Industry Trend Analysis - Macro Risk To Remain Heightened Through FY17 - MAY 2017

BMI View: The deteriorating political and economic outlook in Latin America is increasing the risks to multinational drugmakers' regional growth . For example, t he increasing likelihood of a sovereign default in Venezuela will degrade the country's operating environment and impact multinational drugmakers' regional performance. NAFTA renegotiation also poses downside risks for the Mexican pharmaceutical sector with the potential for prolonged weakness in the Mexican peso, protectionist trade measures and restricted foreign direct investment. Nonetheless, government commitment to healthcare in Latin America remains a positive for long-term prospects, with the expansion of public medical services to provide significant commercial opportunities.

Revenue-generating opportunities in Latin America will narrow in the face of ongoing challenges, continuing a trend highlighted in the Q416 and FY16 results of multinational drugmakers. Industry-specific factors such as unfavourable patent regulations, generic competition and pricing pressures will continue to threaten the profitability of pharmaceutical companies; however, the most pressing issues will be associated with the deterioration of the local macroeconomic and political landscape. This is particularly relevant in countries such as Venezuela and Mexico, where there is significant potential for disruption to the drugmaker operating environment.

Venezuela: Hyper-inflation has severely weakened the Venezuelan bolivar and a number of pharmaceutical companies commented in their FY16 results on the top line impact of foreign currency exchange. BMI's Country Risk team believe the probability of Venezuela defaulting on its sovereign debt obligations in 2017 exceeds 50% for the first time ( see 'Sovereign Default Is Likely In 2017', November 4 2016) and this creates further risk for multinationals in FY17. With nearly all imports cut off, unrest will become severe and could push the country to the brink of becoming a failed state.

NAFTA Upheaval Will Impact Mexican Pharmaceutical Exports
Mexico: US Pharmaceutical Exports (LHS, 5-Year Moving Average, USDmn) & Top 10 Export Markets (RHS, 2011-2015, %)
Source: United Nations Comtrade Database , DESA , UNSD, BMI

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