Pharmaceuticals: Strong Medicine

The pharmaceutical industry has made strong moves in Latin America. High volumes and healthy market growth are driving investment decisions, but hurdles remain.

Photo: ©iStockphoto.com / gemphotography

In April 2013, the Brazilian health minister, Alexandre Padilha, flew down to São Paulo to unveil a series of eight agreements with manufacturers to produce 10 drugs locally and some $3.5 billion in low-cost loans to foster innovation. “The least the government spends with imports, the greater the number of medicines the government will be able to supply the national health service (locally known as SUS) for free,” he said. Last year, Brazil’s pharmaceutical industry registered a deficit of 10.5 billion reais (around $5 billion), and the government is pushing hard for technology transfer. Foreign pharmaceutical companies agree to pass on their knowledge to domestic institutions to produce a drug or a medicine locally within five years. In return, they enjoy the exclusive rights to supply the government with these products at market value during this period.

The pharmaceutical sector has been part of Brazil’s industrial policy since Lula’s era, and is Latin America’s, and one of the world’s, largest healthcare market. According to Fernando Pimentel, the Brazilian minister of development, in charge of industrial policy known as “Brasil Maior” (Greater Brazil), as many as 35 companies are already involved in the government operation. Demand for better healthcare and for quality drugs is growing, and a substantial part of the Brazilian middle class, according to a McKinsey survey, is ready to increase its medical spending, as the public sector is struggling to cope with such demand. “While [the middle class] does not spend as much on drugs out-of-pocket as the upper classes does, on a per capita basis, its sheer size translates into total spending almost twice as big as that of wealthier segments. Global pharma companies should not ignore it,” wrote Sanjeev Agarwal, João d’Almeida, and Tracy Francis in a joint McKinsey article.

 

Consolidation rounds

In Brazil, perhaps more than anywhere else in Latin America, economic activity has remained subdued lately, but investors are still banking on its long-term potential. The per capita spending on medicines is still relatively low, much lower than in Mexico, the region’s second largest market, for instance. But, there are currently over 700 manufacturers and 1,000 pharmaceutical plants in Brazil, and the scope for consolidation is still great.

“Developing countries are definitely on the radar of pharmaceutical companies, especially since the global financial crisis of 2007-08. Pharmaceutical companies have been doubling their efforts to sell in emerging markets. They are desperate to expand in developing countries,” said Jamie Davies, head of pharmaceuticals, medical devices & healthcare at Business Monitor International. “Brazil is one of the most open markets in terms of mergers and acquisitions. It is easier to buy companies there than it is in China and Russia,” he said.

 

Growth of generics
The most significant deals have taken place in the growing generics industry in the wake of Sanofi’s acquisition of Medley in 2009, which allowed the French group to assume the leadership of the local industry, soon after Pfizer purchased Teuto. Smaller acquisitions later involved Belgian UCB and Japanese Takeda, while India’s generics producers, such as Ranbaxy, entered the domestic market. While fewer local companies are now up for grabs (such as Aché and EMS), the trend will be towards smaller transactions, according to Davies. “There have been a series of big deals… but we would highlight smaller companies and unlisted companies as one area where there are investment opportunities,” he said. “It is a natural evolution as the overall market is expanding, a lot of small players emerge.”

Meanwhile, British GSK and Takeda’s subsidiary Nycomed, are also investing in vaccine production, sometimes in partnership with the government. There has been some spectacular deals in the drugstore/retail sector (U.S.-based CVS acquired a majority stake in Onofre this year, following a wave of intense consolidation among Brazilian players in recent years), and in the private health insurance industry (in October 2012, U.S.’s UnitedHealth agreed to pay $4.9 billion to purchase Amil, which had previously acquired several domestic competitors).

“Brazil is very high up in emerging markets priority globally. [Health insurance] is an attractive area, it has had a lot of government support in Brazil.  The government is very keen to promote the provision of healthcare, which is not the case in India,” said Davies.

 

Regulating the regulators

Market size is not everything. The regulatory environment is very uneven across the region. “Each country has its own regulatory system, and they are not all up to international standards. This is a challenge for companies, because regulations are not great for their stage of development. They should have better regulations,” said Davies. While Argentina and Venezuela fared poorly and have often taken foreign investors aback, Mexico has been considered more investor friendly than Brazil. Its status as an open economy, and its multiple trade agreements should also attract investments from those manufacturers that want to use the country as an export platform. “Things have been improving there. Mexico used to be an underperformer in terms of economic growth. This is changing. Most importantly, there have been improvements in the regulatory system. They used to have a backlog of approval of medicines that spanned several years. This is now back to one year or two, which is a lot more manageable. Companies are now looking at Mexico again to launch new drugs,” said Davies. If drugs have already been approved in the U.S., in Canada or in Europe, the approval process is even quicker.

Meanwhile, it may still take more than two years to register a new medicine in Brazil. The regulating agency Anvisa is trying to implement an electronic system that would cut the registration process down to six months, but there has been little progress so far. “Regulations are fine but there are not implemented,” said Antonio Britto, president of the Brazilian association of research pharmaceutical industry, Interfarma. According to Britto, Anvisa is short staffed to meet all its requirements ranging from food, cosmetics to drugs.

 

Price controls

Pricing is also an issue for the industry in Brazil. Drug prices have been capped for the past 10 years and increase on an annual basis. In Mexico, only patented drugs are subject to price controls. Price controls do not necessarily make drugs affordable. There is still a huge unmet demand from the patients’ point-of-view. Britto has some telling figures: he says that Brazilian consumers currently have to bear three quarters of the cost of medicine themselves. The consequence is that 52 percent of the treatment of patients is actually interrupted before their completion.

Thierry Ogier reported from São Paulo.

 

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