Local Drugmakers To Dominate The Biopharmaceutical Sector

BMI View: The Brazilian government has been proved to have significant influence on the domestic pharmaceutical market. Since domestic production of biosimilars is of next great interest to the local authority, we believe Brazilian drugmakers will soon become more competitive and leave limited market space for foreign companies in this sector. Innovative drugmakers will be placed in a less favourable position. They can only enjoy a secured revenue stream within the PPP deal term, and eventually lose their advanced technologies and market shares to the local players. This aligns closely with our view that local pharmaceutical companies will outpace multinationals in Brazil.

Brazil's local media Valor Economico has reported that by June 2013 half of the Brazilian pharmaceutical sales were generated by domestic manufacturers. In terms of volume sales, local companies accounted for over 70% of the market share. Brazil's domestic pharmaceutical industry has made significant progress, given the fact that its market share was only 25% in 2000. According to primary market research firm IMS Health, Brazilian drugmakers EMS and Hypermarcas were listed among the top ten pharmaceutical companies in Latin America in terms of regional pharmaceutical sales in 2012. In Q213, while Sanofi experienced a 'frustrating quarter', largely due to the 'Brazil generic medicines issue'; Hypermarcas continued to enjoy double-digit growth during the same period. The company, a domestic leader of biosimilar drug producers, is reported to generate approximately 20 % of its revenues from biosimilar drug sector, 8% from generic small molecule drug sales, and 28% from over-the-counter (OTC) medicines.

BMI has highlighted before that Brazilian pharmaceutical companies have been strengthened by the government's favourable policies such as up to 25% price premium for local produced medicines in government procurements, tax incentives, government direct investment in research and development, low-cost loans and technology transfer deals from Public-Private Partnerships (PPPs). The PPPs, one of the Ministry of Health's flagship programs, have facilitated 88 deals between multinational drugmakers and domestic enterprises since it started in 2009. The PPPs, which include sixty-four medicines, six vaccines, four health products and four research programmes, have enabled domestic drugmakers to produce more cost-effective medicines and reduce Brazil's reliance on imported drugs.

BMI View: The Brazilian government has been proved to have significant influence on the domestic pharmaceutical market. Since domestic production of biosimilars is of next great interest to the local authority, we believe Brazilian drugmakers will soon become more competitive and leave limited market space for foreign companies in this sector. Innovative drugmakers will be placed in a less favourable position. They can only enjoy a secured revenue stream within the PPP deal term, and eventually lose their advanced technologies and market shares to the local players. This aligns closely with our view that local pharmaceutical companies will outpace multinationals in Brazil.

Brazil's local media Valor Economico has reported that by June 2013 half of the Brazilian pharmaceutical sales were generated by domestic manufacturers. In terms of volume sales, local companies accounted for over 70% of the market share. Brazil's domestic pharmaceutical industry has made significant progress, given the fact that its market share was only 25% in 2000. According to primary market research firm IMS Health, Brazilian drugmakers EMS and Hypermarcas were listed among the top ten pharmaceutical companies in Latin America in terms of regional pharmaceutical sales in 2012. In Q213, while Sanofi experienced a 'frustrating quarter', largely due to the 'Brazil generic medicines issue'; Hypermarcas continued to enjoy double-digit growth during the same period. The company, a domestic leader of biosimilar drug producers, is reported to generate approximately 20 % of its revenues from biosimilar drug sector, 8% from generic small molecule drug sales, and 28% from over-the-counter (OTC) medicines.

BMI has highlighted before that Brazilian pharmaceutical companies have been strengthened by the government's favourable policies such as up to 25% price premium for local produced medicines in government procurements, tax incentives, government direct investment in research and development, low-cost loans and technology transfer deals from Public-Private Partnerships (PPPs). The PPPs, one of the Ministry of Health's flagship programs, have facilitated 88 deals between multinational drugmakers and domestic enterprises since it started in 2009. The PPPs, which include sixty-four medicines, six vaccines, four health products and four research programmes, have enabled domestic drugmakers to produce more cost-effective medicines and reduce Brazil's reliance on imported drugs.

However, we believe that domestic production of biosimilars is of next great interest to the government. Currently, the federal government purchases about 60% of total biologics in Brazil (BRL4bn (US$1.8bn)). This makes up 43% of the Ministry of Health's expenditure on medications, but accounts for just 5% of the total in volume terms. Locally produced drugs account for 15% of the medicines supplied to the unified health system (SUS), and the government aims to increase this to 35% by 2015.

The government believes that the technological barrier is the main obstacle for Brazil to produce biosimialr drugs locally. The head of the Department of Chemicals and Pharmaceuticals at the Brazil's National Bank (BNDES), Mr Peter Palm, stated that due to the complex nature of the products, even after biological drugs lose their patent protections, it is still very hard for local companies to copy. We note that in H113, taliglucerase, etanercept, rituximab and trastuzumab, as well as other biological medicines, were already listed in the PPPs.

Etanercept and rituximab are expected to be launched in the Brazilian pharmaceutical market in the next two years. First clinical trials are scheduled between the end of 2013 and beginning of 2014, representing research and development (R&D) investments of BRL200mn (US$88mn). We believe that they will be soon produced by local companies. Clearly, the Brazilian government is unsatisfied to have local manufacturers to just produce small molecule products that have lost patent protection.

The Brazilian Congress is also considering changing the legal aspect of interchangeability for biosimilar drugs to reduce drug prices. According to the Brazilian law, if a generic drug is interchangeable with a reference patented product; its price has to be at least 35 % cheaper. But this practice is not yet applicable to biosimilar drugs. Currently, almost 100 % of biosimilar drugs in Brazil have met the bioequivalent requirements from Brazil's National Health Surveillance Agency (ANVISA). According to Valor Economico, by June 2013, Brazil's biosimilar drug market reached BRL9bn (US$3.8bn) and generic small molecule drug market was around BRL13bn (US$5.5bn). We note that ANVISA also suspended new applications for medicine registrations, filed after July 31 2013, with 'Good Bioavailability and Bioequivalence Practices' certifications issued by clinical research centres located outside of Brazil in September 2013. We believe this will significantly limit market space for foreign companies.

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Sector: Pharmaceuticals & Healthcare
Geography: Brazil
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