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. How is Latin American Healthcare Different? 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 Pan American Health Organization – www.paho.com North AmericaLatin America

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) $2700m $700m $440m $90m $195m

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 Corporate owned Subsidiary in each Country US Corp Franchise BUS Corp Franchise C

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 MexicoBrazilC. 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 Franchise AFranchise BFranchise C Regional Sales ManagerRegional Marketing Director

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 Tariffs Devalued currencies - export reductions Healthcare Structure - differ among countries Private healthcare for upper 5% only Govt Subsidized Low reimbursement - Keep money in Country Slow reimbursement process – Encourages pre payment Govt 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 – 2 nd 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 1.The organ shortage: a public health crisis. What are Latin American governments doing about it?, Santiago-Delpin EA, Transplant Proc, December 1997. 2.[The fragmentation of national health systems.], La fragmentacion de los sistemas nacionales de salud., Barillas E, Rev Panam Salud Publica, March 1997. 3.The transfer of vaccine technology to developing countries. The Latin American experience., Homma A; Knouss RF, Int J Technol Assess Health Care, Winter 1994. 4.How should resources be reallocated between physicians and nurses in Africa and Latin America?, Vargas-Lagos V, Soc Sci Med, 1991. 5.Distributing and transferring medical technology. A view from Latin America and the Caribbean., Pena-Mohr J, Int J Technol Assess Health Care 1987. 6.The medical "brain drain" and health priorities in Latin America., Horn JJ, Int J Health Serv, 1977. 7.DIAGNOSTICS INTELLIGENCE- Corgenix Medical Corp.: entered distribution agreements with South American companies., Chemical Business Newsbase, May 1999. 8.Oral Diabetes Drug to Reach Venezuela., Medical Industry Today, 1999 May. 9.CHILE- MEDICAL EQUIPMENT MARKET., Industry Sector Analysis, U.S. Department of Commerce., April 1999. 10.Merck Latin America Agrees to Market Wound Care Products., Medical Industry Today, January 1999. 11.St. Jude, Avecor Form Product Family for Foreign Sale., Medical Industry Today, April 1997. 12.TROPICAL DISEASES: Four Tropical Diseases Can Be Eliminated, WHO Says., Infectious Disease Weekly, May 1997. 13.Health Policy: Investing in Peoples Future, The Puzzle of Latin American Economic Development [Ch. 12], Franko, Patrice M., 1999.

35. Works Consulted (cont.) 14.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. 15.MediStat Country Pofiles: Mexico, Venezuela, Peru, Argentina, Chile, Brazil, Espicom Business Intelligence, 2000-01. 16.Overview of Medical Equipment Market: Brazil., U.S. Foreign & Commercial Servce & U.S. Department of State, 2001. 17.Industrial Sector Analyses (ISA): Argentina, Chile, Mexico, U.S. Foreign & Commercial Servce & U.S. Department of State, 2001. 18.Emerging Market Reports: Argentina, Brazil, Chile, Mexico, HIMA, 1999.