies located nationwide. The distributors worked with an average

mark-up of 5%, in comparison with the average mark-up of 30% of chains. Since each

pharmacy was visited by several distributors, price was a crucial criterion for sales.

Moreover, since most pharmacies kept low inventory levels, distributors were expected to be

able to replenish products quickly, which forced them to maintain minimum levels of all

products in inventory. To obtain competitive resale prices, distributors used part of their

monthly budgets to speculate. Like pharmacy chains, distributors waited until the end of the

month and claimed they were overstocked (which was not always true for all products) in

order to secure more discounts from laboratories. When they were able to secure favorable

prices, they would buy large quantities of products, which allowed them to go several

months without making additional purchases. In addition to discounts, distributors could

also extend their payment terms.

To take advantage of taxes with different rates set by state governments, such as the Taxes

on Goods and Services (ICMS) state tax, distributors maintained warehouses in various

states, with the locations where distributors received deliveries from laboratories varying in

accordance with the tax benefits. While the average ICMS tax rate for the industry was 18%

of the product price, depending on the state, distributors could enjoy a deferred tax credit of

between 8% and 12%. Although most customers were located in states in the Southeast

region, such as São Paulo, the revenue of laboratories was very high in states like Goiás and

Espírito Santo, which offered significant tax incentives (Exhibit 7). These tax incentives led to

benefits that corresponded to approximately 4% of a product's price, already considering the

additional logistics costs.

In the past few years, competition intensified among the main distributors as each sought

to become market leader. In some cases, they even sold medicines with negative margins in

order to gain market share. It was common for distributors to offer drugstore chains more

competitive prices than the actual laboratories. Moreover, sale representatives at distributors

were encouraged to place products at any sales point. As a result, it was easy to find

dermatology products in small grocery stores (“mercadinhos”). In addition to these two

distribution channels, Stiefel also sold directly to institutional clients, such as medical

cooperatives and government agencies. However, this latter channel accounted for just 2% of

the company’s total sales volume.

The impression shared by Stiefel’s more than 300 clients was that of an excellent company

with exceptional products but that had difficulties in delivering products on time and was

suffering from the entry of new competitors that could launch a greater number of products

and were more concerned with influencing consumers at the point of sale. In a conversation

with one physician, Max heard her compare Stiefel with soap-opera actors like Antônio

Fagundes and Fernanda Montenegro, who were very popular, consistent and never got their

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lines wrong, but who were also nearing retirement. Meanwhile, she compared La Roche-

Posay with Reynaldo Gianechini and Gisele Bündchen, who were much younger, more

promising and a lot sexier. Since 2000, La Roche-Posay has been investing heavily in creating

unique packaging, securing the best positions at the most important points of sale and

providing training to pharmacy assistants. It had closed deals with various drugstores to

secure exclusive space on shelves and maintain promotional materials in establishments,

efforts that would ensure La Roche-Posay a higher share of direct sales to drugstores than

Stiefel.

Sales and Logistics Department

The sales department was managed by the chief Sales and Logistics Operations officer,

Max Ferreira, a young executive born in the interior region of the state of São Paulo. Since he

was 15 years old, Max had taken an interest in sales. He began selling cars and had a

promising career in pharmaceutical laboratories. During his years in the pharmaceutical

industry, Max had built a strong reputation among many distributors and drugstore chains.

He had recently graduated with honors from an executive MBA program in São Paulo.

Max’s structure included the recently hired national sales manager, Pedro Marcondes, who

supervised four regional account managers who were responsible for product sales. There

were also district managers who managed some 80 sales representatives spread nationwide

(Exhibit 14). The representatives were responsible for promoting products at dermatologists

and clients (distributors and drugstore chains) and many of them had worked at the

company for decades. There was a tradition of promoting the sales representatives with the

most years of service as account managers or district managers. As a result, Stiefel’s

representatives and most of its employees were very proud to work for the company and

were very committed. The account managers had a low fixed salary and an aggressive

variable compensation policy tied to monthly sales targets. Although they often complained

about the constant lack of products, they usually met their sales target. One of the ways they

found to meet their targets was to expand their client portfolio, offering additional discounts

or extending payment terms. Some even resorted to making emotional pleas: “Help me out.

Just buy a little bit more this month. If I don’t reach my target, I’ll have problems here at the

company.” They were required to make sales projections for each of the company’s 90 SKUs

and complained a lot about the difficulties in forecasting sales that fluctuated so much

(Exhibit 8). The forecasts made by the account managers were consolidated by the Logistics

Operations Department and used to determine the volume of products to be manufactured.

Besides the managers in the Sales Department, Max was also responsible for the Logistics

Department. To head up this department he hired a young executive named Roberto

Guimarães who was concluding his Executive MBA at Insper. The challenges Roberto faced

were enormous.

All of Stiefel’s clients were served by the factory distribution center in the city of

Guarulhos. However, because of tax incentives, many clients wanted to receive products at

their own distribution centers, and the fact that they were located in states far from São

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Paulo resulted in long travel times (Exhibit 7). Considering the time required to process (two

days) and dispatch (three days) orders, and depending on the travel time agreed upon in the

Service Level Agreement (SLA), it was not unusual for clients to wait more than ten days to

receive their orders. Almost 50% of monthly orders were processed during the last five days

of the month (Exhibit 9), which overloaded the logistics team and led to the payment of

overtime hours. In addition to these additional costs, the lack of handling and freight

capacity made on-time delivery more problematic and made it difficult for the company to

follow the procedures recommended by the Risk Management area, which was charged with

reducing the incidence of theft during transport.2

There was also enormous pressure to reduce distribution costs. The higher number of

small clients increased the number of split orders, which increased personnel needs in the

picking3 operations, leading to higher payroll costs. The number of overtime hours had been

growing at a rate of 10% per year. Although on the one hand the alternative of using

standardized shipping boxes filled with a high number of primary packages chosen by the

Manufacturing Department had benefits, on the other hand, the excess space between the

individual products in boxes made them less resistant and increased the loss rate from

damage to products and packaging, particularly during the long journeys on the poorly

maintained roads outside of the state of São Paulo (Exhibit 10). The standardized boxes also

increased the need for piece-picking (opening boxes and separating individual products). To

make matters worse, Roberto also struggled with excessive costs from holding high

inventories at the distribution center (Exhibit 11).

There were many products with sufficient inventory to meet the sales projected for the

next two years, which required a larger storage area and generated constant product losses

due to deterioration, since the average expiration date was 24 months and most clients

would not accept products with expiration dates shorter than 12 months. At the same time,

due to pressure from colleagues in the Sales Department, Roberto constantly requested

changes in the factory’s production schedule to minimize product shortages. He also

monitored the forecasting accuracy (Exhibit 12) and the frequent discrepancies between the

forecasts made by the regional account managers and the volume produced by the plant. The

higher prices charged by freight operators at the end of the month and the constant flow of

returns due to expiration or problems with orders were also serious problems. In April, the

number of returns was even worse than usual. Robert often complained about the lack of

reliable data upon which to base decisions and the fact that many of the company’s

departments lacked formal processes.

2 In Brazil, the incidence of theft of high value added cargo was very high, which forced companies to not only

pay for cargo insurance but also to adopt special measures, such as limiting the quantity of products carried by

each vehicle and traveling only during the daytime. According to the National Freight and Logistics Association

(NTC), in 2007, R$ 735 million in goods was stolen during transport in Brazil, which corresponds to 0.3% of

the country's GDP.

3 Picking refers to separating the products ordered by customers, a process that usually requires a large number

of employees.

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Manufacturing

João Sanches, the chief manufacturing officer, was an experienced pharmacist in charge of

the entire production department. João complained about the serious impacts that the

constant forecasting errors made by the Sales Department had on his operations: “My plant

isn’t flexible enough to change the production line at just any time! You should tell the

people in marketing to stop increasing the number of products I have to produce. We have

many restrictions imposed by ANVISA.4 We have a long response time and must ensure the

factory’s peak operational efficiency in order to offset the low utilization rate of our lines.”

Local suppliers also suffered from the frequent changes to orders and were often unable to

meet Stiefel’s requests in a timely fashion, which caused line stoppages and last-minute

reprogramming of production. In the case of international suppliers, the problem was even

worse, with products taking months to arrive and suffering from ANVISA delaying the

release of lots at airports. To mitigate the effects from the fluctuations in forecasting and to

lower inventory levels, João asked his team to make their own sales forecasts and use them

to plan production and purchasing. Moreover, to boost line efficiency, João prioritized the

production of large batches, which meant less time lost with setting up the lines.

Finances

The Finance Department received annual sales revenue targets from the company’s global

executives and was responsible for calculating the budget for operating expenses and for

preparing the managerial income statement (Exhibit 13). The Finance Department also was

responsible for setting product prices and breaking down the revenue expectations for

establishing the quotas of the regional account managers. These numbers were approved by

the executives at Stiefel Latin America and if a country was not achieving good results, they

would be modified over the course of the year to ensure that regional targets were met

(Brazil accounted for 70% of the company’s Latin American revenues). The department

struggled with the lack of data and often warned the Sales Department that it should shorten

the average payment term. The department was also responsible for reporting to the head

office the reasons why the company did not meet its targets in any given month.

The turnaround challenge

In early 2007, Sandra Stefano was hired to head up Stiefel Brazil and lead a turnaround

process that would stop the market-share losses that had been occurring over the previous

six years and take advantage of the prospects for growth in the Brazilian market. Although

young, Sandra had worked for 20 years at a large laboratory recognized in the segment for

its high-quality executives. Sandra had a reputation for being a direct, results-oriented

4 The National Sanitary Surveillance Agency (ANVISA) is the governmental agency charged with regulating the

industry. Before a product can be sold, ANVISA requires detailed information on the production process, which

includes the formula used, an explanation of the productive process and the size of the production lot. Changes to

any of these factors require authorization by the agency, which can take years to secure.

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executive capable of making tough decisions. She seemed to be the right person for the

challenge. After a few months, Sandra began changing the company’s organizational

structure (Exhibit 14): She hired Max Ferreira, who she had worked with previously. On his

first day, she took him aside and said: “I’m giving you the authority to make whatever

changes you think are necessary for us to stop losing market share, but we have to meet our

target for this fiscal year (which ends in March 2009).”

To better understand the situation, Max decided to visit some clients. One of the larger

clients reacted with astonishment upon seeing Stiefel’s sales director: “What are you doing

here? Did you want to sell something? I have 120 days of your products in stock and I still

haven’t received payment for the R$ 200,000 in expenses I incurred because I had to

incinerate a pile of your expired products!” When Max asked the account manager who had

accompanied him about the high inventory (Exhibit 15), he was told the tactic helped long-

term sales since it generated “shelf pressure”: distributors would push the stock to

drugstores, which in turn would boost sales. Upon returning to his office, Max thought

about how to best resolve the problem of Stiefel’s shrinking market share: “How can I

increase sales if my clients are overstocked and distributor discounts, which should be 12%

at most, are often 15% of the sales price? Then there’s the matter of reaching the sales

revenue target. I’m going to call Roberto and Pedro to help me to put together a proposal for

Sandra.”

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Exhibit

Exhibit 1 – Evolution of Brazil's pharmaceutical industry

Source: IMS Health.

Exhibit 2 – Breakdown of social classes in Brazil

A Class: over 30 minimum wages

B Class: from 15 to 30 minimum wages

C Class: from 6 to 15 minimum wages

D Class: from 2 to 6 minimum wages

E Class: under 2 minimum wages

Note: the minimum monthly wage in 2007 was R$ 380.00, or US$ 182.00

Source: IMS Health.

US$ 10.8B US$ 12.2B US$ 13.4B

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Exhibit 3 – Location of Stiefel's operations in 2008

Source: Stiefel.

HEAD OFFICE

Sales Operations

Plants

R&D

Offices and other

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Exhibit 4 – History of Stiefel in Brazil

Source: Stiefel.

1971 – Launches

operations in the Santo

Amaro district of

São Paulo

1995 – Opens new

offices in the Vila

Olímpia district of São

Paulo

1996 – Begins

construction of new plant 2007 – Begins turnover of

executive team

1995 – Launches new

Consumer product line

1999 – Opens new

plant in Guarulhos

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Exhibit 5 – Market share in Brazil's dermatology segment

Competitors Market Share

Nov/2005 Nov/2006 Nov/2007

TOTAL 100.0% 100.0% 100.0%

STIEFEL 10.0% 9.8% 8.8%

MANTECORP I Q FARM 6.4% 6.5% 6.7%

GALDERMA 7.7% 7.0% 6.2%

LA ROCHE POSAY 4.0% 5.0% 5.9%

MEDLEY 4.0% 4.6% 5.3%

BAYER SCHERING PH 5.6% 5.2% 4.6%

EUROFARMA 4.0% 4.4% 4.6%

PROCTER&GAMBLE 4.4% 4.6% 4.5%

ROCHE 3.9% 4.2% 4.3%

EMS PHARMA 2.9% 3.7% 4.1%

Source: IMS Health.

Exhibit 6 – Photograph of Stiefel Brazil's products

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Exhibit 7 – Breakdown of Stiefel Brazil’s sales by state

% Net Rev: Net Sales percentage

Km: distance from factory in kilometers

SLA: Service Level Agreement

Source: Stiefel.

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Exhibit 8 – Stiefel Brazil’s Monthly Sell-in vs. Sell-out

Source: IMS Health.

Sell-in: Stiefel´s sales to client

Sell-out: Sales by Stiefel´s client

Exhibit 9 – Percentage of Stiefel Brazil’s sales over the month

(Nov. 2006 vs. Nov. 2007)

Source: Stiefel

-

200.000

400.000

600.000

800.000

1.000.000

1.200.000

1.400.000

Sell in

Sell out

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Exhibit 10 – Condition of Brazil's Highways

São Paulo State Privatized Highway

Government owned Highway in the Northeast Region

Government owned Highway in the Midwest Region

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Exhibit 11 – Stiefel Brazil’s monthly inventory and net sales

Source: Stiefel.

Exhibit 12 – Stiefel Brazil’s forecasting accuracy

% of SKU´s with forecasting errors between – 20% and 20%

Source: Stiefel.

-

500.000

1.000.000

1.500.000

2.000.000

2.500.000

3.000.000

Apr 06

May

06

June

06

July

06

Aug

06

Sep 06

Oct

06

Nov

06

Dec 06

Jan

07

Feb 07

Mar

07

Apr 07

May 07

June

07

July 07

Aug

07 Sep

07

Oct

07 Nov

07 Dec

07

-

1.000.000

2.000.000

3.000.000

4.000.000

5.000.000

6.000.000

7.000.000

8.000.000

9.000.000

10.000.000

Finished product inventory (US$) Sales revenue (US$)

Sales Inventory

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Exhibit 13 – Typical income statement of industry companies

Net sales price 100

Direct costs 30

Production costs 10

Raw materials and

packaging 15

Logistics 5

Gross margin 70

Indirect expenses and taxes 50

Net margin 20

Note: Figures do not exactly match those of Stiefel.

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Exhibit 14 –Stiefel Brazil’s Organizational Chart, 2008

Latin America Chief

Executive Officer

Chief Manufacturing

Officer João Sanches Brazil Chief Executive

Officer Sandra Stefano

HR ManagerChief Sales and Logistics

Officer Max Ferreira

Chief Marketing

Officer Carlos Perreira

Chief Financial Officer

Antonio Silva

Chief Legal

Officer

Medical

Manager

10 District

Managers

National Sales

Manager Pedro Marcondes

Sales and Logistics

Manager Roberto Guimarães

Training

Manager

4 Regional Account

Managers

80

Sales Representatives

R&D VP

Chief R&D Officer

IT Manager

National Demand

Manager

Global

Manufacturing VP

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Exhibit 15 – Average inventory of Stiefel Brasil's products in distribution channels

Source: Laboratórios Stiefel.

Benchmark

Days of coverage

100

78

67

88

6259

71

71

78

86

61

72

30

45

60

75

90

Jan 07 Feb 07 Mar 07 Apr 07 May 07 Jun 07 Jul 07 Aug 07 Sep 07 Oct 07 Nov 07 Dec 07