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New Horizons

Latin America will become increasingly important for pharmaceutical companies who are seeking global expansion. Demand for advanced medicines from the steadily increasing middle class in the region will continue to drive revenue growth for innovative businesses, while improving local healthcare systems will come to rely on an enhanced supply of medical treatments to address the main health problems. We forecast that by 2023, medicine expenditure in Latin America will account for over 11% of the global drug market – up from 6% in 2005.

Brazil: Set for Success

Brazil will continue to be the most attractive market for drug-makers in Latin America. Sales of pharmaceuticals in the country have been resilient to fluctuations in economic activity, which is strongly influenced by commodity prices. As the Brazilian Federal Constitution dictates that access to healthcare is a social right and independent of financial capacity, the government is committed to improving the national standard of healthcare. The majority of the leading foreign manufacturers have a well-established presence in Brazil – over the past few years, Sanofi, with the largest Latin American sales among its global peers, generated over 40% of its Latin American revenue in Brazil alone.

Local Production
The Brazilian government has been very protective towards its domestic pharma industry. The role of leading local manufacturers extends beyond supplying affordable medicines to the domestic market; they are a strategic component of the government's support of the economy. Locally produced medicines in Brazil can be purchased at a 25% price premium compared to imported medicines through the Unified Health System, with domestically-manufactured biopharmaceuticals enjoying an even higher margin of 40%. Furthermore, Brazil's Agência Nacional de Vigilância Sanitária requests extensive clinical testing to be performed in Brazil and does not recognise foreign quality compliance certificates. Instead, it has implemented compulsory certification of Good Manufacturing Practice (GMP) guidelines for foreign drug-makers exporting to Brazil.

In recent years, the public-private partnerships (PPPs) between foreign and domestic manufacturers have been one of the most powerful tools by which the government has achieved some of its social and economic objectives. Due to PPPs, the Brazilian government – the major player in Brazil's pharma market – has enabled better, more affordable medicines to be produced by local companies, offering effective and sustainable control of many diseases, and reducing the financial burden on local citizens. Domestic manufacturers, strengthened by the government's favourable policies and well-equipped with advanced production technologies, have emerged as a competitive force in the Latin American generic drug market.

Multinational Investment
As well as collaborating with the Brazilian government, increasing investment in local production and integrating with local enterprises will continue to be prominent strategies for foreign drug-makers looking to generate significant revenues in Latin America, given the projected expansion of the pharma market. Within Brazil's public health sector, multinationals will secure revenue streams within PPP deal terms, as well as benefit from other favourable government policies. However, the downside risk is that innovative drug-makers will eventually lose advanced technologies and market share to local players.

While local public healthcare systems are evolving towards basic universal health coverage to benefit lower-income groups, the demand for private healthcare and advanced treatments to manage chronic diseases is rising as a result of the fast-growing middle class population. This opens up new routes for innovative drug-makers to reach the Brazilian middle class, which has a strong preference for branded medications – providing a significant advantage for multinationals over their local peers.

Mexico: Full of Promise

Mexico's encouraging macro-economic growth prospects, business-friendly operating environment and improving pharma regulatory regime have made it an increasingly attractive market for multinationals. The ageing population, the increasing incidence of chronic diseases and the government's determination to improve healthcare services are other fundamental factors driving market growth.

While key issues such as the low healthcare spending, the lack of a unified reimbursement system and the absence of widespread private health insurance have hindered the access of innovative medicines in the country, in the long term, healthier fiscal revenue due to the energy sector reforms will encourage the government to further increase public healthcare spending and improve national standards.

Generics

Generic drugs are set to be a key element of Mexico's healthcare modernisation. They are an effective tool for the government to control public spending while trying to increase coverage of medicines. Mexico’s government has committed to encouraging the genuine generic drug market and battling consumer and prescriber misconceptions about the sector. Since October 2011, when Comisión Federal para la Protección contra Riesgos Sanitarios (COFEPRIS) started to promote the generic drug sector and accelerate the market approval process, nearly 30,000 such drugs have been approved.

The growing prevalence of generic drugs in Mexico has reshaped the country's pharma market landscape. In the short term, the generic drug sector will outperform the patented drug sector. According to COFEPRIS, generic drug sales as a percentage of the total pharma market have increased from 12% in 2005, to 34% in 2013. In terms of volume sales, the sector accounts for over 80% of total prescription drugs sold in Mexico. Furthermore, we forecast that the Mexican generic drug market will rise in value from $3.45 billion in 2013, to $5.77 billion by 2018 – equating to a compound annual growth rate (CAGR) of 17.7%. Meanwhile, after the moderate contraction between 2009 and 2013, Mexico's patented drug sector is set to grow a CAGR of 1.6% between 2014 and 2023.

Drug Approvals
In recent years, Mexico has significantly improved its regulatory regime for the pharma industry. In July 2012, COFEPRIS was recognised by the Pan American Health Organization and the World Health Organization as a National Regulatory Authority of Regional Reference of Medicines and Biological Products. It has since reduced the issue period for innovative drug approval from 360 days to 60 days if medicines have already been approved in Europe, Canada, the US and Switzerland.

Confidence among Latin American countries has been fostered to allow medicines approved by COFEPRIS to enter their domestic markets with a simplified process. This has encouraged multinationals to launch more innovative drugs and shorten the relative drug approval lags between Mexico and other developed states. Mexico is also one of the very few countries that has made efforts to facilitate medicine imports – the country has abolished legislation requiring local manufacturing and offers reduced pharma import taxes.

Emerging Interest

Chile's open economy, efficient legal framework, businessfriendly environment and local manufacturers’ strong regional presence have also attracted foreign pharma companies to invest in its local businesses, capitalising on the strong growth in the broader Latin American market. In May 2014, Abbott Laboratories acquired a major Chilean drug-maker, CFR, to boost its generic drug sales, as CFR has a significant presence throughout Latin America. Abbott has been striving to expand its emerging markets presence after launching its spin-off drug business, AbbVie. We believe that local leading healthcare companies in Latin America will become increasingly attractive to multinationals, as the region has become a key target for market expansion.

Puerto Rico has been an attractive manufacturing base for major multinational companies for decades, due to its tax incentives, relatively low production costs and close ties with the US economy. Although the island's pharma industry has been operating below its potential, and the competitiveness of the local market has been deteriorating in recent years, as one of the most concentrated locations for the manufacture of medical, pharma and biotechnology products in the world, Puerto Rico will continue to be a global production hub for many companies. The government is determined to continue to attract investment from multinationals, especially in relation to the development of generic medicines and biologic drugs.

Other countries in Latin America, such as Costa Rica, Panama and Uruguay, have also tried to boost direct foreign investment and local production by offering tax incentives in the free-trade zones. Trade liberalisation, low operational costs, their strategic locations, favourable business environments and institutional stability, as well as a range of tax exemption policies, can provide drug-makers with a unique opportunity to reach the American markets, including the US.

Second-tier markets – such as the Caribbean and Central American countries – are relatively easier to access and provide more profitable revenue-generating opportunities for multinationals. The underdeveloped nature of the domestic pharma industry in the region, the general preference of patented medicine consumption, regional regulatory harmonisation and joint medicine procurement programmes will continue to improve operational efficiency for multinational drug-makers.

Risky Business

Emerging markets have experienced various levels of local currency devaluation against the US dollar in the past few quarters. With the US Federal Reserve tapering off quantitative easing, investors have discarded their local currency holdings, resulting in capital flowing back into developed states. The Argentine Peso and Venezuelan Bolívar have experienced significant depreciation, which has had an immediate negative impact on the performance of multinational pharma companies. Merck, Roche, Sanofi and Novartis have all booked charges tied to these weakened currencies.

In Venezuela, after the authorities called an 'economic war' against business owners and foreign influences in November 2013, the government has attempted to depict additional drug price cuts as a fight against opportunistic capitalism – especially on essential drugs – of which price controls have been re-introduced since 2003. Nearly 70% of all essential drugs are produced at a loss. Consequently, many manufacturers have opted to halt the commercialisation of such drugs in order to diminish financial losses, resulting in severe drug shortages and the depletion of inventories.

In Argentina, due to the devaluation of the Peso, the average price of medicines sold through pharmacies has increased dramatically. Some product prices have risen by nearly 50%, as many medicines and active pharmaceutical ingredients are imported to Argentina. The government has tried to negotiate with pharma companies to have drug prices rolled back, and are planning to impose fines on drug-makers that do not comply with the regulation.

However, these unpredictable and highly interventionist government practices will not be able to amend the countries' economic concerns, or resolve wider issues within the industry. The local markets and healthcare systems will continue to deteriorate due to insufficient medicine supply. Domestic inflation in both Venezuela and Argentina will continue to erode the competitiveness of their pharma exports when trade relationships are already significantly distorted due to frequent government policy interventions.

As a result, many multinationals have opted to freeze or downscale investment in Argentina and Venezuela due to increasingly challenging business environments. Anticipated future currency devaluation, high inflation, foreign currency controls and nationalisation approaches may significantly undermine foreign pharma businesses’ profitability in the two countries.

Sustained Success?

As foreign drug-makers deepen their ventures in Latin America, pharma companies are more exposed than ever to local political and macro-economic changes. Sustained success will come from more proactive approaches to understand and embrace local trends and developments in each individual market.


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Shanshan Wang is a Pharmaceuticals and Healthcare Analyst at Business Monitor International, a Fitch Group company. She joined in 2011 and is responsible for identifying market entry and expansion opportunities, assessing operational risk, and analysing global corporate growth strategies. Previously, Shanshan worked at Thomson Reuters, where she focused on pipeline product studies. She obtained her Association of Chartered Certified Accountants affiliate membership in 2012, and graduated from the University of Cambridge with a PhD degree in Pharmacology.
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