Modernizing Pharma Markets in Brazil and Mexico

Key Takeaways

* Policies in Brazil and Mexico have been introduced that require generics to have bioequivalence data (i.e., drugs must demonstrate bioequivalence to their corresponding reference drug)

* These reforms are phasing out “similares” (non-bioequivalent copy drugs) that have been popular in both markets, thereby shifting the advantage away from branding/marketing to upstream manufacturers that comply with quality/bioequivalence requirements

* However, questions remain how much of the market will shift as local and foreign firms continue to invest in both branded sales forces and improved, complying manufacturing facilities

Latin America as an Emerging Pharma Market

According to a March 2012 Deutsche Bank market research report1, the Latin American pharma market is worth more than $60 billion per year, which is equivalent to 7% of global pharma sales.  The market has always presented a challenge for pharma companies due varying demographics and a diversity of political and economic systems.  However, healthcare reforms are changing the landscape in Latin America’s two largest markets – Brazil and Mexico – as governments aim to reduce healthcare costs by phasing out similares (branded generics that lack bioequivalence data) in favor of generic drugs (whether branded or unbranded).  Governments also hope these reforms will provide the regulatory framework and market incentives necessary to promote investment in local drug manufacturing operations that meet the high international quality standards required for pharmaceutical exports.  A similar trend was seen in India – which often serves as the model for said reforms.

Brazil

According to a report from Cutting Edge Information2, Brazil is on the verge of emerging into a world power, perhaps even surpassing the other BRIC countries (Russia, India, and China).  It is already the largest pharma market in Latin America (accounting for more than a third of regional pharma sales), and ranks seventh globally due in part to the following:

  • a fast-growing and increasingly wealthy middle class,
  • favorable demographics (aging population with associated chronic medical conditions),
  • high out-of-pocket or private funding (20% of Brazil’s 200 million people have private insurance),
  • developing regulatory and patent systems,
  • high healthcare spend (8% of GDP), and
  • a stable political environment.

With pharma sales growth expected to remain the 11-13% range3 in the years ahead, IMS Health4 forecasts Brazil’s pharma sales to climb to sixth globally by 2015.

Brands Entrenched in the Brazilian Market

The pharma market in Brazil has been driven predominantly by growth in the branded drugs segment (including off-patent brands and branded generics), which are preferred by both out-of-pocket payers and prescribing physicians. A closer look at the market shows that only 4% of sales comprise unique, patented drugs (usually in niche areas), while unbranded generics account for 17% of the market (albeit this is the fastest growing segment – as will be discussed later).  That leaves nearly 80% of the market made up of off-patent branded generic drugs (e.g., innovator brands that have lost patent protection, third-party branded generics, and “similares”).  This branded proportion has only fallen slightly in recent years, from 84% in 2007, due in part to the large sales forces on the ground targeting physicians (and in some cases pharmacists) in an effort to preserve market share for the well-entrenched branded generic drugs.  Also, aggressive pricing has lowered branded generic costs to levels approaching unbranded generics – so, in this sense, government efforts to reduce drug costs are working despite the high prevalence of branded drugs still dominating the market.

The situation in Brazil is similar to much of the rest of Latin America where physician-driven, branded generics, including similares, have dominated the market. Similares were largely introduced before patent regimes were enforced or bioequivalence standards were introduced, and are sold under a brand name rather than an international non-proprietary name (or INN).  As a result, these branded, copy drugs became entrenched in the market, especially in Mexico where it’s common for patients to purchase drugs without a prescription, in which case pharmacists may advise on substitution.  Also, because generic quality has been uncertain in the past, brand has played an important role in generic choice, and led to further brand competition.  Government policies aim to change these market forces.

Phasing out of Similares

In 1999, the Brazilian government introduced and passed the Generics Act – legislation that requires a higher standard for the manufacturing of generic drugs – as well as bioequivalence data for said generics.  The aim of the legislation was twofold: increase consumption of generic drugs (compared to expensive branded originals), thereby reducing healthcare costs; and foster the development of a domestic pharmaceutical industry. Under the Act, registration of new similares was banned after 2003, and existing similares, launched prior to 1999, were required to pass bioequivalence tests by 2014 to remain on the market.  The cost of bioequivalence studies varies depending on the complexity of the molecule, but it is generally considered to be prohibitively expensive for some of the country’s smaller firms.  Furthermore, some firms lack the expertise or equipment to conduct bioequivalence studies, and, in any case, some products may not be bioequivalent. As a result, many companies could potentially exit the market or discontinue certain product lines as the 2014 deadline approaches.  According to the Brazilian regulatory agency ANVISA5, around half of all marketed similares have yet to demonstrate the requisite bioequivalence.

Impacts of the Generics Act

The Generics Act has fostered an era of ‘technology-based competition logic’6, under which Brazilian firms are modernizing their production facilities and developing innovation capabilities. For instance, between 2000 and 2003, generic producers in Brazil invested nearly a billion dollars in the construction and modernization of units7.  About 1,140 new pharmaceutical products were granted marketing approval between 2000 and 2005 – many of which are generics8. The increase in market size has clearly benefited Brazilian firms.  According to Osec9, there are 270 private and 20 state-owned pharmaceutical laboratories in Brazil, and many have started to make their mark – at least locally.  As mentioned above, this growing business has been driven by the government’s industrial policy, enhanced regulations, and the introduction of generics.  Many pharma companies, whether local or multinational, see the Generics Act as an opportunity to take market share left by companies/products exiting the market, and to acquire assets at a discount from struggling, non-complying companies.  While the Act requires higher fixed costs of production to meet the new standards with respect to drug quality, local firms that comply have been able to enter the growing generics market – both locally and abroad.

In addition to the Generics Act, the Brazilian government has also launched a campaign to inform the public about the quality of unbranded generics (i.e., those sold under an international non-proprietary name), while also rolling out the “Farmacia Popular” program, which provides access to free medicines for chronic conditions like hypertension and diabetes.  These policies and programs – together with many popular branded drugs coming off patent – have been key factors contributing to the increase in market share of locally manufactured, unbranded generics.  Also, as Brazilian officials had hoped, the spend on expensive branded products within the country is decreasing while local generic players are growing stronger thereby forcing innovators to move into niche segments or invest in mature lines with strong brands.  As the population has become increasingly more comfortable with the quality of generics, the larger domestic manufacturers – which primarily market branded and non-branded generics – have taken market share (from multinationals) through aggressive promotion, heavy discounting, and exploiting relationships with pharmacists and physicians.  This trend is also being driven by large retail pharmacies, especially in Mexico, where multinational players like Walmart are quickly gaining control of the retail market through aggressive promotion of less expensive non-branded generics readily available through their existing supply channels.

Multinationals are also making inroads further upstream as Brazilian pharma companies seek global partners in an effort to comply with federal regulations and preserve existing value in their similares brands.  At the same time, multinationals see an opportunity to take advantage of consumer choice and brand loyalty by buying or partnering with reputable, recognizable local firms. For example, Pfizer took a stake in Teuto Brasileiro, while Sanofi’s Medley generics business is investing in a similares sales force to leverage existing brand loyalty for its well-known products.  In addition to acquiring local pharma companies for their brands and sales forces, numerous global pharmaceutical companies are starting to use Brazil as a production platform, and, in some cases, investing in R&D opportunities in the country.  Other examples of pharma-related M&A transactions in Brazil – both local and international – are listed in the table below with deal values provided when available.

Brazil M&A Transaction Table

A Similar Situation in Mexico

Mexico represents the second largest pharma market in Latin America – worth $11.4 billion in 2010, which ranks fourteenth globally according to Deutsche Bank – while a Russell Reynolds Associates report ranks Mexico as the tenth largest global market for healthcare products. It is largely a self-pay market with government spending limited primarily to a short list of formularies for the poorest of the population.  The pharmaceutical market has grown to its present value from about $7 billion in 2004 despite a severe economic recession in recent years.  IMS predicts the market will continue to grow at a compound rate of 6% per year over to reach around $13 billion in 2014.  While noting the reluctance of government plans to include any new therapeutic advances on formularies, a recent Deutsche Bank market research report cites several companies that are optimistic about Mexico, including Sanofi, which recently rolled out its successful Brazilian generics brand Medley there.

Like Brazil, there is an emphasis on branded drugs, which has resulted in limited unbranded generic penetration.  Even in the public sector, non-branded, substitutable generics account for less than 10% of pharmacy sales (with Business Monitor International putting the number as low as 4% of total pharmacy sales).  However, the generics industry trade body, Asociacion Mexicana de Fabricantes de Genericos (AMEGI), believes that generic consumption in the private sector will accelerate in the coming years due to the expiry of patents on a number of high selling drugs, and, more importantly, the introduction of legislation – like that seen in Brazil – that requires bioequivalence data.  The 2005 reform, issued in Article 376 of the General Health Law, requires the interchangeable-generic designation for drugs to be sold as generics.  These new rules mean product registration is no longer unlimited – instead now only lasting for a five-year period, and drugmakers must demonstrate bioequivalence and therapeutic efficacy prior to initiating the production of any new drug.

Whether these rules will lead to a shift away from the dominance of brands remains to be seen.  Some pharmacies are so married to their similares brands that they maintain physicians on staff to offer free medical services for customers, who in return are given scripts for similares brands offered by the pharmacy.  However, shifts in the market similar to those seen in Brazil – that is the relatively fast growth of unbranded generics from a low base but with branded generics and off-patent branded originals continuing to dominate prescribing – are already taking shape.  In both countries, a first meaningful step has been taken: the regulatory framework is in place to change consumer perception of generic drugs and incentivize investment in world-class drug manufacturing facilities. Pharmaceutical manufacturing firms are opting to pursue bioequivalent generics – or partner with those who can. Even manufacturers who have opposed tougher bioequivalence requirements now see legitimate generics as the only way to secure market position domestically and in the regional marketplace in the long-term.

Perhaps more than pharmaceutical manufacturers or distributors driving change in the Mexican pharma market, it’s the large, chain retail pharmacies (often part of multinational retail stores like Walmart – which was opening nearly a store a day in Mexico during 2011) that are increasingly introducing cheap interchangeable generics or their own private-label generics to the market in a model favored by cost-conscious U.S. consumers and payers.  Those local players, whether on the manufacturing or retail side, with antiquated operations that are slow to adapt to the evolving market are being targeted by equally slow to adapt large pharma companies that view acquisitions as the only way to maintain market share.

M&A Activity in Latin America: Evidence of Change

Mexico has not experienced the same M&A deal volume seen in Brazil; however, both Opko Health and Valeant Pharmaceuticals, two active players in the Latin American market, have made purchases during the last three years.  See “Mexico M&A Transaction Table” below.  Valeant’s acquisition of Tecnofarma S.A. de C.V., a producer of generic pharmaceuticals which has a number of manufacturing sites including a new 160,000 square foot manufacturing plant, allowed its Latin America business to reduce its dependence upon third-party manufacturers.  Also, through the transaction, Valeant acquired 80 registered products – many of which were introduced into their branded generic platform in Mexico.  More recently (April 2012), Valeant agreed to acquire certain assets from Atlantis Pharma, a branded generics pharmaceutical company in Mexico with products in the gastro, analgesics and anti-inflammatory therapeutic categories, for approximately $71 million. J. Michael Pearson, chairman and CEO at Valeant, said of the deal, “Atlantis Pharma’s well-known brands in Mexico, and the potential to expand our export business to Central America and the Andean region, make this a strong addition to our current operations in Mexico.”  Meanwhile, Opko Health added an ophthalmic brand and other pharmaceutical products through its acquisition of Pharmacos Exakta, a privately owned Mexican pharmaceutical company.

Mexico M&A Transaction Table

With bioequivalent generics at mere 4% of total sales in Mexico and an improving regulatory environment for generics, many global pharma companies, especially Indian generics (e.g., Wockhardt, Ranbaxy, Dr.Reddy’s, Glenmark and Torrent), have increased their presence in Mexico with the expectation that bioequivalent generics will grab a significant share of the market in the next few years.  For example, Torrent Pharma has launched six products in Mexico from its CNS portfolio with a sales force of 35 people. It is planning to launch more products from its cardiovascular portfolio in the near term.   The company ultimately hopes to expand to 30 products with a sales force of 200 people.

Conclusions

Recent healthcare policies in both Mexico and Brazil represent steps in the right direction towards modernizing the pharma markets in both countries such that competition is based, at least partially, on technology rather than branding and marketing.  While there’s a clear shift towards lower-priced generics (including interchangeable, non-branded generics) as similares are phased out of the market, it’s still too early to say if Mexico or Brazil will become the next India in terms of generics exports.  At the very least, the high M&A deal volume in Brazil suggests the necessary investments are being made to support the required innovation – even if these deals are initially motivated by grabbing branded market share.  Perhaps a similar increase in Mexico can be expected as the political and economic situation there stabilizes.

Footnotes:

1 Deutsche Bank – Market Research “LatAm Field Trip – Key Takeaway”, March 28, 2012

2 Cutting Edge Information – Emerging Markets Clinical Trials: BRIC Countries (PH143), 2010

3 Deutsche Bank – Market Research “LatAm Field Trip – Key Takeaway”, March 28, 2012

4 IMS Health, PharmaVOICE Report, January 2011

5 Agência Nacional de Vigilância Sanitária (ANVISA)

6 Frenkel, J., 2001. O Mercado Farmacêutico Brasileiro: A Sua Evolução Recente, Mercados E Preços. In: Brasil: Radiografia Da Saúde. Negri, Barjas, Di Giovani and Geraldo (Eds.). IE/Unicamp, Campinas.

7 Oliveira, M. A., et al., 2004. Pharmaceutical Patent Protection in Brazil : Who Is Benefiting. WHO/PAHO Collaborating Center for Pharmaceutical Policies, National School of Public Health Sergio Arouca and Oswaldo Cruz Foundation, Rio de Janeiro.

8 Guennif and Ramani. Catching up in pharmaceuticals: a comparative study of India and Brazil. United Nations University. October 2011

9 Osec. Brazil’s Pharmaceutical Industry, Opportunities for Swiss suppliers. June 2010

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One Response to Modernizing Pharma Markets in Brazil and Mexico

  1. Coumara Radja says:

    It is a comprehensive report on Brazilian and Mexican Pharma markets. More information on the evolution and future plans of ANVISA and COFEPRIS would have added more value to the report since these two are supposed to “Controlled Facilitators” of the Pharma industry in the entire Latin American and Caribbean region.

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