Since the introduction of generic drugs in Brazil five years ago, the country’s pharmaceutical industry has undergone a transformation. Generic drugs have been steadily gaining market share and today represent 11.6% of total production. Their rise has led to a decline in the influence of major multinational drug companies that sell branded products in the domestic market. Generic drugs, however, are not the only danger confronting these multinationals. In an attempt to negotiate discounted prices, the Brazilian government is threatening to violate the patents on medications used to treat AIDS. That threat alone, say the multinationals, will lead big drug companies to reduce their investments in Brazil’s pharmaceutical sector.

The story of generics in Brazil begins in 1996 with the passage of the Patent Law, which recognizes international patent rights over certain products, services and innovative ideas. Relying on this legislation, the Brazilian government decided to regulate the pharmaceutical sector, an industry known for its abuse of intellectual property rights. Indeed, Brazil had become a paradise for pharmaceutical fraud, including the practice of freely copying drugs without paying required royalty fees to the drugs’ manufacturers.

In 1999, the government passed the Generics Law, which allowed companies to legally produce generic drugs that were perfect copies of patented drugs. The result was the introduction of generics into Brazil, a situation that clearly made Big Pharma multinationals uncomfortable. Relations between them and the generic manufacturers eventually stabilized, however, despite the fact that generic drugs had acquired a growing share of the market. During the third quarter of this year, generic manufacturers produced 11.6% of all drugs in Brazil, or 9.05% of the market in terms of dollar value.

According to Vera Valente, executive director of Progenéricos, the Brazilian association of generic drug manufacturers, “The Brazilian market for generics has grown steadily, month to month, and will continue to do so. The growth has been in production volume, most importantly, and also in value. During the last four years, the overall market for pharmaceuticals has been practically paralyzed.”

If one takes into account only those products that are no longer protected by patents, generic products have stolen away a considerable share of the market from “blockbuster” drugs made by multinational pharma brands, Valente says. “We did an analysis of the 50 biggest products in the pharmaceutical market that are not under patent. We compared them to the introduction of generics, which have gone from having only a minimal share of the market in 2001 to a 41% share of the market at present.”

Jorge Raimundo is president of the consultative council of Interfarma, the Brazilian association for scientific research, which represents the big global laboratories. He and other multinational executives say that coexistence between generics and Big Pharma can be achieved without conflict. “If a product goes through the processes of ‘bio-equivalence,’ ‘bio-stability,’ and ‘bio-availability,’ if the manufacturing method is perfect, and if it has complied with the time period in the patent, then the most appropriate thing is to permit generics [for that product],” Raimundo says, adding that he believes research-based pharma companies have a major competitive advantage. “When a laboratory discovers, invents and then launches a product, it has a period of exclusivity guaranteed by law, during which it can exploit the product covered by the patent worldwide. Brazil is no exception to that rule. So I see nothing wrong with allowing a generic product to enter the market when a patent expires.”

According to Raimundo, when generics first arrived, it looked as if the multinational pharma firms opposed them, but that wasn’t the case. “We were opposed to what was being sold as generics — namely, drugs that were similar [but not identical], and were being passed off as generics,” he says, suggesting that producers of similar drugs were hoping their products would be confused with generic drugs.

Manufacturers of generics agree that production of drugs that were similar [but not genuinely generic] was the main problem in the market, especially because producers of these products do not invest in research or look for ‘bio-equivalence’ and ‘bio-availability’ in order to meet the requirements of the law. “We have a common enemy — those who produce ‘similar’ drugs,” says Valente. “Competition between generic products and branded products is becoming more balanced, and we realize that each of us has our share of the market.”

Lower Drug Costs for Some

Apart from differences between the players in the pharmaceutical market, generics are viewed in the academic world as an extremely positive way to democratize access to medications.

Indeed, the development of the generics sector in Brazil has led to reduced costs for drugs. Geraldo Alécio de Oliveira, who coordinates the pharmacy curriculum at Anhembi Morumbi University in Sao Paulo, says that “whenever a patent expired, the price for that drug fell by between 30% and 40%. That means generic drugs fulfill a major social role. One of the biggest problems in Brazil is that the people who make up to three times the minimum salary (the equivalent of 900 reais or slightly more than $400) cannot afford to pay for healthcare or drugs. With the arrival of generics, poor people began to have greater access to drugs, which had not been true before.”

Naira Villa Lobos Vidal de Oliveira, a pharmacist active in both the Ministry of Health and the pharmacy department of the Federal University of Rio de Janeiro, “applauds” generics because of their high quality. “ANVISA (Brazil’s national agency for monitoring healthcare) has invested a great deal inspecting laboratories that were starting to manufacture generics. We had to do that because we had serious [quality control] problems with the products made here in Brazil.”

For Vidal de Oliveira, what’s important is that people are now in a better position to buy drugs, even though approximately 40% of the population in Brazil still cannot afford to pay even for generics. “The situation has improved for those people who could already afford to pay,” she says. “Now they are paying lower prices.”

A Paralyzed Market

Contrary to expectations, those who were already consuming drugs began to substitute cheaper generic products for brand-name drugs. Most people had anticipated an increase in the number of drug consumers because low-income people would start buying generic drugs. That didn’t happen. “In 1997, for example, before the introduction of generics, 1.35 billion units of drugs were sold in Brazil,” says Raimundo. “In 2005, the industry is going to wind up the year selling 1.35 billion units. In other words, we are selling exactly the same volume we sold before generics [came on the market]. What happened was that middle-class buyers bought generic products instead of branded products.”

According to Gerardo de Oliveira, the Generics Law has, in fact, had an impact on the major pharmaceutical companies. The law “benefited many smaller labs, many of which are Brazilian; they now were able to produce these drugs at a much lower cost …. In reality, we now have a group of cheaper drugs that have the same quality and efficacy as the much more expensive branded drugs. This has cut into the sales of the Big Pharma labs, and that’s why they resist accepting the generics.”

He contends that the adoption of generics contributes to progress in Brazilian drug manufacturing. “In the pharmaceutical sector, there has been a great deal of hiring in Brazilian-owned labs. These labs have grown as the generics industry expanded. Day by day, they have acquired a certain share of the market.” Multinational labs such as Novartis, he adds, are entering the generics segment of the market. “That means it’s not just the Brazilian labs making generics. Now that the big multinational companies have lost [market share], they are also starting to invest in generics.”

The generics segment is expected to continue growing in the medium term. “Their goal is to conquer 20% of the entire drug market by 2009,” says Valente, adding that “this forecast is somewhere between realistic and pessimistic. Only time will tell if it pans out.”

Costly Confrontation?

The Brazilian government stresses that generics manufacturers must show that they behave within the “laws and rights” of the global economy. However, some actions by the government made the pharmaceutical sector uncomfortable. During the administration of President Fernando Henrique Cardoso (1995-2002), Brazil’s minister of health threatened to violate the patents on the drugs that make up the cocktail for combating AIDS. His goal was to lower the purchasing price of these products. More recently, the current government has adopted a similar strategy.

For example, during price negotiations with U.S. manufacturer Abbott Laboratories, Brazil’s minister of health threatened to break the company’s patent on Kaletra, the anti-retroviral medication that is one of the components of the anti-AIDS cocktail. That threat was never carried out because Abbott ultimately agreed to lower the price of its medication by 46% — and distribute it free-of-charge to 163,000 of the 600,000 carriers of the HIV virus in Brazil. Although the government decided to preserve the patent intact, that confrontation could nevertheless prove harmful to Brazil.

“Because of the continued danger that patents will be violated, employment in Brazil’s scientific research sector has dropped to about 20,000 from a total of 24,000 jobs in 1999,” says Raimundo. “Until 1999, Brazil was attracting annual investments worth about $350 million [in this sector]. In 2005, the figure has dropped to about $90 million. The investments are moving instead into Mexico, South Korea and other countries. Pharmaceutical research requires a great deal of money, a lot of people, and a lot of time.

“When you invest in something, you have to assume you will acquire intellectual property rights for it,” Raimundo notes. “When you threaten a foreign investor and tell him, ‘Look, I am going to violate your patent on AIDS,’  the foreign investor is going to say, ‘Today, they violate my patent on AIDS and tomorrow they will do the same thing to my patent for heart drugs and the next day to my patent on analgesics.’ If you threaten to violate one patent, people become much more aware of the possibility that you could violate other patents, too.”

As a result, the pharmaceutical industry is becoming increasingly cautious about making new investments in Brazil, says Raimundo. “It is sad to see a country like Brazil, which is so large, making a threat that goes against international agreements …. We don’t think it is fair for the government to threaten to violate a patent; you don’t get any money if you sell more cheaply in Brazil than anywhere else in the world. This is an extremely inappropriate move. And it will only create problems for attracting capital to Brazil.”

Gerardo de Oliveira disagrees, choosing instead to defend a social vision for dealing with the AIDS problem. “These days, the pharmaceutical industry is one of the most profitable sectors in the world. If you violate the patent of one of the powerful industries, you are always going to start a war. It seems to me there are very significant social grounds [for doing that] …. I don’t think that violating patents on anti-retroviral drugs is motivated by politics. It is going to be considered a necessity for those countries that really want to treat people who carry the HIV virus…. As a professional in that sector, I defend violating those patents,” he says, adding, however, that the Big Pharma labs do deserve some return on their investments. Without that, “they cannot research any new drugs.”