Medical Device Link.

Originally Published IVD Technology September 2003

Global Diagnostics

A North American manufacturer of IVD products wishing to enter, or expand its presence in, the IVD market in Latin America and the Caribbean (LAC) cannot anticipate what operating environment it will face in the region over the next five years. The economic forecast for LAC continually undergoes revision. The past few years have seen declining growth in the area economy and in the economies of most LAC nations, including lower than previously expected export growth in most countries. Furthermore, political uncertainty in some countries and the unstable economy of others could suffocate a recovery in domestic demand for IVD products. LAC market participants are now concentrating on cost-cutting measures and better price-performance ratios as ways to overcome the challenges posed by the market contraction of 2002.

Before this economic downturn, the market for healthcare in the LAC was quite promising (see Table I). However healthcare services in LAC have been severely affected by the recent regional slump. A study conducted by the Organización Mundial por el Derecho de los Pueblos a la Salud reveals that more than 65% of the regional population, mainly people in the middle and lower income groups, have lost all or most of their healthcare coverage.¹ Many households replaced private healthcare coverage with reliance on public services.

A correlation between health status and health expenditure as a percentage of gross domestic product (GDP) can be discerned across the countries. Better-performing nations are spending above 6% of GDP on healthcare, while countries with lower economic performance are under 5% of GDP. Paraguay and El Salvador are exceptions to the rule; health expenditures in these countries are 7.3 and 8.9% of GDP, respectively. The inconsistency may be attributable to variations in efficiencies of spending.

The news is not all bad. Regional economic recovery and growth are expected in the next few years. The World Bank estimates growth in LAC GDP to be perhaps 3.7% for 2004.²

IVD companies with LAC ambitions do have options. The first thing they should do is identify the key issues affecting the stability of economic growth in the area and then plan to capitalize on the business opportunities offered in the seven largest LAC markets: Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Venezuela. This article outlines market conditions in the region and discusses how IVD companies can accelerate growth in market share through identification of the optimum market niche and most-effective distribution channel for their IVD products.

Market Opportunities

Table I. Healthcare expenditures for countries in Latin America and the Caribbean.  Source: The World Health Organization, 2003.

LAC is made up of several distinct economic areas with their own characters. A free-trade area encompassing the entire Western Hemisphere is in negotiation, however.

Mercosur Territory. GDP for the LAC region decreased in 2002 in large part because of the Argentinean economic crisis. That national debacle had consequences that affected the Mercosur territory.

Mercosur is the fourth largest economic community in the world and represents the regional integration of the South American countries Argentina, Brazil, Paraguay, and Uruguay as full members, as well as Bolivia and Chile as associate members.³ This free-trade zone, encompassing most product categories, provides a competitive opportunity for IVD companies that understand how to exploit it. By setting up local subsidiaries or joint ventures with local players in the region, foreign diagnostics manufacturers can take advantage of lower taxes and duties, local labor rates and free access to Mercosur countries.

Argentina is a strong supporter of biotechnology. Its biotech industry sales for 2000 totaled more than $50 million.⁴ Despite present economic woes, Argentina represents future opportunity for U.S. diagnostics companies as its economy recovers.

Brazil ranks among the 10 largest healthcare markets in the world. The public and private health sectors in Brazil generate an estimated revenue of $50 billion per year, which amounts to almost 5% of the country’s GDP.⁵ A strong private health network that often competes with the public health system provides health assistance to about 25% of Brazil’s population of 160 million. It is expected to grow significantly over the next 10 years.
Brazil was recently reported to have 2744 health-related companies, 7811 hospitals (some 6000 of them private), 550,000 hospital beds, and 15,327 institutions for complementary diagnosis (clinics and laboratories).⁶ Public and nonprofit hospitals—defined as private hospitals supplying a minimum of 60% of their services to the poor under government Medicare fees—are not subject to import duties or value-added taxes. In order to take advantage of this tax-free status, hospitals generally import directly, or do so with the assistance of an import agent. Import agents usually receive their commission directly from the foreign supplier.

Mexico. As a result of the North American Free Trade Agreement (NAFTA) of 1994, Mexico is the largest Latin-American trading partner of the United States and Canada. The country has a population above 100 million and, with a GDP of more than $900 billion, offers exporters interesting opportunities in the health industries, a Mexican economic sector that has experienced considerable recent growth. The medical device market was $690 million in 2000, of which 90% was imported products.⁷

Mexico has some 3700 hospitals and about 2170 private institutions offering inpatient facilities. These institutions are the primary purchasers of healthcare products. Most of the private facilities, about 80%, are small centers with 15 beds or fewer. Public healthcare services are increasingly being supplemented by private-sector providers as more and more middle-class Mexicans seek the higher-quality care offered by private institutions. Private facilities saw approximately 21 million users in 2000. As many as 2.5 million Mexicans are covered by private health plans. The private and public healthcare systems run parallel to each other with very little integration.

Chile. The 1997 Canada-Chile Free Trade Agreement eliminated tariffs for the majority of Canadian IVD products exported to Chile. Certainly there are opportunities for foreign companies to assume leadership in the Chilean industry and work with native companies to build capacity within existing organizations. The 2001 Chilean health industries market had an estimated value of $4.6 billion. And in the 1999 laboratory equipment market, Chile imported $95.9 million worth of goods; within this sector, imports of reagents reached $22.6 million.⁸

Andean Community. The Andean Community, formerly called the Andean Group, is another South American economic organization, and consists of Bolivia, Colombia, Ecuador, Peru, and Venezuela. For almost 20 years, its goal of economic growth and the creation of a regional common market floundered. The Andean Community finally achieved a free-trade agreement in 1991, and by 1993 the free-trade zone was complete. Intraregional trade has subsequently increased tremendously. At the end of 1997, exports among the member states amounted to $5.3 billion.⁹

The Andean Community has set an ambitious external agenda that includes the establishment of closer links with other Latin American and Caribbean countries and with the United States and Canada. It also involves the joint participation of the Andean countries in the World Trade Organization and, in particular, negotiations surrounding the Free Trade Area of the Americas. However, it is in the negotiation of a free-trade agreement with Mercosur that the Andean Community seeks to achieve results in the short term. These negotiations have raised great expectations. Once the desired agreement is fully implemented, the landscape of Latin American economic integration may indeed change.

Central America and the Caribbean Community. A borderless Caribbean economic region was established in 1965 to give its small constituent nations the strength of collective resources and opportunities. This Caribbean Community, Caricom, agreed to impose no import duties on goods of community origin. The Caricom entity has signed other trade agreements with the Dominican Republic and Venezuela.¹⁰ This could be a major incentive for manufacturers to introduce their goods to a market of more than 12 million people in the Caribbean.

In most of Central America and the Caribbean, the state is a major provider of healthcare, in addition to financing healthcare. Budgets for care-providing institutions are based on historical data rather than actual needs, and are funded through a detailed line-item budget submitted to the health ministry. These countries have a mix of public and private providers and commonly share health services and facilities.

Future Integration. An effort to unite the economies of the Western Hemisphere into a single free-trade zone began at the Summit of the Americas held in December 1994 in Miami. The heads of state and government of the 34 democracies in the region agreed to construct a Free Trade Area of the Americas, whose acronym FTAA (ALCA in Spanish) will become better known. FTAA would progressively eliminate barriers to trade and investment. The signatories intend to complete negotiations for the agreement by 2005.¹¹ Although not yet in effect, this broad free-trade agreement represents a large near-term opportunity for IVD exporters.

LAC Healthcare Systems

LAC countries are marked by extreme contrasts between social strata. The rich are far removed from the poor, and those in power are entitled to privileged healthcare. Wealth, family lineage, and education are primary determinants of social position. These economic and cultural divisions in LAC have produced a two-tiered healthcare system. The public system handles problems related to conditions of poverty, such as inadequate sanitation and infectious diseases, while the private sector provides sophisticated healthcare to the wealthier families. Manufacturers must provide lower-cost versions of their products as well as their standard line, in order to be able to supply the two distinct market segments.

More than 80% of the LAC population must be considered low-income. Financial resources are limited in most households; a chronic illness, or even an acute ailment, can pose a significant economic challenge.¹² Consequently, providers in LAC commonly seek lower-cost alternatives for medical treatment and healthcare. Foreign IVD manufacturing companies might also consider pursuing opportunities to supply raw materials for domestic production and engaging in joint-venture arrangements with local manufacturers.

The aging population is also having an effect on the IVD market. The health system is under increasing pressure to supply products that serve the diagnostic needs of the older demographic group while being constrained by the financial issues already noted.
In summary, the main characteristics of the healthcare sector in LAC are the following: 

• The system lacks resources for disease prevention programs.
• The main financers of the system, government and private health insurance, do not have a deep understanding of the needs and requirements of its clients.
• Minimal levels of automation and standardization in both management and clinical processes make fraud common.
• Healthcare system clients, suppliers, and financers are poorly connected.

Also, as a general trend, health projects in the least-developed countries focus on primary healthcare and disease control. In the middle-income countries, projects focus on health sector reform, service delivery, and management. IVD firms with expertise in epidemiology and HIV/AIDS are well positioned to compete for projects financed by the World Bank, Inter-American Development Bank, and Pan American Health Organization.¹³

Strategies for Maximizing Sales

Distribution and Promotion. To be successful in entering an LAC market or enlarging its business in the region, a foreign IVD company must investigate available channels of distribution in order to identify the best for a particular product line or market niche. The firm must also decide whether to employ a distribution network or pursue direct sales. Engaging in direct sales requires that each country’s import regulations and norms related to the distribution of IVD products be fully comprehended. The ability to make the appropriate decisions depends on the company having a thorough understanding of its product’s position in the marketplace. Such awareness will enable the distribution channel to be exploited to the greatest advantage.

Local representatives can assist in dealing with distribution issues. Agents are able to expedite the process and avoid unnecessary expenses. Distributors often market a variety of product lines, winning customers by offering a more attractive product mix. Typically based in major cities, distributors either market IVD products on a national basis or use subdistribution chains.

Potential distribution partners should be investigated to determine their style of doing business, their financial circumstances, and their standing in the local medical community. Also, IVD manufacturers should be aware of the country-to-country variation in the legal implications of hiring a direct representative. Any foreign company selling a product in LAC must meet applicable legal requirements and the technical standards stipulated by the local regulatory agency.

“Style of doing business” is an important consideration. In meeting with a potential LAC business partner, foreign company executives should allow local social and cultural standards and practices to prevail. Business meetings should be scheduled at least two weeks in advance and should always be confirmed a couple of days before the appointment. They normally begin with a period of casual socializing, occasionally are interrupted, and may last longer than anticipated. Patience and understanding are key in maintaining a positive relationship with Latin American business partners. North American firms doing business in this region should keep in mind that deadlines are often less meaningful than in their own culture. That has ramifications for forecasting and delivery schedules.

As anywhere else, it is very important that IVD manufacturers selling in LAC promote their products. Appropriate targeting channels are industry associations, senior doctors at key hospitals, and professional magazines. Educational sessions may be the most valuable means of promotion. They provide the quickest return.

The perception outside of the region is that a lack of healthcare expertise on the local level is characteristic. Fostering good relationships is essential—but experience will reveal the existence of professionals with expertise.

Procurement and Payment. Most LAC countries have a need to replace old instrumentation. Foreign IVD companies should investigate the best financial avenues for institutional funding during the period between product registration and eventual approval. Loan rates can vary from 5% outside of Latin America to 300% locally, so companies should plan ahead for financing through particular institutions.

Most of the LAC public health systems use public tenders to meet their procurement needs. Requirements, standards, and procedures for submitting and approving tenders and bid applications are highly regulated. Price plays an important role here. Normally, tenders are published annually. Most government bodies have their own supplier registration system.

Conclusion

Today, the monetary market in Latin America and the Caribbean is restricted, while the demand for diagnostic tests and the number of tests performed are increasing. The present situation is relatively quiet. Now is a good time for North American IVD companies to initiate the product registration process that takes 3 to 18 months, depending on the country. They should use this period for market investigation and segmentation, customer education, and information dissemination.

When registration is complete and the end of the recession is coming over the horizon, the promise of success will be at hand. Companies should establish a market monitoring program, take advantage of available Latin American capabilities, and create an action plan for leading the market. Relationship building during this period of financial uncertainty can yield competitive advantages later.

References

1. "Mas del 65% de hispanos no tienen seguro medico," El Diario, La Prensa (New York: Organización Mundial por el Derecho de los Pueblos a la Salud, 2002) [accessed 20 August 2003]; available from Internet: www.eldiariony.com/noticias/detail.aspx?section=23&desc=Comunidad&id=606032. 

2. The World Bank Group, “Latin America & the Caribbean: General Overview” (Washington, DC: World Bank Group, 2003) [accessed 12 August 2003]; available from Internet: www.worldbank.org/data/countrydata/countrydata.html. 

3. Mercosur Desk, Mercosur-European Community, “Regional Strategy Paper 2002–2006, CSP Mercosur September,” (2002):1 [accessed 12 August 2003]; available from Internet: http://europa.eu.int/comm/external_ relations/mercosur/rsp/02_06en.pdf. 

4. Argentine Forum for Biotechnology (FAB) Web site, (Buenos Aires, Argentina: FAB, 2003) [accessed 20 August 2003]; available from Internet: www.foarbi.org.ar. 

5. DG Trade, European Commission, Market Access Sectoral and Trade Barriers Database, “General Features of Trade Policy,” Brazil [accessed 12 August 2003]; available from Internet: http://mkaccdb.eu.int/mkdb/mkdb.pl. 

6. InfoExport, The Canadian Trade Commissioner Service, “Market Reports and Sectional and Trade Barriers Database” (2003) [accessed 12 August 2003]; available from Internet: www.infoexport.gc.ca/ie-en/OfficeSelection.jsp?cid=723. 

7. InfoExport, The Canadian Trade Commissioner Service, “Market Reports and Sectional and Trade Barriers Database,” (2003) [accessed 12 August 2003]; available from Internet: www.infoexport.gc.ca/ie-en/OfficeSelection.jsp?cid=002. 

8. Trade Chile, International Business Development, “Executive Summary,” (2002) [accessed 12 August 2003]; available from Internet: www.tradechile.cl. 

9. International Centre for Trade and Sustainable Development, “The Andean Pact,” (1999) [accessed 12 August 2003]; available from Internet: www.ictsd.org/dialogueweb/texts/overviewAndean.rtf.  

10. The Caribbean Community Secretariat, “Single Market and Economy,” (2003) [accessed 12 August 2003]; available from Internet: www.caricom.org. 

11. FTAA–Trade Negotiations Committee, “Guidance and Instructions to the FTSS Entities,” (2003) [accessed 12 August 2003]; available from Internet: www.ftaa-alca.org. 

12. Instituto Nacional de Salud Pública, “Informing and Reforming,” Newsletters 1-3-. [accessed 12 August 2003]; available from Internet: www.insp.mx/. 

13. World Health Organization, “Health, Nutrition, and Population Fact Sheet, Latin America and the Caribbean Region,” (2003) [accessed 12 August 2003]; available from Internet: www1.worldbank.org/hnp/.  

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