Changing Health Profile, Aging Population Reshaping Industry

Mexico has made significant advances in several areas of healthcare but the country still has many hurdles to overcome. In a year of transition and uncertainty, many have hedged their bets waiting to see how the tables will turn, but most still see Mexico’s health industry as an area of opportunity. 

Medicines, vaccination campaigns and hygiene improvements have lengthened the lives of Mexicans during the last decades. Today, the life expectancy of a child born in Mexico is almost 77 years, according to the World Bank. Birth rates, on the other hand, have plunged. In the 1970s, a woman generally had an average of 6.8 children, while now she has 2.2. Together, these changes show the country is undergoing a profound population shift, moving from a younger and more productive population to an older one. The next generation will have to deal with a large number of older individuals and all that that entails, including an increase in the costs of care due to palliative services and the need to address more age-related diseases, such as dementia.

Mexico has another significant problem. According to the UN’s Food and Agriculture Organization (FAO), 73 percent of all Mexicans are overweight or obese. That number breaks down into seven out of every 10 adults, four out of 10 teenagers and one out of three children. Growing obesity rates have translated into more cardiovascular diseases, diabetes and cancer, which now represent Mexico’s largest mortality causes, according to INEGI. Even more worrying is the large number of overweight children. This segment of the population is at greater risk of developing an obesity-related disease earlier in life. “The costs of chronic diseases are much 

higher than infectious diseases, as the former must be addressed for the person’s entire life instead of a few days or weeks,” says Héctor Valle, Founder and Partner at INNOVASALUD.

These problems, of course, are not just in Mexico. Individuals and healthcare systems across the globe are spending a pretty penny addressing obesity-related diseases. A report from the Harvard School of Public Health released in 2016 stated that it takes healthcare systems around the world US$825 billion per year to cover the medical costs of 422 million adults with diabetes. This study states that the number of diabetics could rise to over 700 million individuals by 2025, with care costs for them rising accordingly.

PUBLIC SECTOR BLUES

A larger and overweight population will mean higher medical care expenses; however, in recent years the health sector in Mexico has seen its budgets cut.

In 2018, the International Monetary Fund (IMF) ranked Mexico’s economy 15th in the world by GDP. However, the country is in last place among OECD countries in healthcare expenditure. Mexico invests only 5.8 percent of its GDP in healthcare, while the OECD average is 9 percent. Moreover, half of that 5.8 percent is paid not by the government or by public institutions, but by patients themselves, putting Mexico in first place for out-of- pocket healthcare costs among OECD countries.

This small investment in healthcare is the result of many years of budget cuts. The Mexican Institute of Competitiveness (IMCO) has said that during the six years of President Enrique Peña Nieto’s administration, the Ministry of Health’s budget fell by 20 percent and those cuts are directly reflected in Mexican wallets.

In Mexico, the main provider of healthcare is the public sector, composed of several independent hospital networks working autonomously. While Mexican law states that all citizens must be provided healthcare, INEGI says that about 32.6 million people do not have access to any kind of care. As the different networks do not exchange services, there is a simultaneous oversaturation of some hospitals and the underuse of others. Patients attending oversaturated hospitals might find a lack of medicines and medical supplies, long waiting times or insufficient specialists, beds or equipment, leading those who can afford it to the private sector. The Center for Economic and Budget Research (CIEP) says that during Peña Nieto’s administration out-of-pocket expenditure in healthcare increased by 120 percent, forcing Mexicans to spend up to 41 percent of their income on healthcare.

INSURANCE GROWTH POTENTIAL

Most of the money patients spend on healthcare goes to pay for drugs, tests, doctors, hospitals and many other services, but Mexicans rarely spend on insurance. The country has one of the lowest insurance penetration rates in the OECD. “Mexico’s private healthcare market remains small in terms of insurance coverage. The country has 120 million inhabitants but there are only 10 million people covered by health policies. Private health insurance remains expensive for many, so the sector is looking for alternatives,” says Luis Francisco Galván, Vice President and Head of Pricing Latin America at SCOR.

Insurers say that Mexicans distrust private insurance, forcing families to de-capitalize in cases of emergency. To increase insurance penetration, some choose specialized products focused on a single disease, such as diabetes or cancer. “Today in Mexico, the most common policy is the major expenses premium, created years ago for a lifestyle and an epidemiology very different from what we have today. We need to create new policies that address the country’s needs. To this end, MASZ is designing new products for launch in 2018. One is a policy only for heart attacks,” says Alejandro Sancen, Director General of MASZ. Smaller insurance plans represent smaller costs for the individual and lower risk for the insurer, while ensuring that the person is covered in case of developing the disease. Other insurers propose to make insurance products either mandatory or tax free to incentivize individuals to acquire them. Finally, some insurers are pursuing the introduction of Big Data practices to closely monitor the healthcare habits of patients to do better risk estimations that might permit more accurate price projections for insurance.

LOWERING OUT-OF-POCKET SPENDING

Other strategies have directly addressed out-of-pocket expenses in healthcare, like the introduction of generic versions of branded drugs with expired patents. “Our work with generics is one of this administration’s greatest achievements, as these medicines cover 70 percent of Mexico’s main mortality causes and bring about a 60 percent overall reduction in costs,” says Julio Sánchez y Tépoz, Federal Commissioner of COFEPRIS. 

Due to their lower cost in comparison to patented medicines, generics have become the drug of choice for most Mexicans. Generics represent 84.1 percent of all drug sales, according to OECD data, but their lower costs translate into smaller margins, as they only represent 49 percent of the medicine market by cost. Nonetheless, generics are a significant business opportunity that continues to grow.

“The pharmaceutical sector sold a total of 985.7 million units with a value of MX$156 billion (US$8.97 billion) between February 2017 and February 2018,” says Rafael Maciel, President of the Mexican Association of Generics (AMEGI). He explains that the growth rate of generics has outpaced that of patented medicines. “During those 12 months, the generics market grew at a 3.9 percent rate and the OTC segment grew by 5.3 percent, while the price market decreased by 1.5 percent,” he says.

Patent expirations will continue driving the generics market, especially in emerging economies. In its report Global Medicine Use in 2020, IQVIA explains that emerging economies, including Mexico, will continue to prefer generics and over-the-counter (OTC) medications over patented medicines. 

The generics market is not without challenges. Current regulations require all manufacturers to fully ensure the efficacy and safety of all medicines in the market. All things being equal, patients prioritize prices, buying the cheapest option available. This makes manufacturers compete on the lowest price, reduce their margins. “In markets like Mexico, where the majority of spending is out of pocket, people seek lower prices but want the same quality,” says Mariano de Elizalde, CEO Sandoz México.

Alejandra Palacios, President of the Federal Commission of Economic Competition (COFECE), however, points out that generics are slow to enter the Mexican market. In 2017, she explained to media that while in the US the production of a medication might start immediately after a patent expires, in Mexico this process usually takes up to two years. Furthermore, current regulations complicate their sales in the case of prescription medication. “Health regulations limit the possibility to substitute a patented medication for its generic alternative unless the doctor explicitly writes down the generic name,” says Palacios. Generics manufacturers are working to change this to promote the use of these medicines. AMEGI, for instance, is working directly with doctors to address the issue. “Doctors were initially reluctant to prescribe generic medications but we have provided them with enough information to change that initial hesitation,” says Maciel. 

Another strategy to reduce costs has been proposed by the Association of Over-the-Counter Manufacturers (AFAMELA), which suggests promoting the use of self- medication for common diseases and those that are easy to diagnose. In early 2018, the association pointed to the MX$43.5 billion spent by the public sector caring for ailments of this kind for 15 million Mexicans and suggested that that money could have been saved by empowering individuals to handle these illnesses on their own.

Many manufacturers see in OTCs a way to grow their market by producing affordable medicines for a larger customer base. Big Pharma has also climbed onto the OTC and generics train. For instance, giant Swiss pharmaceutical Novartis separated its generics and OTC drug portfolio into its subsidiary Sandoz. Other pharmaceutical companies continue selling innovative medicines together with OTCs and generic versions of their own medicines once the patent has expired. “Pfizer is a company of innovation but we also offer Pfizer Vitales in Mexico, our generics line that combines accessible prices

with Pfizer’s quality,” says Rodrigo Puga, President and Country Manager of Pfizer Mexico.

HEALTHCARE: FROM MEXICO TO THE WORLD

Big Pharma has found in Mexico more than a good business environment; it is also a good place to manufacture their medicines. According to ProMéxico, the country hosts subsidiaries of 20 of the 25 largest pharmaceutical companies in the world and the industry received a total of US$4.76 billion in FDI between 2010 and 2016. Some advantages include an ideal location that acts as an entry point to the US and Latin America, numerous free trade agreements and lower production costs than neighboring economies, explains ProMéxico.

However, the pharmaceutical manufacturing industry has faced its share of ups and downs. The country reached its largest manufacturing capacity in 2013 with a total of US$12.33 billion in medicine production, but since then capacity has been gradually shrinking, dropping to US$9.28 billion in 2017. This trend is expected to change, with Global Insights forecasting a small increase in production in 2018 to US$9.35 billion and growing until 2022, when the consultancy expects the country to reach US$11.26 billion in medication manufacturing.

The global pharmaceutical sector is also experiencing several changes that will gradually impact local manufacturing. The main change is the shift from small molecules toward biomolecules, large chemical compounds manufactured by cell. For instance, 2017’s top-selling patented medication was AbbVie’s biomolecule Humira, which accounted for sales of US$18.43 billion worldwide. The shift toward biomolecules brings both advantages and disadvantages. On the one hand, these drugs are more expensive to research, develop and produce than small molecules; on the other, it is much harder to make generic versions, known as biosimilars. For that reason, patent holders can expect a longer delay between the expiration of a patent and the entrance of a generics competitor into the market, leaving the with a broader sales exclusivity period. For this reason, among others, the market for biomolecules is expected to continue growing, as can be seen in Evaluate Pharma’s forecast for 2024.

Biomedicines are barely permeating the Mexican market, but local players already see their potential. For instance, ANCE, an authorized third party, built a strong business focused on the authorization of medical devices, but the company is increasingly turning to biomolecules. “We are also seeing emerging opportunities in biomedicines. The country has many prospects for laboratories, especially in the case of biotechnological products, due to their complex requirements in comparison to small molecules. For that reason, laboratories are investing in Mexico to develop these medications,” says Abel Hernández, Director General of ANCE.

The problems facing the local drug manufacturing sector have not been extended to medical supplies, a sector that is now booming. Mexico is the largest provider of medical devices in Latin America and the largest provider of the US, according to ProMéxico. In its latest report, ProMéxico affirmed that the sector is expected to continue growing at a 4 percent compound annual growth rate (CAGR) between 2016 and 2020. In 2016, the production of medical devices totaled US$12.7 billion and is expected to reach US$16.52 billion by 2020.

Mexico has built a strong manufacturing base for medical devices, especially in northern states such as Baja California, Sonora, Chihuahua, Tamaulipas, Coahuila and Nuevo Leon. Baja California alone accounts for 50 percent of all exports of medical devices, according to ProMéxico. In recent years, the country has had a positive trade balance of imports and exports, a trend that is expected to continue.

Most of the products manufactured for export are for the medical, surgical, dental and veterinary industries, which 

account for 75.9 percent of all exports. These are followed by orthopedic devices with 10.8 percent, respiratory therapy and massage devices at 6 percent and the remaining 7.3 percent by other types of products, according to ProMéxico. Much lower manufacturing costs in comparison to Mexico’s northern neighbor, which is also the largest destination for Mexican medical device exports, has underpinned the segment. According to KPMG and Competitive Alternatives, the manufacture of a medical device is 21.2 percent less expensive in Mexico than in the US, which receives 92.8 percent of all medical device exports, according to ProMéxico. Even though the relationship between both countries is shaky at the moment, the US has been one of the largest investors in the medical devices sector. Between 2005 and 2016, the US invested a total of US$1.61 billion, almost 10 times the amount of second place The Netherlands with US$177 million, according to the Ministry of Economy.

However, as the US is the largest investor in the local industry and the main destination for Mexican exports, there is a cloud looming over the medical devices industry: the renegotiation of NAFTA. “Importers will suffer the most. With NAFTA changes that gave us a zero tariff, we will need to rethink our plans, although we have to wait. Asian products might have advantages attributed to more aggressive prices but the government could continue saying no to the Asian market and only buy from the US and Europe,” says Alejandra Groff, Director General of GMMC.

While some have a more positive outlook on NAFTA renegotiations, others are already looking for opportunities that take advantage of Mexico’s other numerous trade agreements. “Having operations in Colombia, Chile and Peru allowed us to take advantage of the Pacific Alliance, which promotes exchange of workers and products across its member countries. Furthermore, Peru, Chile and Mexico are part of the TPPII, which will allow us to export to Australia, Vietnam, Canada, Brunei and Japan,” says Dagoberto Cortés, Director General of Sanfer.