Brazilian Pharmaceuticals:Healthy Market Top Line Growth in a Muted GDP Year-Supportive for Our Positive Outlook-ALERT
Pharmaceutical industry associations reported today healthy 2014 top line figures forthe Brazilian human pharmaceutical market at both sell-in and sell-out levels in a yearof muted GDP growth. On the sell-out level – drugstores, the market grew 13.5% y/yat R$65.8bn according to IMS Health and Sindusfarma (the Industry Syndicate ofPharmaceutical Products). On the sell-in level – distributors and manufacturers, themarket grew 11.5% y/y at R$41.8bn according to the Brazilian PharmaceuticalResearch Industry Association (Interfarma). In our view, the solid top line growth in ayear of muted GDP growth is supportive for our positive view on the sector. Weexpect the market to continue printing double-digit growth until 2018, growing at a13% CAGR (link). This data also supports our OW-ratings on Raia Drogasil (RADL3)and Hypermarcas (HYPE3, OW-rated by Andrea Teixeira) once it confirms that bothcompanies should have gained market share in 2014. Also, for drug distributors, thedata is positive as it discloses stable discounts on a y/y basis, but our OW-ratedProfarma (PFRM3) likely lost market share on the distribution. Please refer to page 2of this report for further information on top line data for the market.
Solid sell-out growth in 2014, up 13.5% y/y, on solid volumes, +8% y/y. Drugsales at the drugstore level reached R$65.8bn in 2014, up 13.5% y/y, supported bysolid volume growth, 7.9% y/y. We expect such growth pace for the market topersist through 2018, growing at a 13% CAGR (link). The main drivers shouldremain: (1) accelerated population ageing; (2) recent upgrade in socioeconomicdemographics; and, (3) higher generics availability.
Generics penetration continues to increase, reaching 28% in volume. Thepenetration of generic drugs continued to increase reaching 27.9% of volumes in2014, up from 27.3% on the previous year, while in terms of value it reached 24.7%in 2014, increasing 1p.p. y/y. This confirms the belief that generics should continueto outpace the overall market, growing 18% y/y in value at R$16.2bn at the sell-outlevel, being 10.6% y/y in volumes. On the sell-in level, we estimate generics grewaround 21% y/y, disclosing potentially higher discounts at the retail level.
Healthy sell-in growth, up 11.5% y/y in 2014. The drug market amounted toR$41.8bn at the sell-in level (industry/distribution), up 11.5%, closing the gap to thesell-out pace on relatively stable discounts. In our view, the recent merger of largedrugstore chains (Raia + Drogasil, and S?o Paulo + Pacheco) led to increasingindustry discounts on higher purchasing power by retailers. However, this figurestarted to stabilize just in 2014, at 36% in 2014, vs. 35% in 2013, while it rapidlyincreased from 21% in 2010.
Stabilizing sell-in discounts is positive news for distributors. The slight increasein industry discounts in 2014, up to 36% from 35%, is positive for distributors.
Sector’s growth has been pressured by the consolidating drug retail market andcommercial aggressiveness by some distributors. Thus, we believe the slightincrease in discount is a positive indicator of a healthier growth environment, ascommercial aggressiveness may have eased and the negative impacts of the largemergers at the retail level are already fully reflected in market discounts.