A Comparative Analysis Of The Pharmaceutical Markets Of Brazil And Mexico

BMI View: Brazil and Mexico have been essential for the commercial performance of multinational pharmaceutical companies in Latin America. Brazil's traditional commitment to healthcare has made the country very lucrative for many multinational pharmaceutical companies. However, the often intimate relationship between multinationals and Brazilian authorities, and deeper integration with local drugmakers, may become their undoing in long-term. Mexico has demonstrated many promising aspects for the development of multinationals in Latin America, such as its inclination to free trade and encouraging macroeconomic growth prospects. However, in short term, the relatively less investment in healthcare and low drug spending capacity will hinder multinationals to fully materialise their commercial benefits in the country.

Pharmaceutical Revenue Generating Opportunities

The pharmaceutical market of Latin America has become increasingly important yet challenging for multinational drugmakers. The Brazilian drug market is an integral component of the strategic outlook for many major pharmaceutical companies. Pharmaceutical public-private partnerships (PPPs) have been a prominent driving force for multinational companies' revenue growth in Brazil. In 2014, we believe that multinational drugmakers will continue to enjoy secured revenue streams under the deal terms, given the significant influence of the Brazilian government in local drug market; however, multinationals will eventually lose their advanced technologies and market shares to local drugmakers.

Brazilian Market Performance Significantly Impacts Regional Growth
Sanofi Revenue In Latin America (EURmn)

A Comparative Analysis Of The Pharmaceutical Markets Of Brazil And Mexico

BMI View: Brazil and Mexico have been essential for the commercial performance of multinational pharmaceutical companies in Latin America. Brazil's traditional commitment to healthcare has made the country very lucrative for many multinational pharmaceutical companies. However, the often intimate relationship between multinationals and Brazilian authorities, and deeper integration with local drugmakers, may become their undoing in long-term. Mexico has demonstrated many promising aspects for the development of multinationals in Latin America, such as its inclination to free trade and encouraging macroeconomic growth prospects. However, in short term, the relatively less investment in healthcare and low drug spending capacity will hinder multinationals to fully materialise their commercial benefits in the country.

Pharmaceutical Revenue Generating Opportunities

The pharmaceutical market of Latin America has become increasingly important yet challenging for multinational drugmakers. The Brazilian drug market is an integral component of the strategic outlook for many major pharmaceutical companies. Pharmaceutical public-private partnerships (PPPs) have been a prominent driving force for multinational companies' revenue growth in Brazil. In 2014, we believe that multinational drugmakers will continue to enjoy secured revenue streams under the deal terms, given the significant influence of the Brazilian government in local drug market; however, multinationals will eventually lose their advanced technologies and market shares to local drugmakers.

Generic competition will continue to be the biggest challenge for multinationals to generate healthy revenue growth. Sanofi, with the largest Latin American sales among its global peers, generated over 40% of its regional revenues in Brazil for the past few years. However, the company reported a 'frustrating quarter' in Q213, largely due to Brazil's generic drug issues. Although in Q313 Sanofi adjusted the 'excess trade inventory back to normal', sales still decreased by 17.4% from the same quarter in the previous year to EUR269mn (US$364mn) in Brazil due to the low sales of generic drugs.

Brazilian Market Performance Significantly Impacts Regional Growth
Sanofi Revenue In Latin America (EURmn)

Mexico is the second most important market for multinationals in Latin America after Brazil. The encouraging macroeconomic growth prospects, growing middle-class population, business-friendly environment and improving pharmaceutical regulatory regime have made Mexico an increasingly attractive market to multinationals. However, major drugmakers have generally experienced mixed financial results in the country.

BMI believes that the low coverage of advanced medicines by the public sector and the relatively low level of middle class income in Mexico could be one of the key factors than hinder the revenue growth of multinational drugmakers in the country: according to a report from PricewaterhouseCoopers, private pharmaceutical consumption in Mexico accounted for 75% of the total spending in 2011 and only 6.2% of the population have medical expense insurance coverage. A study from Page Personnel, a primary market research company, also showed that the level of middle class wages in Mexico is lower than other major Latin American countries.

Mexico's healthcare expenditure as percentage of GDP is the lowest among OECD countries. At 6.3% in 2013, it is also significantly lower than other major Latin American countries' level: Brazil (9.4%), Argentina (8.3%) and Chile (7.7%). We note that in September 2013, Mexican President Enrique Peña Nieto unveiled the fiscal reform proposal to bolster government revenue. The exemption of medicines to VAT and the creation of universal social security have improved the long-term outlook of the country's pharmaceutical market. In 2014, if Mexican government improves the national access to medicines, it will help multinational drugmakers to fully materialise their commercial benefits in the country.

M&A Developments

Multinationals and foreign investors have also capitalised on Latin American pharmaceutical and healthcare markets' robust growth through merger and acquisition (M&A). Brazil has been a major recipient of foreign investment in Latin America. Notably in October 2012, UnitedHealth Group, the biggest US healthcare insurer by revenue acquired a 90% stake in Amil Participações, a Brazilian insurance group and hospital operator, for US$4.9bn. In April 2013, US-based healthcare company Healthways entered into a five-year strategic agreement with SulAmérica, the largest independent health insurer in Brazil. We believe that Brazil's private healthcare sector offers foreign investors significant investment opportunities: 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.

On the other hand, in April 2013, Pfizer, Novartis and Abbott Laboratories reportedly bid over US$5bn for Aché, a leading Brazilian pharmaceutical company, in a private auction that could not be completed. Several pharmaceutical companies have been deterred by reports that one of the families that own Aché would not divest its stake. We note that the Brazilian government has determined to promote domestic pharmaceutical industry; by 2013, nine out of the largest 20 pharmaceutical companies are local players, despite the expansion of multinational drugmakers in the country. However, the attractiveness of Brazilian generic companies as acquisition targets has been counterbalanced by the government's current drive to maintain the industry's independence and competitiveness.

We believe that major local drugmakers such as Aché have become strategically important for the Brazilian government to promote the domestic biological drug sector; therefore, it is very unlikely they will be acquired by a multinational in the short term. However, foreign drugmakers still can capitalise on the strong pharmaceutical market growth in Brazil by collaborating with local partners through PPPs and joint ventures. In addition, there are many mid-sized private businesses ripe for consolidation. For foreign drugmakers, acquiring such companies can give them immediate access to the market and allow them to enjoy the government's favourable policies in drug pricing and tax incentives for local drugmakers.

Foreign investors and companies will face less government intervention due to Mexico's inclination to free trade. In October 2013, Alliance Boots was reported to negotiate with Grupo Casa Saba (GCS), Mexico's major national wholesale distributor, to purchase its pharmaceutical distribution business. We note that Mexico's swift approvals of medicines, its abolition of the local production requirement and the reduction of import tax have allowed rapid entries for foreign pharmaceutical products, and provided less incentive for foreign drugmakers to quire local companies. In addition, hardly supported by favourable policies towards local producers, domestic Mexican pharmaceutical companies have not capitalised on growth in the region's second largest pharmaceutical market and established a significant presence in Latin America as their Brazilian peers have.

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