Sector Overview

    Sector Overview

    The health care industry consists primarily of a network of hospital and pharmaceutical service providers and the relevant supply chain. Globally, the health care industry had a CAGR of 4.2% from 2008 to 2014, in terms of revenue, and total revenue of US$7.8 trillion in 2014. Similarly, health spending as a percentage of global GDP totaled 9.9% in 2014. The table below sets forth information related to the global health care industry for the periods indicated:

    Source: World Bank, February 2017.

     

    2008

    2009

    2010

    2011

    2012

    2013

    2014

    Revenue from the global health industry (in US$ trillion)

    6,074

    6,223

    6,585

    7,123

    7,340

    7,534

    7,792

    Total health spending (as a percentage of the global GDP)

    9.6%

    10.4%

    10.0%

    9.8%

    9.9%

    9.8%

    9.9

    From 2008 to 2014, the health care industry in Latin America and Brazil had a CAGR of 6.4% and 6.5%, respectively, in terms of revenue, and total revenue of US$457 billion and US$204 billion, respectively in 2014. In 2014, health spending in Latin America and Brazil as a percentage of GDP totaled 7.2% and 8.3%, respectively.

    Health spending is more significant in developed countries due to lower penetration rates. Accordingly, the role of the public sector in the health care system of these countries is relevant, as shown in the chart below:

    Total Health Spending per Country
    (as a percentage of GDP)

    Source: the Organization for Economic Cooperation and Development.

     

    According to The Economist Intelligence Unit, pharmaceutical industry sales in Latin America increased significantly in recent years, at a CAGR of 7.5% between 2010 and 2016. This growth was primarily due to an increase in life expectancy, population growth, improvement in health care standards, the development of new products and treatments and the adoption of government campaigns to prevent diseases.

    Brazil is the ninth largest market in the world in terms of health spending, accounting for 2.2% of total world health spending, according to BMI Research in 2016 and the World Health Organization in 2015. Compared to other countries, health spending as a percentage of GDP is low in Brazil. In 2014, estimated health spending accounted for 8.3% and 16.6% of GDP in Brazil and the United States, respectively, according to the World Bank. Accordingly, we believe the pharmaceutical industry has strong growth potential.

    The table below sets forth the 20 largest global pharmaceutical markets in the years indicated:

    Source: IQVA (IMS Quintiles)

    The pharmaceutical market encompasses the retail and the non-retail segments.

    Retail Segment

    The retail segment includes:

    • Generics and branded drugs: drugs equivalent to reference brand-name drugs and sold based on a sales strategy that offers significant commercial discounts to distributors and drugstores;
    • Over-the-counter drugs (OTC): products that relieve minor symptoms or discomfort, easily recognized by consumers, including headache, flu, cold and heartburn, among others. These products are distributed to drugstores (drugstore channel) and are displayed in self-service areas. This segment requires significant advertising investments; and
    • Prescription drugs: drugs subject to restricted sale. Consumers may only purchase them at drugstores with a physician’s prescription. Companies focused on this segment usually have a sales team dedicated to meeting with physicians.

    The choice of a drug from this group is directly related to consumer preferences, based on the lowest prices and knowledge of the relevant product obtained as a result of the marketing and advertisement strategy conducted by the industry.

    Companies operating in the retail market concentrate their efforts on (i) maintaining large sales teams to promote and advertise their prescription drugs to the medical community and (ii) marketing strategies through different media channels, which requires high investments.

    Non-Retail Segment

    The non-retail segment includes blood products, biological products, biotechnological drugs and antiretrovirals, usually in injectable form for use in clinics, hospitals and outpatient facilities.

    Accordingly, health care providers select drugs based on personal beliefs regarding drug efficacy, safety (low risk of adverse reactions) and product quality.

    Companies operating in the non-retail market concentrate their sales efforts on hospital chains, outpatient facilities and clinics. Additionally, these companies rely on distributors to sell and deliver products to consumers. Accordingly, they have smaller sales teams and, as a result, require lower investments in marketing and advertisement compared to companies operating in the retail market.

    The Brazilian Pharmaceutical Market

    Encompassing the retail and non-retail segments and following global and Latin American trends, the Brazilian pharmaceutical market increased by an average of 10% per year between 2013 and 2017 and both segments experienced similar increases. Despite the economic crisis, the retail and non-retail segments continued to show two-digit growth between 2016 and 2017.

    The Brazilian Pharmaceutical Market
    (in billions of R$) (pharmacy purchase price and second price level)

     

    Source: PMB MAT April 2017 (Pharmacy Purchase Price) and NRC Brazil MAT April 2017 (2nd price level). Latam Review Brasil – Pharmaceutical Market Dynamics and Prospects in Latin America and Brazil (April 2017).

    As in Latin America, the gradual increase in health spending in Brazil is due to:

    • Aging of population. Consumption of pharmaceutical products tends to increase by age group and is higher among older people. We expect that individuals who are 65 or older in Brazil will play an important role in the economy, especially with regards to spending on health products and medical services, due to the increase in demand for health care assistance.

    Annual Average Health Spending by Age Group
    (in thousands of reais per capita)

    Source: IBGE
    • Expansion of the hospital network. As a result of the aging of the population, the hospital network will have to be expanded, primarily in the non-retail drug consumption channel. According to the Brazilian Association of Private Hospital (Associação Nacional de Hospitais Privados), or ANAHP, in 2014, during the Brazilian economic crisis, the number of hospital beds significantly increased to 105,700 beds, representing 27% of all jobs created during the period.
    • Increased penetration of health care plans. Between 2006 and 2016, the number of beneficiaries of private health care plans in Brazil increased at an average rate of 2.3% per year, compared to an average population growth of approximately 1.0% per year, according to the Brazilian Health Agency (Agência Nacional de Saúde) and IBGE. The percentage of the Brazilian population with private health care plans increased from 18.2% in 2000 to 25.1% in 2012. We expect this trend to intensify in the coming years, contributing to increases in the demand for drugs by private hospitals.
    • Introduction of new drugs. Traditional R&D efforts, including research in new areas, including biotechnology and genetic research, are expected to continue to generate new and more efficient products to meet patients’ unfulfilled needs. We expect that launching new drugs that more efficiently treat complex diseases will increase the demand for these products in the coming years.
    • Unified Health System and Government health programs. As is common in developing countries, the health policies of federal, state and municipal governments that are part of the Unified Health System (Sistema Único de Saúde), or SUS, play a decisive role in improving the health assistance provided to the population through the implementation of vaccination programs or subsidized programs for prevention and treatment of diseases which cure is not yet known, including AIDS and cancer. As a result, the demand for drugs increases.

    The Brazilian Federal Constitution created SUS as a regional, hierarchical health network subject to Brazilian government control. SUS is responsible for determining general health rules to reduce the risk of disease and other conditions, as well as ensuring universal and equal access to health actions and services, according to the principles of universality, integrality, equity, decentralization and social participation. Accordingly, SUS plays a significant role in health care assistance in Brazil.

    The Ministry of Health conducts federal inspections of SUS and manages its planning, and the Brazilian government is the main funding entity of the public health network. The Ministry of Health represents the Brazilian government and sets forth the Brazilian health policies, relying on states, cities, NGOs, foundations, government, government agencies and private companies to operate the system.

    Brazilian Federal Government

    The Brazilian government is responsible for coordinating highly complex and high-cost health systems and public laboratories, which are the markets in which we operate, in a centralized manner to treat diseases that are considered public health issues and require the use of drugs that are not available in the market. Nonetheless, the Brazilian government decentralizes the health care system, partially subsidizing the states that fulfill this role.

    Pursuant to Law No. 10,520/2002 and Decree No. 5,450/2005, purchases to meet the demand for drugs of federal, state and municipal health institutions are made through electronic reverse public auctions, i.e., the company that offers the highest discount on the maximum price set forth in the auction invitation is awarded the contract. Electronic public auctions are conducted on electronic platforms in accordance with information security requirements to ensure transparency, efficiency and traceability.

    Pursuant to SUS regulations, the Ministry of Health sets forth the group of special drugs which clinical approaches and therapeutic guidelines aim at treating specific diseases that affect a limited number of patients, including transplant patients, AIDS patients and patients with chronic kidney failure, multiple sclerosis, chronic hepatitis B and C viral infection, epilepsy, refractory schizophrenia and genetic diseases such as cystic fibrosis and Gaucher disease. Our blood products or specialties are used to treat most of these diseases. 

    State Governments

    State governments are responsible for assisting in the implementation of domestic policies allocating at least 12% of the revenue transferred by the Brazilian government to high and medium complexity health care assistance.

    Municipal Governments

    Municipal governments play a secondary role in low complexity health care assistance regarding basic drugstore assistance.

    Pursuant to Law No. 10,520/2002 and Decree No. 5,450/2005, purchases to meet the demand for drugs of federal, state and municipal health institutions are made through electronic reverse public auctions, i.e., the company that offers the highest discount on the maximum price set forth in the auction invitation is awarded the contract. Electronic public auctions are conducted on electronic platforms in accordance with information security requirements to ensure transparency, efficiency and traceability.

    The chart below sets forth the size of the non-retail market, which has been growing at an average annual rate of 9.7% between 2012 and 2017. In 2017, the public sector accounted for 57% of the non-retail market.

    Non-Retail Market
    (in billions of reais)(1)

    Source: IQVIA, last 12 months ended April 2017 and last 12 months ended March 2016.
    (1)   Refers to pharmacy purchase price.
    (2)   Includes outpatient facilities, private companies and school hospitals.

    The Hospital Network in Brazil

    According to CNES, in October 2015, 39% of all 442,000 hospital beds in Brazil are located in public hospitals, as set forth in the chart below:

    Number of Hospital Beds
    (in thousands of beds)

    Source: CNES, October 2015

     

    Accordingly, both public and private health care institutions generate the demand for drugs in the non-retail segment, including highly-complex drugs. The demand of public health care institutions is met by government procurement, pursuant to Law No. 8,666/93 and Decree No. 5,450/2005. The demand of private health care institutions is met by free competition.

    We are among the 20 largest non-retail pharmaceutical companies in the 12 months ended June 2017 in the Brazilian market, as set forth in the table below:

     
     

    According to IQVIA, in the 12 months ended November 2017, the 20 largest companies in the Brazilian pharmaceutical market accounted for 74.3% of the industry, and we ranked 14th among the 20 largest companies and held 2.0% of the market share.

    As number eleven in the national ranking, we have a significant market share resulting from the sale of certain drugs. The table below sets forth net revenue derived from the sale of our ten top drugs and as a percentage of total net revenue:

     
    The table below sets forth government contract amounts regarding sales to the Ministry of Health in 2016:
     

     
    The Company has in its portfolio some products whose demand increases in the period before the middle of the year, the winter season, where the incidence of respiratory diseases, such as Doclaxin®, is growing. In this case, approximately 25% to 36% of the Company's annual demand is concentrated in the months of May to July. Nevertheless, such eventual seasonality does not impact on the Company's total revenues, since we do not have any dependence on this drug.
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