Why Brazil's Pharmerging Market Can't Be Ignored
by Tony D'Altorio, Investment U Research
Friday, November 19, 2010
As sales stall in developed markets, their emerging counterparts have become a lucrative battlefield for major global pharmaceutical companies.
Industry consultancy IMS Health (NYSE: RX) has pinpointed 17 of them that it's dubbed "pharmerging markets." And it sees them accounting for 50% of global growth in pharmaceutical sales over the next five years... making them irresistible targets.
In just 2011, sales in these markets should grow 15%-17% to $170 to $180 billion.
That's why pharmaceutical companies no longer compete in premium-priced markets like the U.S. They need emerging markets with marked sales volume to further their profits.
But each pharmerging market presents unique challenges and risks. And Brazil is no exception to the rule.
Brazilian Growth Prescription
Three decades ago, global pharmaceutical companies quit Brazil. High inflation, tough price controls and very weak intellectual property rights did them in.
They also had to fight against similares: drugs containing similar ingredients to the originals... but without rigorous testing to show similar performance.
Things are different today though. Since the mid-1990s, patent rules and regulatory requirements for generic drugs have become stricter.
Brazil's national drug regulator, Anvisa, has gone a step further recently. It has imposed bioequivalence measures and new auditing requirements. The latter reduces pharmacies' discretionary abilities to sell prescription drugs or substitutes over the counter.
Such measures will likely further limit similares by 2013. By then, a clearer distinction should exist between patented and genetic products, similar to developed markets.
This new friendly environment has the multinational drug companies rushing back. European business has led the rush so far, but the Americans are starting to catch up now.
Both like Brazil's middle class' rapid growth and its increasing number of pharmacies to meet demand. Thanks to the rising middle class, the country is now the eighth largest drug market by sales in the world.
- It makes sense then that insulin maker Novo Nordisk ADR (NYSE: NVO) jumped in to buy the Biobras plant near Sao Paulo in 2001. Or that the move started a buying spree.
- Last year, Sanofi-Aventis ADR (NYSE: SNY) purchased Medley, the number two Brazilian pharma company by market share. That move boosted its portfolio of over-the-counter and branded products.
- And last month, Pfizer (NYSE: PFE) bought 40% of Teuto, another generic business. This gives it a notable presence in Brazil by volume, though it does create problems concerning profit margin.
Some pharmaceutical companies, however, have so far held back from making acquisitions. They're pursuing different market strategies instead.
Right now, pharma sales in Brazil are largely unfunded by state or private health insurance. That means pharma companies have to rebalance and widen their mix of prices, products and marketing approaches.
- AstraZeneca ADR (NYSE: AZN), for one, usually focuses on discovering innovative medicines. But in Brazil, it is trying a new and different commercial approach. It is seeking regulatory approval for seven products combining low-cost, off patent drugs. They will treat cardiovascular and central nervous system conditions... the company's expertise.
- GlaxoSmithKline ADR (NYSE: GSK), on the other hand, wants to sell more expensive, innovative products to Brazil's middle class. Using discounts, it hopes to stimulate demand for off-patent branded generics and some over-the-counter products. It has also placed sales representatives in Brazil's pharmacies to help sell products.
Similarly, Novo Nordisk is selling innovative, higher-priced, pen-injected insulin for diabetics. But it also supplies cheaper, older generation insulin, which the Brazilian government does pay for.
All three companies understand the need to ditch their traditional approaches in order to fully function in Brazil.
Nilton Paletta, president for Latin America of IMS, said: "Brazil is becoming one of the largest and most attractive [pharmaceutical] markets. It's the second-biggest emerging market after China, with double-digit growth that will continue for the next few years."
No wonder then that the big global pharmaceutical companies believe it to be a market they can't afford to ignore. Or that the potential upside is well worth the effort.