Shanghai, 6th November 2006

The terrible news of the Chernobyl accident reached me when I was staying at the Peace hotel, this was in April 1986 and it was my first time in Shanghai. In those days little had changed in that City since the Japanese occupation and the Communist take-over. Once this Paris of the Orient had the second tallest skyscrapers in the World, now it was drab, poor and faded - even the players in the hotel’s famous Jazz Band had not changed their Glenn Miller tunes and their white hair somehow had remained black.


I have since returned every year or so. By 1996 if one looked across the river from the Bund, one saw a forest of cranes. Hundreds of cranes! A sight never to be seen anywhere. Within a few years the marshes of Pudong have become the Manhattan of the largest metropolis in the World. This city, the most populous in the World, now has the most spectacular buildings in the World and no other city exudes more growth, ambition, energy and vision.

During the last 10 years China’s GDP has grown at an average of 10% a year, its gross fixed capital formation (investment in infrastructures and production capacity) amounts to 46% of GDP, beating the record figures of Japan and Korea at the peak of their growth. More airports and motorways have been built in this country than in the rest of the World put together. Since 2002, 750 multinational firms have built research centres in the PRC. Between 1995 and 2003, China increased its investment in R&D from 0.6% to 1.3% of its GDP – in comparison the USA is at 2.5% and Europe languishes at 1.8% - despite every Lisbon Agenda effort. China trains 200,000 scientific university graduates per year – as many every year as there are Swiss chemists and engineers! By 2010 it is estimated that about 90% of all scientific Ph.D.s will be Asians. Another catalyst of this process is the flow of about 200,000 “returnees” -Chinese nationals, mainly scientists, who trained and worked in the West- that return to the Motherland and are now leading science based companies. 174 of the Fortune 500 firms have set up regional headquarters in Shanghai and 185 multinationals also have set up R&D centres there. In this city R&D already represents 2.4% of its GDP.

Hovione has had a presence in the PRC, through its Macau plant, since 1984. But for any manufacturer China represents such a monumental tidal wave, that I felt it imperative that Hovione’s Board of Directors should go and see for itself. We were in China for nearly a week last November in Shanghai, Guandong and Macau visiting competitors, meeting local bankers and experts. At the end the Board met at our plant in Taipa.

WuXi is the largest Chinese CRO (Contract Research Organization). Set up 6 years ago and led by 50 Returnees. With sales of $70million of R&D services (preparing compound libraries, carrying out pre clinical tests, toxicology studies, process synthesis…), they employ 1300 scientists and are growing 30% a year. We also visited the new plant of the most admired company in our Industry, Lonza, in Nansha. We discovered a 35 acre site where we found an elegant symbiosis of Swiss discipline, Oriental attention to detail and Chinese energy and enthusiasm – an industrialist’s dream of eagerness to learn and to excel. This is their second Vitamin B3 production unit. They have a 60 strong R&D process chemistry group. Two new plants, each with 200m3 reactor capacity, will be built - one for GMP APIs (active pharmaceutical ingredients made under Good Manufacturing Practices) and the other for non-GMP intermediates. Lonza is already negotiating the purchase of an adjoining plot of 40 acres. You might find it odd that competitors allowed us to visit. It is not surprising, Hovione is well respected in the industry, but more importantly in China everyone is beaming with optimism and they have every reason of being proud of their achievements – so they welcome their peers.

What will the next decade look like ? Japan and Korea, destroyed by wars, started from a level similar to China only a few decades ago, and they are at present well ahead in the group of the rich countries. Both are substantially richer and more developed than Portugal; in other words, they have overtaken the average European country in less than two generations.

The 21st Century will the China’s coming of age. Over the last 2000 years China and India, because of their large populations, were always vastly richer than any other nation. Economic theory tells us that at same levels of technology, values, transportation and communication infrastructure – all nations have about the same productivity. The only short exception to Asian global leadership were the last 250 years when the Europe and its “spin offs” driven by a favourable rule of law, values that promoted competition and market forces, and superior technology, was able to increase dramatically its productivity. The West generated wealth to an unprecedented level, and in so doing built up transportation and communication systems that supported not just their growth but, in turn, that of the whole World.

China and India are today in a phase of fast development, albeit following very different models. Their amazing growth rates are fuelled by improvements of productivity – this is owed not only to the importation of technologies but especially because these great countries seem finally to have created the conditions for their markets to become efficient at managing supply and demand, for their people to be given skills and knowledge and allowed freedom and motivation to work. Additionally this whole process has been catalysed by globalization and the internet.

China’s growth is very much responsible for the recent increase in commodity prices: trebling in oil prices and doubling in steel. In order to assure a continued supply of raw materials China is investing economically and diplomatically in many commodity rich developing countries: African states and Brazil are specific examples. Only yesterday CITIC’s president invested, personally, $800m in taking a share of Anglo-American, a mining giant with its base in South-Africa. The recent appointment of Dr. Margaret Chan to the position of Director General of the WHO, the first appointment of an ethnic Chinese to the leadership of a UN Organization, is a clear sign of China’s growing role in World Affairs.

But not everything is positive. If on one hand China seems to be returning to its Confucian traditions (in the long passport control queues at the Guandong/Macau border I saw for the first time a line for “Over 65s”), China has major structural problems.

As a consequence of two generations of the single child policy to mitigate population growth, China’s population now finds itself short of young people – it is very typical for 4 grandparents to have, between them, a single grandchild. Chances are China will become old before it becomes rich. Environmental tragedies are also far more frequent than the media reports and the trend is frightening. Air pollution in most large cities is several levels of magnitude higher than WHO safe levels. Social unrest fuelled by pollution issues as well as arbitrary political decisions is on the rise. This explosive economic growth occurs while in Europe manufacturers are handcuffed by regulations and anaesthetized by political correctness. Everyone lives beyond their means, either by eroding capital or by mortgaging our future. While our compliant plants stand idle and the best trained people are unemployed, our competitors in China grow at 40% per year… Some wise men predict that after the Beijing Olympics there will be an inflexion point. On verra.

But for us in the West, what was once called the Free World, there is not much ambiguity… our Society is in relative decline. Within the next 20 or 30 years China’s GDP per capita will surpass that of the EU average – and since they are three times more numerous – they will have an economic weight three times that of the EU. Within the short space of time that is our children’s lifetime, we shall have to accept that China will overtake Europe in terms of Global economic relevance. We shall have to accept that the West’s supremacy is a thing of the past, that we are now – with any luck - Nº2 or 3, and that we are a minority. In other words what we today take for granted – that we are at the fore-front, that we set the standards, that we are the leaders of the World in values, fashion, art, science and technology – will mostly be a thing of the past. This will be very, very hard for us to accept – but the sheer numbers will force us to swallow our pride.

What about Hovione – my view is that we need to continue to constantly adapt our business model to match the opportunities. We need to accept that our only sustainable competitive advantage is our ability to learn. I am confident -and the evidence shows- that our bet on Custom Synthesis for Exclusive customers is a winning proposition. That work in new areas of R&D such as nanotechnology and inhalation will bring us robust margins. Serving demanding customers and offering them solutions they can’t find elsewhere will never go out of fashion. On the other hand our industrial activity in China will need to “bite the bullet” – there is no doubt that to succeed in Generics we need to be in a low-cost location, to provide low-price APIs at a quality level that is just right, just good enough for the medicine agencies to be satisfied. We can no longer afford to provide our Generic customers with the excess quality they are not willing to pay for. As such the Board appointed a team to study the matter and present alternatives until the end of the year.

The World is changing fast; Hovione will need to move faster.

Guy Villax
Chief Executive

Hovione now offers its customers a new service: the supply of products in capsules for Phase 1 and Phase 2 clinical trials.
Hovione requested a manufacturing authorisation from Infarmed, the Portuguese Health Authority, which resulted in an inspection to the Pharma facilities on May 9th last. The respective authorisation was successfully issued on 6th June 2006 and a certificate of conformity with Good Manufacturing Practices for Medical Products under Research will be issued in due course.

Innovation is a key factor for our Company. On 31st May, the Executive Committee approved a new program to promote invention patents at Hovione, with individual prizes that may exceed 4000 Euros per patent.
The prize is granted the moment the patent is filed, which means the inventor will see his/her creativity and additional work immediately rewarded. In cases where the Company determines that the invention is not to be patented but remain an industrial secret, the prize may still be granted if so decided by the Executive Committee. Since May 16, inventors have been rewarded in this way, as the authors of 6 patents filed during the years of 2004 and 2005.

Project “Rainbow Global” is now under way in order to extend to the other sites of the group the same range of software systems presently being used in Loures: SAP, LIMS and Streams (Docstream, Navstream, etc.)

The purpose of this project is to obtain better integration among all companies, namely:

“This is a project which is critical to the success of Hovione as it will have great impact on productivity, work speed, decision making and customer satisfaction”, states Jorge Pastilha, Project Manager.

Rainbow Global was launched in September and should be concluded within 8 months, at the latest. The main stages of the project are:

The success of this project depends on the strict cooperation of all, in particular of the “key-users” of the three sites. The Macau “key-users” will be working on the project, at the Loures plant, in December 2006 and February 2007. This will also be a great chance to share experiences and discuss work processes and methods of organisation. We should all use this opportunity to get to know one another and improve our communication channels.

Manager’s Pocket Guide – describes basic management concepts helping and promoting management work and tasks in all areas. Its objective is to explain the basics of management in a simple and appealing way. Get your copy from sharepoint.

Manager’s Checklist – list of management activities common to every manager, concerning resource and personal management, as well as other tools which are specific to Hovione. Its main purpose is to assemble the activities that are most important to the management of the different areas, so that an updated record of task completion is available. Get your copy from sharepoint.

TrainStream – With around 600 staff and, on average, more than 6500 training records a year, Hovione has realised that, on its own, and despite all the work and people involved, the high number of training actions provided, did not ensure the intended objectives were being reached: development of individuals, management of their careers, compliance, planning, cost reduction and evaluation of its effectiveness. It was, therefore, decided to structure training in connection with the competences identified for the various functions within the Company. This allows the people responsible for the different sectors to adequately plan the individual training of staff while taking into account their career progression. The software TrainStream from Migg Systems, which will go-live on December 4th, was acquired to help manage the whole process in an effective and decentralised way.

Forum - A new communication tool called “Forum Hovione” has been available, since July, at http://forum.hovione.com.
This is a blog where questions and opinions related to Hovione can be posted, which can then be commented on or answered by anyone interested. Already with 184 members, the aim of this Forum is to provide another means for debate and exchange of information, and especially to facilitate communication among Sites and contribute towards the enrichment of ideas within the Group.

Hovione Publications - Originated in the Ideas Contest, this software application, available at http://publications.hovione.com, was created to manage circulation and access to Hovione publications and magazines.
A better use for the reading and managing of subscription costs as well as easier access to information are some of the advantages of this application.

Hovione Meetings - There is vast know-how at Hovione, but how do we share it? This was the question that led to the organisation of the “Hovione Meetings”.
These are informal meetings held in the relaxed atmosphere of the Hovione Bar, on Fridays, between 3 and 5 pm, with no fixed periodicity, where information, ideas, projects and suggestions on various matters of multidisciplinary interest are shared.

Scientific Sessions - The R&D groups of Loures and New Jersey have organised “Scientific Sessions” by video conference, where projects underway on both sites are discussed, with the purpose of sharing information, stimulating debate and exchanging ideas. To watch these conferences please contact Ana Paula Rodrigues in Loures or Lavinia Emery in New Jersey.

Following Directive Nr. 1999/92/CE of the European Parliament and Council of 16th December, with the name ATEX (Explosive Atmospheres), directives establishing rules for protection of workers at risk from exposure to explosive atmospheres were applied to Portuguese legislation by Decree Law nr. 236/2003 of 30th September.

With this in mind, and in order to identify and solve possible situations of non compliance with the respective legislation, Hovione launched a set of actions that were included in a project, managed by António Almas, which was carried out between January/05 and September/06.

This project involved all areas of manufacturing, R&D, Warehouse, Maintenance and Safety, Health and Environment in order to assess and improve working conditions in dangerous areas, attesting legal compliance and the importance given to this issue by Hovione.

The project for implementation of ATEX included the following steps:

This objective was completely achieved. To António Almas and everyone who worked with him on this project, our congratulations.

The 7th International Conference “The Scale-Up of Chemical Processes”, sponsored by Hovione, was held this year at the Tivoli Marinotel in Vilamoura, between the 25th and 27th September.
The conference was attended by around 80 people from the largest international pharmaceutical companies, among which were 3 from Hovione including Bill Heggie who participated as speaker and as Chairman on one of the Conference panels.

The first Technology Transfer between sites took place in 1986 at the time Hovione started operations. Since then many other manufacturing processes have covered the long distances that separate the three Hovione sites: Loures, Macau and New Jersey.
With the TTC located in the USA, which for strategic reasons operates at the first stages of development of new processes, the “Tech transfers” for manufacture of greater quantities or regular production have multiplied and become more complex. Worthy of note is the fact that TTC, in only four years of operation, has already successfully transferred five processes to Loures and one to Macau.
The main purpose of Technology Transfer is to ensure continuity of the project. Most of the processes transferred involve not two but three axis: besides the two sites, the sender and the receiver, there is also the customer, who owns the project. Accordingly both the project containing all the information and the relationship with the customer must be efficiently transferred. The human relationship itself changes hands and therefore the customer profile must be transmitted in detail. This is a vital issue for the continuation of the relationship of mutual trust between Hovione and the customer built by the first site. Management of the relationship with the customer is, at this stage, as critical as the project itself.

In 1997, with the support of the Ministry of Economy and the OPE (Operational Program for Economy), Icep Portugal launched Innov Contacto, a program of international internships with the objective of contributing to the development and internationalisation of the Portuguese economy. The program is designed to integrate in companies people interested in international careers and capable of adding value to the national corporations operating throughout the world.
“It provides the interns with a complement to their academic training, the possibility of an international career, contact with other cultures and integration in NetworkContacto” says Joana Cunha, presently working at Hovione Macau.

The intern is, in general, a professionally ambitious person with an aptitude for international careers. Most of them have recently graduated from university but it is increasingly common to find people with some experience who leave their jobs in Portugal to seek opportunities abroad.

Hovione has been participating in this program since 2001. Of the nine interns we have welcomed, three have been offered jobs at Hovione, one in Loures and two in Macau.
 

*internship underway

Hovione Macau was inspected by INFARMED, the Portuguese Health Authority in September last. This inspection took place at the request of Hovione in order to obtain the Certificate of Compliance with Good Practices for Manufacture of Active Ingredients. This certificate will help European customers update their records with the health authorities in accordance with the new European Union regulations.

In order to develop synergies and make the most out of the “best practices” of each site, our colleagues Ana Ferreira, Avelina Pereira, Jorge Pastilha and José Saraiva spent a week (October 16th to 20th) in Macau comparing the HSE (Health, Safety and Environment) system including Occupational Health and Human Resource practices of both sites. This was a very productive visit for both sites at the end of which a list of actions was drawn up to improve and standardise procedures. In an atmosphere of great cooperation it was possible to make an in-depth study of the HSE situation of both sides.

On 21st June last, a team from CVT/Astellas visited Hovione New Jersey to thank us and paid tribute to Hovione for our commitment to the speedy development of project PA03 as well as for the outstanding attention we paid to the needs of the customer. PA03 will be subjected to validation in New Jersey in 2007 and launched in 2009. Afterwards, and to celebrate the occasion, we were presented with a pleasant and enjoyable barbecue. It is great to see our clients happy and our work recognised!

A group of students from the SEED program (Science Education for the Economically Disadvantaged) paid a visit to TTC on July 7th.
This project, supervised by Professor John Sheats of Rider University, is sponsored by the American Chemical Society and by local industries. The idea is to provide students from high schools with the possibility of working in university research labs under the supervision of tutors with research projects underway. Preference is given to students coming from low income families as these are minority groups which are poorly represented within the scientific community.

Mário Caetano, 32 years old, Instrumentation and Control Engineer, joined Hovione in March 1999. He started in Automation having later been transferred to Instrumentation where he became supervisor. In September 2002 he moved to the TTC to be in charge of Installation and Process Equipment Maintenance, returning to Loures in October 2005. He is presently a “Strategic Sourcing” officer with Purchasing – Material and Equipment. The main purpose of this new function is to seek new suppliers for material and equipment and/or optimise the existing ones.

How do you analyse your three years in New Jersey?
MC: My three years living in New Jersey were a good experience. At first it was hard as it meant starting a new life away from home, family, friends. To overcome this I had to keep busy with the activities I most enjoy like ski, diving, hiking and travelling all over that vast country, and this way the three years just flew by.

What new competences did you acquire?
MC: Living in the USA allowed me to develop my English in a way that would not have been possible had I just attended a school. Besides English I acquired a whole new range of competences because this was the set up of new installations; it was a small Centre, which meant I had to work in various areas, and also because I had to work with American colleagues with a different culture and method of working. It was also interesting to be part of a group of Portuguese people who contributed to the start up of the TTC. I felt that it was part of our mission to transfer some of the company’s know how and culture to our American colleagues.

What were the main differences you were faced with both culturally and in terms of work?
MC: There are many cultural differences and they are reflected not only at work but also elsewhere. For instance, legislation, norms and rules are endless… there is legislation for everything and I really mean everything! And in the US they are not just for show; they really have to be complied with because inspections are frequent and thorough. Individuals and entities follow them without frowning. I highlight safety. At work, people refuse to carry out a certain task until it is clear that their safety is safeguarded. It is the people themselves who are interested in finding out what they will be handling and under what conditions, there is no need for a Safety Area to inform them of the various risks. Unlike the Portuguese, they always put their safety first and never disregard safety rules and procedures. Everything is complied with rigorously. That is why they do not have in their dictionary an equivalent for the word “desenrascanço” – a Portuguese word used to express an ability to solve a problem without the adequate tools or proper technique to do so, and by use of sometimes imaginative resourcefulness when facing new situations!

How does the experience acquired abroad help you with your present job?
MC: Besides the English improvement, it is useful to know how TTC works, as well as the rules and/or directives specific to the USA, since my present job in material and equipment procuring also applies to the TTC.
I also think that while working in another country and with another culture I learnt new techniques, concepts and acquired a different outlook on a variety of subjects, which is a plus for the development of my career and work.

In your opinion what are the advantages of an international experience?
MC: To have the opportunity to know a different country, a different culture, another language, to broaden the horizons and meet people. It also provides us with a different perspective on our country, family and friends. The whole experience ends up reflecting on one’s work and person.

Last September, the American ambassador in Lisbon, Al Hoffman, organized a trip with 60 Portuguese personalities from political, cultural, education and business backgrounds, with the purpose of showing them how the state of Florida works.

People like Marçal Grilo, Artur Santos Silva (directors of Gulbenkian), Maria de Belém, Valente de Oliveira and José Luís Arnaut (former ministers) participated in this initiative which also had the support of our ambassador in Washington, Pedro Catarino. The group covered five cities from Orlando to Miami and followed a very organized daily schedule: breakfast, lunch and working dinner!

We visited four universities and had the opportunity of witnessing the excellent relationship between them and business enterprises. While in Europe universities are exclusively devoted to knowledge creation, in the United States, besides those that have the same objective, there are others whose main concern is to train people for the work market, preparing them for the jobs that are in demand. There is, therefore, a direct connection between entrepreneurs and education professionals with excellent results for everybody.

Economically Florida has a budget surplus, zero unemployment and tax cuts every year- certainly an example to be followed by Portugal.