Brazilian Pharma - Emerging hot spot?

In recent years, Brazil has been the focus of investment among the major emerging countries of the world, also called the BRIC countries (Brazil, Russia, India, and China). The recent economic slowdown was caused by the adverse factors that influenced the global business environment rather than the structural problems inherent in the system. Current indicators suggest that the Brazilian economy is poised for higher economic growth due to higher exports demand and a higher inflow of investment The population of Brazil is estimated to be around 180 million in 2005 and is growing at a rate of 1.11 per cent every year. The demographic profile of the country shows that the majority of the population is very young with 26.6 per cent below 15 years and 67.6 per cent between 15 and 64 years. The birth and the death rates are estimated to be 17.24 and 6.14 per 1000 of the population, respectively. The average life expectancy has increased while, at the same time, infant mortality has decreased. Communicable diseases have almost disappeared, with their existence restricted to only a few pockets. Brazil was signatory to the Trade Related Intellectual Property Rights (TRIPS) agreement under the WTO in 1996. The market for pharmaceuticals on the ground level has shown a fairly flat growth over the past few years mainly because of extreme volatility in the currency's exchange rate. In terms of turnover Brazil's healthcare industry generates revenues of $20 billion, which is equivalent to 5% of the country's Gross Domestic Product (GDP). Healthcare industry has undergone tremendous change in the last 50 years. The constitution of 1988, following a decade-long social movement to combat the inequitable healthcare policies of the departed military regime, mandated a free healthcare system, Unica De Saude. Privately financed healthcare has grown rapidly and the government is divesting its control in the public-owned facilities. At the same time, costs are also rising due to the introduction of new technology. In order to respond to the increasing demand and rising costs, the industry is seeking more efficient operations that can provide higher quality care at lower costs. The country is initiating measures to bring major reforms in both the private and public sectors with the intention of accessing substantial business opportunities. Pharmaceutical Industry Pharmaceutical industry in Brazil is the second largest in Latin America after Mexico. The market for pharmaceuticals in Brazil for 2005 is estimated to be around $8 billion. The pharmaceutical market shrunk in the period from 1997 to 2003 and is witnessing a peak since 2004. This is primarily because of the economic problems in Brazil and the recession that the country went through during that period. The increase in 2004 is largely because of a strong resurgence of the economy and reduction of volatility in the foreign exchange market. The pharmaceutical industry invests the equivalent of 21% of sales in R & D more than other industries like automobiles, electronics and telecommunications. The government of Brazil collects over $1 billion in form of taxes which is one of the highest in the world. Most of the activity in Brazil pharmaceutical industry is concentrated in the production stage of the value chain leaving areas such as research and development (R&D) and active pharmaceutical ingredients (APIs) production locally open for competition. These are the areas, which hold a lot of promise in the coming years and are likely to help the pharmaceuticals market grow. In Brazil there is no concept of medical reimbursement therefore the product is totally paid by the user or it may be received free of charge through a government health organ. The pharmaceutical industry in Brazil can be categorized broadly into: Branded Pharmaceuticals Generic Pharmaceuticals Branded pharmaceuticals contribution towards the total market is close to 90% whereas the generic pharmaceuticals account for remaining 10%. The branded market had witnessed a negative growth in the year 2002 but is experiencing growth slowly over the last couple of years. The principal factors for such a sluggish growth are recession in economy and volatility in foreign exchange. Branded pharmaceuticals still continue to benefit from being the first preference of medical professionals but in recent years the generic manufacturers have been indulged into targeting pharmacies and drug stores for sales which to some extent has affected the branded pharmaceutical sales. To overcome this issue, the innovator companies have altered there marketing policies and have started focusing on drug stores and pharmacies along with physicians. The generic drugs market has been flourishing in recent years eroding the branded pharmaceuticals market. The core reasons behind this impressive growth has been on the background of strong fundamentals of localization of manufacturing, improved foreign exchange management, and the much needed push from the government. The government in recent years, in order to provide cheap medication to those who cannot afford medical facilities, has been procuring generic drugs and supplying it free of cost. The public health care systems in most Brazilian states purchase almost the entire production of generic drugs as part of the government's programme to distribute medicines to the poorest. The government recently has also made arrangements for the quick approval of generics and the public health system is also expected to buy generics over branded pharmaceuticals for distribution under the public healthcare system. Since the first bioequivalent generics were approved in February 2000, the number of marketing authorizations has risen exponentially as ANVISA (Agencia Nacional de Vigilancia Sanitaria) has given high priority to processing generic applications that conform to the pro-generic government policy. The monthly rate of approval has steadily increased over the last two years, reaching 32 new generic registrations in the recent times as compared with 21 in 2001. Antibiotics, antihypertensives and anti-ulcerants are the most commonly registered generics in the country. There are close to 4500 generics registered in Brazil of which most are from local manufacturers comprising of EMS Sigma Pharma - 191, Medley - 111, Eurofarma - 123, Nature's Plus Fica - 68, Prati. Donaduzzi - 66. Multinationals like Abbott - 32, Novartis - 40, Merck - 22, Apotex - 45 have generics registered in the country. Indian contribution to generic drug registrations is low with Ranbaxy having near to 90, Hexal - 33, IPCA - 4 Generic drugs registered in Brazil pharmaceutical market

Local Company	Total number	MNC	Total Number	Indian Company	Total Number
Brainfarma	33	Abbott	32	Hexal	33
Biosintetica	40	Apotex	45	Ranbaxy	90
Cristalia	36	Merck	22	IPCA	4
EMS Sigma Pharma	191	Novartis	40	Knoll	1
Eurofarma	123	Alcon	9
Prati. Donaduzzi	66
Nature's Plus Fica	68
Neo Quimica	45
Teuto	61

Source: Frost & Sullivan After liberalizing the price of medicines in 1994, the Brazilian Government re-imposed a strict policy of price controls for prescription drugs in 2001.The most popular therapeutic segments in terms of sales are cardiovascular, CNS, analgesics, anti-diabetic, hypertension, and anti-cancer. In terms of government purchases, anti-AIDS is a large segment where the government has procured drugs for free distribution to the public and this has resulted in a decrease in the number of deaths due to AIDS over the last 3 years. Challenges Most of the families in the region suffer from an acute shortage of financial resources. Inequality and exclusion remain the main challenges facing the industry in the region. The Brazilian government's new approach to healthcare will have a major influence on the outlook for the pharmaceutical industry as the country's economic problems appear to have increased the popularity of cost containment policies. There has also been a high profile campaign to encourage the use of generic medicines in Brazil and the government has taken a tough line with pharmaceutical companies it believes to be intransigent in their pricing strategies. The biggest challenge that the pharmaceutical industry is likely to be confronted with is that of R&D expenditure. With R&D costs soaring, pharmaceutical companies are under real pressure to find ways to reduce costs. One way they can reduce costs is by investing in 'centers of excellence' There is still considerable potential for companies to perform well in the Brazilian market, but they will need to carefully assess the changing healthcare environment and predict the implications for their products. These types of challenges are natural in an emerging market and so companies are still likely to have a positive view for the future. Market players The Brazil pharmaceutical industry has been subject to mergers and acquisitions. The intention is to seek efficiency in R&D and cost cutting in production, marketing and general overheads. Due to intense competition and tough rivalry amongst the manufacturers in the country approximately 2000 new drugs have been launched in the last seven years. The Brazilian pharmaceutical industry comprises around 370 companies. In terms of country participation in Brazil pharmaceutical market, local companies still have a larger involvement with close to 35% share, followed by US companies' in existence with 23%, German companies 16%, Swiss companies 11% and other countries with 15% share respectively. The overall pharmaceutical market in Brazil is fragmented to such an extent that no individual company has a market share of more than 5%. Branded pharmaceuticals market has presence of almost all the leading multinationals in the globe including Novartis, Aventis, Roche, Bristol-Myers Squibb, Schering Plough, Boehringer Ingelheim, Merck, Pfizer etc. the market share of multinationals is more or less uniform. With patent protection for 20 years, brands available in developed market are launched by innovators devoid of being copied and sold at a cheaper rate. However MNCs have expressed concern over slow or almost non existence of pharmaceutical patent approval with close to 18000 patents still pending for approval. Generic pharmaceutical market is under the tight grip of local manufacturers with players like Medley Pharmaceutical Industry, EMS Sigma Pharma, Europharma, Biosintetica, Neo Quimica and many others taking toll of the market. In Brazil the top 5 players contribute to almost 80% of generic market. Drug distribution At present it is estimated that there are more than 56,000 establishments, which are involved in the trade of pharmaceuticals. Brazil has some class associations representing pharmacies of which Brazilian Association of Pharmacies (ABFARMA) and Association of pharmaceutical trade (ABCFARMA) represent a total of 90% of the retail pharmaceutical market. Almost 80% of the drug stores are small with low billing. The companies also encourage sales by offering discounts and performance-based incentives to the distributors and pharmacies that achieve sales targets and increase sales. The main source of earning for drug stores in Brazil is through sale of non medicine products. In Brazil state VAT on medicine is between 17% and 19%. Regulations ANVISA was formed under the Ministry of Healthy in 1999 along the lines of FDA to protect and promote public health ensuring the health safety of products and services, participating in the construction of the access to them. .Pharmaceutical products both locally produced and imported must be registered with ANVISA. Since 2001, Article 229-C of Law 10196 has charged that the "grant of patents to pharmaceutical products and processes subjected to prior approval by ANVISA. ANVISA role is to provide technical support in granting of patents by the National Institute of Industrial Property. ANVISA oversees reference medicines, similar and generic drugs, medical equipment, cosmetics and hospital services, and has responsibility for authorizing products on the market, as well as licensing manufacturers. User fees for ANVISA have grown substantially in recent years, so that they are ninety times higher today than five years ago. Some reports claim that, at least up until 2000, drug regulation was an area of weakness for Brazil, partly because of budget constraints and insufficient technology. Between 1997 and 1998 the Ministry of Health received 172 reports of counterfeit drugs. With the creation of ANVISA, the regulatory capacity increased and from 1999 to 2003, there were only seven confirmed cases of counterfeit drugs. Regarding substandard drugs, 2003 saw 72 drugs apprehended and destroyed and 39 were withdrawn. Technically, there is a 90 day review period for drug application registration, but processing often takes 8 to 12 months. AIDS drugs are an exception, in that registration normally takes less than one month. In 1999, Brazil passed legislation which dealt with the licensing and registration of generic medicines. Supplementary measures provided technical standards and norms, such as bioequivalence and bioavailability standards, that are now applied by ANVISA. Generic drug approvals started to issue in 2000, and by December 2004, 1377 approvals were issued for 284 active ingredients in 5,960 dosage forms. A new regulatory body Chamber of Drug Market Regulation CMED was established in October 2003 to regulate price and establish regulatory guidelines for pharmaceutical sector. This development followed a change in the law in June 2003, when the Ministry of Health and ANVISA took full responsibility for drug pricing and pharmaceutical industry regulation from the Ministry of Justice. The first yearly price adjustment occurred in March 2004, when the government considered the competitiveness of companies and prices in the domestic sector. Pharmaceutical investments The capital inflow in the county is estimated to be around R$750 million experiencing a stable growth. Apotex, Canada's leading generic player with a significant global presence. Apotex has forayed into the Brazilian market via an investment of R$8 million on a new production plant. Ranbaxy Farmaceutica Ltda has also invested in new facilities in the country and has formed alliances with Davidson and Schering Plough do Brazil. Indian companies have been increasingly attracted to Brazil. A few years ago several companies started selling bulk drugs to Brazil. Since then other Indian majors like Cadila Healthcare, Core Health Care, Strides, Torrent etc. have set up operations in Brazil to market their formulations and are even planning to set up manufacturing bases there which could be used for exports to Mercosur countries in the future. To assist in building a strong presence in the Brazilian market, Glenmark Pharmaceuticals acquired Laboratorios Klinger in 2004 for a consideration of USD 5.2 million. Klinger is a leading, privately owned Brazilian company with a work force of 176 employees, including a sales force of 91 sales representatives. It has 21 approved product registrations in Brazil Teva has formed a joint venture with Brazilian Biosintetica (BioTeva) and invested nearly US$50mn in setting up production facilities in the country. Hexal has also invested into local Brazilian production in Cambe and distributes imported drugs in the country. Local companies are not to be left far behind and are actively investing in modernizing and building new production facilities to step up their output of generics. -- Kapil Parab is research analyst -Healthcare Practice,Frost & Sullivan. The author can be reached through sdedhia@frost.com