BBF CUG Brazil Pharma Industry Report

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Brazils Pharmaceutical Industry. Opportunities for Swiss Suppliers osec.ch

Branchenbericht Brasilien.

Brazils Pharmaceutical Industry. Opportunities for Swiss Suppliers. Englisch 69 Seiten, Stand Juni 2010

Brasilien ist nicht nur ein grosser Absatzmarkt fr die Pharmaindustrie, sondern zunehmend auch ein bedeutender Produktionsstandort. Neben den multinationalen Firmen sind mit staatlicher Untersttzung und auf dem Nhrboden des schnell wachsenden Generikamarktes zahlreiche brasilianische Unternehmen entstanden. Diese investieren in den Aufbau von Labors und Produktionsanlagen fr Pharmazeutika und Impfstoffe. Daraus ergeben sich Marktchancen auch fr kleine und mittlere Schweizer Firmen, die sich bereits als Lieferanten der Pharmaindustrie etabliert haben. Der Bericht analysiert die treibenden Krfte, die fr das Wachstum der brasilianischen Pharmaindustrie verantwortlich sind, stellt die wichtigsten Hersteller und Forschungslabors vor und untersucht, welche Chancen fr auslndische Zulieferer bestehen. Martin Matter (Redaktion) Swiss Business Hub Brazil c/o Consulado Geral da Sua Av. Paulista, 1754, 4 andar, Edifcio Grande Avenida BR-01310-920 So Paulo SP Phone +5511 3372 8200 [email protected] www.osec.ch/sbhbrazil Ricardo C. Mendes / Hlio Camargo / Ivan Marcos Milano dos Santos / Anselmo Takaki Prospectiva Consultoria Rua Diogo Moreira, 135, Pinheiros BR-05423-010 So Paulo SP Phone +5511 3816 3636 www.prospectivaconsultoria.com.br

Copyright F. Hoffmann-La Roche AG, Basel

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Inhalt.

Table of Contents

Executive Summary..........................................................................................................1

1. About this report ..........................................................................................................3

2. Brazils Pharmaceutical Market...................................................................................4 2.1. Retail Market Size and Trends ...............................................................................4 2.2. Ethical, OTC and Generic Segments .....................................................................5 2.3. Therapeutic Classes Market Share ........................................................................7 2.4. Non-Retail Demand................................................................................................7 2.5. Foreign Trade ........................................................................................................9 2.6. Geographical Distribution of Demand and Production ..........................................12 2.7. Regulatory Framework.........................................................................................14

3. The Pharmaceutical Industry in Brazil......................................................................16 3.1. Overview..............................................................................................................16 3.2. Government Industrial Policies.............................................................................18 3.3. The Growth of Domestic Laboratories..................................................................19 3.4. Market Shares by Company.................................................................................21 3.5. Major Competitors Profiles...................................................................................23 3.6. State-Owned Laboratories ...................................................................................32 3.7. Compounding Pharmacies...................................................................................36 3.8. Manufacture Outsourcing.....................................................................................37 3.9. Research & Development ....................................................................................40 3.10. Biotechnology Companies....................................................................................45

4. Special Segments Highlights ....................................................................................48 4.1. Herbal Medicines .................................................................................................48 4.2. Homeopathy ........................................................................................................49 4.3. Vaccines ..............................................................................................................50 4.4. Diagnostic Medical Devices .................................................................................52

5. The Pharmaceutical Industrys Supply Chain..........................................................54 5.1. Raw Materials ......................................................................................................54 5.2. Machines & Equipment ........................................................................................58 5.3. Services...............................................................................................................61

6. Conclusion and Recommendations..........................................................................63

Annex 1 Events and Publications of Interest ............................................................64

Annex 2 Industry Associations ..................................................................................66

Annex 3 Main Sources Consulted for This Study.....................................................68

Osec Market Report: Brazils Pharmaceutical Industry 1

EXECUTIVE SUMMARY

With total revenues exceeding USD 26 billion per year, Brazil is an emerging pharmaceutical market: Demand for pharmaceutical products grows approximately 10% per year. Thanks to better income distribution and social programs, more and more of Brazils 191 million people are getting access to health services and medicines.

On this breeding ground, the country has developed its pharmaceutical industry. There are 270 private and 20 state-owned pharmaceutical laboratories in business. Multinational companies (including Novartis and Roche) are using Brazil as a production platform, exporting to Latin America, North America and Europe. At the same time, the domestic laboratories, both private (like EMS, Ach, Eurofarma) and public (like Fiocruz and Butantan), have gained sophistication and market share in recent years.

The rise of domestic laboratories was mainly driven by three factors: the Brazilian governments industrial policy, new regulations, and the introduction of generics.

The development of a national health industry complex is a priority for the government. It supports investments and exports by providing special credits (USD 300 million per year), through the Profarma program, operated by the national development bank BNDES. It also stimulates innovation through subsidies and a solid IP protection.

Regulations and technical standards enforced by the national health surveillance agency (ANVISA) keep the industry under pressure to adjust their plants in Brazil to the state of the art and thus to improve its competitiveness.

Growing demand for generics offered another growth opportunity for domestic laboratories over the past decade. They came to dominate this market segment and are expanding and modernizing production capacities.

The pharmaceutical industry in Brazil has increased its production by 50% within 5 years. While overall capacity usage stands at 74% (2009), foreign and state-owned laboratories present relatively high levels of idle capacity, as some of their production lines are outdated. They sometimes resort to manufacture outsourcing.

The demand for pharmaceutical production machines is estimated in the range from USD 50 million to USD 100 million per year. Almost all process equipment is imported; packaging machines, however, are manufactured in the country.

Brazil still relies on foreign raw materials and imports more than USD 2 billion worth of active pharmaceutical ingredients per year, since there are only a few local producers. It is a net exporter of excipients, though.

Research and innovation are concentrated at public institutions. There are more than 100 small biotech companies, most of them located in clusters linked to public universities and research centers. Private laboratories spend a small (6%), but growing part of their revenue on R&D. They still lack infrastructure for pre-clinical tests. Certain toxicology studies and special chemical tests are not available in Brazil yet.


Brazils amazing biodiversity has been little exploited so far, but might attract more investment in research centers if registration procedures were facilitated. The domestic market for herbal medicines (currently USD 1 billion) already sustains some Brazilian companies specialized in phytotherapy.

Brazil also produces 260 million doses of (human and veterinary) vaccines per year. These are mainly supplied to the government by the big state-owned laboratories, sometimes with technology transferred under agreements with multinationals.

The Brazilian way of doing business is peculiar, requiring a local market expertise for a successful entry.


1. ABOUT THIS REPORT

This market report introduces the Brazilian Pharmaceutical Industry to Swiss companies active in the pharmaceutical supply chain. It is meant to assist them in identifying new business opportunities.

The domestic market is the cradle of Brazils pharmaceutical industry. To understand this industrys characteristics, it is necessary to first take a closer look at the demand-side (Chapter 2). Subsequently, the report analyzes the major players, including both multinational and domestic laboratories, public and private, and how the Brazilian government acts to develop a health industry complex (Chapter 3). It then highlights some special segments (Chapter 4) and finally shows which business opportunities can be identified in the pharmaceutical supply chain (Chapter 5). The annexes list relevant trade shows, congresses, business associations, and specialized media, as well as the main sources consulted for this report.

Data for this report were collected and interviews conducted in early 2010. Some of the statistics presented were expressed in Brazilian Real (R$). An exchange rate of R$ 1.75 was used to convert Brazilian currency values to USD, where appropriate.

The report has been elaborated by Prospectiva, a local consulting firm, and edited by the Swiss Business Hub Brazil. Companies interested in following-up on business opportunities identified through this report are invited to contact the Swiss Business Hub Brazil through Osec.


2. BRAZILS PHARMACEUTICAL MARKET

Among the major pharmaceutical markets in the world, Brazil is one of the fastest growing. It belongs to the Pharmerging Group (along with China, India, Mexico, Turkey, Korea, and Russia), which is expected to account for three quarters of world market growth in the period 2009-2013.

The Brazilian market has 191 million consumers with a per capita income of roughly USD 8000, while per capita consumption of medicines is still relatively low. Compared to other emerging markets, Brazil also boasts an effective patent protection regime, consistent with TRIPS rules, and a relatively low incidence of falsified drugs.

The main drivers for the market expansion are:

General economic expansion : The Brazilian economy was little affected by the international recession and resumed growth in mid 2009 already. The financial industry estimates a 6% increase in 2010, and a growth rate over 4.5% in the following years;

Increase of purchasing power: In Brazil, medicines are mostly bought by the citizens themselves, since most health insurance schemes do not reimburse patients for the purchase of drugs. Under such circumstances, 15% of the population still account for 50% of consumption. This will change as income keeps increasing steadily and the gap between rich and poor narrows: Nearly 20 million Brazilians moved upwards from the lowest income classes (D/E) to the middle class (C) between 2002 and 2007, largely due to public policies and social programs sponsored by the federal government.

Increasing life expectancy: In 2000, there were 13.9 million people above age 60. By 2020, this figure is expected to reach 30 million. As a consequence, chronic diseases will become more widespread.

Phasing out similar drugs: Similar drugs are medicines with formulations identical to branded medicines, but without proven bioequivalence (as in the case of generics). These were introduced before 1996 (when Brazil did not recognize patents on pharmaceutical products) but must be phased out by 2014, leaving a market of USD 2 billion p.a. to generics, phytotherapics and homeopathy.

2.1. Retail Market Size and Trends

The Brazilian pharmaceutical retail sales reached R$ 31 billion in 2009. The global economic crisis had no negative impact. Indeed, the sales reported a remarkable CAGR (Compound Annual Growth Rate) of 13.5%, as shown in Chart 1.


Chart 1 Brazilian Pharmaceutical Retail Market in R$

Source: IMS Health * Projection (10% p.a. rate)

Demand in 2013 is projected to reach R$ 45 billion, based on an expected growth rate of 10% per year. However, this value is expressed in nominal currency, including the inflation effect. In real terms, it would correspond to R$ 38 billion of 2009 (equivalent to USD 22 billion).

In terms of sales units, the past CAGR reached 6.6%, as shown in Chart 2.

Chart 2 Brazilian Pharmaceutical Market in Units

Source: IMS Health; * Linear Projection

2.2. Ethical, OTC and Generic Segments

The growth rate presented above for the entire retail market applies to both the Ethical (mandatory prescription) and the OTC (over-the-counter) markets, since their market


share has remained almost stable for the last few years.

Chart 3 Ethical x OTC Retail Market

Source: IMS Health - R$ values in nominal currencies

Generics were first introduced in 2001, and reached R$ 4.6 billion annual income in 2009, equivalent to 15% of the retail market. A linear projection of the generics sales evolution is presented in Chart 4.

Chart 4 Brazilian Generics Market Evaluation

Source: IMS Health * Prospectivas Linear Projection

This market segment may grow even stronger, considering the number of patents that shall expire over the next few years, and the phasing-out of similar medicines. On the other hand, laboratories in the OTC segment have begun to react, spending more on advertising to enhance brand loyalty.

The rise of generics has changed the industrys profile, as it gave Brazilian laboratories an opportunity to seize a share of the market. In 2009, the share of medicines produced


by Brazilian laboratories came close to that of multinational laboratories (see Chapter 3.3 The Growth of Domestic Laboratories).

2.3. Therapeutic Classes Market Share

The 20 major therapeutic classes are responsible for nearly 40% of the share in the retail market, in R$.

Table 1 Top Therapeutic Classes in the Retail Market 2009

Source: IMS Health

2.4. Non-Retail Demand

Whereas retail sales account for approximately 70% of the total pharmaceutical market, the remaining 30% fall to state, hospitals and clinics purchases, as shown in Chart 5. Brazilian health plans do not buy drugs.


Chart 5 Brazilian Market of Medicines in 2008

Sources: IMS Health; Ministry of Health / Portal da Sade Government Purchases

Non-retail sales represented R$ 10.5 billion in 2008.

Government purchases amounted to R$ 7.6 billion, of which R$ 5.6 billion was carried out under the Unified Healthcare System (SUS). The SUS program is linked to the Ministry of Health and is meant to coordinate the health-related activities of several government spheres (federal, state and municipal). Nevertheless, state and municipal governments also purchase some medicines without resorting to SUS, mainly vaccines and drugs against some endemic diseases. These medicines are usually supplied by their own laboratories, while the private laboratories catch the lions share (70%) of SUS acquisitions.

SUS procurement is divided into 5 categories: basic pharmaceutical assistance (16%), strategic pharmaceutical assistance (neglected diseases and sexually transmitted diseases, 21%), exceptional acquisition of medicines (higher technology drugs, 41%), vaccines and blood derived products (22%).

The government procurement is carried out through public tenders (for values above R$ 650.000) or through budgeting procedures (for values below the threshold). Medicines are specified by their active principles and galenical forms. Price is the overriding factor in government purchasing decisions. Foreign companies may participate in public tenders, but must be represented by a subsidiary registered in the country or a Brazilian representative. In case of tied bids the preference is for products manufactured in the country.


2.5. Foreign Trade

2.5.1. Trade Performance

The foreign trade figures presented in this chapter include operations with products under HS codes 3003 (pharmaceutical final products not packed for retail) and 3004 (drugs packed for retail). Unpacked products represent only 3% of imports and 1% of exports.

Total foreign trade operations of drugs significantly increased in the period from 2003 to 2008, reaching USD 3.5 billion on an average annual growth of 23%, as shown in Chart 6. In 2009, imports registered a 1% reduction in terms of value, while domestic demand still increased 10%. Less affected by the global crisis, Brazilian exports grew 15% in 2009, while the previous annual growth was 27%.

In 2010, imports tend to increase again and gradually return to the previous growth pace.

Chart 6 Brazilian Pharmaceutical Foreign Trade Evolution (Value)

Source: Ministry of Development, Industry and Foreign Trade

Generally speaking, exports have been growing at a faster pace than imports, but their overall value remains lower. Therefore, Brazils trade balance continues to post deficits for pharmaceutical products, and remains dependent on imports. The Ministry of Health perceives this dependence as a major vulnerability, and its reduction is one of the main objectives of public policies for the sector (see Chapter 3.2 Government Industrial Policies).

In terms of volume, the situation is different. From 2003 to 2007, exports exceeded imports, as shown in Chart 7.


Chart 7 Brazilian Pharmaceutical Foreign Trade Evolution (Volume)


Nevertheless, the volume imported exceeded export volumes in 2008, suggesting a significant change in the trade strategy of international laboratories and reflecting the global crisis effects over the exchange rates worldwide, The average price of medicines decreased from USD 118 to 102 per kilogram in a year.

Approximately 100 countries exported drugs to Brazil in 2009, although 51% of imports (in value terms) come from the USA, Switzerland and Germany, source countries of major international laboratories, as presented in Chart 8.

Chart 8 Brazilian Imports of Drugs in Terms of Value (HS codes 3003 / 3004)


Imports of medicines into Brazil are predominantly carried out by the subsidiaries of international laboratories established in the country. They are also responsible for the biggest part of exports, but the share of domestic laboratories tends to increase.


Latin American countries are the main foreign destination of Brazilian medicines, as shown in Chart 9, since:

The top international laboratories elected Brazil as their production platform for Latin America, on the grounds that Brazil represents approximately 40% of the regional demand (including Mexico);

Brazil participates in regional trade agreements that allow local exporters to sell pharmaceutical products under preferential conditions or tariff-free. This network of agreements comprises almost all Latin American countries.

Chart 9 Brazilian Exports of Medicines (HS codes 3003 / 3004)


2.5.2. Taxes on Imports

Although the federal government exempts medicines from the payment of the main taxes in its own sphere (except for import duties), the total tax burden on the importation of medicines to the country is still high.

At the same time, the import cost calculation is quite complex, involving an inter-correlated system of federal and state taxes, also taking into account the specific product and the state of disembarkation. Products are identified by their NCM codes (Mercosur Common Nomenclature), which is based on the international HS codes.

Table 2 shows the tax values for an imported medicine, compared to the taxes applied to an equivalent domestic product.


Table 2 Example of Tax Amounts for a Medicine

Source: Prospectiva calculation

On the other hand, the tax burden on the importation of equipment is higher, as shown in Table 3.

Table 3 Example of Tax Amounts for Equipment

Source: Prospectiva calculation

Exports from Brazil are made easier by a business friendly drawback regulation. Not only does it exempt the components importation from all taxes, it also provides for a refund of taxes paid on domestic components.

The drawback regulation also encompasses re-exportation operations, i.e. without local manufacturing process involved.

2.6. Geographical Distribution of Demand and Production

Within Brazil, the demand for medicines is not evenly distributed, since the country is still characterized by significant regional and social disparities: The heavily populated and relatively rich Southeast region (comprising the megacities of So Paulo and Rio de Janeiro) is responsible for 56% of the domestic drugs demand. By contrast, the North region, dominated by the Amazon rainforest, barely represents 5% of the market.


Table 4 Brazilian Market Regional Distribution 2008 Basis

Sources: (1) IBGE (Brazilian Institute of Geography and Statistics) (2) IMS Health

Following demand, the production of pharmaceutic

al products is also concentrated in the Southeast region of the country. The State of the So Paulo headquarters more than 110 laboratories, and Rio de Janeiro 80.

However, the State of Gois is in the 3rd biggest manufacturing location, accounting for 33% of medicine production in terms of volume. This position is due to a pharmaceutical industrial cluster located in the city of Anpolis.

The Anpolis cluster was launched in 1989, and its development was stimulated by a tax exemption policy implemented jointly by the state and municipal governments. Currently, the cluster gathers more than 20 pharmaceutical and pharmochemical companies, mainly focused on the production of generics, in addition to bioequivalence, bioavailability, and quality control laboratories.

The industrial cluster of Gois has already generated over 20,000 jobs, and encouraged other regional governments to start similar projects, aiming at the establishment of new pharmaceutical clusters, such as:


Goiana, located in the State of Pernambuco, in the Northeast region of the country. Specialized in biotechnology, it has 3 plants under construction: Novartis (vaccines), LAFEPE (Pernambuco state-owned laboratory) and Hemobras, a new federal-owned laboratory that will produce hemotherapeutic products;

Eusbio, in the State of Cear (Northeast region) is set to become a location for medicines and health equipment production sites. It already counts on a new biotech plant of FIOCRUZ (see Chapter 3.6 State-Owned Laboratories).

The emergence of new regional clusters is expected to reshape Brazils pharmaceutical industry in the future.

2.7. Regulatory Framework

Changes in the regulatory framework have contributed to the development of Brazils pharmaceutical industry over the last 10 years.

2.7.1. Intellectual Property Rights

The most important change occurred in 1996, when the National Congress approved a new Intellectual Property Law, which for the first time extended patent protection to pharmaceutical and pharmachemical products and procedures.

To have intellectual property rights protected in Brazil, it is necessary to register the international patents and trademarks with INPI (National Institute of Industrial Property).

INPI is a signatory of the PCT international protocol (Patent Cooperation Treaty). Therefore, the original depositary receipt agency may extend the rights to Brazil. Unfortunately, Brazil has not signed Madrid Protocol yet, which automatically recognizes the registration of trademarks registered at international patent offices.

2.7.2. ANVISA

ANVISA (National Health Surveillance Agency) is the regulatory agency that controls the management, imports, storage, distribution and sale of health related products and services in the country. Comparable to Swissmedic, it is an autonomous agency linked to the Ministry of Health, under a delegation contract (see http://www.anvisa.gov.br).

The Agencys competences embrace regulation, control and inspection, including the concession of drugs registration permits, which are compulsory for both local production and imports.

Since ANVISA was established in 1999, the registration of drugs and the acquisition of manufacturing permits became slower and more expensive. On the positive side, the Agencys high sanitary standards brought about a significant improvement in the manufacturing practices and thus promoted the quality of medicines sold in Brazil. By now, the majority of domestic products can be sold in most Brazilian export markets without adaptation.


ANVISA has adopted national guidelines for Good Manufacturing Practices (see http://www.anvisa.gov.br/legis/resol/2003/rdc/210_03rdc.pdf) and quality control, which refer to WHO recommendations. There are also Good Laboratory Practice guidelines which follow the OECD standard.

The Agencys competence also includes the establishment of rules for labels, direction information, and advertisement materials on medicines and foods. Foreign laboratories usually need to redesign labels, packages, and advertisement materials in order to sell medicines in the Brazilian market.

In addition, the Agency regulates the sale of medicines. It currently prepares new rules on the importation of drugs, which are going to oblige importers to have their own quality control laboratories.


3. THE PHARMACEUTICAL INDUSTRY IN BRAZIL

3.1. Overview

In Brazil, there are more than 500 pharmaceutical laboratories registered, but less than 300 private laboratories are in fact operating. In addition, there are approximately 20 state-owned laboratories of different sizes. Only 5 of these produce more than 150 million units of drugs per year.

Table 5 Profile of Pharmaceutical Laboratories Operating in Brazil

Sources: IMS Health; Prospectivas market experts (*) gross value

The industry has been shaped and reshaped by international mergers and acquisitions, the rise of domestic companies, local M&A processes and the entry of new competitors from abroad. At the same time, the Brazilian government has been actively promoting the domestic pharmaceutical sector (see Chapter 3.2 Government Industrial Policies).

The growing level of capital assets invested (see Chart 10) reflects the enlargement and modernization of plants by the Brazilian laboratories their investments are focused on manufacturing capacity. At the same time, elevated levels of idle capacity prompted a temporary slump in foreign direct investment after 2004. Recently, multinational companies announced more investments, turning Brazil into a production platform for the Latin American market.


Chart 10 Pharmaceutical Industry Investments

Sources: Capital Assets - Painel de Empresas (Febrafarma) FDI - Bacen/Conap - Brazilian Central Bank

The volume of pharmaceutical production in Brazil (according to the governments statistical office, IBGE) has steadily increased over the past decade (see Chart 11):

Chart 11 Pharmaceutical Production Index

Pharmaceutical Production Index

60

80

100

120

140

160

180

Jan 03 Nov 03 Sep 04 Jul 05 Mai 06 Mrz 07 Jan 08 Nov 08 Sep 09

Source: IBGE

Reference year (100%): 2002

In terms of galenical forms, domestic production is concentrated in solids, representing 60% of volume. Of the newly launched products, 80% are in solid form. Oral liquids represent 15 to 20% and the remaining production is distributed along ointments, suppositories, sterile liquids, etc.

Regarding production capacity usage, see Chapter 3.8 below.


3.2. Government Industrial Policies

The Brazilian government has a policy to promote the development of a national pharmaceutical industry. It is implemented on the federal level, but supported by the state and municipal government spheres.

The federal policy is implemented under the label Health Industry Complex (Complexo Industrial de Sade or CIS) since 2007. It aims at enhancing a national production base of pharmaceutical chemical products, as well as medical equipment.

The targets are to reduce the annual foreign trade deficit on health-related goods from USD 7.1 billion to 4.4 billion, and to develop technology in order to produce 20 drugs considered strategic for the Brazilian healthcare system, both up to 2013.

The major arm of the Health Industry Complex policy is Profarma (Support Program for the Development of the Pharmaceutical Productive Chain), a federal program to finance investments of companies headquartered in Brazil and inserted in the health industry. Other key elements of the policy are implemented by FINEP (Research and Projects Financing), the Brazilian Agency of Innovation.

The policies of the state and municipal governments are focused on the establishment or expansion of regional industrial clusters (see Chapter 2.6 Geographical Distribution of Demand and Production).

3.2.1. Profarma

The funds for the Profarma program are provided by the BNDES (National Bank of Social and Economic Development), which offers long-term credits at low interest rates.

Profarma funds may be used to acquire equipments and industrial systems made in Brazil, but also to import equipment (unless a similar national product exists), as well as to pay for services (like studies, projects and training) and inter-company technology transfers.

The program was launched in 2004 and its first phase, concluded in 2007, leveraged investments of R$ 2 billion, distributed in the following three subprograms:

Production (manufacturing improvement) - Directed to the construction, expansion and modernization of production capacity. This subprogram represented R$ 1.3 billion of investments, distributed in 34 diverse projects;

Innovation - Related to radical or incremental innovations (products and processes), construction and consolidation of innovation infrastructures, and internalization of competences and activities on R&D (R$ 160 million in 13 projects);

Empowerment of National Companies Supporting the incorporation, acquisition, or merger of companies, aiming at the creation of larger enterprises under national control. In its first phase, Profarma financed the acquisitions of Biosinttica by Ach and of Barrene by Farmasa (R$ 560 million).


At the end of 2007, a second phase of Profarma was launched, which runs up to 2012. It foresees a R$ 3 billion investment, with R$ 1.5 billion earmarked for innovation.

The new Profarma puts a special emphasis on improving the competitiveness of exporters and of state-owned laboratories. For the latter, the national development bank BNDES will finance 80% of investments, and the remaining 20% shall be disbursed by the federal, state or even municipal governments.

Foreign companies operating in the country may benefit from Profarma, but projects in the initial period were mainly from Brazilian capital companies (85% of projects).

3.2.2. FINEP

FINEP is linked to the Ministry of Science and Technology and manages the federal government funding for scientific and technological development.

The agency provides non-reimbursable funds for research projects of non-profit institutions, such as universities and research centers, as well as low interest rate loans for projects of private companies established in the country.

It supports every stage of the scientific and technological development cycle: basic research, applied research, and innovation on products, processes, and services.

The Health Industry Complex is one of FINEPs priorities. From 2002 to 2009, FINEP investments in this sector exceeded R$ 600 million (i.e. R$ 75 million per year).

The Eurofarma laboratory, for example, obtained an R$ 11 million loan to develop 5 generic medicines, while EMS Pharma was granted funds to implement a R&D center to develop formulations and carry out validation and stability tests. This center employs 200 technicians. Similarly, Ach financed the development of a new phytotherapic medicine based on a Brazilian herb.

3.3. The Growth of Domestic Laboratories

The big multinational laboratories have been present in Brazil since the government started to attract them in the 1940s. They came to dominate the Brazilian market first through imports (70% of national consumption in 1953) and then by setting up their own manufacturing capacities (80% of national production in the late 1960s). They were later joined by smaller companies and by competitors from emerging markets, notably after 1990, when import restrictions were lifted, price controls eased, and patent protection extended to pharmaceutical products.

Nevertheless, Brazil had domestic laboratories throughout this period. Industrial scale production began in the 1930s, and Brazilian pharmaceutical companies mushroomed after 1970, as they were allowed and indeed encouraged to produce similar medicines, i.e. copies of drugs patented abroad, using active ingredients imported from Italy or Spain. An attempt by the government to stimulate national production of pharmaceutical chemicals through import restrictions failed in the 1980s, not least because it was


accompanied by severe price controls. In the 1990s, market liberalization and the strength of the Brazilian Real took their toll on domestic laboratories.

Domestic laboratories have gained market share in the past decade, though. This trend was driven by the governments Profarma program and by the rise of generics. With a new legal and regulatory framework, and without demanding large R&D investments, generics now offered a relatively low-risk opportunity to grow.

When the sale of generics effectively started in Brazil in 2003, the domestic laboratories overall market share stood at 37%. It has now reached 52% in terms of units, as shown in Chart 12. In terms of value, the market share of international laboratories still remained 10% higher than domestic laboratories, mainly due to the smaller unit price of generics.

Chart 12 Domestic Laboratories Market Share Evolution

Source: IMS Health

Thus far, the generics sold in the country are largely produced by Brazilian capital companies (80% in terms of value). Some international competitors retreated soon after market entry. But the rapidly evolving market scenario proved to be testing for domestic companies, too. The local generics market leader, Medley, ran into heavy debts and was then sold to Sanofi-Aventis in 2009.

The prices of generics in Brazil are usually just 35% lower than branded ones a relatively small discount by international standards. These circumstances allow well-managed companies to earn profits and increase their investment power.

Nevertheless, since most domestic laboratories are still family-owned, their capacity to actively engage in mergers and acquisitions (and innovation) remains limited. The major laboratories, notably Ach, Eurofarma and EMS, now consider going public in order to improve their access to the capital market. The smaller and medium companies, on the


other hand, face the risk of being taken over.

3.4. Market Shares by Company

3.4.1. Retail Market

The retail market is mature and extremely competitive; the leaders share was approximately 7% and the share difference among the 3 major players was just 1% in 2009, as shown in Table 6.

Table 6 Laboratories Share in the Retail Market

Source: IMS Health * Domestic companies

** Domestic company acquired in 2009 by Sanofi-Aventis

Table 6 data do not consider the acquisition of Medley by Sanofi-Aventis. Sanofi-Aventis including Medley will be the market leader. Likewise, Novartis and Sandoz are ranked as two different manufacturers. Jointly, they are the third biggest player in the Brazilian pharmaceutical retail market.

The market shares in the Ethical (mandatory prescription) and OTC sub-segments are presented in Table 7, reflecting values in R$ million.


Table 7 Ethical and OTC Retail Shares


** Domestic company acquired by Sanofi-Aventis

Table 8 shows the market sub-segment of generics. It is highly concentrated and dominated by Brazilian laboratories.

Table 8 Generics Retail Shares


** Domestic company acquired by Sanofi-Aventis

3.4.2. Non-Retail Market

The non-retail market segment is not as competitive as the retail market and is more


concentrated. The seven major players detained nearly 50% of the market in 2008, as shown in Table 9. Though they do not show up in the top 10, it is in this market segment that state-owned laboratories are particularly active.

Table 9 Shares in the Non-Retail Market

Source: Grupemef * Domestic companies

3.5. Major Competitors Profiles

The competitors profiles are presented according to their positions in the retail market ranking.

3.5.1. EMS Pharma

Sources: IMS Health; Grupemef

EMS Pharma laboratory is a family-owned domestic company founded in 1964 as a small drugstore in the metropolitan region of So Paulo. In 1999, EMS began to operate its first pharmaceutical plant near So Paulo, after an investment of R$ 100 million.

Today, EMS has two plants in the state of So Paulo, with an output capacity of 360 million units per year, and more than 4,500 employees, including 1,500 sales


representatives.

EMS has expanded its operations by acquiring smaller laboratories and investing in their plants.

Over 6% of EMS revenues are applied to R&D activities.

Its portfolio has 1,500 products, distributed into 5 divisions:

EMS Hospital with 27 products and 40 presentations; EMS Consumption, which has an extensive portfolio of products divided into

categories such as vitamin C, antiflu, antacid, contusion medicines and menstrual regulator;

EMS Sigma Pharma, having a segmented portfolio of products that cover analgesics, antibiotics, anti-inflammatories, antihypertensive, antianemics, immunosuppressants, contraceptives, etc;

EMS Generics offering over 500 product presentations, including anti-inflammatory, painkillers, antibiotics, antiulcer, anti-hypertensive, antimalarial, antidiabete, topic corticoids, and generics against flu and cold;

EMS Similar: Gerovital (Multivitamin), Apevitin BC, Naridrin, Sominex, Complexo B (B Complex), EMS Expectorante (Expectorant) and Allexofedrin, etc.

Website: www.ems.com.br

3.5.2. Sanofi-Aventis


Combined with Medley (acquired in 2009, see below Chapter 3.5.4.), Sanofi-Aventis now leads all retail market segments, presenting:

Sanofi-Aventis is in Brazil since 1959, established in the city of So Paulo. Today, Brazil is the companys second most important production platform (after France), and its 7th most important market.

Sanofi has a manufacturing plant in Suzano (state of So Paulo), with an output capacity of 200 million units per year and 630 employees. This unit is said to be the


companys biggest pharmaceutical plant worldwide. Nevertheless, Sanofi keeps adding more production capacity: It invests roughly USD 100 million (from 2009-2012) to bring the joint output of the Suzano and Campinas plants (acquired from Medley, see below) to 450 million units. It also operates development centers at both locations.

Sanofi-Aventis delivers:

Ethical Drugs for cardiovascular/thrombosis (15), dermatology (8), metabolic diseases (10), internal medicine (71) and central nervous system (18);

Generics: 23 products OTC: 27 products Vaccines: 18 products, from preventive to therapeutic uses. Sanofi-Aventis and Medley are both manufacture outsourcing providers.

Website: http://www.sanofi-aventis.com.br

3.5.3. Ach


Ach Laboratrios Farmacuticos S.A. is a domestic company founded in 1966, in the metropolitan region of So Paulo, controlled by the Brazilian families Dellape Baptista, Siaulys and Depieri. However, they are planning an IPO for 2010.

Ach has two pharmaceutical plants in the metropolitan region of So Paulo, which employ over 3,000 workers and produce over 160 million units per year. Since 2008, it has been investing R$ 75 million to update and enlarge the output capacity of its main plant, located in Guarulhos.

Currently, the company exports 24 medicines and 36 presentations to 12 countries: Argentina, Bolivia, Canada, Colombia, Chile, Ecuador, USA, Mexico, Peru, Cape Verde, Dominican Republic, and Venezuela.

Ach invests R$ 120 million in 2010 to launch similar and generic medicines, which patents are about to expire. It is also investing R$ 70 millions in the R&D of new medicines, including in the biotech area.

Achs portfolio includes 250 products and 600 presentations, distributed in the following classes:

Ethical 135 products in diversified presentations for arthrosis, infection, inflammation, cardiology, dermatology, endocrinology, gastroenterology, oncology, respiratory diseases, womens health and neurological drugs;


OTC 35 products; Generic 83 products; Dermocosmetics 15 products. The main therapeutic classes of the laboratory are Cardiovascular System (20%); Respiratory System (18%); Musculo-Skeletal System (16%); Genito Urinary System (11%); Alimentary Tract Metabolism (11%); Nervous System (9%), and Dermatology (4%).

Website: http://www.ache.com.br

3.5.4. Medley

Source: IMS Health

Medley was founded in 1932 as a local family-owned company, located in upstate So Paulo. The laboratory has been a pioneer in the production of generic drugs, becoming later the leader of this segment.

In 2009, the company encountered severe liquidity problems, which prompted its sale to Sanofi-Aventis, but it continues to be managed as an independent unit. The acquisition was approved by competition regulators in May 2010, under certain restrictions.

At the time of its acquisition, Medley already operated two pharmaceutical plants in So Paulo, with a combined output capacity over 180 million units per year, employing 1,550 people (incl. 500 sales representatives).

Sanofi-Aventis approved the construction, for USD 45 million, of a new plant in Brasilia to produce generic hormones for the Latin American market. This facility is expected to become operational by 2012.

Products from the laboratory have been exported to 15 Latin American countries. Sanofi-Aventis is opening new fronts in Europe.

Medley operates in the segments of Ethical, OTC and Generic drugs, offering 127 different products.

Website: http://www.medley.com.br


3.5.5. Eurofarma


Eurofarma is a Brazilian pharmaceutical laboratory founded in 1972, as the first Brazilian manufacture services provider. In this field, it is still one of the major Brazilian players. Laboratory services range from single manufacture up to full services, covering all type of galenical forms.

Since its foundation, the company has grown, acquired other companies, and started to manufacture and sell its own brands and other brands under international license. The company has now 3,300 employees; 1,900 involved in the sales force.

Eurofarma is headquartered in the city of So Paulo. In 2007, it began transferring production blocks from its 5 different plants to a new industrial complex located in the city of Itapevi, near So Paulo, to be concluded in 2010. The new plant required an investment of approximately R$ 450 million.

Eurofarma exports to a few Latin American countries and intends to cover 90% of the Latin American market by 2015. In order to achieve this objective, it acquired a small Argentine laboratory in 2009, Quesada Farmacutica. It also has a project to build a new plant in Venezuela.

In recent years, Eurofarma has been investing 5 to 6% of its revenues in R&D projects, including in the biotechnology area. It is working on two radical innovation projects in collaboration with universities: the first is to develop a new treatment for diabetes type 2 and degenerative neurological diseases, and the second is a new phytotherapic drug with anti-inflammatory and analgesic effects.

The company operates eight business divisions:

Pharma Business Unit: Responsible for the sales of branded drugs (158 products); General Practice, Gynecological, Pediatric, Psychiatric, Urological, Gastroenterological, Dermatologic, Neurologic, Orthopedic, Rheumatologic, and Otorhinolaryngologic.

Generic Drugs Unit: has 140 products, predominantly antibiotics, antidepressants and tranquilizers.

Hospital Unit. It offers a complete portfolio comprising reference, similar and generic drugs of the following therapeutic classes: antibiotics, anti-inflammatory drugs, anti-ulcer agents, anesthetics and others. In addition to the private segment, Eurofarma has the Bidding Unit, which supplies public hospitals and the SUS program.

Oncology Unit. Currently, it has the largest volume of cancer products in the Brazilian market.


Pearson Unit (Veterinary Unit), with 34 products. It is launching a new plant in 2010, where it shall produce foot-and-mouth disease vaccines (biotech).

Export Division, which manages the commercialization of Eurofarma drugs in the external market.

Services to Third Part. It coordinates Eurofarmas outsourcing services. Euroglass Unit. It offers containers to store drugs. Website: http://www.eurofarma.com.br

3.5.6. Novartis


Sandoz do Brasil, which is not included in the above figures, presented the following performance in the same period:

Source: IMS Health

Of the two Novartis predecessor companies, Sandoz had been active in Brazil since 1941, and Ciba-Geigy had arrived in 1971.

Novartis do Brasil has over 2,200 employees. From 2007-12, it invests R$ 233 million to expand the capacity of its plants in Resende (RJ) and Taboo da Serra (SP), which it uses as production platforms for both the domestic and export markets. It synthesizes its own pharmaceutical ingredients there.

By 2012, Novartis will install in the State of Pernambuco (Northeast region) a new plant to produce vaccines.

The drugs portfolio of Novartis in Brazil comprises:

Ethical 110 products for cardiovascular diseases, metabolic diseases, oncology, hematology, respiratory diseases, neurosciences, arthritis and bones, infectious diseases/ transplant/ immunology (IDTI), ophthalmology, dermatology, and gastrointestinal and urinary diseases;


OTC 26 products; Vaccines against several viruses and bacteria; Veterinary products for a wide range of animals. Website: http://www.novartis.com.br

Sandoz do Brasil has 800 employees. The plant located in Camb (Paran state) manufactures drugs for the Brazilian market, but also for export to Europe and North America. The product range includes generics, OTC, and drugs for medical specialties, such as oncology, central nervous system, urology, and gynecology. Growth hormones will be added in the second half of 2010. The plant output capacity is 1 billion tablets, 60 million blisters and 46 million packed units per year.

Website: http://www.sandoz.com.br

3.5.7. Pfizer


In 1952, Pfizer started its operations in Brazil, trading imported products. In 1960, the company launched its first industrial plant in the country.

Pfizer has a plant in the metropolitan region of So Paulo, with an output capacity of 170 million units per year. Headquartered in the city So Paulo, it has 1,800 employees.

The local portfolio includes:

Drugs for human use - approximately 110 products, mainly Ethical, for cholesterol, depression, neuropathic aches, arterial hypertension, pulmonary hypertension, oncology, central nervous system, and gynecology;

Veterinary drugs - for cattle, birds, pigs, and pets, including anti-inflammatory, antiparasitic, products for the reproductive process and vaccines.

Pfizer is planning to enter the Brazilian segment of generics. In 2009, it tried to acquire Neo Qumica, but the company was sold to the Hypermarcas domestic group (D M Ind. FTC). Pfizer continues to look out for acquisition targets.

Website: http://www.pfizer.com.br/


3.5.8. Bayer Schering Pharma

Source: IMS Health

Bayer Schering Pharma figures do not consider the Bayer Consumer Care area. Together, they would form the 7th major player in the Brazilian pharmaceutical retail market. Bayer Consumer Care presents the following performance record:

Bayer Schering has been in Brazil for a long time: Bayer for more than 110 years and Schering since 1950, having launched a local production unit in 1959.

The group has local operations in four areas: Pharma (Ethical drugs); Consumer Care (OTC); Diabetes Care and Animal Healthcare, besides drugs for diagnosis.

The company is headquartered in So Paulo and has more than 1,600 employees.

Their main industrial sites are in So Paulo city, dedicated to human health, with an output capacity of 130 million blisters per year, and in Porto Alegre (Rio Grande do Sul State, South region) producing 150 million units of animal healthcare products.

Bayer Schering Pharma produces over 46 Ethical drugs for: Andrology; Anti-infective; Cardiovascular; Dermatology; Diagnosis; Gynecology; Neurology; Oncology and Primary Care.

Website: http://www.bayerscheringpharma.com.br

3.5.9. AstraZeneca

Source: IMS Health

Before their international merger in 1999, Astra had been active in Brazil for two decades, and Zeneca for one.


AstraZeneca is currently headquartered in Cotia (metropolitan region of So Paulo), where it also operates an industrial plant with an output capacity over 38 million units per year. It has 1,200 employees in Brazil.

AstraZenecas product mix comprises drugs for Anesthesiology, Cardiovascular, Infectious diseases, Gynecology, Mastology, Neuropsiquiatry, Oncology, Urology, and Respiratory diseases.

Website: http://www.astrazeneca.com.br

3.5.10. Boehringer Ingelheim

Source: IMS Health

Boehringer Ingelheim started in Brazil in 1953, through a pharmaceutical importer. In 1976, it installed a manufacturing plant in Itapecerica da Serra, in the metropolitan region of So Paulo.

The plant, located in Itapecerica da Serra, has 27,700 square meters and an output capacity of more than 120 million units per year.

The company is headquartered in the city of So Paulo and has approximately 1,000 employees in the country.

Boehringer Ingelheim do Brasil offers manufacture outsourcing services, including full services. Outsourcing accounts for 8% of the production in Itapecerica da Serra.

The company locally produces drugs for exportation to Europe, Asia and all Latin America. Export revenues represent 25% of companys revenue in Brazil.

Its mix comprises:

Ethical 31 products OTC 11 products Veterinary 8 products Website: http://www.boehringer-ingelheim.com.br/

3.5.11. Roche

Roche is the non-retail market leader in Brazil. Overall, with gross revenue of R$ 1.5 billion in 2008, it ranked third in Brazil, behind Sanofi-Aventis and Novartis.

Headquartered in Sao Paulo, Roche do Brasil has 1,375 employees.

Production is concentrated at its site in Jacarepagu (near Rio de Janeiro), refurbished


in 2002-04 for USD 70 million. A new quality control laboratory was added in 2008. In its plant, Roche manufactures solid forms, oral liquids, and sterile liquids for the Brazilian and Latin American markets (export value was USD 82.2 million in 2008). To make use of idle capacity, Roche also offers manufacturing services to third parties.

The companys pharmaceutical division in Brazil sells 51 brands in 110 presentations.

Website: http://www.roche.com.br/

3.6. State-Owned Laboratories

In Brazil, there are 18 state-owned pharmaceutical laboratories affiliated to ALFOB (Brazilian Official Laboratories Association) and a few vaccine producers, such as Biomanguinhos, Butantan Institute and Tecpar. They produced 30% of drugs purchased by the SUS program in terms of value (See Chapter 2.4 Non-Retail Demand), from basic OTC medicines to vaccines.

ALFOB laboratories are linked to the federal and state governments, to public universities, to the Armed Forces or to the Ministry of Health. The main ones are listed in Table 10. Together the ALFOB laboratories have an installed production capacity of 14 billion units of medicines per year, but they present an average idle capacity of 66%.

Table 10 Major ALFOB Laboratories Output and Idle Capacity in 2008

Source: ALFOB (Brazilian Official Laboratories Association)

Idle capacity is especially high in smaller laboratories. This is primarily due to:

the difficulty to adapt production plants to sanitary regulations from ANVISA only the four laboratories presented in Table 10 already had GMP certificates in 2008;

difficulties to purchase new equipment, hire qualified professionals, and develop manufacturing technology;

raw material shortages due to delays in public tender procedures. The main government strategy to strengthen state-owned laboratories is to develop business partnerships with private laboratories.

In 2009, there were eight business agreements entered into by the Brazilian Ministry of Health, involving 9 state-owned laboratories and 11 private companies, being 4 foreign and 7 domestic.


Biomanguinhos, a state-owned laboratory not affiliated to ALFOB, for instance, signed a business agreement with GlaxoSmithKline comprising the technology transfer of a pneumococcal vaccine and the installation of an R&D center for neglected diseases (malaria, dengue and yellow fever).

The improvement of state-owned laboratories also goes through investments into their technological development and output capacity, in addition to R&D projects. From 2000 to 2009, the Ministry of Health invested over R$ 400 million in state-owned laboratories. The second phase of the Profarma program (see Chapter 3.2 Government Industrial Policies) also benefits the improvement and expansion of state-owned laboratories.

However, the release of funds is contingent on an audit of the laboratories operating and administrative processes, and a commitment to eventual changes recommended by the BNDES. This procedure tends to favor the bigger state-owned companies, promoting a concentration process within the segment.

Hence, the government expects the largest state-owned laboratories to become more competitive, reducing its expenses for the acquisition of drugs, and possibly reducing the share of private laboratories in SUS program purchases. In the mid to long term, state-owned laboratories may dispute the retail market to keep their growth pace.

The major stated-owned laboratories are:

3.6.1. FIOCRUZ - Fundao Oswaldo Cruz

FIOCRUZ is a Brazilian centenary institution linked to the Ministry of Health and headquartered in Rio de Janeiro.

It has over 7,500 employees and health professionals working in 15 institutes, including Farmanguinhos, Biomanguinhos, 7 R&D units, 2 health schools, and a reference hospital.

FARMANGUINHOS Institute of Medicines and Drugs Technology Farmanguinhos is part of the federal government policy for the control of medicine prices, mainly through the production of generics for use in the treatment of AIDS. It also produces medicines against tuberculosis, malaria, leprosy, hypertension, and several kinds of cancer. Farmanguinhos quintuplicated its production capacity in 2005, by acquiring from GlaxoSmithKline a pharmaceutical plant located in the metropolitan region of Rio de Janeiro, for an amount of US$ 6 million. Website: http://www2.far.fiocruz.br/farmanguinhos


Biomanguinhos - Immunobiologicals Technology Institute . It is the largest producer of vaccines and kits for diagnosis of infectious and parasitic diseases in Latin America. It is also the worlds largest producer of vaccines against yellow fever, supplying up to 100 million doses per year to the SUS program and for exportation. The product range includes vaccines against measles, poliomyelitis, meningitis meningococcal A/C and by Haemophillus influenzae type B, diphtheria, tetanus, pertussis, and MMR triple vaccine. In a joint venture with GlaxoSmithKline (GSK), at a cost of 35 million, Biomanguinhos develops a new vaccine against dengue (endemic in Brazil).

Annual output exceeds 100 million doses of concentrated viral and around 60 million vaccine doses, catering for 47% of the vaccines demand of the National Program of Immunizations (PNI). Furthermore, Biomanguinhos supplies up to 2.5 million kits of reagents for diagnosis of infectious and parasitic diseases, such as AIDS, leishmaniasis, Chagas disease, dengue fever, hepatitis, and rubella. Website: http://www.fiocruz.br/bio

3.6.2. FURP

FURP, or Fundao para o Remdio Popular (Popular Medicine Foundation), is linked to the So Paulo State government and headquartered in the So Paulo metropolitan region. It was the first state-owned laboratory to produce generics in the country.

It is the major Brazilian state-owned laboratory, having 2 pharmaceutical plants located in Guarulhos and in Amrico Brasiliense. The Amrico Brasiliense unit is the newest, having demanded up to now an investment of R$ 240 million. Its yearly output shall reach 21.6 millions of ampoules and 1.2 billion capsules after reaching its full production capacity.

In 2008, FURP produced almost 2 billion units of drugs, comprising antibiotics, antiretrovirals, antihypertensives, dermatological, immunosuppressors, and medicines for treatment of diabetes and mental health.

Website: http://www.furp.sp.gov.br

3.6.3. Butantan Institute

Butantan Institute, founded in 1901, belongs to the State of So Paulo, and is currently located in the city of So Paulo.

Today it is one of the five major vaccine producers in the world and the largest supplier for the domestic market. It is responsible for 80 vaccines distributed through the SUS program and for 65 anti-snake venom serums. The Institute supplies approximately 80% of the sera and vaccines used in the country.

In addition to anti-venin sera, Butantan Institute produces other sera such as anti- tetanus, anti-rabic, anti-diphteric, antibotulinic "A", antibotulinic "B", antibotulinic "ABE", and anti-thymocytic serums. Its serum output capacity reaches 600 thousand ampoules


per year.

The vaccines produced by the Institute are Tetanic Toxoid, Double vaccine (dT) for prevention against diphtheria, Triple vaccine (DTP) for prevention against diphtheria, tetanus and pertussis, Intradermic BCG, and against rabies (human use).

Butantan Institute produces 500 thousand doses of BCG per year. With new packing and lyophilization techniques, the production is set to increase 50%.

It is currently developing a vaccine against meningitis A, B and C, and a new vaccine against pertussis.

Butantan Institute developed the first recombinant vaccine in Brazil (using the genetic engineering techniques) against hepatitis B, with a production capacity of 50 million doses per year.

Research and genetic engineering are also being conducted for the development of vaccines against dengue fever and schistossomosis (together with FIOCRUZ).

In 2007, the Institute inaugurated a R$ 70 million plant for flu vaccines, with technology transferred from Sanofi Pasteur. The start of production has been delayed due to compliance issues. Butantan will be able to manufacture over 40 million doses per year and become the first Latin American laboratory to produce vaccines against influenza A (H1N1).

Another big project planned by Butantan Institute is a blood derived products plant with a processing capacity of 150 thousand liters of plasma per year.

Website: http://www.butantan.gov.br

3.6.4. FUNED - Fundao Ezequiel Dias

Fundao Ezequiel Dias is linked to the State of Minas Gerais. Located in the capital Belo Horizonte, it was founded in 1907.

Currently, FUNED supplies anti-venin and antitoxic serums that represent around 35% of the national demand. Beyond, the laboratory produces over 30 diverse drugs, comprising analgesics and antipyretics, antibacterials, anti-secretives, antianemic, broncho-dilators, cardiovasculars, antiparasitics, antidepressants, antiinfeccios and anti-inflammatories, antiretrovirals, immunosuppressors, and medicines for treatment of diabetes and for mental health. The laboratory also produces vaccines and others biological and prophylactics products.

FUNED signed in 2009 a technology transfer agreement with Novartis, focused on a vaccine against meningitis C. The transfer process is expected to be concluded in five years.

Website: http://www.funed.mg.gov.br/


3.7. Compounding Pharmacies

Brazil has the largest market of compounding pharmacies in the world, with approximately 7,000 establishments, supplying to more than 60 million people per year. Almost 70% of these establishments are located in the Southeast region; the State of So Paulo alone has over 3,500 compounding pharmacies.

The Brazilian compounding pharmacies revenue is estimated at 8% of the domestic retail sales of regular medicines, that is, near USD 1.4 billion based on the current exchange rate.

Compounding pharmacies are very important in the homeopathic market. Over 2,000 compounding pharmacies work with homeopathies.

The impressive number of Brazilian compounding pharmacies is mainly due to:

Price. The compounded medicine is usually cheaper than industrialized ones; Physicians. The compound prescription is a subject present in almost all academic

medical schools and many doctors prefer to prescribe compounded medicines, especially homeopathic practitioners;

Pharmacists. There are over 120,000 pharmacists in the country, much more than the employer capacity of pharmaceutical manufacturers and drugstores. Thus, many pharmacists start their own business, often compounding pharmacies.

However, this scenario is changing, primarily due to strict regulations implemented by Anvisa:

Since 2005, compounding pharmacies are prohibited from producing products with presentation and concentration equivalent to industrialized medicines;

In 2006, ANVISA introduced the "Good Compounding Practices" guide, with strict demands on the production and quality control of medicines in compounding pharmacies, and quickly started inspections to check its application;

The rules for the labeling of compounded medicines were modified by ANVISA in 2008, compelling pharmacies to include new information on labels, such as the identification of the physician responsible for the medicine prescription and the pharmacist that compounded it.

Thus, smaller independent establishments tend to disappear, since the first regulation restricted the market and the others increased the production costs.

ANFARMAG, the National Association of Compunding Pharmacists, is promoting among its 5,000 affiliates the creation of pharmacy chains as an alternative way to survive. While these are not yet significant market players, their number and size is growing.

Chains of compounding pharmacy stores, mainly those specialized in homeopathy, usually also sell phytotherapics, food supplements, holistic products, vitamins, and sometimes, industrialized homeopathic medicines.


3.8. Manufacture Outsourcing

The Brazilian pharmaceutical industry has gradually improved its production capacity usage, as shown in Chart 13.

Chart 13 Manufacturing Capacity Usage in the Pharmaceutical Industry

Source: FGV NUCI

As a consequence, there is a growing market for manufacture outsourcing which was estimated at R$ 250 million in 2008. The demand for manufacturing services stems both from some domestic laboratories, whose investments to expand production capacity have not kept pace with growing demand, and from a few foreign companies having deactivated outdated or unprofitable production lines of their own. There are also companies facing exceptional demands (e.g. due to a successful public bid) or those whose production facilities do not meet the requirements of sanitary authorities (mainly state-owned laboratories). The demand for manufacturing services shows where companies need extra capacities, a situation which may result in future investments. Of course, the scenario is different for each galenical form and different pharmaceutical specialties.

As shown in Chart 14, the solid forms account for almost 50% of the outsourcing demand.

The share of sterile liquids accounts for almost 20% of the total manufacture outsourcing market, despite of smaller product quantities. Unit prices are higher and few companies have production lines for vials. The market segment of lyophilized sterile liquids, in particular, is characterized by the highest unit prices, although it barely represents 5% of the market.


Chart 14 Manufacture Outsourcing Demand in Value Terms

Source: Prospectiva elaboration

In the future, the outsourcing of lyophilized sterile liquids will be much greater, as biotech products shall dominate the market, especially proteics that should be lyophilized in order to increase products stability.

The lines of semi-solids and oral liquids account for 15% of the market and present the idlest production capacity, since they have the smallest technological complexity and require lower amounts of investments. Thus, there shall be no new outsourcing needs for those production lines, except large volume contracts.

The other category congregates a set of diversified forms, including creams, ointments, aerosols, etc, besides packing services for all galenical forms.

Almost all the current outsourcing contracts comprise single manufacturing services, without packaging and raw materials, or even quality control services, but there is a clear demand for improvement in the service level towards full-services or, at least, complementary services, such as the supply chain.

3.8.1. Manufacture Service Providers

The Brazilian pharmaceutical outsourcing market is very competitive. There is a large number of players with different profiles, ranging from small sized service providers to large multinational companies. At the same time, a competition analysis shows a high level of concentration, with the 5 major providers accounting for approximately 60% of revenues. The top providers are listed in Table 11.


Table 11 Major Suppliers in the Brazilian Pharmaceutical Outsourcing Market

Source: Prospectiva researches

In order to map this market, we can distinguish three groups according to the importance they give to outsourcing services in their overall activities.

Group A - Companies to which outsourcing is their only business. There are more than 25 in this group, mainly small companies that offer a smaller range of services;

Group B - Companies committed to outsourcing, even though it is not their core business. The group comprises 5 to 10 companies, usually large domestic and international laboratories that offer outsourcing services for diverse galenical forms and pharmaceutical specialties;

Group C - Companies that sell their idle capacity, without focus on outsourcing. This group comprises the largest number of companies and is the most heterogeneous.

The market share in terms of value of each class of provider is presented in Chart 15.


Chart 15 Analysis of Outsourcing Services Providers (*)

Source: Prospectiva researches (*) Does not consider cosmetics

3.9. Research & Development

3.9.1. Overview

The R&D investment from Brazilian private laboratories has traditionally been very low, since patent protection was only extended to pharmaceutical products in 1997. While it still remains low by international standards, R&D spending in Brazil shows a tendency of consistent growth, as shown in Chart 16, and has reached R$ 500 million in 2008.

Chart 16 R&D Investments from Brazilian Private Laboratories

Source: Febrafarma report Brazilian Pharmaceutical Innovation

In 2008, R&D investment by foreign companies in Brazil represented 56% of the total


amount. It was applied mainly to clinical research of new products developed abroad.

R&D investments from domestic laboratories amounted to R$ 218 million in 2008, a significant increase over previous years. Major companies now invest more than 6% of their revenues on research projects. A big part of this effort was directed at incremental research.

It appears that Brazilian companies are changing their business strategies. They are coming to perceive innovation and the development of new medicines as essential to sustain and increase their market share. Apart from collaboration with universities and other external research institutions, they are setting up and improving their own research centers.

Eurofarma and Biolab together founded Incrementha PD&I, a joint venture which started by performing incremental researches and went on to develop radical innovations (http://www.incrementha.com.br).

Another example is Cristlia, the domestic laboratory that possesses the largest number of patents. It recently invested R$ 30 million to install a new R&D center. Cristlia is conducting 29 medicine research projects, of which 14 are incremental and 15 radical (http://www.2cristalia.com.br).

A few medium size laboratories are going the same path, such as Almeida Prado (presented in Chapter 4.2 Homeopathy), which is installing a new research center in the North region of the country, considering new phytotherapics based on Amazonian herbs.

There are no accurate data concerning R&D investments from state-owned laboratories, but the amount is likely to have exceeded R$ 80 million in 2008, considering that FIOCRUZ alone spent R$ 46 million.

The major state-owned laboratory research centers belong to FIOCRUZ and Instituto Butantan, which are mainly focused on the immunization and treatment of neglected diseases and sexually transmitted diseases / Aids (see Chapter 3.6 State-Owned Laboratories). Very often, they act throughout the entire research cycle, from basic research to the final clinical test, usually relying on academic or other public research institutions, and even on private laboratories.

Altogether, Brazil already has the capacity and expertise to do basic research and clinical tests. However, it still needs pre-clinical development, due to the lack of infrastructure, particularly in the biotech area.

A recent study carried out by Prospectiva identified a lack of the following:

Companies specialized in toxicology studies; CROs (Contract Research Organizations) certified with GLP/GMP as bioteries and

recombined protein manufacturers; Laboratories for special chemical tests. In the biotech sector, the most complex tests

are currently carried out abroad; Equipment for biotech tests of new products; Experts for the development of biotech pharmacos.


That need for pre-clinical development represents the best business opportunity for international CROs and equipment suppliers in the short and medium term.

3.9.2. Public Institutions Research

The innovation activities are highly concentrated in public universities in Brazil, and 75% of the Brazilian researchers are linked to universities. The five major universities have almost 1,000 PhD researchers dedicated to the life sciences. Their productivity is large, having published over 10.000 scientific papers in 2007.

Until a few years ago, almost all academic researchers from Brazil performed scientific studies without worrying about their practical application. That posture has been changing, especially in the healthcare area. Today many researchers collaborate with projects proposed by public institutions or private companies.

The Innovation Law, adopted in 2004, contributed to this change of mind. It allowed the application of public funds to industrial projects and stimulated business partnerships between public institutions and private companies.

At the same time, this law enabled the commercialization of intellectual rights arising from publicly sponsored inventions.

In 2006, 60% of the patents deposited with INPI (National Industrial Property Institute) belonged to public universities.

The Acheflan medicine is an interesting case on public-private interaction. Its active principle derives from a native herb (Cordia verbenacea) found on the coastline of So Paulo. The success in the development of Acheflan by Ach laboratory was due to the collaboration with four public universities: USP (Universidade So Paulo), UNICAMP (Universidade de Campinas), UFRJ (Universidade Federal do Rio de Janeiro), and UFSC (Universidade Federal de Santa Catarina).

The most remarkable Brazilian universities are:

USP - Universidade de So Paulo. USP is linked to the government of the State of So Paulo, being the largest university and research institution in Brazil.

Radical biotechnological and biomedical researches are carried out by several institutes inside the university, especially the Institute of Biomedical Science, the Institute of Chemistry, the Structural Molecular Biotechnology Center (CBME-USP), and the Luiz Queiroz School of Agriculture.

Performance: 332 patents deposited in the period between 1992-2008; 4,809 scientific papers published in 2007; 509 PhD researchers in the healthcare area in 2008.

Website: http://www.usp.br/prp


UNICAMP - Universidade de Campinas Unicamp is also linked to the government of the State of So Paulo, being one of the top research universities in the country. It is the major Brazilian depositor of patents, most of them in Chemistry and Agribusiness.

Performance: 548 patents deposited in the period 1992-2008; 1,723 scientific papers published in 2007; 115 PhD researchers in the healthcare area in 2008.

Website: http://www.unicamp.br/unicamp/ensino-pesquisa-e-extensao/pesquisa

UFRJ - Universidade Federal do Rio de Janeiro UFRJ is one of the oldest universities in Brazil and has great relevance in biotechnology research, housing eight academic biotech research centers like the Vegetal Biotechnology Center, the Biochemistry Institute, and the Natural Food Center.

Performance: 186 patents deposited in the period 1992-2008; 1,506 scientific papers published in 2007; 106 PhD researchers in the healthcare area in 2008.

Website: http://www.pr2.ufrj.br

UFMG - Universidade Federal de Minas Gerais UFMG is the second largest Federal University in Brazil and has expertise in the biotechnology area; 55% of its patents deal with biotech and it detains technology for diagnosis, vaccines, and treatment of a wide range of illnesses, from cancer to neglected infectious diseases.

The university has some experience in technology transfer in the biotech area.

Performance: 258 patents deposited in the period 1992-2008; 936 scientific papers published in 2007; 115 PhD researchers in the healthcare area in 2008.

Website: http://www.ufmg.br/pesquisa/areas_saude.shtml

Besides the universities, Brazil has some public research institutions, such as:

Evandro Chagas Institute (Biomedical Research - http://www.iec.pa.gov.br); INCA (Brazilian National Cancer Institute - http://www1.inca.gov.br/english); INCT-INOFAR (National Institute of Science and Technology of Pharmochemicals and Medicines - http://www.inct-inofar.ccs.ufrj.br); Ludwig Institute for Cancer Research (http://www.ludwig.org.br); and Royal Institute (Main areas: Toxicology and Genotoxicology - http://www.institutoroyal.com.br).

However, only FIOCRUZ and Butantan Institute (see Chapter 3.6 State-Owned Laboratories) have a performance comparable to the major Brazilian universities.

3.9.3. State Support to Innovation

Innovation in the healthcare sector is the subject of several government initiatives and


policies, with biotechnology as a priority.

The aforementioned Innovation Law is an example. It stimulates research through tax exemption, encourages the participation of ICTs (Scientific and Technological Institutions), and regulates the payment of royalties for technology transfer.

However, in the federal sphere, the main tools to promote innovation are:

Production Development Policy for the CIS (Health Industry Complex, introduced in Chapter 3.2 Government Industrial Policies);

Profarma program (Support Program for the Development of the Pharmaceutical Productive Chain). It finances investments associated to incremental researches and to the development of new pharmaceutical chemicals and medicines, having spent for this R$ 160 million from 2004 to 2007;

FINEP (Research and Projects Financing). It aims at the health industry\s technological qualification in the SUS areas of interest, and the stimulation of private innovative investments. From 2002 to 2009, it spent over R$ 600 million;

Production Innovation Program of BNDES (National Bank of Social and Economic Development). It finances projects of incremental innovations and technological qualification, and the installation of research centers;

CNPq (National Council for Scientific and Technological Development). It is dedicated to the promotion of scientific and technological research and to the development of human resources for research in the country.

In addition to the federal initiatives, there are others in the state governments sphere, such as FAPESP (So Paulo State Research Foundation), the largest one.

FAPESP is a funding agency for scientific and technological research linked to the government of the State of So Paulo. It grants funds and loans for academic and applied researches, in addition to scholarships for researchers.

The agency also supports some special research programs as SMOLBnet (Structural Molecular Biology Network), Virtual Institute of Biodiversity (Biodiversity and environment protection investigation), and Genoma (Molecular Biotechnology investigation).

3.9.4. Regulatory Issues

In Brazil, all clinical researches must be previously approved by ANVISA.

ANVISA requires that clinical researches approval include GLP (Good Laboratory Practice) certificates and the CEP (Committee of Ethics in Research) evaluation, apart from technical reports and corporate documents.

ANVISA GLP guidelines follow the OECD (Organization for Economic Co-Operation and Development) standard.

In the pre-clinical research, all the laboratories must have GLP certificates.

ANVISAs GLP certification process requires that research laboratory facilities are previously approved by INMETRO (National Institute of Metrology, Standardization, and Industrial Quality - http://www.inmetro.gov.br/) or by an institution accredited by


INMETRO. INMETROs approval comprises physical inspection. The basic points for equipment are adequacy for the operation, reproducibility of the experiments, and stability of the results.

INMETROs approval process follows the ILAC standards (International Laboratory Accreditation Cooperation).

3.10. Biotechnology Companies

The biotechnology industry is relatively recent in Brazil. However, the country has already established a global presence in important areas, such as stem cell research, genomic studies, vegetable biotechnology, and vaccines.

Overall, the Brazilian biotech industry is still in the research phase, and the activities concentrated in clusters are linked to the major universities and research institutions (see Chapter 3.9 Research & Development). These clusters host a large part of the 110 biotech companies operating in the country, without considering foreign companies, most of which maintain a purely commercial presence, and companies mainly focused on other areas, such as pharmaceutical laboratories.

Over 73% of biotech companies have formal business partnerships with universities or research centers.

They are small to medium sized companies, which presented the following profile in 2008:

40% had been in operation for less than 6 years; 25% from 6 to 10 years, and barely 15% over 15 years;

50% had up to 10 employees, 27% from 11 to 20, and only 8% over 50; 50% report annual revenues lower than R$ 1 million. In the human health sector, there were 22 biotech companies. This was the second most important sector in 2008, as presented in Chart 17.


Chart 17 Brazilian Biotech Companies Distribution by Sector in 2008

Source: Biominas database (http://www.biominas.org.br)

Revenues reported in 2008 from biotech companies operating in the human health sector reached USD 210 million, arising from a diverse portfolio of products and services.

The largest concentration was on manufacturing of in vitro diagnosis kits (10 companies), followed by CRO (6 companies).

At the same time, the sector of inputs comprised 41 companies operating also with a diverse portfolio of products, including the manufacture of reagents for in vitro diagnosis, biopolymers, vegetable extracts, recombinant proteins, etc.

In addition to these companies, there are a few foreign biotech companies in the Brazilian market, such as Genzyme, Actelion, Shire, Biogen and Biomarin, none of them producing locally.

The domestic biotech companies are the quickest, simplest, and cheapest gateway for the entry of foreign companies into the Brazilian biotech market, through business agreements or even acquisitions.

The Danish New Nordisk, for example, although it had been in Brazil since 1990, only consolidated its local presence in 2002, when it acquired Biobrs laboratory, a national pioneer in biotechnology, and the only producer of insulin at that time. Currently, the Biobrs plant is the largest Latin American manufacturer of insulin (http://www.novonordisk.com.br)

The government plays an important role in the biotech area, through funding programs, regulations and policies. Almost 70% of all Brazilian biotech companies benefit from government incentives, mainly non-reimbursable funds (48.4%), followed by low interest rate loans (9.5%) and tax exemptions (5.3%).

A National Policy for Biotechnology Development was launched in 2007. Its goal is to lead Brazil to figure among the top five countries in biotechnology in 15 years, based on


an investment of approximately R$ 10 billion for that purpose, 60% public and 40% private.

The main regulation on biotech, the National Biosafety Law, was introduced in 2005. This law provides for safety norms and inspection mechanisms for biotech activities and allows the production of genetically modified organisms. However, its guidelines are rather generic.

The Biosafety Law is under review in order to contemplate different requirements for distinct categories of biologic products, establishing

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