International Business Law

Genco Pharmaceuticals in Argentina

Achieving Market Dominance throughout South America

ARGENTINEAN BUSINESS CLIMATE

To acquaint the directors with the necessary factors of consideration, here is a very brief summary of the recent Argentinean financial crisis, and an analysis of the current business climate.

From a 2002 article by Martin Hunter:

Argentina is in the midst of a severe socio-economic crisis. By all accounts, the country is essentially bankrupt: burdened with a 150 billion dollar foreign debt, which saps 30% of the GDP in interest payments alone, the unemployment rate has soared over 20% and the ecomomy's growth rate has plummeted from 8% to less than 1% in the last five years. Austerity measures - a prerequisite for IMF and World Bank foreign debt repayment loans - have been felt heavily by the population, which has seen its purchasing power halved since 1997. Faced with an ever-shrinking tax-base and an economy grinding to a halt, recent governments have relied on relentless salary cuts and appropriation of social security funds in order to meet their budgetary needs.

Currently, Argentina is recovering quite well from their crisis. Politically they are much more stable, and actually have just held history-making elections. The U.S. State Department summarizes well the rebound Argentina has experienced:

Argentina's economy has sustained a robust recovery following the severe 2001/2002 economic crisis, with 4 consecutive years of over 8% growth in real gross domestic product (GDP). Argentine GDP reached U.S. $213 billion in 2006, approximately U.S. $5,460 per capita, with real investment up 18.7%. Economic expansion is creating jobs, with unemployment down from 20.4% in the first quarter of 2003 to 9.8% in the first quarter of 2007. Poverty levels have also dropped dramatically; 26.9% of the population in the 28 largest urban areas remained below the poverty line in the last half of 2006, down from over 50% in the immediate aftermath of the economic crisis.

Foreign direct investment is an important source of capital for Argentina. The country had approximately $55 billion in foreign direct investment in 2005. Despite growing investor confidence, Argentina is still trying to recover from its financial crises, and some setbacks are to be expected. Research and Markets, an industry journal, notes "...the market remains difficult for R&D-based multinationals. These companies capture a lesser share of the forecasted value growth than indigenous firms, which will continue to benefit from discriminatory pricing and lax enforcement of patents." In a nation like Argentina, which is trying to support growth from within, I would advise prudence. Again, Research & Markets notes, "Faced with such a poor environment for high tech medicines, multinationals including US major Bristol-Myers Squibb and Germany's Altana have exited the local manufacturing sector in recent months. More positively, France's Sanofi-Aventis has invested in a hepatitis B antigens facility, but multinationals remain generally cautious on the market."

If Genco does decide to enter the market, it needs to carefully consider its business form, the challenges of international contracts, the factors in employing foreign workers, difficulties in entering foreign markets, and all the issues surrounding patents and intellectual property.

BUSINESS FORM

Considering your fellow French pharmaceutical company Sanofi-Aventis has recently made a similar move into Argentina , and is in fact proceeding with facilities exactly as Genco has planned, my recommendation to the directors will be to form a joint venture. A joint venture is an easy way to enter a foreign market, as the partnering company has already secured the necessary government documents and established a network of industry relationships. With the market as hazardous as it currently is to outside investment, this partnership could be a low risk way to enter South America.

Both in general and in this specific case there are benefits to entering a joint venture. First, Genco can "shorten the learning curve," by partnering and relying on Sanofi-Aventis' experience in Argentina. Sanofi-Aventis will be familiar with suppliers and transport networks that take time to build on one's own. Second, we can "enhance company credibility" by linking the two well-known French pharmaceutical brands. As both companies have high levels of investor satisfaction, as well as excellent safety records, a partnership can only enhance the already stellar reputations. Third, both Genco and Sanofi-Aventis have an opportunity to grow, "[B]y formulating a joint venture with a solid partner, your company expands its sales force and distribution channel for low cost." And finally, the partners can "build competitor barriers." A partnership between Genco and Sanofi-Aventis will create a daunting presence in South America's pharmaceutical industry.

The benefits of a joint venture for Sanofi-Aventis will be numerous, as well. With the infusion of capital Genco provides, production facilities expansion can begin almost immediately, in order to produce their hepatitis B antigens, as well as Genco's AIDS treatment drugs. As Sanofi-Aventis leases space to Genco, they will be able to profit from previously underutilized office space, while shifting some of the tax burden to Genco. As partners in transportation, Sanofi-Aventis will be able to dramatically cut costs, as the two companies' products are often en route to the same destination. The companies will also be able to rely on each other's extensive knowledge in the pharmaceutical field, as their products are compatible, and not competing. As Genco and Sanofi-Aventis have the same goal, that is to ensure their product's dominance in South America, they are extremely compatible companies, and with similar corporate goals and cultures, Genco and Sanofi-Aventis should be able to form a successful and lasting partnership.

INTERNATIONAL CONTRACTS

There are several factors of which to be aware when drafting an international contract.

Contract Terms

In order to protect both Genco, and other corporations involved, it is imperative to state clearly both the purpose of the partnership, as well as the duration. I propose that Genco and Sanofi-Aventis partner to share facilities and transport, and the partnership's activities shall be limited to the pharmaceutical field.

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