Along with several colleagues from the US and Europe, I had the opportunity last week to visit Sao Paulo and to spend time with our Brazilian Life Sciences team and with the Brazilian management teams of several of our global pharma clients. Sao Paulo is a very dynamic city and one certainly cannot miss the hallmarks of a rapidly growing economy which are present in there, including an incredible amount of construction and completely unpredictable traffic. It is almost impossible to leave too early to travel to the airport as one never knows if it is going to take one hour or three. I was fortunate enough to have a “creative” driver who got me there in 90 minutes by traversing most of the city.
E&Y colleagues from L to R: Transaction Advisory Resident Andrew Forman, Brazil Life Sciences Leader Frank de Meijer, Glen Giovannetti, and Brazil Chairman Jorge Menegassi
On the healthcare front, costs in Brazil are actually growing at a faster rate than the rest of the economy, which has slowed a bit in recent quarters, and now total about 8% of GDP. The growth is largely due to a combination of increased spending by a rising middle class, the so called “C” class, and the government’s efforts to provide more care to the “D/ E” classes (see figures below). According to government numbers, the middle “C” class has expanded from 45 million in 1993 to over 105 million today – an increase larger than the entire population of many developed countries. While the Brazilian constitution mandates healthcare as a right for all citizens, as in many other markets, there is a clear divide between what is available to the “haves” in the “A/B” classes (with the ability to pay out of pocket or through use of employer sponsored insurance) and the “have nots” which must rely completely on government provided care (government healthcare coverage generally does not cover the cost of prescription medications administered outside of the hospital setting).
Beyond the broader economic trends, Brazil is also a key focus for global pharma companies seeking growth because of an aging population and an increased incidence of chronic disease (see chart below for diabetes as an example). The elderly population is growing at nearly triple the rate of Brazil’s overall population and by 2050 at least 30% of the population will be at least 60 and life expectancy will reach 81 years of age.
Source: International Diabetes Federation
As a result, Brazil’s Pharma industry growth remains robust and is expected to continue at a CAGR of over 13% thru 2015. With the advent of austerity programs in Europe, Brazil could move past Italy and France to the #6 market in 2012 (2 years ahead of expectations). Compared to the anemic growth expected in the developed world as a result of the combination of expiring patents and pricing pressures, it is no wonder that most global pharma companies see Brazil as key to hitting their global growth targets. At the same time, the market presents many uncertainties. Some themes that emerged from our discussions included:
How best to align product offerings to the purchasing power of the population. Generic drugs have grown from only 5% of total pharma sales a decade ago to in excess of 20% today – a figure that is expected to increase to 33% by 2014. While companies can sell “developed world” products to the A/B class that can afford these medicines, the growth opportunities in the C class and below require a generic or branded generic portfolio. For companies lacking this portfolio, or the means of distribution to a fragmented market of pharmacists, acquisitions of a local generic player is a logical step. However these transactions are few in number, Sanofi’s 2009 acquisition of Medley and Pfizer’s minority stake in Tueto being among a limited number of examples. The challenges to completing deals mirror those of other emerging markets – a lack of targets with sufficient scope/scale and concerns about the quality of reported revenue due as a result of sales practices that do not match the compliance standards of the multinationals. In addition, the Brazilian government would like to reduce the dependence on imported drugs by encouraging the development and consolidation of its domestic companies and can be expected to carefully review any proposed transactions.
Market access is also a challenge – especially for high price oral medicines that are administered outside of the hospital setting and therefore not reimbursed by the government. Many of these novel medicines have not yet been introduced in Brazil because of the need to secure a price that is reasonable and also conforms to global pricing regimes. In our discussions, companies are open to the idea of discussing creative, risk sharing pricing arrangements with regulators, however the practical ability to implement such arrangements is unclear. We found great interest the outcomes-focused business models we have discussed in Progressions the last few years (the latest edition can be found here www.ey.com/p12).
It can also be expensive to operate in Brazil and the Brazilian currency, the Real, remains very strong. According to The Economist “Big Mac Index” which seeks to measure relative purchasing power as compared to the dollar, the Real trailed only the Swiss Franc in terms of being overvalued as of January 2012. In addition, imported drugs are also highly taxed - at approximately 35% as compared to a global average of 6.1% - due to a complex cascading tax applied in the import cost calculation, involving an inter-correlated system of federal and state taxes. This requires the multinational companies to carefully consider how best to structure their supply chains for maximum efficiency and to carefully examine other costs in order to grow profitably.
All in all, a great week and I offer congratulations to our EY Brazil team, lead by Frank de Meijer, who has been doing a terrific job helping our clients address these and others issues as they seek to capitalize on growth rates that no longer exist in the developed markets.