In the Field: Report from Brazil

Is Brazil's pharmaceutical industry following the consolidation trend?
Jan 02, 2010


PHOTO: ADALBERTO RIOS SZALAY/SEXTO SOL / GETTY IMAGES
According to most analysts, the global pharmaceutical industry is going through a consolidation phase. Major moves were reported throughout last year, including the high-profile acquisitions of Wyeth (Madison, WI) by Pfizer (New York) for $68 billion, Schering-Plough (Kenilworth, NJ) by Merck & Co. (Whitehouse Station, NJ) for $41.1 billion, and Genentech (South San Francisco, CA) by Roche (Basel, Switzerland) for $46.8 billion. But is Brazil's pharmaceutical industry following the trend?

Following the trend

"Yes, Brazil is definitely following the trend, aiming at cost-cutting goals and diversifying portfolios," says Alexandre Gallotti, a pharmaceutical sector economist for the São Paulo-based consulting firm Tendências Consultoria Integrada. According to Gallotti, one major acquisition involving a local company could set the pace for the industry's next steps. In April, Brazilian São Paulo-based generic-drug manufacturer Medley (São Paulo) was acquired by French major sanofi-aventis (Paris) for R$1.5 billion ($798 million). The third largest pharmaceutical firm in the country, Medley held 5.7% of the overall pharmaceutical sector domestic share and reported 2008 revenues of R$458 million ($244 million).

Before the deal, sanofi-aventis already had a strong presence in the Brazilian pharmaceutical industry, with its largest plant located in Suzano, São Paulo. sanofi's sites also include administrative and research offices located in the city of São Paulo. But with the move, the French company now accounts for 12% of Brazil's pharmaceutical market in terms of sales, according to Tendências Consultoria figures, and leads the generic-drug sector, not only in Brazil, but also in Latin America as a whole. In October 2009, the company announced plans to build a $45-million plant in Brasília to produce generic contraceptives with a target operational date of 2012.

"There is no doubt that the consolidation here too is being driven by the expiration of major drug patents.... which makes generics producers a potential target for acquisitions," explains Gallotti.

Jumping R&D hurdles

According to a recent Tendências Consultoria report, the development of new drugs could revert the projected drop in earnings of drug-producing laboratories. The problem is that research and development (R&D) units have had limited success in developing new drugs to be patented as results have not come out as expected, while operating costs have been very high. Also, to apply for patents and comply with the strict rules imposed on sales of prescription drugs, companies have had to risk large sums.

After completing a merger or acquisition, companies may be in a better position to cut production costs. Lower costs could lead to reduced drug prices for consumers, according to Gallotti. But citizens in Brazil, and throughout Latin America, may not see any real benefits for some time. "Those moves would increase companies' market strength in the region and hold prices from falling," says Gallotti. "Companies would probably keep the extra profit," he adds. On the other hand, economists from Tendências Consultoria note that larger companies should have financial resources to conduct additional R&D in niche areas such as oncology. "Brazilians and others would benefit from feeling a greater sense of well-being, with easier access to drugs and treatments," explains Gallotti.