Brazilian Medical Devices Market: Investment Opportunities, Growth Forecasts by Care Areas and Local

Competitive Landscape (2015 – 2018)

EM03A

SAMPLE REPORT

2015-2018

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CHAPTER 2: EXECUTIVE SUMMARY

• Amidst political unrest and corruption scandals, Brazilian economy has been weakening over the last few years

• Marked by unstable economic indicators and dwindling strength of Brazilian Real, the business environment in Brazil portrays an uncertain picture

• Despite a very slow growth in 2014, 1% growth in the economy is expected in 2015. Weakening Brazilian Real and higher interest rates have attracted many foreign investors

• Typically known for late penetration of high-end technology, the scenario is expected to change in the coming few years. Investments to promote technological innovation and research are underway, carving a path for many innovators to commercialise their products

• Moreover growing middle class, higher rate of urbanisation, and higher disposable income have led to increased consumerism among the Brazilian population

• As per EMeRG’s analysis, Brazil represents a favourable market for business; however recent instability in the economic indicators and reduced flow of capital investment in 2014 are likely to impact its growth in 2015. Given its track record of quick economic recovery, the country’s economic growth is likely to regain momentum in Q4 of 2015

Business Environment in Brazil

Brazilian Healthcare and Hospital Industry in 2014-2015

• Despite universal coverage and subsidised public facilities, Brazil’s healthcare industry is driven majorly by private funding

• Owing to longer waiting lines, limited services, inadequate quality and obsolete medical equipment in the public sector, the demand for private facilities has been increasing

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• Moreover, expanding private health insurance and increased disposable income have further bolstered the demand and usage of private facilities

• The Brazilian healthcare system majorly depends on private funding with a considerable proportion spent as out of pocket expenses. Although the public system covers over 75% of the population, the depth of coverage is deemed to be inadequate. With majority population being exposed to private health insurance schemes, growth of private sector is likely to be dominant

• Of the total hospitals functional in Brazil, over 70% belong to the private sector. With hospitals largely concentrated within 6 major cities, disparity in healthcare access is evident

• Growth in FDI in healthcare facilities is anticipated owing to promulgation of new FDI laws and lowered entry barrier

• The Brazilian IVD market crossed $1Bn mark in 2011 and continues to grow at a steady rate. Around 21,000 private diagnostic / pathology laboratories (including collection sites) are estimated to be functional currently

• Benefitted by inadequate public facilities, higher disposable income and increasing ratio of consultation, the market for In-Vitro diagnostic labs is booming. However with the current consolidation measures, market concentration is on the rise as evident from the market shares commanded by Diagnosticos da America (DASA)

• Growing at a CAGR of 12.9% from 2015 to 2018, the Brazilian medical device market is expected to be valued at $10.4Bn in 2018

• Despite sluggish economic growth in 2014, the medical devices market grew steadily, attributed to inadequate public facilities and rising demand for private services

Medical Device Market in Brazil: 2014-2018

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Competitive Landscape

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• Owing to recent dip in GDP and other economic indicators, the medical devices market in 2015 is expected to have a slower growth. However, dwindling Brazilian Real and relaxed FDI law in healthcare have been attracting many foreign investors, resulting in expansion of private facilities

• Domestic market for medical devices in Brazil is significantly strong. However for high-end devices, the country largely depends on imports

• Over 50% of the medical devices in Brazil are imported. With the weakening of local currency, the volume of imports has been decreasing

• Chiefly met by local production, orthopedic, dental and medical consumables markets are expected to grow at a CAGR of 16.4%, 13.0% and 12.3% respectively (from 2015 to 2018)

• With only 24% of CT scanners and 14% of MRI scanners under SUS, the market for diagnostic imaging is expected to surge

• Diagnostic reagents market is expected to grow at a higher rate, owing to increased number of consultation, tests and bounteous outsourcing from Government hospitals

• Moreover, home health products are expected to receive adequate denomination owing to recent policy changes

• Brazil is one the most important markets for international manufacturers owing to its advantageous demographic profile and strategic location

• Tapping on Brazil’s potential to become export headquarters in Latin America, many manufacturers are looking to invest in the country with a long-term vision

• To further enhance their presence in Latin America, GE acquired Belo Horizonte based Omnimed – a producer of patient monitoring products along with solutions used during medical screening, surgical procedures and in Intensive Therapy Units

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Stabilization of dwindling economy:

Government’s foremost agenda

Slow yet steady flow of investments likely

to boost Brazil’s export revenue

Brazil represents a favourable market for foreign investors. However recent instability in the economic indicators and reduced flow of capital investment in 2014 is likely to impact its growth in 2015. Given its track record of quick economic recovery, the country’s economic growth is likely to regain momentum in the Q4 of 2015

• ‘Quantitative Easing’ (QE) by the European Central Bank is likely to help increase investments in Brazil

• Higher investment is expected to translate into higher export revenue for Brazil in 2015

• Furthermore, QE may help countries such as China gain economic growth, thereby increasing the demand of Brazilian products in the emerging markets

• With an aim to stabilise plummeting economic indicators, Foreign Direct Investments are being sought in priority areas such as agriculture, healthcare, infrastructure, etc.

• As a measure to reinstate smooth financial operation and long-term fiscal health, the Government is expected to levy higher taxes on products such as cosmetic items, fuel, etc. The policy is expected to generate a revenue of $7.5Bn. Moreover, to curb deficit of around $2.7Bn (BRL 8.1Bn), pensions and unemployment benefits are expected to be curtailed

• Policies such as higher import taxes on selected products considered ‘non-essential’’ is being implemented to boost local production of goods and enhance export business

3.2 Brazil: Business Environment in 2014-2015

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3.2.1 Business Environment in Brazil: Overview

~6,785 Registered hospitals

2.5 Hospital beds per 1000 population

9.3 Percentage GDP spent on healthcare

47-53 Public-private split of healthcare expenditure

>4,700 No. of private hospitals

Sub-standard quality of services provided at public

hospitals

Despite budgets sanctioned for the improvement of public services, bureaucracy, lack of transparency and corruption have led to sub-standard facilities at public hospitals. Over 50Mn patients use some form of private facilities

Lack of in-depth coverage by SUS

Although SUS covers over 75% of the population in Brazil, depth of coverage is deemed to be insufficient. Many services are either not covered or observed to be sub-standard, pushing many residents to opt for private health insurance or out-of-pocket payment

1.89 Physicians per 1000 population Source: EMeRG Analysis

Figure 4: Brazilian Hospital and Healthcare Demographics, 2014

4.1 Brazil: Health Demographics

CHAPTER 4: BRAZILIAN HEALTHCARE AND HOSPITAL INDUSTRY IN 2014-2015

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Increased Government

funds and focus on oncology

units

Around 5,77,000 new cases of cancer were registered in 2014. Non-melanoma type skin cancers were the highest, followed by prostrate cancer and breast cancer.. With an aim to reduce waiting lines and the quality of services provided, Government has increased investment for cancer patients by over 121% as compared to 2008. As per revised regulations, the waiting time for patient requiring treatment such as surgery, chemotherapy, or radiation therapy should not exceed 60 days.

Budgets for screening of breast cancer have also been increased under the National Plan for Prevention, Diagnosis and Treatment of cervical cancer and breast cancer.

With the number of mammography tests increasing each year, Government has also introduced mobile mammography units to reach rural areas. Around 4.4Mn mammograms were carried out under SUS in 2013. By 2015, the Government is likely to invest $1.5Bn (BRL 4.5Bn) to further increase the expanse and access of prevention and treatment of cancer.

In 2011 an investment of BRL 2.1Bn ($745Mn) and BRL 505Mn ($176Mn) in 2012 were made towards the roll out of 50 new specialised centers in rural areas and for improving infrastructure in existing 48 units. In addition, this is also likely to help acquire 80 linear accelerators and expand the treatment to another 28,800 patients per year. With more number of patients being diagnosed, the number of surgical procedures is likely to surge in the coming few years.

4.4 Why Invest in Brazilian Healthcare

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Rise in the number elective

surgeries

Increased income levels, demand for better healthcare services and rising middle class are few reasons attributed to the increase in the number of elective surgeries being conducted. To cater to the increasing demand for elective surgeries, the Ministry of Health in 2013 allocated over BRL 579.1Mn ($240Mn).

Highest portion of the total allocated fund will be utilised for cataract surgery, followed by orthopedic surgery, ENT, urology procedures etc. Around 13% would be allocated for the state to fund critical and high volume procedures.

Furthermore, in 2014 procedures such as cataract surgery, treatment of varicose veins and removal of tonsils received another boost from Government with investments worth $23.7 Mn. Better public services and increased payment capacity of the patients for private services has led to a 43% increase in the number of elective surgeries from 2008 to 2012; with the trend expected to move upwards. In 2012, over 4,50,000 cataract surgeries and over 1,30,000 orthopedic surgeries were conducted. Brazilian medical devices market represents a matured environment to accept new technology along with an increase in the installation of new machines and higher uptake of medical consumables. 8

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Cancer is the second leading cause of death in Brazil. Over 577,000 new cases of cancer were reported in 2014. Skin cancer followed by prostrate cancer were reported to have higher incidence rates. In 2014, 68,000 new cases of prostate cancer and 57,000 new cases of breast cancer were detected. Non-Melanoma type skin cancer was reported to have highest incidence at over 98,420 cases. Although mortality from prostate cancer has been observed to be increasing, the magnitude of death due to this cancer is rather low. On the contrary, breast cancer mortality rate has been on the rise. In 2013, it reported over 14,000 deaths in the nation.

4.5.1 Opportunities by Disease Areas

CANCER

Table 1: Cancer Demographics, Brazil, 2014

Parameter Value Population newly diagnosed with cancer (excluding NMSC) / year 577,000 Age-standardised rate, incidence per 100,000 people/year 205.5

Risk of getting cancer before age 75 20.8%

Risk of dying from cancer before age 75 (%) 13.70%

People dying from cancer /year 224,700

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Source: EMeRG Analysis

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Despite free mammography services provided by SUS, early detection of breast cancer poses a major challenge. In 2013, of the 4,400 mammography devices installed in Brazil, more than 50% installations belonged to SUS. Hence, it isn’t the shortage of devices, but uneven distribution in more developed areas that has been a key challenge in Brazil.

Owing to lack of awareness and absence of early detection programmes, prostate cancer mortality in Brazil is on the rise. With just over 6.8 MRI machines/100,000 population, the reach and accessibility of this modality is limited. However, decentralisation of diagnostic activity, expansion of private hospitals, modernization of obsolete equipment and strengthening of public hospitals is likely to improve the scenario in the coming years.

Opportunities in cancer detection and treatment: • Government spending on early detection and treatment of

cancer cases has increased • Number of mammogram test performed each year are on

the rise • There is increased investment in the purchase of linear

accelerators, mammography units and specialised oncology units

• Expansion of early cancer detection services and mobile mammography units to rural areas

• Owing to early detection, surgical procedure volumes are expected to increase; thereby leading to elevated usage of surgical and medical consumables

Cancer

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Type of Hospital Number

Private Philanthropic ~1,470

For Profit ~3,173

Total ~4643

Public

Federal hospitals ~66

State hospitals ~530

Municipal hospitals ~1392

Total ~1988

Hospital Beds in Brazil by Specialty

Within SUS Outside SUS TOTAL

Surgery 75,275 39,456 114,731

General clinic 84,111 31,921 116,032

Psychiatry 30,388 10,163 40,551

Pediatrics 43,864 10,854 54,718

Obstetrics 41,776 13,457 55,233

Other 68,965 44,600 113,565

4.6 Types of Hospitals in Brazil

4.6.1 Understanding Public Hospitals

Table 3: Number of Hospital Beds in Brazil by Specialty, 2014

Table 2: Hospital Split, Brazil, 2014

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Source: EMeRG Analysis

Source: EMeRG Analysis

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Figure 9: Key Customer Segments for Medical devices, Brazil, 2014

• Private hospitals continue to be the high traction segment for medical device manufacturers, followed by public hospitals and independent In-Vitro Diagnostic labs or diagnostic imaging labs

• Although the purchase propensity of private hospitals is higher, public hospitals are demonstrating significant growth

• Providing a large addressable market and easier procurement process, private hospitals forms a high yielding segment for medical device manufacturers

• While being currently dependent on private providers for many therapeutic and diagnostic services, public hospitals are looking to build their own capabilities. Thus a drastic increase in the purchase activities of public hospitals is anticipated

• As per EMeRG’s analysis, consolidation and increase in the number of IVD private labs may increase in the next 2-3 years, providing favourable environment for the growth of diagnostic devices and reagents

Private hospitals

~68% medical device

purchased

Public Hospitals

~22% medical device

purchased

Private Labs ~10%

medical device

purchased

4.6.3 Opportunities by Customer Segments

Source: EMeRG Analysis

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OPPORTUNITIES IN PUBLIC HOSPITALS

• Public hospitals are expected to undergo a major wave of expansion in services, equipment, facilities and infrastructure. Special emphasis is on oncology units, diagnostic capabilities and elective surgeries is anticipated owing to higher demand

Major restructuring and revamping of facilities underway

Focus on oncology and diagnostic facilities

Favourable environment for technological innovation in healthcare IT

Extensive and time consuming procurement cycle

Bureaucracy and lack of transparency

Constraints Opportunities

Higher margin permitted by SUS to domestic manufacturers

Source: EMeRG Analysis

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CONSTRAINTS IN PUBLIC HOSPITALS

• Although the expansion plans in the public sector are extensive, lengthy procurement cycle makes this segment less lucrative in short term

• In addition, complex purchase procedures and uncertainties surrounding schedule of tender release makes it difficult to track purchase cycle

• Public tender characteristics:

• If purchase value is >BRL 6,50,000, procurement cycle may range from 1 to 6 months

• If purchase value is between BRL 80,000 and 650,000 Real; price surveys are conducted to benchmark average selling prices of various suppliers

Figure 11: Opportunities and Constraints in Public Hospitals, Brazil, 2014

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• Health financing in Brazil is highly decentralised. In 1996, responsibility of financing and managing health was transferred to 26 states and 5000 municipalities. In the current context, while 50% of the health expenditure is typically earmarked from federal budget; states and municipalities are required to allocate a minimum 12% and 15% respectively of the total budget towards healthcare

• While 98% of the municipalities have been reported to adhere to this mandate; states were observed to invest lesser portion of the total budget in healthcare

• Brazil’s health system represents a mix of private and public with 47% of the total health expenditure (THE) being designated by Government and remainder being accounted for by private entities

• While around 31% of THE is accounted for by out-of-pocket spending, private health insurance spending accounts for the remaining 22% making Brazilian healthcare system largely dependent on private funding

4.7 Health Insurance in Brazil

4.7.1 Healthcare Funding in Brazil: Overview

Private Funding

Health Insurance plans ~ 43.1 %

Out of pocket spending ~ 56.9%

Public Funding

Federal Funding from National MoH ~47.8%

State Funding from State funds ~ 21.4%

Municipal Funding from Municipal funds ~ 30.8%

Private ~53%

Public ~47%

Figure 13: Source of healthcare funding in Brazil, 2014

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Medical Devices Installed Base

Gamma Camera 923

MRI 1,877

Computerized Tomography (CT) 3,840

Mammography units 4,756

X-Ray units (100mA – 500mA 22,844

PET/CT 22

Infusion pumps 159 505

Defibrillator 34,633

Incubator 20,164

ECG Monitor 67,145

Respirator/Ventilator 53,210

Electrocardiograph 36,994

Digestive Endoscope 11,280

Diathermy machines 26.750

Hemodialysis Equipment 22,505

Table 6: Installed Base Estimates of Specific Medical Devices in Brazil, 2015

Source: EMeRG Analysis

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Figure 16: Revenue Forecasts, Brazilian Medical Device Market, 2015-2018 ($Mn)

Cardiology Devices

Critical Care Devices

Dental Devices

Diagnostic RadiologyEquipment

Dialysis Machines

Medical Consumables

OR Devices

Orthopedic Devices

Other Medical Devices

2015 2016 2017 2018Source: EMeRG Analysis

Figure 15: Revenue Splits, Brazilian Medical Device Market, 2014 (%)

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5.1.2 Revenue Forecasts (2015-2018)

Source: EMeRG Analysis

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CARDIOLOGY DEVICES MARKET

5.3 Understanding the Brazilian Cardiology Devices Market

5.3.1 Need Gaps in the Brazilian Cardiology Devices Market

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While most complex cardiac procedures are supported by SUS, specialized cardiac facilities are concentrated only across top few cities; thus creating a disproportionate access especially in semi-urban and rural areas. Despite being a developing market, Brazil’s infrastructure for cardiac procedures is considered to be equivalent to various developed markets. However, with just over 8,000 cardiologists, the country faces an acute shortage of specialists. With most cardiologists practicing only in the top few cities, uneven distribution of specialists is another pressing concern. While around 227 heart transplants were carried out in 2012, more than 1,145 patients were in need of the procedure. This highlights long waiting lines for organ donation. Moreover, regional disparity in the number of procedures carried out is evident. In the last six years, 45% of valve surgeries were reportedly carried out in the South east region, while only 3.8% of the total valve surgeries were carried out in the Northern region. Since SUS supports complex and advanced cardiac surgeries, most patients prefer public hospitals despite the long waiting lines. However, obsolete devices and lack of advanced technology increases the length of stay, thus resulting in over-crowded public hospitals.

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CARDIOLOGY DEVICES MARKET

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Figure 17: Revenue Splits, Brazilian Cardiology Devices Market by Product Categories, 2014

Pacemakers

ECG

Blood Pressure MonitoringDevices

Interventional CardiologyDevices

Other Cardiology Devices

Interventional cardiology devices in Brazil were valued at $262.3Mn in 2014 owing to high procedural volume and higher usage of consumables. Attributed to growing inflation and Government’s strategy of curtailing expenses, this segment is expected to grow at a slower pace.

The market for pacemakers is expected to grow at a CAGR of 11.9% from 2015 to 2018 – relatively higher than other cardiovascular devices. Attributed to under-penetration of pacemaker implants in the country and aging population, the demand is set to increase. While the country has an adequate installed base of Blood Pressure monitoring machines, mobile and home based monitoring is expected to pave the way for growth in the coming years.

Source: EMeRG Analysis

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Market Value in 2014: $46.3Mn Forecasted Market Size in 2018: $72.6Mn CAGR, 2015-2018: 11.9% Market Age: Early Growth Adequacy of installed base: Low Key Differentiators: Automatic, double chamber, home monitoring software, MRI compatibility

CARDIOLOGY DEVICES MARKET

Figure 18: Pacemaker Market in Brazil – Market Metrics, 2014

Source: EMeRG Analysis

Pacemakers

Despite high incidence of atrial fibrillation and arrhythmia, the number of pacemakers being installed in Brazil is significantly low as compared to other Latin American countries. Attributed to insufficient public funds for the purchase of implants, most patients are pushed to wait for the release of new funds each year.

Countries such as Uruguay, Chile and Argentina have a base of 578, 216 and 382 pacemakers per million population respectively. However, the scenario is rather grim in Brazil with just 190 pacemakers per million population.

As per EMeRG’s analysis, over 2,000 pacemakers were sold in 2014, with Biotronik leading the market. Despite the high cost, double chamber pacemakers are perceived to be clinically more beneficial. Majorly dependant on imports, locally produced pacemakers possess a relatively smaller share in the market. The market for pacemakers in Brazil is expected to be valued at $72.6Mn by 2018.

5.3.2 Cardiovascular Devices Market in Brazil: Key Opportunities

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Key Hospital and Healthcare News (2014-2015)

7.1 New Hospital Launches

‘Hospital Restinga e Extremo-Sul’ inaugurated in Porto Alegre, Rio Grande de Sul

In July 2014, a new community hospital - the ‘Hospitals Restinga e Extremo-Sul’ was inaugurated. Located in the southern district of Porto Alegre, Rio Grande do Sul, the hospital is equipped with 25 beds in the emergency department and 62 in-patient beds. The healthcare facility is expected to cater to approximately 13,000 adult and paediatric patients per month. Funded by the union, state and municipality, the hospital management plans to expand the existing facility to 170 beds, thereby serving a community of over 110,000 inhabitants of various districts that include Restinga, Lageado, Lami, Belém Novo and Ponta Grossa e Chapéu do Sol. Investment of $1.5Mn (BRL 4.6Mn) is made per month, with major funding by the union (50%), followed by the municipality (26%) and the state (24%). The Hospital Moinhos de Vento – a participant in the Programa de Apoio ao Desenvolvimento Institucional do Sistema Único de Saúde (PROADI-SUS) is responsible for managerial operations of the new hospital. Further expansion plans include the incorporation of a Surgery Center, Obstetric Center, Intensive Care Unit, Rehabilitation Services, Diagnostic Unit, and Specialty Center for outpatient visits. With over 800 employees, the hospital is expected to mark the onset of other healthcare Public Private Projects (PPP) in the country.

Hospital Israelita Albert Einstein to tackle cancer in collaboration with Texas based MD Anderson Cancer Center

With an aim to tackle increasing burden of cancer cases in Brazil, Hospital Israelita Albert Einstein (HIAE) entered into a ten year partnership with the University of Texas MD Anderson Cancer Center. The partnership is expected to empower HIAE with best practices and treatment regimes developed at the MD Anderson Cancer Center - Texas.

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