A maturing market: Pharmaceuticals companies adjust business strategies to changing market dynamics

The continued increase in market share of low-cost generics, coupled with the consolidation of purchases by the institutional market led to slower revenue growth in pharmaceuticals for human use in 2014. Nonetheless, the strengthening of Mexico’s regulatory framework is opening up new opportunities.

Market Fundamentals

Generating annual revenues of around $13bn, Mexico’s pharmaceuticals industry is among the 15 largest in the world and second only to Brazil ($16bn) in Latin America. According to investment promotion agency ProMéxico, the industry represents 0.6% of overall GDP and 3.6% of manufacturing GDP. Figures from the National Chamber for the Pharmaceuticals Industry (Cámara Nacional de la Industria Farmacéutica, CANIFARMA) show the industry employed more than 85,000 people in 2013.

The pharmaceuticals market (including veterinary products and medical devices) has registered steady growth in the past few years, with CANIFARMA reporting compound nominal growth of 4.3% in the period 2007-13, from MXN151bn ($10.2bn) to MXN194bn ($13.1bn). The industry grew 5.4% in 2014, reaching total sales of MXN204bn ($13.7bn). Pharmaceuticals for human use is the largest segment, generating some MXN152.5bn ($10.3bn) from the sale of more than 2.6bn units, while the medical device market accounted for MXN42.5bn ($2.9bn) and the veterinary products market made up the remaining MXN9.4bn ($632.6m). While the industry exports a small portion of production – about 5.4% in 2014, totalling around $1bn – exports have been growing at a steady pace. According to CANIFARMA, exports grew at an average annual growth rate of 7.3% in the 2007-13 period. Imports, which totalled nearly $5.6bn in 2014, remained virtually unchanged from the previous year.

Demand for pharmaceuticals products comes primarily from the private health care sector, which represented 70.8% of the market – nearly MXN135bn ($9.1bn) in 2014 – while the public sector accounted for the remaining 29.2%, or MXN54.6bn ($3.7bn) that year.

Generics Vs Innovative

The sale of pharmaceuticals for human use registered a slowdown in 2014, growing 15% in units but only 1% in value, primarily a result of the increasing share of low-cost generics in the market. The sale of generics has grown at an unprecedented pace in the past decade. Today, generics account for 87% of the market by units, according to CANIFARMA. This expansion has been in large part due to the efforts of the Federal Commission for Protection against Health Risks (Comisión Federal para la Protección contra Riesgos Sanitarios, COFEPRIS), which in recent years has been actively promoting the development of generics in an attempt to increase access to medicine. The agency has considerably shortened the time it takes to get licences to release generics. From 2012 to the first quarter of 2015, COFEPRIS approved the release of some 357 generic medicines.

The industry is also feeling the effects of the government’s efforts to curb rising costs. Since 2013, the public sector consolidated purchases in a bid to get more competitive prices. “Medicine sold to the public sector can at times be up to 90% cheaper than the one sold to the private sector,” Karel J Fucikovsky, managing director at Pierre Fabre, a pharmaceuticals company, told OBG. The consolidation of purchases has led to significant savings. Basilio Velasco Barros, advisor at the Mexican Institute of Social Security (Instituto Mexicano de Seguridad Social, IMSS), the country’s largest social security institution, told OBG, “The consolidation of the purchasing process for the public health sector has resulted in savings totalling some MXN8bn ($538.4m) in the past two years for the public health sector as a whole and MXN4.5bn ($302.9m) for IMSS alone.” This has also led to greater competition within the distribution market, which was previously highly concentrated. “Since the consolidation of public purchases, the 12 largest distribution firms saw their share of the market fall from 80% to 53%,” Velasco said.

Changing Dynamics

Reflecting global patterns, the rise of generics has coincided with increasingly maturing portfolios and a slowdown in the release of innovative drugs, forcing big pharma labs to adjust to new market dynamics. Thus, labs are becoming more focused on the production and commercialisation of generic drugs. “Most of the big labs in Mexico with mature products have started releasing generics into the market,” Maricarmen Barreto, market research manager at Apotex, a Canadian pharmaceuticals company operating in Mexico, told OBG. However, not all have been successful. “Because they have failed to adjust their commercial model, they have generally not been as successful at commercialising generic products, which by virtue of being a different market, need special management,” Barreto added. At the same time, pharmaceuticals companies are also pursuing niche markets in high-cost orphan drugs where higher margins make up for smaller sales volumes.

Regulatory Framework

The industry’s regulatory framework has been significantly strengthened thanks to two regulatory changes. In 2008 article 170 of the Health Input Regulations was amended, eliminating the requirement for firms to have a plant in Mexico to be able to commercialise products in the country. This opened the market to new players and led to an influx of generics from China and India.

Mexico has also recently harmonised its institutional practices with the US, Canada, Australia and Japan, which has reduced administrative barriers and made Mexico a more attractive destination for research. In 2013 the Pan-American Health Organisation recognised COFEPRIS as a regulatory authority of regional reference for ensuring the quality, safety and efficacy of pharmaceuticals in the country. As a result, many countries importing pharmaceuticals products from Mexico are able to obtain licences for Mexican pharmaceuticals imports at faster rates.

The most recent regulatory change – Regulation 257, which was gazetted in late 2014 and came into force in February 2015 – affected biosimilar and biotechnological products and is expected to contribute to greater dynamism in the biotechnology market. Rule 257 essentially empowers a special subcomittee to analyse such products using clinical trials and other scientific data, and then to categorise them as “innovators, reference products or biosimilars” – assessments that COFEPRIS will then take into account when reviewing and approving renewal applications.

Mexico’s new stricter regulation places it ahead of other Latin American countries, and on a level with Europe. According to Americo Garcia Elizondo, managing director for Apotex, “The regulatory framework is more stringent now than it was in the past as COFEPRIS has revolutionised the requirements for tests needed to commercialise generic products. However, there is still room for improvement, especially with respect to imported products from China and India.” Though the higher standards are likely to increase production costs and thus contribute to higher concentration in the biotechnology industry, Mexican firms will have access to new markets in Europe and Latin America.

Attractive Market

The strengthening of the regulatory framework is likely to support continued investment to the sector. According to CANIFARMA, the industry (including medical devices and veterinary products) registered an inflow of over MXN200bn ($13.5bn) in investments in the 2007-13 period, and an additional MXN36.9bn ($2.5bn) in 2014. Investment in pharmaceuticals for human use increased 46.1% in the sevenyear period, registering an annual average growth of 6.5%, while investment in medical devices rose 137.3%, though from a smaller base. With one of the largest institutional markets in the region and a population of 124m people, Mexico remains an attractive market. From a manufacturing perspective, the country offers 14.4% lower manufacturing costs than the US, and more competitive costs than Canada, the Netherlands and Germany, among others, according to ProMéxico.

IMS Health Mexico, a vendor of health care data, forecasts the segment to experience growth of around 5% in the period 2015-18. With maturing portfolios, and the eminent expiry of a number of patents, growth prospects for the generics market are reassuring.