Medical Device Channels in Latin America John Brady Mark

1
Medical Device Channels in Latin America

• John Brady
• Mark Givens
• Thom Murphy
• Ron Sacher
• Mike Zajack

2
Agenda

• Overview of current healthcare situation
• Overview of current distribution model
• Operating Considerations

3
How is Latin American Healthcare Different?
North America
Latin America

• Resources / 10,000
• 27 physicians
• 96 nurses
• Infant Mortality Rate
• 7 of 1000 live births
• Annual Spending
• 4,300 per person

• Resources / 10,000
• 15 physicians
• 8 nurses
• Infant Mortality
• 35 of 1000 live births
• Annual Spending
• _at_ 200 per person

Pan American Health Organization www.paho.com
4
Flood, Patricia Latin American Medical Device
Regulations, MDDI July 2000
5
Overview of LA Healthcare Markets

• Health Status
• Young populations
• Leading causes of death
• Circulatory disease
• Cancer
• Respiratory Illness
• Infectious and communicable diseases
• Other concerns
• Safe drinking water
• Waste / sewage concerns
• Sterilization

6
Healthcare System Structure

• Balance of public/private development
• Most are controlled by State agencies
• Focus on decentralization
• Largely a two-tier system rich poor
• Two-tier again urban vs. rural

7
Population (millions)
8
Health Expenditure per capita
9
Medical Device Market Size, 2000, (US4.1billion)
195m
440m
2700m
90m
700m
10
Current Medical Device Market

• Majority are imports
• Specialist agents distributors
• Regional manufacturing/offices necessary
• Bidding
• Decentralization emphasized

11
Issues with Current Medical Device Market

• Lack of trained personnel to run equipment or
  purchase appropriate equipment
• High of equipment not functioning after three
  years
• How to transition from importer to manufacturer
  exporter sustainable development

12
Typical Euro Models

• Large Country Model
• Italy, Germany, UK, France Spain
• Single Franchise sales responsibility
• Franchise Director is Country Manager

US Corporation
US Corp Franchise
Franchise owned Subsidiary in each Country
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Typical Euro Models

• Large Country Model
• Infrastructure
• Market size supports franchise based operation
• Finance
• Operations
• Human Resources
• Distribution Channel(s)
• Typically Direct
• Infrastructure allows more direct control of
  sales force
• Single Franchise sales responsibility
• Franchise Director is Country Manager

14
Typical Euro Models

• Small Country Model
• Czech Rep, Poland, Turkey
• Multiple Franchise sales responsibility
• Multiple Franchise Directors report to CM

US Corporation
US Corp Franchise A
US Corp Franchise B
US Corp Franchise C
Corporate owned Subsidiary in each Country
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Typical Euro Models

• Small Country Model
• Infrastructure
• Corporate owned subsidiary
• Shared infrastructure with other franchises based
  on smaller market size
• Distribution Channel(s)
• Typically Indirect
• Independent Representatives
• Independent Distributors
• Some Direct
• Direct Rep - Sale through Local Distributor
• Single Franchise sales responsibility
• Franchise Director is Country Manager

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Latin American Model

• Corporate owned Subsidiary
• Single infrastructure umbrella
• Countries grouped into Regions
• Responsible for all 5 Regions PL

Corporate Owned Latin America Subsidiary
Mexico
Brazil
C. America Caribbean
Northern Zone Ven, Col, Equa
Southern Cone Chile, Arg, Urag
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Latin American Model

• Regional Management
• Multiple franchise responsibility

1 Region Southern Cone
Regional Sales Manager
Regional Marketing Director
Franchise A
Franchise B
Franchise C
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LA Model Reg Mgt. Considerations

• Distribution
• Varies by Country within Region
• Localized relationships necessary
• Infrastructure only supports Independent
  Distributorships
• Multiple franchise product responsibility
• Ratio Management - Manage capital/inventory
• Competition
• Local competition knockoffs
• Typically Influential Surgeon driven / owned
• Little patent protection from Govt. Keep money
  in Country
• Pricing
• Cheaper local knockoffs
• rich/poor vs. high/low volume

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LA Model - Reg Mgt. Considerations

• Economic variability in country mix
• Exchange rates
• Tariffs
• Devalued currencies - export reductions
• Healthcare Structure - differ among countries
• Private healthcare for upper 5 only
• Govt Subsidized
• Low reimbursement - Keep money in Country
• Slow reimbursement process Encourages pre
  payment
• Govt spending for local war Vs healthcare

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LA Model Reg Mgt. Strategy

• Distribution Strategy
• Invest in long term relationships
• Education is key
• Competition
• Offer total value to customer
• Surgeon education
• High Quality Product
• Reduce Hospital Liability
• Pricing strategy
• Tariffs incorporated into price
• Bundling to optimize volume discounts
• High volume _at_ lower prices or target rich _at_ high
  prices

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LA Model - Reg Mgt. Strategy

• Economic Stability
• Budget for predicted country issues
• Place manufacturing in the country
• Protect outflow of capital keep money in the
  country
• Protection from currency exchange rates
• Healthcare Strategy
• Educate govt. on total healthcare costs

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Q A
23
In addition to appendices , supporting
information may be found in the slide notes
provided.
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Appendix 1 - Argentina

• I.    Argentina Medical Market
• a.      Intro
•              i.      Movement to deregulate
  healthcare system to allow private companies to
  compete with trade unions.
• II.                 Health status
• a.      Population primarily young.
• b.      Huge country 2nd largest in South
  America
• c.      Leading cause is circulatory disease
•              i.      Circulatory disease 26.1
  of all deaths
•              ii.      Respiratory 10.7 of all
  deaths
•              iii.      Cerebrovascular 8.4
• III.      Structure of healthcare system in
  Brazil
• a.      Argentina spends more on healthcare than
  any other Latin nation
• b.      Complex structure public, social
  insurance and private
•             i.      Many sub entities leading to
  complicated administrative structure.
• IV.       Current distribution model
• a.      More lassiaz-faire than any other
  country.
•              i.      Most sold through local
  agents and distributors.
•              ii.      Common to buy expensive
  items direct from manufacturer.
•              iii.      Distributors generally
  cover entire country, with network of agents
  throughout.

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Appendix 2 - Brazil

• I.       Brazil Medical Market
• a.      Intro
•              i.      The New Constitution of 1988
  created the unified health system (SUS),
  guaranteeing free universal healthcare to all
  Brazilians
•              ii.      A two-tied system of
  healthcare due to extreme economic diversity in
  Brazil.
• II.      Health status
• a.      Population primarily young.
• b.      Huge country.
• c.      The health status of Brazil lags behind
  neighboring countries with similar incomes.
  Comparable with poorer nations like Peru.
• d.      27 of population live in poverty.
• e.      Economic diversity leads to two disease
  profiles chronic and degenerative diseases in
  the wealthy part, and infectious and parasitic
  diseases in the poorer part.
• f.        Sterilization is the most common form
  of birth control.
•           i.      40 of married/cohabitating
  women have been sterilized (27 10 years ago).
• g.      Causes of death
•             i.      Leading cause is circulatory
  disease
• 1.      Heart disease 14.9 of all deaths
• 2.      Cancer 11.9 of all deaths
• 3.      Infectious and parasitic 5.2

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Appendix 2 Brazil (cont.)

• III.      Structure of healthcare system in
  Brazil
• a.      SUS
•             i.      Focused on decentralization
  giving more autonomy to state and cities in
  planning local programs
•             ii.      This process has been slow,
  marked by corruption and poor control of funds.
•             iii.      Private insurance covers
  28 of population.
• 1.      These companies maintain their own
  hospitals, medical centers, etc.
• b.      Localized in large population areas
• IV.     Current distribution model
• a.      Imported medical devices must meet
  specific requirements in order to be sold.
•             i.      Establishment of a local
  manufacturing unit or local office.
•             ii.      Establishment of a Brazilian
  distributor
• b.      Import duties and VAT taxes were
  abolished in 1999 to ease public health
  expenditures.
• c.      Cut tariffs up to 30 on some medical
  devices such as heart valves and pacemakers.
• d.      Public hospitals are exempt from all
  duties and tariffs but to import a device must
  prove
•             i.      Brazilian companies do not
  manufacture a similar product
•             ii.      If it is locally
  manufactured, its price must be higher than the
  import.
• e.      Distribution is best done through
  developments with local agents or distributors.
•             i.      On-site Brazilian reps are
  critical for gaining access to end-users.
•             ii.      Personal visits to hospitals
  and doctors are essential.

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Appendix 3 - Chile

• I.      Chile Medical Market
• a.      Intro
•             i.      Imbalances remain in Chile
  healthcare system
•             ii.      Standard structure of public
  and private medical care
• II.      Health status
• a.      Population primarily young.
• b.      85 live in urban areas, 40 of
  population lives in Santiago.
• c.      Sanitation an issue in rural Chile.
•             i.      97 of all waste water (urban
  and rural) is released without being treated.
• d.      Causes of death
•             i.      Circulatory disease 27.5 of
  all deaths
•            ii.      Cancer 21.8 of all deaths
•             iii.      Respiratory disease 12.7
• III.    Structure of healthcare system in Chile
• a.      Both public and private sectors regulated
  by Ministry of Health
• b.      Both sectors participate in health
  insurance

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Appendix 3 Chile (cont.)

• IV.    Current distribution model
• a.      Medical devices regulation in Chile is
  relatively new.
•             i.      Must receive a local
  compliance through a government agency.
• b.      Best way of entry is through a local
  import company.
• c.      Market is small and personal
  selling/connections is important.
• d.      National Health Service is leading
  purchaser of medical devices, but hospitals are
  encouraged to purchase on their own.
• e.      Purchasing is done mostly through tender
  offers.
• f.        Importing into Chile is not difficult
  and there are few restrictions.
• g.      Chile relies highly on imported medical
  devices, mainly from USA.
• h.      10 major distributors

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Appendix 4 - Mexico

• I.      Mexico Medical Market
• a.      Intro
•              i.      main objective of
  governments health care sector reform program is
  to address inadequacies of health care system.
• b.      10m people currently no access to
  healthcare services and additional 20m with less
  than adequate access.
• II.     Health status
• a.      Causes of death
•             i.      Seen a substantial fall in
  mortality from communicable diseases
•             ii.      But a rise in mortality from
  chronic and degenerative diseases
• 1.      Heart disease 13.8 of all deaths
• 2.      Cancer 12.1 of all deaths
• 3.      Endocrine, nutritional, immunity
  disorders
• III.     Structure of healthcare system in Mexico
• a.      Comprised of 3 sectors
•              i.      Public
•              ii.      Social Security
• 1.      directly related to employment
•              iii.      Private
• b.      Localized in large population areas

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Appendix 4 Mexico (cont.)

• IV.    Current distribution model
• a.      Most equipment sold through specialist
  agents and distributors
•           i.      These specialize by product
  or brand name
• b.      Sales driven largely through technical
  advisors who call directly on hospitals and
  doctors.
• c.      Public institutions account for 80 of
  market
•             i.      Formalized bidding process
• d.      Private hospitals use informal process
  much like private US hospitals.
• e.      Financing is extremely important
  (especially in light of the Peso crisis in 1994)
•             i.      Social Security sector has
  piloted a new program in which manufacturers
  supply devices for free in exchange for
  consumables contracts.
•            ii.      NAFTA agreements exempt us
  from 10-20 duty charges plus 15 VAT
• f.        Nine major distributors, with sales
  ranging from 1 to 25m.

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Appendix 4 Mexico (cont.)

• V.     Issues with current medical device market
• a.      Lack of trained personnel to run
  equipment and purchase appropriate equipment
• b.      Reported 52 of imported equipment is not
  functioning after 3 years.
• c.      Reported 65-75 of medical equipment and
  devices needs replacing
• d.      Maquiladora Program - introduced in 1993
•            i.      Production sharing program
  whereby raw materials and components get
  imported duty-free into Mexico and assembled in
  Mexican medical devices
•            ii.      Exports outpaced imports of
  medical devices but balance was restored in
  1998.
•            iii.      Mexican production revolves
  largely around consumables and low- tech
  devices.
•            iv.      But 95 of high-tech
  equipment is still imported, mainly from USA

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Appendix 5 - Peru

• I.      Peru Medical Market
• a.      Intro
•            i.      In dire need of modernization.
•            ii.      Health indicators are poor,
  with sanitation and malnutrition issues prevalent
  in rural parts of country.
•            iii.      Health expenditure remains
  very low.
• II.                 Health status
• a.      Population primarily young.
• b.      74 of the population is urban.
• c.      Causes of death
•            i.      Only 58 of deaths in 1999
  went reported.
•            ii.      Respiratory diseases are
  major recorded cause of death.
• 1.      Respiratory disease 18.8 of all deaths
• 2.      Circulatory 16.9 of all deaths
• 3.      Infectious - 8.6
•             iii.      Infectious is a major issue
  malaria, cholera.
• III.               Structure of healthcare system
  in Peru
• a.      Fragmented between various government
  agencies
• b.      Small number of private hospitals
•             i.      Based in Lima

33
Appendix 5 Peru (cont.)

• IV.              Medical Device Overview
• a.      Most of the activity is based in Lima
• b.      Local agent necessary government only
  issues tenders to them.
• c.      All purchases over US75k must be put
  out to public tender.
• d.      12 import customs duty and 18 sales
  tax.
• e.      85 of market supplied through imports.
• f.        Huge demand for medical devices and
  equipment.
•            i.      Replacement of old equipment.
•            ii.      Providing expanded services
  in rural areas.
• g.      Equipment is largely at low/medium end of
  technology scale.
• h.      USA is leading supplier of imports to
  Peru.

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Works Consulted

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  are Latin American governments doing about it?,
   Santiago-Delpin EA,  Transplant Proc, December
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   La fragmentacion de los sistemas nacionales de
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35
Works Consulted (cont.)

• HNP/Poverty Thematic Group of The World Bank
  Socio-Economic Differences in Health, Nutrition,
  and Population in Peru, Columbia, Brazil.,
  Gwatkin, Rustein, Johnson, Pande and Wagstaff,
  May 2000.
• MediStat Country Pofiles Mexico, Venezuela,
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• Overview of Medical Equipment Market Brazil.,
  U.S. Foreign Commercial Servce U.S.
  Department of State, 2001.
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  Chile, Mexico, U.S. Foreign Commercial Servce
  U.S. Department of State, 2001.
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  Chile, Mexico, HIMA, 1999.