Country Report: Mexico

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The race is on to transform Mexico into a more innovation-driven country, from a prevalently manufacturing-based economy. Appointed an 'emerging sector', the pharmaceutical industry is part of this plan. Despite a difficult 2014, targeted industrial policies aimed at increasing production and attracting investment, as well as the opening up IMSS (Mexico`s largest public healthcare institution) to clinical trials, the plan is now full speed ahead.

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EMERGING PHARMA

Since he took office in December 2012, President Peña Nieto and the ruling Institutional Revolutionary Party (PRI) have made it their number one priority to restart Mexico's engine of growth. "Over the past thirty years, economic growth in Mexico has averaged only 2.4 percent per year, mainly as a result of structural problems of our economy," explains Rogelio Garza Garza, Mexico's undersecretary of industry and commerce at the Ministry of Economy. "The country's performance is well below potential due to a number of reasons, such as scarce financing to business, expensive energy costs, insufficient regulation of economic competition and a lack of highly qualified human capital. The magnitude of the challenges we faced required a transforming impulse, which culminated in the eleven structural reforms implemented by the current government."

Rogelio Garza Garza, undersecretary of industry and commerce, Ministry of Economy

In 2014 the economy showed the first signs of recovery, with a modest yet remarkable 2.1 percent GDP growth. Although the 2015 forecast has already been revised downwards since the beginning of the year, following the slump in global oil prices and a weaker domestic output, this year Mexico's economy is still expected to grow by 2.7 percent. Undeniably healthier than its largest regional contender, Brazil, whose GDP is expected to shrink by 1 percent, and faster than the average 1.5 percent projected for Latin America. Step by step, Mexico is gaining back its pace of growth.

Eric Alvarez, managing director, Janssen Mexico.

"The objective of the current government is to transform Mexico from a prevalently manufacturing-based into a more innovation-driven country," explains Garza Garza. "We are interested in positioning Mexico not only as a cost competitive manufacturing hub, but also as a country which develops value-added products. With this new mentality and thanks to the implementation of specific industrial policies, we are migrating from a traditional model leveraging manufacturing cost competitiveness to a model fostering R&D tailored to fit the needs of the country".

According to estimates by national chamber of the industry, Canifarma, pharmaceuticals represent 1.2 percent of Mexico's GDP and 7 percent of its manufacturing GDP. However, most industry experts agree that pharma pales in comparison to the automotive industry, with its 15 percent of manufacturing GDP. "Traditionally when talking about engines of growth in the Mexican economy, we refer to the automotive business, which clearly is an important one," explains Eric Alvarez, managing director of Janssen Mexico. "In 2013, IMS conducted a study comparing us to nine other countries, such as the UK, Turkey, Argentina and Brazil. It highlighted how Mexico is behind when it comes to innovation and, more importantly, made clear the impact this has on the productivity of the population. The IMS report emphasized the importance of the pharmaceutical sector and now the authorities and the pharmaceutical sector are working together to further improve the situation."

Dr David Kershenobich, general director of the National Institute of Medical Science and Nutrition Salvador Zubirán

Garza Garza agrees on this point. "The pharmaceutical industry plays a key role in the Mexican economy. Despite the percentage of GDP it represents, the industry is closely related to labor productivity and human capital formation, as it contributes to improving life expectancy and quality." For this reason the Ministry of Economy has classified the industry as an 'emerging sector' of the economy to be fostered through targeted industrial policies aimed at increasing production, attracting investment in technology and expanding exports both for multinational companies and national laboratories. "In Mexico, as in other countries, multinational labs specialize in the production and marketing of innovative products, a result of R&D of new chemical entities and therapeutic applications. Here, the question we need to answer is: 'How do we generate an ideal environment for them to develop and grow?'" Garza Garza explains. "By the same token, we need to create the right conditions for Mexican companies to develop innovation: we don't want our country to stagnate and decline by exclusively being a manufacturing hub for foreign companies. To do so we are generating funds to support local companies in their operations and are currently in talks with the World Health Organization (WHO) to allow product developments made in Mexico to have international recognition; this will clear the path for many small companies to reach other areas of the globe in a much easier way."

Dr Pablo Kuri, undersecretary of prevention and health promotion, Ministry of Health

PREVENTION IS BETTER THAN CURE

Mexico’s epidemiological profile has changed dramatically over the past 20 years. Whereas back in the 1990s the main causes of premature death were communicable diseases such as diarrhea and respiratory infections or birth complications, in 2010 non-communicable diseases were taking their toll. Today ischemic heart disease, diabetes and chronic kidney disease are the leading causes of death, with obesity being the major risk factor, affecting seven in ten Mexicans. In 2012 the obesity rate among adults in Mexico was 32.4 percent, up from 24.2 percent in 2000 and the second highest rate among OECD countries, second only to the US. This rapidly changing epidemiology – if not controlled – foreshadows a dramatic impact on an already overloaded healthcare system.

Erik Bakker, market access and public affairs director, Novo Nordisk Mexico

“The main transformation Mexico is undergoing is the migration from having a very successful health policy focused on controlling infectious diseases to having the current problem of controlling non-transmittable diseases,” explains David Kershenobich, general director of the National Institute of Medical Science and Nutrition Salvador Zubirán. “Chronic diseases cannot be approached in the same way as infectious diseases, as they require a completely new realignment in the way you attend them. One of the big changes we need to foster is moving from a system focused on curing to a system focusing on prevention.” To reverse the trend in 2013 the government launched the National Strategy for Prevention and Control of Obesity and Diabetes, aimed at promoting more proactive public health interventions, a comprehensive medical care model and implementing more effective public policies. Proposed regulatory policies included standards for food and beverages in schools, food labeling, marketing of foods and non-alcoholic beverages to children and fiscal measures as well as a concerted effort to change Mexicans’ bad habits.

Eduardo Arce Parellada, general manager, Sanofi Pasteur

It’s still a little too early to evaluate progress. “Obesity is not something you can change in one or two years, so it’s early to talk about results,” points out Pablo Kuri, undersecretary of prevention and health promotion at the Ministry of Health. “You have to first deal with the social determinates of health –the conditions unconnected to the health system, but still impacting it: education, work, income, and taxes, for example. These are all non-health issues but reflect how we still have a lot to do. We may not have results so far, but we have implemented initiatives, put process indicators in place, and are monitoring their development.”

Roberto Tapia, CEO of the Carlos Slim Foundation

The so-called ‘silent killer,’ diabetes, poses the greatest challenge. According to the 2012 National Survey on Health and Nutrition, 9.2 percent of Mexicans have been diagnosed with diabetes. While the survey indicates that 80 percent of patients receive some form of treatment, only 25 percent showed adequate metabolic control. “The minister of health has called the situation a public health emergency and made a powerful statement explaining that if we don’t address diabetes and its consequences today, we’ll lose the gains in life expectancy from the last 40 years,” explains Erik Bakker, market access and public affairs director at Novo Nordisk Mexico. This is especially worrying given that evidence indicates that around half of most common chronic disorders are left undetected, suggesting that at least twice as many Mexicans actually suffer from diabetes. “The federal government recognized very early that they are unable to tackle this issue on their own, and that all stakeholders - including state and municipal governments, civil organizations, and the private sector - must play an active role in improving the standard of treatment for diabetes,” he adds.

Mikel Arriola, federal commissioner of COFEPRIS

One where Mexico has reason to boast is vaccination. “Many will be surprised to hear this, but Mexico has one of the most complete public immunization programs in the world after the US,” explains Eduardo Arce Parellada, general manager of Sanofi Pasteur Mexico. “This means a Mexican is vaccinated with the largest offer of vaccines available and the costs are fully covered by the government. This is something unbelievable, even in Europe where governments are very welfare-oriented. The Mexican government has had this pioneering vision for a long time.” Back in 2009 Mexico was chosen by Sanofi Pasteur as one of the few countries to install one of its global production plants for vaccines. “The main reasons that lead the company to pick Mexico over other countries - in the region as well as worldwide - is the strong commitment of the Mexican government to public health, and specifically to vaccination,” he points out. This commitment is reinforced by the recognition of Cofepris as a functional regulatory agency for vaccines by the World Health Organization (WHO) for the 2014-2017 period, and the recent announcement of the eradication of rubella in the country.

Cristóbal Thompson, executive director, AMIIF

Despite this, challenges persist. In the words of Roberto Tapia, CEO of the Carlos Slim Foundation, Mexico’s system “in the past has been successful on many fronts, mainly on infectious diseases, but today is dealing with problems that require the system to work as a system. Prevention has become more a political statement than a reality, as besides vaccines not much was done in the past. We have to take a proactive preventive approach, shake the system up and push it outside of its comfort zone. We really think we need to bring energy to health.”

OPENING UP TO INNOVATION

Making innovation increasingly available to the Mexican population is a shared concern among public stakeholders and private industry. Mikel Arriola, federal commissioner of Cofepris, has made one of the priorities of the regulatory authority he leads to help innovation access the country. “We know that compared to more developed countries, our portfolio of drugs is weak in terms of innovation, also because of the backlog the agency experienced until 2011,” explains Arriola. As a result, besides reducing the timeframe necessary to approve innovative molecules, the commissioner implemented a “policy to foster access of innovative drugs and started recognizing the work of other agencies, especially the EMA and the FDA.” The most recent milestones was the approval of 17 new molecules in March 2015, with five orphan drugs among them, making a total of 150 new molecules approved since his appointment in 2011.

Gerardo Cárdenas, CEO, Innovare R&D

Yet, much more is boiling under the surface. Ensuring innovative drugs get access to the Mexican market is also number one priority of AMIIF, the association that brings together the most important research-based pharmaceutical companies in the country, and its executive director Cristóbal Thompson. Besides lobbying for access, which is still the main obstacle, one of the strategic objectives of the association is positioning Mexico as a hub for clinical research. “Today the pharma industry is in a very different position with the government compared to other sectors, which receive millions and millions of dollars of investment every year, as is the case of the automotive industry,” explains Thompson. According to AMIIF estimates, every year USD 50 billion are invested globally in primary and secondary research. In 2013 Mexico received USD 160 million in investment for clinical research, while, despite the economic crisis, Argentina saw nearly USD 500 million – more than double Mexico. “Why doesn’t the same amount of money get invested in Mexico?” challenges Thompson. “Given the macroeconomic stability and strategic position we should get at least USD 500 million per year, which in a ten-year period would mean USD 5 billion investment - as much as the automotive industry.” The main challenge: long approval times, which make companies prefer alternative destinations such as Korea and India. “There have been instances when protocols were not ready to be run in Mexico because they were lacking the required approval,” explains Claudia Soto, general manager of the contract research organization Parexel in Mexico. “As an industry, we need to be competitive. Sponsors are always looking to start with the fastest country. The sooner a study can begin, the more patients can be included.”

To place Mexico in a better position on the global map in October 2014 AMIIF announced an agreement with the Mexican Social Security Institute (IMSS) and Cofepris to open the institution up to clinical research for the pharmaceutical industry and decrease the approval time for clinical protocols from three months to one. “The agreement definitely represents a historic milestone for the Mexican health system,” points out Gerardo Cárdenas, CEO of Innovare R&D. “Mexico did not use to have a clinical trial culture and recruitment processes were not well established. This arrangement means having nearly 70 million patients under the same roof – an impressive number and network. IMSS was completely closed in the past, so this agreement opens a goldmine. This is a game changer in terms of R&D in the country. That being said, now the regulatory authority needs to define good clinical practices,” he points out. “Cofepris is taking care of this, but I think the pharmaceutical industry should share this responsibility by importing best practices from abroad and investing resources to establish state-of-the-art clinical research centers at IMSS. Today it’s like having only crude oil; we need the infrastructure to refine and get gasoline - and big pharma definitely needs to participate.”

Irma Egoavil, country manager, Celgene

As a result a number of companies are planning to include Mexico within their upcoming clinical protocols. Orphan drug companies are no exception. “For us, clinical research is a way to bring medical innovation to patients, especially for those who otherwise would not have access to treatment,” explains Irma Egoavil, country manager of the recently opened subsidiary of Celgene in Mexico. The company has more than 300 clinical trials running worldwide and already some trials in Mexico for leukemia and myelodysplastic syndromes. “The authorities have understood that opening the doors to clinical research is a good way to provide better access, but also to provide early experience to physicians to learn about the products and better select the right treatment. However, in order to be competitive at an international level, as a country we need to expedite the approval and recruitment process for trials. We have the patients, the physicians and the need: if we don’t move faster, we’ll lose the opportunity.”

Bernardo Kanahuati, general manager, Bayer HealthCare Pharmaceuticals

This is especially true for companies focusing on innovation. “Innovation is in our DNA,” explains Bernardo Kanahuati, general manager of Bayer HealthCare Pharmaceuticals Mexico. “The only way to keep our leadership – not only in Mexico, but throughout the rest of the world – is by keep launching innovative products. We are interested in involving an increasing number of Mexican patients in global clinical trials to allow a faster registration process in the country and, thus, benefit a larger portion of the population,” he explains. “As we speak, we have five drugs in the pipeline, all of them about to enter Phase III. These products represent our latest developments in oncology, cardiology and women health, among others. The future is around the corner, so the first step is to make our innovations available on the market and, of course, to patients.”

NEW CHANNELS, NEW CHALLENGES

2014 was not an easy year for the pharmaceutical industry in Mexico. IMS Health and Knobloch Information Group, the two leading data providers to the industry, estimate that the total market grew between 2.4 and 2.6 percent over 2013, with the private retail market reporting negative growth. Besides the evolution of the market towards more mature dynamics, a number of factors have impacted its performance. One of the top drug wholesalers, Casa Saba, went unexpectedly bankrupt, forcing the industry to rechannel the distribution of products. Also, the tax reform implemented in January 2014 hit the purchasing power of consumers, forcing them to look for more affordable options, especially taking in consideration that half of healthcare expenditure in Mexico is still out of pocket.

Grupo Knobloch

Back in 2000 Juan Knobloch, president and founder of the Knobloch Information Group, started realizing that retailers were changing their purchasing patterns. “They were still mainly buying from traditional wholesalers, but they also started sourcing products from smaller alternative distributors, as well as directly from manufacturers, not tracked by other data suppliers, meaning that part of the market was not being captured. We soon came to realize that the sell-out was higher than the sell-in reported by wholesalers, mainly due to two trends,” Knobloch explains. “On the one hand, pharmacies were increasingly acquiring low-price branded generics from approximately 500 minor distributors spread across Mexico and not tracked by our competitors; on the other, pharmacies - especially larger chains - had started developing their own private labels, which were delivered directly by contract-manufacturers to the chains, thus not tracked either.” Today these two groups of products report the highest growth rate mainly driven by consumers looking for pricing.

Grupo Loeffler Russek facilities

In 2014 the total pharmaceutical market had a value of nearly USD 16 billion (at pharmacy price), with approximately 74 percent from the private market and 26 percent from the institutional market. However, “in the private market only 63 percent of units move through audited channels (traditional wholesalers, national and regional drugstore chains, supermarkets and independent pharmacies), whereas 37 percent move through alternative channels,” Knobloch explains. These channels encompass the low-priced branded generics drugstore chain Farmacias Similares, generics’ drugstores and generic-only wholesale clubs, which are warehouses, where independent pharmacies go and buy directly low-priced branded generics. “15 years ago this alternative market did not even exist; in units today it represents almost 40 percent of the total private market,” he stresses.

Pablo Escandón, president and CEO, Nadro

“After the so-called ‘Tequila crisis’, which hit Mexico in 1994-95, the Mexican businessman Víctor Manuel González Torres understood that people needed a low-cost alternative to out-of-pocket healthcare expenses,” Knobloch goes on. In 1997 González Torres started the breakthrough model of Farmacias Similares: a drugstore chain selling low-priced generic drugs under the slogan ‘Lo mismo, pero más barato’ (The same, but cheaper) and with physicians at the point of sale. It was a game changer.

Luis Zerecero, general director, Laboratorios Keton

The family at the head of the Grupo Loeffler-Russek also identified the same need. “In the early 1990s I started avidly studying the emerging - and yet unknown - generics market and my brother and I decided to start our own business,” recounts José Angel García Hinojosa, vice president of sales and second generation at the head of the company. “Given our capital availability and the market demand for more affordable drugs, we decided to start a wholesale firm to distribute generic drugs to the Mexican population. That is when Loeffler-Russek was born. At that time we did not have the capital to enter the high-priced patented market and invest in marketing. That is why we opted for generic drugs instead; we saw a huge niche opportunity. However, we didn’t want to stop at being a mere distributor, we wanted to be producers. So we acquired facilities to have our own laboratory and created Russek - today our manufacturing branch.”

Private labels are also the big winner of this shift. Today store brands represent approximately 12 percent of the total volume of the private market. “We estimate that in the future, 90 percent of pure generics will be private labels,” Knobloch believes. The main drivers behind this trend: competitive pricing and the trust people place in large retailers and big pharmacy chains. And the increasing practice of recommending store brands at the point of sale. “Shifting of prescriptions at pharmacies is also becoming a big issue. Patients get to the point of sale with a prescription, but pharmacists change it, often for a home brand,” explains Gurulinga Konanur, general manager of the Indian pure generics manufacturer Torrent in Mexico. “Nadro recently launched a TV campaign exhorting people not to get their prescriptions switched, as only the physicians knows the best drug for the patient to take.” Under the slogan Círculo de la Salud (Circle Of Health) the leading wholesaler is promoting a national campaign among approximately 7,000 affiliated points of sale nationwide to fight against the practice. “Sometimes it is simply more advantageous for the retailer to substitute one drug for another,” explains Pablo Escandón, president and CEO of Nadro. “However, the only one that has a capacity to decide on a given prescription is the doctor who prescribed it in the first place. This is not clearly understood in Mexico, thus we are pushing to ensure that prescriptions are and should not be substituted.”

Despite shifting trends, Mexico continues to be an attractive market space to access. “With a population of almost 120 million and a high level of out-of-pocket expense for healthcare, Mexico is a very interesting market for any company operating in the pharmaceutical marketplace,” points out Luis Zerecero, general director of Laboratorios Keton, a 100 percent Mexican company founded in 1956. “People naively believe that the pharmaceutical industry is not complex; but things are changing at a quick pace, so it is not easy to keep up with what is going on,” he adds. Thanks to his decade-long experience, Zerecero is well aware of the challenges new entrants face in Mexico and decided to start offering hosting services to companies interested in tapping the Mexican market. “Today we represent ten different international companies, spanning from Austria to Italy, Spain, France, and Germany,” he boasts.

José Angel García Hinojosa, vice president of sales, Grupo Loeffler-Russek

REDEFINING DISTRIBUTION

The distribution of pharmaceutical products in Mexico is undergoing a profound reshaping. “In the past, four wholesalers - Nadro, Marzam, Casa Saba and Fármacos Especializados - were in charge of distributing medicines to the more than 20,000 independent pharmacies across the country,” explains Mario Sicilia, CEO of the third-party logistics provider Bomi Mexico. However, at the beginning of 2014 Casa Saba declared bankruptcy, leaving a black hole of an estimated USD 450 million in the market. “Some pharma companies have lost revenues and cash they are not going to collect anymore, while the market shares have been significantly affected in some categories due to the scarcity of products at the point of sale,” he adds. Besides the exit of Casa Saba the increasing negotiation power of big pharmacy chains with drug manufacturers as well as the growing vertical integration of production for store brands is squeezing wholesalers to reinvent themselves.

Gurulinga Konanur, general manager of the Indian pure generics manufacturer Torrent in Mexico.

Pablo Escandón, president and CEO of Nadro, today the leading wholesaler in the market, seems well aware of this trend. “Specialized wholesalers like Nadro are responsible for the physical movement of products, and provide innovation through different means, such as promoting small stores and making them more competitive. We help them improve their level of service and increase the fill rate they offer to their consumers,” he explains. For this reason, while serving all types of final customers, he decided to focus the company on servicing the more than 14,000 small independent stores located outside of urban areas, which are often the only options for healthcare in smaller communities.

The future vision for the company seems very clear. “We understand that our core business is not only traditional wholesale and distribution, but also providing and articulating solutions in health care. There are multiple needs, services to supply, and diverse opportunities in the health sector in Mexico. We see other ways of creating value for manufacturers, retailers, suppliers, doctors and even ways of servicing patients directly.”

Mario Sicilia, CEO, Bomi Mexico

While many may think a natural move for wholesalers could be to become logistic partners to the industry, thus competing with third-party logistics providers, Sicilia has a different opinion. “The changes in the distribution landscape have not affected our operations. We deliver to wholesalers, as we do to any other client,” he stresses. “Our business model is very different because we never own the inventory, whereas wholesalers do. It is not our intention to compete with them, as we fulfill different needs of the market.” He concludes: “It’s really tough for such companies to do the downscaling, as they have a different business model and organization, whereby they own the whole transportation system. It’s hard to do what we do, because we start from a very frugal culture and a more asset-light business model. It’s not easy to downscale the model fast and efficiently. That’s why I am not so concerned about them entering our market.”

Carolina Galicia Durán, general manager, World Courier

The supply chain of pharmaceutical products in Mexico today involves a number of challenges that only specialized providers can cope with. More cost-efficient solutions and lead times seem to be the most important requests on side of clients, while providing the sufficient flexibility to handle tailor-made requests. “We do not consolidate shipments, which helps us be more flexible in our routes and be able to change at any moment,” explains Carolina Galicia Durán, general manager of World Courier Mexico. “However, there are also a lot of challenges. Packaging is complicated, especially in Latin America where there are not as many options as in the US, for example. And as for logistics, the competition is increasing day-by-day. When it comes to risk management, it’s important to analyze the risks and to be ahead of the game. However, on the positive side, in recent years in Mexico we have experienced a better regulatory environment, which has made our work much easier.”

For this reason logistic providers are looking for an increasing collaboration with clients to better understand their operations and their needs, along the complete supply chain. “The most important change was a shift from being a ‘black box’ to be much more transparent towards the client,” notes Sicilia. “In the past the thinking was ‘the less you know, the better’, as this would make the client more dependent on the logistic supplier. We have completely changed this paradigm to become a real partner to our clients and provide them with the best solutions.”

Sanofi Pasteur plant