In Canada we have a saying that goes ‘When the US sneezes, Canada catches a cold’ —that is, when the US economy slows, the Canadian economy goes into recession due to its dependence on its neighbor to the south. Well…China sneezed and Brazil caught a cold.
Having spent the last several months covering these two countries, it’s become clear that the dependence of the Brazilian economy on the Chinese market has become its Achilles heel, which is not only hurting the broader economy, but also the peripheral vascular (PV) device market in Brazil. In fact, the CFO of Medtronic, Gary Ellis, put it more bluntly: “If there is any country I would tell you I am more nervous about, it’s not China, it’s probably Brazil.”
With the slowing Chinese economy and an end to the global commodity boom, Brazil’s economy is in free-fall. It is expected to contract by 2.8% in 2015 and 1% in 2016, unemployment has soared, its budget deficit sits at 8% of the GDP, and the local currency, the Real, has depreciated nearly 50% against the USD. On top of all of this, the administration of Dilma Rousef is currently mired in the worst political scandal the country has seen in decades.
So how does this economic decline affect the Brazilian PV device market? First, overall procedure growth will be minimal in the coming years, affecting both the public and private sector, and nowhere near the double-digit growth from earlier in the decade. Budget deficits will impact the public healthcare system (the SUS), reducing funding for high-volume procedures like lower-limb endovascular procedures. I don’t believe this will slow the shift to endovascular procedures from bypass surgery, as this trend is driven by physician and patient preference for the former, but it will decrease the number of endovascular procedures that could have been performed this year. The decreasing funds for the SUS will also bring down ASPs for all PV devices because it puts pressure on manufacturers and distributors to adapt to the new economic environment. Procedures performed in the private sector will also feel downward pressure as Brazilians lose their coveted private insurance due to increasing unemployment. Procedures that would have used premium products such as drug-eluting stents, drug-coated balloons, and aortic stent grafts will see their numbers decrease, especially if they are imported (more on this below).
Not only are procedures affected by budget deficits and growing unemployment, the cost of medical devices has increased dramatically because of the decreasing Real. As with most developing countries, Brazil imports most of its medical devices, paying for them in USD, yet it reimburses these devices in Reals. To make matters worse, the reimbursement rates for medical devices have not changed for nearly a decade, ignoring recent currency exchange fluctuations. This means that a multinational company that imports its devices today, paying for them in USD, is getting reimbursed at 50% of what it received at the beginning of the year in USD terms. To add insult to injury, ANVISA decided to raise sanitary inspection fees for the first time in 16 years, citing inflationary adjustments as its rationale. Finally, more stringent capital controls have been put in place for companies wanting to get money out of Brazil. All of this translates into a much more challenging environment for multinational corporations in the PV device market. The only silver lining may be that domestic firms like Braile Biomédica and Indústrias Barone will have a competitive advantage over international competitors, as they do not have to worry about currency fluctuations, and they generally have lower prices, which will make their products more enticing to cash-strapped hospitals.
Brazil is not the only country in Latin America that is suffering. Argentina, Colombia and Mexico have all seen their economies and health care budgets take a hit because of the decrease in commodity prices. Overall, Latin America’s PV device market will continue to grow, but the next few years will be trying times for a region that is used to seeing double-digit growth.