Medical Device Channels in Latin America

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. 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 @ $200 per person How is Latin American Healthcare Different? North America Latin America 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, (US$4.1billion) $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

13. 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

15. 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

16. Latin American Model • Corporate owned Subsidiary • Single infrastructure “umbrella” • Countries grouped into Regions • Responsible for all 5 Regions P&L Corporate Owned Latin America Subsidiary Mexico Brazil C. America Caribbean Northern Zone Ven, Col, Equa Southern Cone Chile, Arg, Urag

17. Latin American Model • Regional Management • Multiple franchise responsibility 1 Region – Southern Cone Regional Marketing Director Regional Sales Manager Franchise A Franchise B Franchise C

18. 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

19. LA Model - Reg Mgt. Considerations • Economic variability in country mix • Exchange rates • Tariff’s • Devalued currencies - export reductions • Healthcare Structure - differ among countries • Private healthcare for upper 5% only • Gov’t Subsidized • Low reimbursement - “Keep money in Country” • Slow reimbursement process – Encourages pre payment • Gov’t spending for local war Vs healthcare

20. 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 @ lower prices or target rich @ high prices

21. 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

22. Q & A

23. In addition to appendices , supporting information may be found in the slide notes provided.

24. 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. •              iv.      Takes time to introduce new products into market: endorsements by leading doctors/hospitals are helpful. •              v.      Nine distributors in Argentina

25. 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%

26. 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. • f.        In an effort to promote decentralization, federal hospitals can purchase their own medical supplies. State and locals hospitals source through the state/municpal health secretsariats. • g.      10 major distributors

27. 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

28. 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

29. 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

30. 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.

31. 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

32. 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 •            ii.      Serve a small wealthy sector • c.      Localized in large population areas

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 US$75k 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.

34. Works Consulted • The organ shortage: a public health crisis. What are Latin American governments doing about it?,  Santiago-Delpin EA,  Transplant Proc, December 1997. • [The fragmentation of national health systems.],  La fragmentacion de los sistemas nacionales de salud.,  Barillas E,  Rev Panam Salud Publica, March 1997. • The transfer of vaccine technology to developing countries. The Latin American experience.,  Homma A; Knouss RF,  Int J Technol Assess Health Care, Winter 1994. • How should resources be reallocated between physicians and nurses in Africa and Latin America?,  Vargas-Lagos V,  Soc Sci Med, 1991. • Distributing and transferring medical technology. A view from Latin America and the Caribbean.,  Pena-Mohr J,  Int J Technol Assess Health Care 1987. • The medical "brain drain" and health priorities in Latin America.,  Horn JJ,  Int J Health Serv, 1977. • DIAGNOSTICS INTELLIGENCE- Corgenix Medical Corp.: entered distribution agreements with South American companies., Chemical Business Newsbase, May 1999. • Oral Diabetes Drug to Reach Venezuela., Medical Industry Today, 1999 May. • CHILE- MEDICAL EQUIPMENT MARKET., Industry Sector Analysis, U.S. Department of Commerce., April 1999. • Merck Latin America Agrees to Market Wound Care Products., Medical Industry Today, January 1999. • St. Jude, Avecor Form Product Family for Foreign Sale., Medical Industry Today, April 1997. • TROPICAL DISEASES: Four Tropical Diseases Can Be Eliminated, WHO Says., Infectious Disease Weekly, May 1997. • Health Policy: Investing in People’s Future, The Puzzle of Latin American Economic Development [Ch. 12], Franko, Patrice M., 1999.

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, Peru, Argentina, Chile, Brazil, Espicom Business Intelligence, 2000-01. • Overview of Medical Equipment Market: Brazil., U.S. Foreign & Commercial Servce & U.S. Department of State, 2001. • Industrial Sector Analyses (ISA): Argentina, Chile, Mexico, U.S. Foreign & Commercial Servce & U.S. Department of State, 2001. • Emerging Market Reports: Argentina, Brazil, Chile, Mexico, HIMA, 1999.