Brazil Pharmaceuticals and Healthcare Report Q1 2013

BMI View: The Brazilian pharmaceutical market remains our favourite regional market in LatinAmerica due to its large market size and strong domestic demand for innovative, high-tech products. Thegovernment is increasingly investing in the healthcare sector and pharmaceutical industry to reduce thefinancial burden of diseases, and the country's private healthcare sectors provide opportunities forforeign companies. However, the increasing drug rebate level has significantly undermined the profitsrecorded by generic drugmakers. The more aggressive government techonology transfer deals withmultinationals as well as the drug approval delays due to bureaucracy and staff shortages at ANVISAhave also dampened multinationals' revenue-generating opportunities

Headline Expenditure Projections

Pharmaceuticals: BRL48.10bn (US$28.72bn) in 2011 to BRL51.76bn (US$25.88bn) in 2012;

+7.6% in local currency terms and -9.9% in US dollars terms. Forecast down from Q412 due to less optimistic industry projections.

Healthcare: BRL378.63bn (US$226.04bn) in 2011 to BRL416.46bn (US$208.23bn) in 2012;

+10.0% in local currency terms and -7.9% in US dollars. Forecast upwards from Q412 due to more optimistic historical data.

Medical Devices: BRL7.45bn (US$4.45bn) in 2011 to BRL8.31bn (US$4.15bn) in 2012;

+11.5% in local currency terms and -6.6 in US dollars terms. Forecast revised downwardsfrom Q412 due to analyst intervention.

Risk/Reward Rating: Brazil's position in the Americas Pharmaceutical Risk/Reward Rating (RRR)system - which ranks markets according to attractiveness to multinational drugmakers - has remained infifth place for Q113. Brazil is no longer as prominent as it once was in the Latin American region,particularly now the outlook for Mexico is more optimistic. BMI's RRR ranking in Q113 highlights anopportunity for multinational drug companies to re-evaluate their long-term regional strategy in LatinAmerica if further significant changes occur.

Key Trends And Developments

In October 2012, BMI revised down Brazil's pharmaceutical market size and its growth rate.The increasing number and extent of drug rebates in Brazil's pharmaceutical market hassignificantly undermined the profit recorded by drugmakers, reduced the overall market valueand lowered market growth prospects. Generic drugmakers have been particularly hard hit bythese rebates. However, we still believe that Brazil's pharmaceutical market remains the mostattractive to multinationals in Latin America, because the large patented drug subsector (themost profitable part of the industry) is the least affected by these rebates, due to the nonBrazilsubstitutable nature of medicines with intellectual property protection. In addition, drug prices inBrazil are still increasing steadily, while medicine prices have stagnated or even fallen in manydeveloped countries.

In November 2012, Brazil's Health Minister Alexandre Padilha signed agreements to formalise20 new domestic production development partnerships, involving 12 public pharmaceuticalcompanies and 17 private drugmakers during the third meeting of the Executive Committee andCouncil of Competitiveness of Industrial Health Complex (Gecis). The deal comprises 21medicines targeting 11 therapeutic areas including neurology, respiratory diseases, immunology,haematology, HIV/AIDS, and oncology. Currently, most of these products were imported by thehealth ministry for the users of the Single Health System (SUS). The ministry estimated thatdomestic production of these products will save the government approximately BRL940mn(US$462.5mn), nearly 40% of what it has spent on these medicines.

In October 2012, UnitedHealth Group, the biggest US healthcare insurer by revenue, was toacquire a 90% stake in Amil Participações, a Brazilian insurance group and hospital operator,for US$4.9bn as part of its plans to increase its presence in emerging markets.

In October 2012, the Association of Pharmaceutical Industry Research (Interfarma), a non-profitorganisation representing the research-based pharmaceutical industry, reported that betweenAugust 2011 and August 2012 the average time for a generic medicine to receive approvalincreased to up to two years. For innovative drugs it has increased from seven months to 16months. Biological products now take over a year to be authorised. Interfarma believesbureaucracy and staff shortages at the National Health Surveillance Agency (ANVISA) are themain reasons for the approval delays. It also attributed the delay to the increasing number ofmedicine approval applications. Nevertheless, ANVISA said it would improve its regulatoryframework, restructure the agency and implement electronic drug registration to match thegrowing demand for drug registration.

BMI Economic View: Weak private consumption and industrial production data, combined withcontinued infrastructure project delays, point to a more modest increase in economic activity during H212than we had been expecting. As such, we have revised down our 2012 real GDP growth forecast to 1.8%from 2.4%.That said, with significant stimulus in the pipeline and construction in advance of the 2014World Cup set to bolster growth in several sectors, we maintain our 3.7% real GDP growth forecast for2013

BMI Political View: Brazil's socialist party, Partido Socialista Brasileiro, posted strong gains in theOctober 7 2012 municipal elections, supporting our view that it will become an increasingly importantnational political player over the coming years. That said, President Dilma Rousseff's Partido dosTrabalhadores also performed relatively well in the contests, increasing the number of mayoralities itcontrols, such that both the president and her party look poised to post a strong showing in the 2014general election.