Industry Trend Analysis - A Recap On The Pharmaceuticals & Healthcare Outlook For 2017: Latin America - SEPT 2017


BMI View: The Latin American pharmaceutical and healthcare market is set for expansion in 2017 but prolonged macroeconomic headwinds pose downside risks. The Latin American market will be impacted by the failure to pass the Trans-Pacific Partnership, as presently constituted, putting on hold the debate over patent protection and lessening the pressure on the region's health systems. The short-term picture is challenging but the region's long-standing liberalisation efforts and strong consumer base mean that Latin American pharmaceutical markets remain an investment opportunity for pharmaceutical companies. Ongoing trends , such as the roll - out of universal healthcare , are expected to continue and will shape opportunities for the region .

At the end of 2016, we set out a number of expectations for the year ahead in our annual review of the Latin American pharmaceuticals and healthcare sector ( see 'Pharmaceuticals & Healthcare Outlook For 2017: Latin America ' , December 9 2016). We have selected the two key trends and reviewed the progress of each. This article notes our views and details any developments that support or confirm our outlook. Overall, we expect that these views will continue to play out.

Market Resilience Will Continue Despite Macro Threats

BMI View: We expect Latin American pharmaceutical and healthcare expenditure to be resilient in the face of a number of challenges in 2017, although the macroeconomic outlook for the region will pose downside risks to our forecasts. We highlight Brazil, Mexico and Venezuela as three key markets that will face macro risks through 2017 , with the potential to impact the landscape for multinational drugmakers. Together, these countries will account for approximately 55% of Latin America's pharmaceutical expenditure in 2017, reflecting the potential impact of macro instability.

Brazil

  • On January 11 2017, the Banco Central do Brasil cut interest rates by 75 basis points (bps), while economic activity for November 2016 was released indicating a 0.2% m-o-m expansion with retail sales jumping 2.0% m-o-m. The increase in economic activity was in line with our Country Risk team's view that the Brazilian economy had bottomed out and was set for a modest recovery in 2017. The more aggressive rate cut policy by the Banco Central do Brasil will bolster investor interest, reducing inflation, which will lead policymakers to shift to support economic growth.

  • The Brazilian Ministry of Health's budget for medicines in 2017 grew by 3.0% y-o-y, a significant decrease on the 24.5% y-o-y increase in 2016 and the 12.6% y-o-y increase in 2014.

  • In May 2016, ProGenericos (the Brazilian Association of the Generic Medicines Industry) highlighted that the country's economic 'crisis', and the consequent inability of the population to spend on medicines, has led to an uptick in demand for generic drugs. Sales of generic medicines in January 2017 were 11.1% higher than in January 2016.

  • Highlighting the impact of the recession on the healthcare sector - which will have knock-on effects for the pharmaceutical sector - in 2016, only 10.35% of tax revenues were spent on public health, instead of the 12% set out by law. As such, according to a 2016 survey by the Partido de Social Democracia Brasileira (PSDB, Brazilian Social Democracy Party), the public health system accumulated a debt of BRL2bn (USD607mn). This survey also highlighted that certain healthcare programmes had been 'stripped of resources', leading to a 'shortage of medicines.'

  • In March 2017, BMI's Country Risk team downgraded its real GDP growth forecast for Brazil for 2017 to 0.5% y-o-y from 0.8% previously. According to the Country Risk team, reform momentum is being sapped by the push to enact pension reform, a key component of fiscal consolidation efforts. This will likely inhibit labour and sector reforms that businesses had been expecting, resulting in lower fixed investment.

  • Posing downside risk to the Brazilian pharmaceutical market, a study published in March 2017 highlighted that the economic crisis, and principally rising unemployment, had led to 1.3 million Brazilians abandoning their healthcare plans in 2016, after 1.4mn did the same in 2015. The Sistema Unico de Saude (SUS, Unified Health System) is now far more in demand, resulting in an increasingly stretched budget.

  • According to a May 2017 report from the Associacao Brasiliera de Redes de Farmacias s Drogarias (ABRAFARMA, Brazilian Association of Pharmacies and Drug Store Networks), revenues from major pharmacy chains grew by 9.25% in Q117, a significant slow-down from the same period in 2016.

Mexico

  • Highlighting the firm's commitment to the market, Novartis Mexico announced in April 2017 that it will invest USD10mn in research and development in 2017 in line with its 2015-2020 commitment to invest over USD50mn into Mexico. The firm expects sales growth of approximately 5% growth in 2017 - similar to 2016 - supported by increased access to its innovative products.

  • In May 2017, Mexico's Central Bank raised its 2017 economic growth forecast, highlighting the economy's resilience to policy proposals by US President Donald Trump that were expected to harm exports and investment. GDP growth was upgraded from 1.3-2.3% y-o-y to 1.5-2.5% y-o-y. This followed the Ministry of Finance's growth upgrade in April 2017.

  • The Banco de Mexico (Banxico) raised its policy rate by 25bps to 6.75% in May 2017. This highlights that Banxico remains concerned about staving off secondary effects from substantial currency depreciation early in the year and ensuring that medium- and long-term inflation expectations remain anchored.

  • According to the CEO of Pfizer Mexico Rodrigo Puga in June 2017, the Mexican pharmaceutical market is expected to expand at 4.0-4.5% y-o-y in 2017. Puga noted that the market will benefit from the country's better-than-expected macroeconomic growth. Pfizer's performance is expected to beat the wider market's growth by approximately 50bps, driven by the launch of a number of new products. The firm is set to invest USD16mn in research and development in Mexico, alongside USD14mn for renewing production facilities.

  • According to Puga in June 2017, the renegotiation of the North American Free Trade Agreement (NAFTA) will be seized as an opportunity to re-discuss intellectual property issues. According to Puga, Pfizer Mexico is working with Canifarma to ensure that pharmaceutical trade is not disrupted within Latin America, as well as implementing measures to strengthen patent protection.

Venezuela

  • The Venezuelan Pharmaceutical Federation (FEFARVEN) reported in January 2017 that 85% of medicine demand was not being met. In May 2017, the President of FEFARVEN reiterated this shortage, adding that in high-priced pharmacies the shortage of medicines had reached 90%. This shortage is being blamed on the government's use of the official foreign exchange rate.

  • In March 2017, union delegate of local medicine producer Biotech announced a partial closure of medicine production facilities - due to a combination of a lack of raw materials and large numbers of worker resignations. Both of these factors have been blamed on the hyperinflationary environment, reducing the value of salaries and increasing the cost of ingredients.

  • In March 2017, the workers at the Sanofi laboratory in Guarenas, Venezuela demanded a 150% salary increase, noting that the January 2017 increase from VEF30,000 (USD3005) to VEF53,000 (USD5308) was insufficient to acquire basic foodstuffs. The United Workers of the Company Sanofi Aventis in Venezuela (Sutesavsa) claimed that the additional pay rise of VEF35,000 (USD3505), planned for the end of March 2017, remained insufficient. According to Sutesavsa, the Sanofi medicines that are produced in the factory have risen in price by 1000% due to the hyperinflationary environment.

  • In May 2017, the Banco Central de Venezuela (BCV) introduced a new secondary FX rate, auctioning US dollars at VEF2,010/USD, a devaluation of 63.8%. This devaluation was seen as inevitable by BMI's Country Risk team, due to pressure on the country's external accounts from low oil prices and declining production, although the team noted that the devaluation was steeper than anticipated. This devaluation will not be sufficient to address the substantial macroeconomic imbalances given that the parallel market rate was VEF6,109/USD on the same day. This rate had fallen to VEF7,984/USD by June 29 2017.

  • In June 2017, the Federation of Workers of the Pharmaceutical and Chemical Industry in Venezuela (FETRAMECO) denounced the reduction of essential medicine production by a number of local firms, namely Calox, Leti, Vargas, Behrens and Cofasa.

Failure Of TPP Poses Downside Risk For Pharmaceutical Companies

BMI View : A failure to ratify the TPP will be a negative for pharmaceutical companies with exposure to Latin America in 2017. While just three of the 12 TPP participating markets are in Latin America (Mexico, Peru and Chile), the US ' formal withdrawal from the agreement in January 2017 will compromise the pace of intellectual property reforms - posing downside risk for innovative drugmakers. Multinational drugmakers will continue to expand their presence in key markets, however, while alternative trade pacts could benefit the region over the longer term.

  • The US' formal withdrawal from the Trans-Pacific Partnership (TPP) in January 2017 will inevitably lead to the demise of the long-awaited trade deal despite efforts by the remaining signatories to keep the TPP alive through a reformulated agreement.

  • At a meeting held between May 20 and 21 2017 in Hanoi, Vietnam, ministers and vice ministers from Australia, Brunei, Canada, Chile, Japan, Mexico, New Zealand, Malaysia, Peru, Singapore and Vietnam met to discuss the TPP in the margins of alternative trade deals. Consisting of Peru, Mexico, Colombia and Chile, the Latin American Pacific Alliance (PA) focuses on boosting external trade with strategic partners, including those in Asia, as well as adopting a business-friendly agenda aimed at incentivising investment into the region to enable companies to better access Latin American markets and create intra-regional supply chains.

  • According to Puga in June 2017, the renegotiation of the North American Free Trade Agreement (NAFTA) will be seized as an opportunity to re-discuss intellectual property issues. According to Puga, Pfizer Mexico is working with Canifarma to ensure that pharmaceutical trade is not disrupted within Latin America, as well as implementing measures to strengthen patent protection.