It's springtime in Brazil, and as the temperature rises and the rain returns, there's more growing than just the tropical foliage.
The country's pharmaceutical industry looks ready to blossom as well. Ranked as the world's 10th largest in 2011, it crept up to eighth place last year and is set to snag the fifth spot by 2021, according to data from the QuintilesIMS Institute. Brazil shelled out $26 billion on medicine in 2016, and market researchers anticipate spending will increase at a compound annual growth rate of 7% to 10% over the next five years.
That growth would come on the heels of a historic recession in Brazil that pummeled the country's gross domestic product, currency value and employment levels. Compared to other industries, biopharma has done better at weathering Brazil's economic upheavals — aided by government investments in the healthcare system and improved patient access to healthcare services.
That isn't to say there haven't been complications. The same federal engagement that in some ways nurtured Brazil's pharmaceutical market has, in others, discouraged drugmakers from expanding their businesses in the country. Tricky tax codes, persistent government corruption and a fragmented healthcare system continue to encumber manufacturers as well.
A fruitful environment for generics
Brazil is one of the premiere emerging pharmaceutical markets in the world, along with Russia, India and China (collectively referred to as BRIC).
For years, branded products have made up the bulk of drug spend in the country. Data compiled by EMIS, a Euromoney Institutional Investor company, found that prescription medications accounted for BRL 28.7 billion ($12.8 billion) worth of sales in 2013, or roughly half of the Brazil's pharmaceutical market share.
Conversely, sales of over-the-counter and generic drugs totaled BRL 15.6 billion ($4.7 billion) and BRL 13.7 billion ($4.2 billion), respectively.
Part of that dynamic stems from the Brazilian marketplace not having a generic drug presence until the government passed its Generic Medicines Policy in 1999, thereby laying the groundwork for copycat treatments to take root. Since then, generics have become the fastest growing segment of the Brazilian drug market.
"The generic market is being very aggressive, especially in commercial terms," Mario Levada, a director of business development for Pfizer Brazil, said in an interview. To that point, researchers have acknowledged that generic manufacturers in Brazil have routinely discounted their drugs 90% from the products they reference so as to gain a competitive advantage.
Further helping generic sales is Brazil’s burgeoning middle class, which grew by 40 million people in the roughly 10 years leading up to the country’s historic recession in 2015. Though many citizens still cannot afford medications, developments such as low-cost physician networks are helping to expand access to more underserved populations.
"Brazil is such a big and complex market that you can have states that may be similar to Switzerland, while you have other states that may be similar to one of the poorest countries in the world," Levada said.
While working to address those disparities, the government is also approving new technologies and treatments, "so it's really a matter of finding the right balance," he said.
What’s more, the Brazilian Institute of Geography and Statistics estimates that the country's senior population will surpass its young population over the next two decades, which in turn should increase the need for a wider variety of affordable medicines for age-related diseases.
Yet even with those growth drivers, drugmakers in emerging markets remain vulnerable to economic shifts both at home and abroad. Large-scale recessions like those experienced in the U.S. in 2008 and Brazil over the last couple years can crimp consumers' ability to pay for their prescriptions or cause governments to reel in healthcare spending.
Though such effects can be especially damaging for makers of low-cost drugs with already narrow profit margins, large pharmas aren't completely shielded either. Pfizer Inc., for example, confirmed to Reuters this past summer its decision to ditch its investment in Brazilian generics developer Laboratório Teuto Brasileiro SA, underscoring the company's complicated relationship with generics in recent memory.
"Maybe the major issue was that profitability was not in line with what Pfizer expects from the market," Levada said. "You see that these companies usually play the buy-market-share game. And this might not be in line with the company's strategy."
For both generics and branded Brazilian pharmas looking to move past small-molecule drug development, crafting copycat biologics appears to be the next frontier, according to PwC partner Eliane Kihara.
"Biosimilar investment has been growing a lot here in Brazil because they're realizing they can be more competitive," Kihara said in an interview. "So even the traditional generic drug companies, they are doing a lot of investment in biosimilars."
A mountain of regulations
In addition to economic concerns, drugmakers must be wary of Brazil’s political pratfalls. Just a few months ago, Brazil’s president Michel Temer faced an impeachment vote by the country’s Chamber of Deputies concerning corruption charges. Temer’s two predecessors were respectively impeached and convicted of corruption.
"The pharma companies, they have to put heavy controls; they have to be very careful in selecting the people they want to work with because the opportunities [for corruption] are there," Kihara said. "So if they put the wrong incentives toward their performance here in Brazil, it can be a challenge to manage the possibility of committing a fraud."
Kihara noted, however, that Brazil’s health regulatory agency, known by the acronym ANVISA, has gotten better at working with the pharmaceutical industry and streamlining processes where it can, such as relying on the findings of manufacturing site inspections conducted by foreign agencies.
"ANVISA now ... has a very good team and they are really trying to make the Brazilian market more competitive,” Kihara said. "I guess in the past it was very difficult to have these discussions with them, and now we see a positive and practical attitude towards leveraging more of the the international experience."
Nonetheless, Brazil's bureaucracy remains a hard pill to swallow for many pharmaceutical companies. An arm of ANVISA called CMED, for instance, tightly regulates price hikes on medicines. Each year, CMED sets a maximum price increase that drugmakers have to follow; it also plays a prominent role in the complex and quite secretive process of formulating a treatment's price tag.
"They determine the amount of increase per segment depending on the concentration of each molecule," Levada explained. "For instance, where we see a high penetration of generics, they would allow us to give the highest increase whilst, when I have only one molecule in that market, they will grant us the lowest increase possible."
Brazil’s tax code is another headache for biopharmas looking to grow operations in the country. Aside from being highly convoluted, the code levies greater import taxes on pharmaceuticals than other goods. Importantly, about 90% of active pharmaceutical ingredient is shipped into Brazil from other nations, according to Levada and Kihara.
The taxes ultimately make drug development more expensive. Those greater costs frequently trickle down to Brazilian patients, who already have a hard time affording their necessary medications. As of 2014, less than half actually could, according to EMIS.
At the very least, tax and regulatory hurdles have deterred investment in the Brazilian pharmaceutical industry.
"These adversities are obviously reflected in research and development expenditures: local pharma labs received only $140 million of the $40 billion invested worldwide in this area in 2009," PwC said in a 2013 report.