Taking their meds: Regulatory changes have shifted the composition of the market

Generating revenues of $13.6bn in 2012, Mexico’s pharmaceutical industry is among the 15 largest in the world, second only to Brazil ($16bn) in Latin America. According to ProMéxico, the country’s investment promotion agency, the pharmaceutical industry accounts for 1.2% of GDP, 7.2% of manufacturing GDP and generates 80,000 direct and 300,000 indirect jobs. The pharma market is attractive for several reasons, including the size of the domestic market, which registers the highest drug spend as a percentage of total health expenditure, 28.3%, among OECD members. Moreover, Mexico’s manufacturing capacity coupled with a strengthened regulatory framework make it a key market in the region and a gateway to other markets.

REGULATION: The pharmaceutical industry has undergone various significant changes over the past decade, the most significant of which has been the strengthening of its regulatory framework. Two regulatory changes in particular have boosted the industry’s potential considerably. One of these reforms was introduced in 2008 and involved changing article 170 of the Health Input Regulations, eliminating the requirement that a manufacturing plant in Mexico needed to be able to commercialise pharmaceutical products.

As a result of these regulatory changes, foreign pharmaceutical manufacturers only require a licence issued by the health authority in their country of origin in order to demonstrate that the company has received permission to manufacture goods. The requirement to produce a sale certificate from another country to be able to sell pharmaceuticals in the Mexican market has also been eliminated. Previously, selling pharmaceuticals on the Mexican market required foreign companies to have a sale certificate from the country of origin. This, however, is no longer the case.

Even so, this certificate can now be replaced by clinical studies that have been performed on the Mexican population. Mexico has also managed to harmonise its institutional practices with the US, Canada, Australia and Japan. This has had the effect of reducing the administrative barriers, and has made the country an attractive destination for research in health care.

In addition to this, in 2013 the Pan-American Health Organisation (PAHO) recognised the Federal Commission for Protection Against Health Risks (La Comisión Federal para la Protección contra Riesgos Sanitarios, COFEPRIS) as a National Regulatory Authority of Regional Reference after an evaluation of the commission’s performance of basic functions for ensuring the quality, safety and efficacy of pharmaceuticals in the country. As a result, countries importing pharmaceutical products from Mexico are able to obtain licences for Mexican pharmaceutical imports at a much faster rate.

Alongside reforms such as these in the regulatory framework, there have been significant changes in the composition of the market, which in recent years has seen a rapid increase in the release of generics and dynamic growth in the biotechnology segment.

MARKET COMPOSITION: The pharmaceutical market is commonly divided into two segments: the institutional market and the private market. Valued at $4bn, the institutional market encompasses the large social security institutes and the Popular Health Insurance Scheme (Seguro Popular de Salud, SPS). States are also part of this market, making their own purchases. Purchases are done through a bidding process, or, not uncommonly, the institutions buy directly from three to five pharmaceutical laboratories. Prices are kept relatively uniform with a regulatory commission overseeing pricing. The private market, worth $10bn, is made up of the sales within pharmacies. Included in this market are other consumer products, such as over-the-counter (OTC) products, which account for $1.5bn-1.8bn. The remaining $8bn includes products for all types of pathologies, with prescription or without. OTC drugs, 98% of which are sold through the private sector, represent 15% of the value and 21% of the volume of the total market.

GENERICS: The generics market has grown exponentially in recent years. According to a study by the Mexican Health Foundation (Fundación Mexicana para la Salud, FUNSALUD), in 2012 98.5% of the volume and 84.8% of the value of sales in the pharmaceutical market were from products with no patent or expired patents. Generic versions after patent expiry represent 51.8% of total sales. Together no-brand generics and brand name generics represent 74.6% of the volume of the market but only 31.3% of the value. On the other hand, brand generics and brand products with no patent together represent 23.9% of volume and 53.5% of the value of total sales.

The growth in the generics market is due in large part 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 promoting their development in an attempt to increase access to medication. In 2012 alone COFEPRIS approved the release of 190 generics, a move expected to curb the sale of similar drugs and effectively consolidate the generics market. Carlos Vázquez Darimont, director general of Asofarma de México, a pharmaceutical company, told OBG, “Generics are being released at a very rapid pace. Previously, it would take two years to get a licence. Today, it takes an average of eight months.” Combined with the elimination of the plant requirement, this has meant that a large amount of generics from China and India have also entered the Mexican market, worrying some about quality standards. Karel J Fucikovsky, general manager for Mexico and Central America of pharmaceutical company Pierre Fabre, told OBG, “It is important for the government and our regulatory agencies to continue supervising the quality of generics from abroad, so that all players compete on a level playing field.”

The vertical integration seen in the sector as a result of the rapid increase in the number of large pharmacy chains featuring their own medical office has also enabled these large groups to actively commercialise their own products. Nicolás Rubió Figueroa, vice-president of Andrómaco, a pharmaceutical company, also told OBG, “The power has shifted from doctors and medical centres towards pharmacies, where doctors made 250,000 consultations in 2013. It is a problem as they can prescribe any medications, making it difficult for the private pharmaceutical companies to compete in the low-priced generics segment.”

INNOVATION: Conversely, the release of innovative drugs has stagnated. “There are no new molecules which are at this moment becoming blockbusters in the private market,” Vázquez told OBG. Research and development costs as well as lengthy approval processes for innovative products have kept prices for these products high and they are generally inaccessible to the average Mexican. Despite representing only 1.5% of the volume of sales, innovative drugs with a patent represent 15.2% of the value of sales, as they are on average 12 times more expensive than products which either have no patent or an expired patent.

BIOCOMPARABLES: Over the past few years, the biotechnology segment has seen dynamic growth. Despite representing only 7.5% of the total market, annual sales have been growing much faster than the rest of pharmaceuticals, a trend expected to continue. In 2012 it grew 19.8% in volume and 15.9% in value while non-biotech drugs grew 2.7% and 5.6%, respectively. Biotech drugs are on average 12 times more expensive than chemical drugs. Sales are concentrated in the public sector (66.5%), followed by hospital chains and private insurance companies (15%). They represent 26.9% of total public sector purchases. Despite recent growth, the segment still faces some challenges.

To obtain a bioequivalence, studies must be conducted on patients whose condition has deteriorated and they have to be done in tandem with the use of the original innovative product. No institution is required to place a patient in a study. According to Vázquez, this has held back the release of bio-similars and enabled innovative drugs to extend their monopoly. “The fact that there is no requirement to have institutions supply patients to conduct bioequivalency studies creates an entry barrier. For pharmaceutical labs this means added costs and time. It is much easier to enter the private market in chronic conditions than in more complex conditions with high-cost products,” Vázquez told OBG. Moreover, according to Raúl Iturralde Arce, director general of Randall, a pharmaceutical company, Mexico lacks incentives to do further research in this area. “Countries like Colombia offer important incentives to invest in biotechnology. For instance, Bogotá equals any investment up to a certain limit, done by a local or foreign company, to encourage capital inflows in the sector. The National Council for Science and Technology (Consejo Nacional de Ciencia y Tecnologia, CONACYT) lacks a clear programme to encourage research in this area, since the general consent is that it represents the future of the pharmaceutical sector,” he told OBG.

DISTRIBUTION: Traditionally distribution has been concentrated among four large players, Nacional de Drogas (NADRO), Casa Saba, Casa Marzam and Fármacos Nacionales. Combined, they control 58% of the distribution market. For the past few years, supermarket and pharmacy chains have been gaining market share while distributors have played a less prominent role. Some companies are adopting vertical integration strategies, buying pharmacy chains and grouping them to increase purchasing and bargaining power, while some pharmaceutical companies are negotiating directly with large chains. Nonetheless, the majority of pharmaceutical labs commercialise their products through whole distributors who administer, store, transport and deliver products to pharmacies and hospitals, and often also provide credit to finance inventories.

MANUFACTURING: Owing to the advantages it offers, Mexico has become the largest exporter of medications in Latin America. According to figures from ProMéxico, the industry makes up 7.2% of manufacturing GDP, and is the fourth-largest segment in the industry, after oil refining, petrochemicals production and auto manufacturing. In 2012 production reached $10.7bn while domestic consumption was valued at $13.66bn, whi ch means Mexico still needs to import pharmaceuticals to meet internal demand. With 18.6% lower manufacturing costs than the US, according to ProMéxico, the country offers a wide range of important cost-saving advantages. Its manufacturing costs are also lower than Canada, Brazil and Germany. Of the 15 most important pharmaceutical companies in the world, 14 are already operating in the country. Since its regulatory framework was recognised by the Pan American Health Organisation, Mexico has been able to sell to a range of countries in the more easily penetrable large institutional markets in other parts of Latin America. Enrique Villareal Barocio, general manager of TEVA, a pharmaceutical company, told OBG, “Many international pharmaceutical companies are considering entering the Mexican market as their production base through the purchase of local companies. This is due to a series of factors such as skilled affordable labour and high-level research development facilities. Some companies are still being reticent about entering the Mexican market due to an overly strong and complex legal framework, but the recent reforms should help appease those fears and be followed by significant foreign investments in the pharmaceutical sector.” In 2012 Mexico exported a total of $1.87bn in pharmaceuticals; the largest share, 22.1%, went to the US, followed by Venezuela (17.6%), Panama (11.9%), Brazil (7.5%) and Colombia (5.9%).

INVESTMENT: Mexico’s progressively stronger regulatory environment as well as its attractiveness as a manufacturing base have drawn increasing investment in the past few years. According to ProMéxico, from 2005 to 2012 it took in $2.86bn, including $982m in 2012 alone. That year, Mexican companies such as Neolpharma, Silanes, PISA and Probiomed invested $2.5bn to expand and modernise production plants.

On the other hand, foreign companies, including Japanese company Daiichi Sankyo and Chiesi Farmaceutici, have established operations in Mexico that are geared at penetrating the Mexican market as well as other Latin American markets. “When in 2009 Mexico saw the plant requisite removed, the general feeling was that the country’s pharmaceutical industry would disappear, or at least it would struggle significantly,” Iturralde told OBG. “The truth is that these measures have eventually given the sector numerous opportunities as Mexican companies turned into gates for multinationals to penetrate the country. This measure was expected to slow foreign investment in the sector, but instead made many small Mexican businesses grow. These companies have become very attractive and are candidates for possible acquisitions by larger pharmaceutical multinationals.”

PRESENCE: Just 10 years ago, the pharmaceuticals industry in Mexico was characterised by multinationals dedicated to manufacturing innovative products and national companies specialising in the production of generics. However, this segmentation has for the most part disappeared as many multinationals have started releasing generics and many national companies are investing in the development and production of innovative products. Five out of the 20 companies with the highest retail sales in the private sector are national companies, which have increased their national and regional presence significantly.

ADAPTING: Reflecting global patterns, increasing competition is forcing players to reposition themselves in the market and adjust their business strategies. As the patents expire, pharmaceutical companies are pursuing niche markets in high-cost orphan drugs, where smaller sales volumes are made up by higher margins. Large pharmaceutical labs have tended to trim down their organisational structures and shift research from primary care to niche markets in biotechnology.

The Swiss lab Roche and the Japanese lab Takeda are some examples of this shift. Mexican companies such as Genomma Lab have also bet on niche OTC products and have experienced significant growth. “These niche markets are especially attractive in Mexico in comparison with other countries because the Seguro Popular alone is a $3bn-4bn outlet. To introduce a product, even if you sell few units, it is still attractive,” Vázquez told OBG. The ease of getting licences for these has also been encouraging. For an orphan product, a licence can be obtained within 60 days. Such a shift has also come about at a time when large companies are struggling to compete in the Mexican generics market. Vázquez told OBG, “Big pharmaceutical companies have failed to take advantage of a market like Mexico. National companies can manufacture large volumes, and benefit from a structure in which they can aggressively commercialise their own products through doctors in pharmacies. National companies have benefitted the most from the private and institutional markets.”

The coming year is expected to see continued sector growth in addition to a consolidation of existing dynamics within the industry, with companies focusing on biotech products likely to register higher growth rates. According to PwC México, over the next five years the industry as a whole is expected to grow at an average annual rate of around 8%. Global Insight also forecasts production to reach $21.4bn by 2020. With a large domestic market and manufacturing capacity, Mexico’s pharmaceutical industry will be one to watch.