The political economy of production: Local pharmaceutical manufacturing

In parallel with the recent rapid expansion of the Brazilian economy, the country's pharmaceutical market has consistently grown in double digits over the last five years, increasing by 20 per cent in 2008 and 13 per cent in 2009. In 2009, sales of pharmaceutical products in Brazil reached US$17 billion and accounted for one-third of the Latin American pharmaceutical market. Growth in Brazil's pharmaceutical market has been buttressed by macroeconomic, demographic and policy factors. Brazil's gross domestic product (GDP) has expanded by approximately 3.3 per cent annually over the last decade (World Bank, 2009). Combined with diminishing levels of inequality, the purchasing power of middle and lower income Brazilians has surged (Lustig and Lopez-Calva, 2010). An urban population of nearly 90 per cent has enabled concentrated logistics and distribution of pharmaceutical products. Moreover, with nine in ten of Brazil's citizens' basic health costs covered through a public programme providing low-cost medicine, access to pharmaceutical products has reached segments of the population excluded in other developing countries (IMS Health, 2010).

Competitors in the Brazilian pharmaceutical market fall into the same two broad categories as in any other country: generics and on-patent/innovator producers. I will now focus on private generics manufacturers. These firms are predominantly owned by local capital, while providers of on-patent medicines are largely foreign multinationals.⁷ Recent data indicate that, a decade after the creation of the generics category in 1999, national firms were responsible for over 70 per cent of generics sales (IMS Health, 2009). The strong position held by local firms is also reflected in registrations of products in this category. Of the more than 2790 generics products registered in Brazil, 89 per cent were held by national generics firms in 2008 (ANVISA, 2009). Imported generics registered with the national regulatory authority amount to less than 10 per cent of total market share. Of foreign registrations, almost two-thirds are held by Indian generics pharmaceutical firms (Sweet, 2008).

The strength of Brazil's representation in terms of its share of the local generics market is notable. Yet, beneath the veneer of market representation, the Brazilian model of generics pharmaceutical production is somewhat shallow and misleading. While seven in ten generics products in the country are produced by Brazilian firms, local companies engage in a low level of innovative activity or basic organic chemical production. The majority of APIs, the building blocks of any pharmaceutical product, be it on or off patent, are imported. Furthermore, only a handful of local firms are engaged in innovative research or chemical production. As the market for generics has grown, so has the import of inputs in the pharmaceutical production chain. Figure 2.1 illustrates trends in the importation of both finished formulations and bulk chemicals into the Brazilian market, which reached a combined approximate value of US$6 billion in 2011.

Figure 2.1 shows that Brazil's trade deficit and import of pharmaceutical products appear roughly correlated in increasing divergence. Over the last five years Brazil's import of APIs, or bulk pharmaceutical chemicals, nearly doubled, increasing from US$1.1 billion in 2005 to more than US$2 billion in 2011. Finished pharmaceutical products followed a similar trajectory, increasing from US$1.5 to 3.5 billion. As a result, by 2011, Brazil's balance of trade in this sector reached a combined deficit of US$4.2 billion.

For local pharmaceutical firms, dependence on the key inputs of bulk generics pharmaceutical chemicals has made Brazilian industry vulnerable to currency fluctuations and has limited the value-added qualities of locally produced pharmaceutical goods. More crucially, it highlights that the manufacturing activities of Brazilian generics firms are overwhelmingly concentrated on assembly and packaging and that the capacity to conduct innovation activities is restricted, even at a very basic level.⁸

In addition to increasing dependence on foreign APIs, another trend affecting the Brazilian generics industry has been the acquisition of leading national generics firms by multinationals. Recent examples include

Figure 2.1 Trends in trade: Brazil's pharmaceutical import and trade balance, 2005-2011

Source: Associafao Brasileira das Indhstrias de Quimica Fina, Biotecnologia e suas Especialidades, ABFINA (2012), elaborated by the author.

Sanofi-Aventis' acquisition of leading domestic generics producer Medley in 2009, and Pfizer's agreement for generics production with Eurofarma in April 2010. Another leading generics producer, Neo Quimica, was recently purchased by Hypermarcas, signalling a continued consolidation of players in the generics market. Trends in Brazilian pharmaceutical production are consistent with the wave of global consolidation across the pharmaceutical industry over the last decade (Nolan, 2001; Nolan, Sutherland and Zhang, 2002) and specifically in the developing world, Eastern Europe (Kesic, 2009) and India (Yee and Leahy, 2008). In the wake of acquisitions, the three remaining major Brazilian-owned generics firms are EMS, Ache and Eurofarma. There are signals, however, that the current trend towards consolidation is not confined to acquisitions by northern firms. EMS itself has also adopted the strategy, purchasing two other generics producers in Latin America and pursuing regional expansion.

In light of the recent acquisitions, the Brazilian government is reportedly considering imposing restrictions on foreign takeovers in the pharmaceutical sector. This is not a likely policy outcome, given the high level of risk it might provoke in other sectors of the Brazilian economy. What is notable, however, is the consistency with which the pharmaceutical sector has remained an important policy area for the last decade. The linkage of health policy and industrial development has emerged as a single policy platform in the government of President Luiz Ignacio da Silva, who early in his first term identified the pharmaceutical sector as one of four 'strategic sectors' that would be a goal of his administration (Quental et al., 2008, p. 620).

There is clear recent evidence of government support for this sector, as is illustrated in the disbursement of competitive grants and loans for innovative activities. In recent years PROFARMA, a publicly funded programme administered by the state-owned Brazilian Development Bank (BNDES), has allocated over US$697 million in projects directed towards strengthening the national pharmaceutical industry. During the first three quarters of 2009 alone, BNDES distributed over US$ 697 million, aimed at 86 projects. PROFARMA projects fell into four areas: production (51 per cent); exports (3 per cent); restructuring (27 per cent); and innovation (19 per cent). Over 92 per cent of funding was destined for nationally owned firms. One of the challenges the current government has faced is that the PROFARMA programme, charged with increasing national production of pharmaceutical goods and reducing Brazil's deficit in the import of pharmaceuticals and bulk inputs, has meant that the Brazil pharmaceutical sector has become attractive to foreign firms. As such, many Brazilian companies that were recipients of government financing schemes are now targets of foreign takeovers.

Brazilian generics pharmaceutical firms currently control a significant share of the local market. Nevertheless, they lack depth in their manufacturing activities, and few undertake research and development (R&D). As is the case in other countries in the region, Brazilian pharmaceutical producers now find themselves wedged between low-cost bulk chemical suppliers (which are also quickly entering the generics market) on the one side, and innovation-driven patent firms on the other. For Brazilian firms producing generic products, their advantage remains their knowledge of the local regulatory system and local market preferences. For Brazilian policy makers, maintaining a competitive market place that benefits low-income citizens and fosters local innovation has proven a difficult policy balance.