FIRC-RISC CONFERENCE RESEARCH AND ENTREPRENERSHIP IN THE KNOWLEDGE-BASED ECONOMY

MILAN, ITALY, 7-8 SEPTEMBER, 2009.

PATHS ON INNOVATION IN LATIN-AMERICAN PHARMACEUTICAL INDUSTRY

ALENKA GUZMÁN UNIVERSIDAD AUTÓNOMA M IZTAPALAPA, MEXICO

(FIRST DRAFT)

ABSTRACT

This paper studies the paths on innovation followed by pharmaceutical industry en Latin American

countries. The aim of this paper is to know how Argentina, Brazil, Cuba and Mexico have managed

the tools of intellectual property to develop the bio-pharmaceutical sector, by considering the

specificities of national and sectorial systems of innovation. We identify efforts of Argentina, Brazil,

Cuba and Mexico axed to research and development, technological transference and human capital

skills on pharmaceutical fields. We propose taxonomy of the technological capabilities by country by

considering the pharmaceutical innovation system and intellectual property system of these Lain

American Countries.

INTRODUCTION

Argentina, Brazil and Mexico developed significant imitation capabilities in pharmaceutical and

pharmo-chemical fields during importation substitution industrialization period and those of Cuba

are more recent. Indeed, beginning in the 70´s and 80´s, Argentina, Brazil and Mexico reached a

partial development in the pharma industry. The industrial capabilities developed in the sector, using

an imitation strategy, were placed in fine reasonable chemistry, which allowed for the production of a

great part of raw materials needed for final production of drugs (Katz, 1997). Nevertheless, the

incapacity to incorporate technological progress in this industry, characterized by its high

technological intensity, impeded the local firms to have a productive chain integrated development,

from new molecules R&D to its commercialization (Katz, 1997; Burachik y Katz, 1997; Queiroz,

1997; Brodowsky, 1997). This weakness was more evident in economy liberalization framework, the

end of proteccionism structure and the adoption of strong patent system. Yet, these countries lacked

the capabilities to carry out all technological stages, from basic research to marketing, as did

developed nations1 and so the sector’s evolution faced serious limitations. In the transformation

process of the 90´s some companies disappeared (most notably in the pharma-chemical industry),

while others adapted to the new competitive environment. There has been a losing competitiveness

and technological dependence by considering this institutional environment, the huge technological

and innovation gaps, the scale economies and the financial capacity of the local firms in relation to

the multinational pharmaceutical firms.

The local pharmaceutical losses have been enormous, concerning to local markets, laboratories

closed, employment reduction and negative balance trade. At meantime the prices of drugs are

increasing affecting the consumers. In spite of the pharmaceutical new competitive conditions, the

Latin American countries have the necessity to enhance the technological efforts to strength generic

drugs industry by building appropriability capabilities of expired patents. But also, they need to

foster local innovation capabilities on therapies of developing countries diseases and new

pharmaceutical process by increasing productivity and cost reducing.

According to Lall (2003), due to the absence of social capabilities in developing countries, the

technological transfer is low, the GDP per capita is small and the technological efforts few. In these

circumstances, the strength of patents becomes a barrier to the entry of imitative activity because of

the high cost of patents. On the other hand, countries characterized by a high R&D expenditure in

relation to PIB, and important presence of scientists and engineers will find favorable conditions for

the innovation activity in a strong intellectual property framework. Considering the enormous

technological asymmetries between Latin American countries face to industrialized countries, we

wonder are the local Latin American countries building technological capabilities in the new

intellectual property environment. Are Argentina, Cuba, Brazil and Mexico capable of optimizing the

drugs supply and consumption while encouraging innovation, and proving and financing new drugs?

In this sense, we pose the next hypothesis: Pharmaceutical industries from Argentina, Brazil and

Mexico are not integrated. They have a scarce technological effort and insufficient human capital,

though they built some imitation capabilities during the absence of patent protection and a closed

economy. In the case of the pharmaceutical industry from Argentina, Brazil and México, the

1 Some cases were found of firms which managed to create and develop new molecules, such as Mexico’s Sintex.

intellectual property reform (which includes patents), during a process of economic openness, seems

to favor foreign firms, since they own solid innovation capabilities and they profit from the

opportunities of growing their partial production of drugs and their intra-firm trade, making sure to

appropriate R&D efforts made in their home countries. But for the local firms, the strengthening of

patents could help deepen their technological dependence and impede going to a higher development

step. This unless, countries make an important effort to build national and sectoral systems of

innovation and an export-oriented production specialization.

In this context, this paper aims to study the paths of pharmaceutical local firms from Argentina,

Brazil, Cuba and Mexico. This study looks to identify the current firm’s innovation capabilities of

each country and which are their main institutional and firm’s strategies of technological

development; which are the efforts axed to research and development, technological transference and

human capital skills on pharmaceutical fields. Firstly, we analyze the structure on innovation

activities expenditure, based on the innovation survey in the case of Brazil and Mexico and

interviews of specialized on pharmaceutical field of Argentina and Cuba added by statistical data

base, and the patents granted on USPTO and local intellectual property rights. Secondly, we study

the technological transferring patterns in each country. Thirdly, we identify the human capital

specialization on pharmaceutical sector. Finally, we propose the taxonomy of firm’s technological

capabilities by considering the pharmaceutical innovation system and intellectual property system of

Argentina, Brazil, Cuba and Mexico.

1. STRUCTURE ON INNOVATION ACTIVITIES EXPENDITURE In order to analyse innovation systems in the pharma sector in the three Latin American countries

we firstly consider a theoretical framework. After and importance of pharmaceutical industry

Secondly, we settle down the main issues of the economic performance and the main characteristics

of each country’s pharmaceutical market are identified. Finally, each country’s technological effort is

characterized. The sources of the analysis are several statistical databases from their pharma sectors,

on the innovation surveys from Brazil and Mexico from 2000 and on interviews with qualified

informants in the industry. Argentina is covered with interviews of specialized on pharmaceutical

field and Cuba added by statistical data base. Also we consulted the patents granted by USPTO and

by local intellectual property rights.

Theoretical framework

The existence of national systems presupposes that the institutional network works in accordance

with the economic, political, and social fields to foster innovation as well as economic growth

and social welfare. (Freeman, 1987; Metcalfe, 1995 Lundvall, 1992; Nelson, 1993).2

From this perspective, intellectual propriety rights constitute institutional mechanisms that

favor innovation. Temporal concession of monopolistic rights through patents allows society to

obtain four kinds of benefits: i) stimuli to private innovation; ii) usage of new knowledge for

production activity; iii) spillover of new knowledge and iv) innovation stimuli to other

enterprises (Lall, 2003)

Yet, even though the adoption of strong intellectual propriety rights in innovation and

growth in general is supposed to bring positive influence, empiric evidence remains limited and

incomplete. It is generally accepted that the effects of TRIPs over industry and technology vary

depending on economic development levels, nonetheless, the benefits of higher intellectual

protection seem to increase proportionally to income and technological intensity. (Lall, 2003).

Hence, divergent opinions emerge regarding the impact of Intellectual Property Rights (IPR) in

development forecasts for countries.

Some point out that in a globalize economy, the minimum standards set in TRIPs will

bring benefits for developing countries creating incentive structures needed for the generation

and diffusion of knowledge, technological transference and private investment flows. Others, on

the other hand, claim that intellectual propriety, patents in particular, will affect sustainable

growth strategies by raising prices of essential drugs making them unaffordable to poor people.

2 A national innovation system (NIS) is defined as a network of public and private institutions working together to

create, store, transfer and transform knowledge and skills, as well as diffuse new technologies within a framework of state policies favorable to innovation. (Freeman, 1987; Metcalfe, 1995)

(Hong, 2000; Correa, 2002; Lanjouw, 2004; Lanjouw, 2005); reducing the availability of

knowledge heaps (Lall, 2003).

In a world characterized by enormous economic, social, and political differences between

countries and a process of international homogenization of intellectual propriety rights (in

particular patents) worries emerge as to: How can developing countries make use of the tools of

intellectual propriety to enhance their development strategies? What specific challenges they face

during TRIP negotiations? Is intellectual propriety directly relevant for sustainable growth and

for the accumulation of convergent goals for international development? (Lall, 2003)

Concordance between the strengthening of patent systems and economic development of

countries is associated to the efforts made by countries to build national and sectorial systems of

innovation. Technological efforts, for their part, are closely linked to industrialization levels,

which helps establish a kind of production and exploration specialization. (Lall, 2003). The more

sophisticated a country’s specialization, the more benefits strong patent systems tend to yield. On

the other hand, if the country’s specialization is sustained in low technological and industrial

performance (less sophistication) the benefits in development terms are not evident (Ibid).

The construction and strengthening of social capabilities (Abramovitz, 1986), technological

capabilities (Lall, 1992; Bell & Pavitt, 1995) and innovation capabilities of a country favor the

development of other kinds of technological, economic and commercial specialization in which

patents and other forms of intellectual propriety rights gain relevance.

In industrialized countries, intellectual property rights constitute an important incentive to

innovation. However, in those developing countries characterized by low economic and

technological development, and low income per capita, intellectual property rights can deter and

slow their imitating capability. Such is the nature of difficulties facing countries to ensure access

and supply of generic drugs to their populations (Machlup, 1958; Mazolenni y Nelson, 1999).

Imitator countries which have developed social and technological capabilities will enjoy better

conditions to absorb positive externalities from the diffusion of knowledge (Griliches, 1979;

Baumol, 1994; Reiko & Tauman, 2001).

Performance economic and importance of pharmaceutical industry

The four countries of this study produce in overall 75 per cent of Latin America GDP. But the

higher GDP contribution becomes from Brazil (31%) and Mexico (29%), fewer from Argentina

(14%) and marginally from Cuba (1%). Those Latin American countries are characterized, in

general, by their relative low growth and not constant. Therefore, their PIB per capita is also reduced,

in special in the case of Cuba. This poor economical performance is reflected on the size or internal

market, which limits the size of pharmaceutical market in each country. By that reason, the

governments look to compensate for the small purchasing power acquisition of the population to buy

medicines by the public health systems, mainly in the case of Brasil and Cuba. Although the

importance of the public health systems the coverage is insufficient, mostly in the case of Argentina

and Brazil.3

Table 1. PIB and population growth in Argentina, Brasil and México, 2000-2005

Argentina Argentina Brazil Brazil Mexico Mexico Cuba

Cuba

2000 2005 2000 2005 2000 2005

2000

2006

Population ( Millions) 36.9 39.9 173.9 194.2 98 107.8 11.3

Population density (habts x km2) 13.8 21.9 52.7

PIB (Constant billions dls, 2000 prices) 284.3 313.8 601.7 670.4 580.8 636.2

28.2

31.7

PIB per capita (thousand dls X pers constant prices 2000 year) 7.7 8.1 3.4 3.6 5.9 6

2.5

2.8

Population 2000-2005 (Average growth rate) 1 2.2 1

PIB 2000-2005 ( Average growth rate) 2 2.2 1.8

Source: Cepal, Anuario estadístico de América Latina y el Caribe, 2006.

In this study we claim that Mexico, Brazil and Argentina have weak and disarticulated national

innovation systems, which implies an absence of communicating vessels in the different fields that

facilitate the construction strategies aimed at innovation, economic growth and competitiveness.

Consequently, industrial activity is characterized, on average, for being moderate (Lall, 2003). Patent

systems are considered divergent due to their international performance (Aboites and Cimoli, 2002).

Economic growth is sluggish and GDP per capita small. This fragility in national innovation systems 3 El gasto en medicamentos en relación al gasto salud, registra una importancia similar en Argentina y México (25 por ciento en

ambos), mientras en Brasil ésta es significativamente menor (14 por ciento). Asimismo, el gasto per cápita en medicamentos de Argentina y México tiene igual nivel (106 dls per cápita) y contrasta con un nivel inferior en Brasil (57 dls per cápita).

is found too in the pharmaceutical sector. Economic growth in Latin American countries during the

80’s and 90’s was typically low and unstable. This is particularly true if compared with that found in

East Asian countries.4 During the eighties, growth in these three LA countries was practically nil. In

the nineties, the average GDP growth rate picked up, but it fell short to make up for the

backwardness registered during the previous decade. Annual growth in Argentina reached 4.7%, but

it was lower in Brazil and Mexico (2.5% and 3.1% respectively.) From 2000 to 2005, average annual

growth was rather poor (particularly in Mexico) which did not allow for substantial improvements in

the GDP per capita of these countries. Using Lall’s classification, Argentina, Brazil and Mexico are

countries whose technology and technological efforts are moderate. Given their level of development

and the strengthening of patents, these countries could foster innovation and enjoy the benefits. Yet,

to make use of these opportunities, these countries must endeavour to create national and sectorial

systems of innovation which contribute to higher technological intensity and more production and

export specialization.5

Table 2. National Innovation Systems in Argentina, Brazil and Mexico Argentina Brazil Mexico Nac.Inn System/ Intellectual Proprerty System

Disarticulated Systems Moderate activity Technological w/ divergent IPS

Disarticulated Systems Moderate, but growing activity Technological w/ Divergent IPS

Disarticulated Systems Moderate, but stagnant activity Technological w/ Divergent IPS

Economic Performance/ Ecnomic growth

Unstable and relatively low growth. Moderate GDP per capita.

Relatively low growth and low GDP per capita.

Relatively low growth. Moderate GDP per capita.

Technological effort

Low R&D spending (0.4% of GDP) Weak innovation-oriented policies.

Low but growing R&D spending (1% of GDP) Weak but improving innovation-oriented policies.

Low and decreasing R&D spending (0.34% of GDP) Weak innovation-oriented policies.

Agents with R&D spending

High government, low corporate participation

High government, low corporate participation

High government, low corporate participation

4 See CEPAL, Una década de luces y sombras. América Latina y el Caribe en los años noventa, Cepal –Alfaomega, Bogotá 2001; Barbara Stallings and Wilson Peres, Crecimiento, empleo y equidad. El impacto de las reformas económicas en América Latina, FCE-CEPAL, Santiago de Chile, 2000. 5Average high level of technological effort applies to developed nations. As these countries devoted more attention to innovation and reached leadership positions they increased their IPR. South East Asian countries (Korea, Taiwan, Singapore and Hong Kong) were able to catch up with the block of world technological readers in a time characterised by national innovation systems which took advantage of opportunities offered by institutional environments with lax IPRs. Contrastingly, among low-tech and low-tech effort countries some have important industrial developments locally, while others have active export activity (China, India, Egypt, Thailand, and Indonesia). There are other countries with little industry and weak exports. The huge differences between these countries, associated with an absence of national innovation systems can influence in differentiated effects against the strengthening of IPRs. (Lall, 2003)

Industrial performance/specialization

Medium level of industrial development industrial/agro-industrial exports

Medium level of industrial development / Huge exporter; Medium-tech manufacturing Exports

Medium level of industrial development. Huge exporter; Medium and high-tech manufacturing exports

Source: own elaboration, based on Cimoli, Ferraz y Primi (2005) y Aboites y Cimoli (2002).

Each country has its own industrial policy towards the pharmaceutical sector. By one side,

Brazil and Cuba encourage this sector as strategic in the governmental development goals and

therefore, they direct their efforts to build a strong generic industry, as well, to foster the research and

development to generate new molecules. By the other side, the industrial policy in this sector from

Argentina is weak and in Mexico lacks of it.

Among other factors, the increasing importance enjoyed by public and private health systems in

Argentina, Brazil and Mexico since the post-war seems to have a decisive influence over the rise in

life expectancy. The fall in the birth rate and an increase in the life expectancy in all three countries

has led to a population structure dominated by the elderly, which in time results in a higher incidence

of senior illnesses. In the three countries more than three fifths of the population range between the

ages of 15 and 64 years of age. Less than a third lay between 0 and 14 and only 5 to 10 per cent of

the population is older than 65. Nonetheless, poor economic performance has reverberated in the

levels of welfare among the population. This can be clearly appreciated by looking at the figures of

GDP per capita, and proportion of GDP funnelled to education and health. During the 80’s, coverage

to education and health systems was drastically reduced.1 In spite of the recovery of these relative

indicators as of the second half of the eighties, the limited economic growth of the three countries

would contribute to keeping the backwardness in social coverage for large portions of the population.

According to OECD, worked out using purchasing power parity (PPP) as a base, Mexico shows

lower spending on health than Argentina and Brazil.2

Regarding pharma-oriented industrial policy in each country, which decisively impacts

development, two levels were identified. The first one belongs to Argentina and Mexico with a weak

industrial policy. Although they enjoy public health systems no policies are fostered to strengthen

production capabilities of local pharmaceuticals, the generics sector in particular. Furthermore, R&D

support is limited. Brazil is in a second level, where pharmaceutical sector has been identified as one

of the four axes on the new industrial policy. In this context, national producers aim their efforts at

upgrading their production facilities and increase R&D expenditure supported by programs like

PROFARMA and PROGEREN strengthening local producers has bolstered the expansion of the

generics sector where growth rates are higher than the whole pharmaceutical industry3. The

pharmaceutical industry all three countries characterized internationally for its high technological

intensity, made reforms to their regulations and their lawmaking regarding intellectual propriety

(patents) in agreement with international criteria adopted by TRIPS at the heart of the WTO. In the

case of the three countries the extent of the patent from the drug industry was set in 20 years and it

included products as well as processes. However, some differences remain between the countries

with regards to protection levels and in the adoption or rejection of some aspects contemplated in

TRIPS such as parallel imports, mandatory licences in case of emergency, and rejection of patents,

patenting exceptions, and exceptions regulation (Bolar provision).

The technological and innovation effort

Regarding their technological efforts, there are plenty of similarities between the four countries,

but there are some interesting contrasts too. Although innovation policies and R&D spending are

weak in all three countries, a will to increase technological efforts can be sensed in Brazil and Cuba,

particularly in the bio-pharmaceutical sector. Contrastingly, R&D spending in Mexico seems to

decrease rather than increase. Then, while Brazil currently devotes 1% of GDP to R&D spending, the

figure is around 0.4% in Argentina and Mexico. Unlike in other countries, where companies exercise

substantial participation in the total R&D spending, in Argentina, Brazil and Mexico it is the

government who holds the biggest stake. Although there are some similarities between Argentina,

Brazil and Mexico regarding pharmaceutical markets, and the development of technological

capabilities, there are also important differences

Argentina

One hundred and nine pharmaceutical establishments control production, out of which, 90 are

domestic, (82.6%) and 19 (17.4%) are foreign companies which employ 20, 000 people directly and

100,000 indirectly. The production sector of the Argentinean pharmaceutical industry underwent

some significant changes during the last two decade. Besides merger and acquisition activity, some

multinationals ceased operations at their plants allowing local companies to increase their domestic

participation. The plants Aventis Bristol-Myers Squibb (MS), Novartis, Organon, Schering, Valeant

and Wyth left Argentina to concentrate in Brazil and Mexico, which offer better incentives derived

from new regulations.

Whereas drug manufacturing has been in decline, development of clinical studies has increased.

Moreover, the main local producers have increased their production capabilities. Simultaneously, the

government has worked towards promoting the prescription of generic drugs as well as controlling

prices. (WPM Espicom Business Intelligence, 2006).

Participation of Argentina’s Local industry is mainly in the production and marketing of drugs.

In the field of generics, producers have increased their competitiveness and their production

capabilities expanding from their traditional hospital niche into the pharmaceutical arena. Despite the

considerable advancements in the domestic pharmaceutical industry (as suggested by its significant

market participation) innovation has remained mainly in the formulation and administration of drugs

(Correa, 2001). Yet, important efforts are made towards modernization, in spite of technological and

production challenges. One example of this is the construction of a pharmaceutical technology park

in Buenos Aires. (PTF- Pharmaceutical Technology Pole).

Argentina’s pharmaceutical market, which does not promote production development nor drug

exports, is small by value. Access to drugs, is not only limited due to the population’s low income

level, but also because of the high costs found in the market, most specially in innovative, newly

released drugs. One other factor pushing prices further up is the need to import costly raw materials,

although the local industry meets most of the local drug consumption.

High R&D costs and lack coordination are a barrier for the technological modernization of

domestic companies (public ones in particular) producing generics and similars. Developing

production and technological capabilities, and carrying out bioequivalence and bioavailability tests

alongside, could help local producers tap into the generics market in more favourable conditions as

well as being an profit incentive to foreign companies specialized in generics.

Three circumstances can add to the extension of the pharmaceutical market in Argentina: i)an

export increase within MERCOSUR, Turkey and some developing South East Asian countries; ii)

the increasing demand for senior drugs as the elderly segment in the population increases and iii) the

launch of government programs aimed at helping the poor segments of the population gain access to

drugs.

Brazil

Five hundred and fifty one pharmaceutical companies operate in Brazil, including labs,

distributors and exporters (Intercontinental Medical Statistics). Multinationalsdominate the domestic

market; however, among the top ten generic-drug companies controlling around 96% of the market,

there are six local firms controlling almost 75% of total sales. (Medley, EMS-Sigma Pharma,

Biosintética, Europharma, Teuto, Cristalia). Ranbaxy, the Indian World leader in generic drugs,

Germany’s Merck and Novartis from Switzerland are the most notable foreign firms.(Chamas, 2005)

As a whole, most pharmaceutical companies both foreign and local operate with reasonable

capabilities for drug formulation and control of production activities. Most raw materials used are

imported, and many firms base their operation only in the import and marketing of final drugs. A

smaller proportion direct in their industrial capability at fine reasonable chemistry and thus produce

their own raw materials. Finally, only a small fraction of them display all their capabilities to carry

out the whole of the technological stages from basic research to drug marketing.

One phenomenon which has allowed national companies to gain leadership in the domestic

market in recent years is the “pioneerism” in the launch of new generic drugs (Quental, De Abreu &

Bomtempo, 2005). The growing production capabilities of generic drugs in Brazil are the result of

substantial investment in infrastructure with the active support from ANVISA, including 35 new

bioequivalence labs, and the upgrading of industrial plants.

Accordingly, an infrastructure for research and technology services was created to carry out

pharmaceutical equivalence and bioequivalence tests, that would have direct benefits to the national

development. (Quental, De Abreu y Bomtempo, 2005).

Vaccines and serums are areas which have enjoyed priority in industrial programs aimed at

strengthening local capabilities for the pharma industry. Vaccine production in Brazil has been found

mainly in public labs, where important sums (+150m dollars since 1986) have been invested for its

modernization (Chamas, 2005). Drugs classified as Similars, characterized for their lack of bio-

equivalence hold 70% of the pharmaceutical market (O Globo, 7/12/2004) must undergo these tests

by 2014 (Quental, De Abreu y Bomtempo, 2005). Technological and production backwardness in

the local Brazilian industry translates into a huge trade deficit. There has been a substantial increase

in expenditure on science, technology and innovation in the health sector; however, it is still not

enough and the country remains deeply dependant in this field of knowledge (Chamas, 2005).

Multinationals are not interested in deploying their capabilities either, and devote only a small

portion of revenue to R&D (0.5% in ). According to Interfarma.4, all R&D activity carried out by

foreign-based firms was aimed at conducting clinical trials, since other types of research are not

profitable. Biotechnological research in Brazil has reported notable advancements in the fields of

genomics, proteomics, bioinformatics, nano-biotechnology, and cell systems (Chamas, 2005).

Several institutions (Fiocruz and the Buntatan Institute, Ludwig Institute for Cancer research,

and several University departments) have oriented the development of their capabilities in

biotechnology to health. Integrated Biotechnology centers, as well as technology poles and parks

were created in an attempt to link enterprise activity to research institutes. In this specialization

process, the number of researchers and scientific papers in indexed magazines increased (Chamas,

2005) Regarding innovation firms there are still few producing innovative drugs (Quental, De Abreu

y Bomtempo, 2005)

0 10 20 30 40 50 60

S ource : Onnovat ion S urvey of Bra zil P int e c

P ro duct a nd/o rpro c e s s inno v.

Unfinis h and /o ra bando ned pro je cts

Only s tra te gic andmanage ment

cha nges

Brazi l. Type of innovation in pharmaceutical firms, 1998-2003

2001-2003

1998-2000

0 5 10 15 20 25 30 35 40 45 50

Source: Brazil Innovation Suvey Pintec

% of firms with innovación.exp.

Innov.expend/sales

R&DE/sales

R&D/Innov.expend.

Brazil. Pharmaceutical firms innovation expenditure, 2000-2003 (%)

2003

2000

0

10

20

30

40

50

60

70

80

On product On process On both

Brazil.Type of innovation of innovative pharmaceutical firms, 1998-2005 (%)

1998-2000 2001-2003 2003-2005

0102030405060708090100

New for the firm New for the local market New for the firm New for the local market

On product On process

Source: Brazil Innovation Survey Pintec

Brazil. Scope of pharmaceutical firms innovation, 1998-2005 (%)

1998-2000 2001-2003 2003-2005

Mexico

The pharmaceutical industry in Mexico has seen significant growth in terms of sales and

exports to US, EU, and LA markets (70% account for finished goods). However, this performance is

due to expansion by foreign rather than domestic firms.

Local firms in Mexico depend a great deal on the import of active ingredients and their R&D

abilities are minimal and although foreign-based firms operating in Mexico do not carry out R&D

activity in the country, they have all the skills, knowledge and network to introduce new drugs to

market and control it. In an environment of high cross-firm trade, multinationals import raw

materials and some drugs for retail sale, while producing and exporting others to their home

countries and other markets. For its size and dynamic growth, Mexico has an outstanding place in the

field of exports among LA countries.5

Those Mexican pharmaceuticals which still remain in the market6 currently aim their efforts at

developing bioequivalence or bioavailability testing in an attempt to prove their drugs as generics,

thus accumulating research capabilities in the process. However, most firms lack the means to

produce new molecules as their R&D skills are marginal compared to those from foreign firms. Few

are the exporting firms which have matured their expertise to produce generic drugs, and direct their

competition strategy toward a higher R&D effort to produce molecules in the field of bio-pharma.

R&D spending in Mexico relative to sales revenue is not significant. Only one third of foreign

firms carry out R&D activity whereas 40% of local companies do. Both types of firms spend very

similar proportion of their sales revenues to R&D (private 1.3%; local 1%). Multinationals aim their

spending at medical research, or toward clinical trials (Guzman & Brown, 2004) whereas their

national counterparts focus on the bioavailability and bioequivalence testing of drugs.

Mexican pharmaceutical industry. Importance of innovation internal sources, 2004-2005 (%)

Marketing department, 13.3

Customer service department, 5.9

Design department, 7.1

Other sources, 23

Production department, 12.7

Marketing department, 4

Production department, 2

Engeinering department, 16.7

Engeinering department, 7Experimental R&D, 5.3

Mexico. Importance of innovation internal sources in pharmaceutical industry, 2000-2005 (%)

0

20

40

60

80

100

120

Exp

erim

enta

lR

&D

Exp

erim

enta

lR

&D

Eng

eine

ring

depa

rtmen

t

Eng

eine

ring

depa

rtmen

t

Pro

duct

ion

depa

rtmen

t

Pro

duct

ion

depa

rtmen

t

Mar

ketin

gde

partm

ent

Mar

ketin

gde

partm

ent

Cus

tom

erse

rvic

ede

partm

ent

Des

ign

depa

rtmen

t

Oth

erso

urce

s

2001 2005 2001 2005 2001 2005 2001 2005 2005 2005 2001

Highly significativeMiddle significativeLittle significativeNon significative

Mexico. Importance of departments as internal source of innovation in pharmaceutical industry, 2001-2005 (%)

010203040506070

2001 2005 2001 2005 2001 2005 2001 2005 2005 2005 2001

Experimental R&D Engenering Department Production department Marketing department CustomerServices

Designdepartment

Othersources

Source: Innovation Surveys, 2001, 2005

Non significant Few significant Middle significant Highly significant

Mexico. Importance of the external sources of innovation in pharmaceutical industry, 2000-2005 (%)

0%

20%

40%

60%

80%

100%

2001 2005 2001 2005 2001 2005 2001 2005 2001 2005 2001 2005 2001 2005 2001 2005 2001 2005 2001 2005 2001 2005 2001 2005 2001 2005 2001 2005

Other firms Competitionfirms

Customers Nationalconsulting

servs.

Foreignconsulting

servs.

Provscapital ant

equip.

Othernational

firms

Otherforeign firms

Univ. &institutes

Public &Private

ResearchInstitutes

Patents Lect., sems& special.Reviews

TIC'snetworks

Trade fairs& ind.

Expositions

Non significant Few significant Middle significant Highly significant

Importance of factors impeding innovation activities, 2005 (%)

0%

20%

40%

60%

80%

100%

Highereconomic risk

High innovationcost

Lack of adeq.finantial sources

Rigid firm'smanagement

Lack of skillworkers

Lack oftecnologicalinformation

Lack of marketinformation

Laws in force Lack of customer's

receptivity tonew prods.&

servs.

Lack of publicsupport

Source: Innovation Survey, 2000, 2005, INEGI-Conacyt

Non significant Few significant Middle significant Highly significant

Table 3. Pharmaceutical innovation system in Argentina, Brazil and Mexico

Argentina Brazil México

Environment Factors Factors Factors

Demographic Small population density (13.8 inhabitants per sq. Km). Increased life expectancy (73.8 years in 2000). 60% of population between 15 and 64 years of age. 10% above 65

Moderate population density (21.9 inhabitants per sq. km). Life expectancy lower to 70 in 2000. In 2006, 60% of the population between 15 and 64 years of age. 6.2% above 65

High population density (52.7 inhabitants per sq. km). Increased life expectancy (76).In 2006, 60% of population between 15 and 64 years of age. 5.3% above 65.

Social / Health system

9.5% of GDP spent on Health in 2001. (106USDLS per capita) Health system with significant deficit. 48.2% of population coverage. 39.4% being public (social Works) 8.9% private (pre-paid) and 51.9% of population without health coverage. Mixed health system. Pharmaceutical market dominated by prescription drugs (89.6%)and marginal OTC presence(10.4%)

7.6% of GDP spent on Health in 2001 (57USDLS per capita) Mixed health system with mostly private participation (55.9%) but with a growing public one (44.3%). Large portion of the population without access to drugs.

6.1% of GDP spent on health in 2001. (106 USDLS per capita.)Strong public health system. Growing private participation.

Economic Little economic growth. Unstable but with little relative improvement Low GDP per capita in 2005. (8.1bn USDLS)

Little economic growth with little relative improvement. Very low GDP per capita in 2005 (3.4bn USDLS).

Moderate, unsustained economic growth. Low GDP per capita (6.1bn USDLS). The pharmaceutical industry represents 0.5% of total GDP and 2.7% of manufacturing GDP. The 200 companies which make up the industry generate about 50,000 direct jobs and 47,000 indirect jobs.

Political and industrial

Weak industrial policy aiding the pharmaceutical industry.

Active government participation in the industrial policy of the pharmaceutical sector, which is considered strategic.

Weak industrial policy. Little government participation in aiding the local pharmaceutical industry.

Legal Reforms in the regulation for registration of drugs and good practices. Adoption of TRIPs in 2005 with some shortcomings. Second use patents are not accepted. Price stability negotiated with social security. Major increase in prices during the crisis has been tackled with higher participation of generic drugs.

Strengthened regulation for the registration of drugs, in particular generics. Adoption of TRIPs since 1996. Strong patent system. Price regulation for prescription drugs.

Strengthened regulation for the registration of drugs. Adoption of TRIPs since 1991. Linkage of registrations with patents and of registrations and generic proving. Price liberalization.

Market/ industry Third most important market in LA. well below Brazil and Mexico. 4.2 m of sales revenue from drugs. Concentrated market. Transnationals control 51% of the prescription drug market (85% of total market) while local firms hold 49% of the market focused mainly on generics (15% of the total market) Six of the 10 top selling companies are Argentinean (Roemmers, Bago, Ivax Argent, Dador, Elea and Phoenix.) industry growth was 10% en 2006.Exports are limited and mainly oriented at Mercosur.

Second most important market in LA and ninth around the world by sales revenue (10m in 2006) Concentrated market dominated by transnationals (69%) oriented at prescription drugs (20% of total market) although it also participates in the generics market (80%) Six of the top ten selling companies are Brazilian (Medley, EMS-Sigma Farma, Biosintética, Teuto, Cristalia.) Industry growth was 5% in 2006. 87% of total production is operated by the distribution channel, where 20 distributors control 87% of the distribution High deficit in the drug trade particularly in raw materials (40%) coming from US and EU, and final drugs (56%.) Exports are oriented at Mercosur.

Biggest pharmaceutical market in LA. 10th in the world by sales revenue. (12m in 2006.) Highly concentrated market dominated by transnationals (68% ) which control prescription drugs and some generics and similars.Only one of the top ten is Mexican (Senosian.) Remarkable industry growth (12% in 2005.) High concentration in the distribution system (4 distributors hold 80% of distribution.) Trade deficit in raw materials (55.8%) and final drugs (36.1%.) Intra-firm trade in the main US and EU transnationals (Germany, Netherlands,etc.)

Specific innovation factors

Small R&D spending. Clinical trials conducted by pharmaceuticals Few patents registered in USPTO and local patent offices. Company patents are outstanding. More specialization in the formation of researchers in exact and natural sciences. (6.5 PhDs per per million inhabitants.) Most Argentinean researchers (66%)hold only a BA or BS degree. PhD percentage is 22 and MDs 7% 13% of which are in the fields of health science and 30% in exact and natural sciences. Participation in world publications is marginal. Between 1999 and 2003 0.7% in biology, pharmacology 0.6% and 0.6% in molecular biology. Little linkage between universities, research institutes and firms.

Small but growing R&D spending. Institutions invest in R&D but firms barely do. Few but increasing patents registered in USPTO and local offices. Company patents are outstanding. PhD specialization in the fields of health science, exact and natural science. 8.1 and 9.2 per million inhabitants respectively. More than half of researchers hold a PhD (56%), MDs account for (30%) and only 14% have just BA degrees. Participation in world publications is marginal but increasing. Between 1999 and 2003 microbiology held 2.1%; biology held 1.6% and molecular biology 1.3%. Little linkage between universities, research institutes and firms, but developing.

Reduced and not growing R&D spending. What little effort from local firms is aimed at generics. Clinical trials are conducted by transnationals. Few patents registered in USPTO and MIIP. Patents from firms, individuals and institutions. Little formation of researchers in health science and exact and natural science. 0.7 and 2.1 PhDs per million inhabitants. PhD formation in the fields of engineering 4.5 PhDs per million inhabitants In the field of health science, researchers from the national research system focus on chemistry and biology. Participation in international publications is marginal and not growing. Between 1999 and 2003 Microbiology held 0.9% and pharmacology 0.7%. Little linkage between universities, research institutes and firms, but developing.

9ource: Cepal statistics. World Health Organization (WHO). OECD; Argentina: ; Brazil: Brazilian Institute of Geography and Statistics. (IBGE);

Mexico: National Institute of Geography and Informatics (INEGI.)

Impact of TRIPS on the innovation activity in the pharmaceutical sectors of Argentina, Brazil

and Mexico.

We shall analyze the effects felt after the adoption of the reforms to propriety rights for

innovation capabilities of the pharma industry in Argentina, Brazil and Mexico. Firstly, we

studied the behavior of the inventive activity in the LA countries by tracking patents applied for

and granted at local patent offices pondering inventive coefficients and dependence ratios.

Secondly, we looked into patents applied for by Argentinean, Brazilian, and Mexican firms,

individuals and institutes in USPTO (United States Patent and Trademark Office).

The TRIPs adoption process allowed Brazil, Argentina and Mexico to incorporate and

strengthen protection to products and processes in the bio-pharmaceutical sector during the 90’s.

The adoption of a strong intellectual protection system with a 20-year patent lifespan led to a

substantial increase in the number of patents applied for and granted. These patents, however,

belonged to foreign agents, specially, firms, rather than to local agents. Indeed, the new

institutional environment seems to have given multinational firms notable certainty to market

new drugs. Consequently, the number of patent applications from non-residents increased even

before the adoption of the reforms. The answer from local producers to the incentive has been

rather marginal.

Fig. 1. Patents granted to residents and non residents in Argentina, Brazil and Mexico local IPR office on pharmaceutical area

0

500

1000

1500

2000

2500

3000

3500

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Source: Local offices of intellectual property of Argentina, Brazil (INPI) and México (Banapa) and Latin_pat y Espacenet.

Argentina_residentes

Argentina_no residentes

Brasil_residentes

Brasil_no residentes

México_residentes

México_no residentes

Graf. 2 Patentes granted to Argentina, Brazil & México by USPTO in pharmaceutical field, 1980-2006

0

2

4

6

8

10

12

1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Fuente: USPTO clases 514 y/0 424

Ar_Pat_Sol Ar_Pat_Conc Br_Pat_Sol Br_Pat_Conc

Mx_Pat_Sol Mx_Pat_Conc

Between 1980 and 2006, 11,961 pharma-related patents were granted in Argentina. 99.7%

of them (11,925) were granted to non-residents, and only 36 patents (0.3%) went to Argentinean

hands. This shows the level of dependency in the pharmaceutical sector which deepened between

1991 and 2006.

Most patent holders (46%) come from North America; Europe follows suit with 36%,

while Asia owns 3% and Latin America 1%. The classification by type of holder gives 93% to

firms, while institutes and individuals lag behind with 2% and 1% respectively. Hoffman La

Roche, Pfizer, AstraZeneca, Novartis and Merck are among the most notable pharmaceuticals.

Twenty four thousand 676 patents were applied for between 1980 and 2006 in Brazil by residents

and non-residents in the pharmaceutical field. From 1996 to 2006, 21,826 patents were granted.

Brazil, unlike Mexico or Argentina, has high local agent participation in patents: 6% of total

applications. The remaining 6% is being controlled by foreign agents.

In the classification by holder type, most patent applications come from firms based in

North America, mainly US with 48% followed closely by Europe and Asia with %.

Multinationals with leadership in the international market are among the firms that patent the

most, but we can also find firms known internationally for their capabilities to produce generic

drugs such as Indian Ranbaxy.

The number of patents from residents has increased as a result of growing efforts made

R&D. Brazil aimed at R&D and formation of science specialists. In 1996, residents obtained

concessions from 16 patents, bypassing the 100 figure as of 2000 and improving in the following

years, reaching 161 patents in 2005. Almost two fifths of patents granted between 1996 and 2000

went to enterprises and individuals and 25% belonged to institutes. After reforms passed in

Mexico in 1991, patent applications in the pharmaceutical area increased significantly in the local

offices going from 239 applications in 1990 to 3,164 in 2006, with an average15.2% of annual

growth rate. 98.7% of all 11, 936 patents granted in Mexico between 1980 and 2006 belong to

non-residents and only 1.6% to Mexicans (residents). Local patents, contrary to foreign patent

trends, have been marginal, although they climbed from only 3 patents in 1980 to 35 in 2006.

Almost half of patents in Mexico between 1980 and 2006 come from North America, namely US;

two fifths belong to EU and 7% went to Asia; and only 1% to Latin America. 91% of them are in

the hands of firms and marginal 6% to institutions and 3% for individuals.

US-patented Inventive activity

The level of patent applications and grants from USPTO to Argentina, Brazil and Mexico

has remained low and stagnant during almost three decades. This is explained by the limited

efforts these countries have aimed at R&D in pharmaceutical and biotech industries. Between

1980 and 2004, 25 Mexican inventions were patented in USPTO within class 514 (Drug, bio-

affecting and body treating compositions) and/or class 424 (Drug, bio-affecting and body treating

compositions). Patent levels in Brazil and Argentina are relatively similar (26 and 29

respectively.) During the eighties, and the first half of the nineties, patents stagnated at their

lowest level. Some recovery was seen after the second half of the 80’s but the trend is rather

erratic.

Fig. 3. Patents applied and granted to Argentinian, Brazilian and Mexican holders by USPTO biotechnology area, 1980-2006

01

234

56

789

10

1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Source: USPTO class 435 and/ 800

Argentina_solicitadas Argentina_concedidas Brasil_solicitadas

Brasil_concedidas México_solicitadas México_concedidas

Diffusion rate of the pharmaceutical inventive activity in Brazil is little since Brazil has

the biggest number of local patents and not all of them have been applied abroad (US in this

case). Diffusion rate in Argentina is less than1, but still bigger than that in Mexico and Brazil

during the first five and last two years of the 1980’s. This country has no diffusion rate in the rest

of the studied years for it registered no USPTO patents. Diffusion of inventive activity in Mexico

in the pharmaceutical field is almost nil and stagnant. High costs for US or PCT patenting,

together with a weak patent culture in all three countries can probably explain the little diffusion

rate found there.

Fig. 4. Argentina, Brazil and Mexico Inventive activity diffusion rate on pharmaceutical area, 1980-2006

(Patents applied at USPTO/patents applied in local IPR office)

00.10.20.30.40.50.60.70.8

1975 1980 1985 1990 1995 2000 2005 2010

Source: USPTO, class 514 and/or 424

Argentina Brasil México

2. TECHNOLOGICAL TRANSFERRING PATTERNS

3. THE HUMAN CAPITAL SPECIALIZATION ON PHARMACEUTICAL SECTOR

With regards to human capital, Argentina outperforms for its level of schooling and the

number of engineers and scientists per million inhabitants. Yet most researchers barely hold a BS

of BA degree. Brazil, on the other hand, has a higher ratio of PhD researchers, primarily in the

bio-pharmaceutical sector, despite having fewer scientists and engineers per million inhabitants.

Another outstanding fact is that in all three countries, the predominant bachelor qualification is in

the social sciences. At the post graduate level, Brazil has a higher specialization in exact, natural

and health science, while Argentina excels in natural and exact science. In Mexico, most post

graduates are in the fields of engineering.

1.31.1 0.7

2.1

0.7

4.5

6.5

1.1 1.1

5.3

3.7

2.5

9.2

8.1

4.6

0123456789

10

1996 2002 1996 2002 1996 2002

México Argentina Brasil

Fuente: Concayt

Argentina, Brazil and M éxico: P hD par million inhabitants, 1996, 2002

Ciencias exactas y naturales Ciencias de la salud Ingeniería y Tecnología

Brazil’s human capital and scientific publications have shown a growing (yet still marginal)

relevance in the fields of microbiology, biology, and molecular biology, among international indexes.

This is attributed to the increased number of PhD researchers in the health, exact and natural

sciences. Mexican publications, contrastingly, have not improved significantly in these international

indexes, however, they achieve stronger impact (citation to article ratio), specially those in the fields

of biotechnology, immunology, and pharmacology. PhD formation in Mexico is mostly concentrated

in the fields of engineering and not in the biopharmaceutical sector. Argentina has a lower ratio of

PhD researchers and participation in scientific publications is marginal

Argentina, Brazil and México part on total ISI articlesby scientific field 1999 - 2003, (%)

1.3

0.4

0.6

1.6

0.6 0.7

1.8

0.7

0.6

1.4

0.5 0.6

1.0

0.4 0.4

2.1

0.9 1.0

1.1

0.5 0.5

0

0.5

1

1.5

2

2.5

Biol. Molecular Biología Farmacología Inmunología Medicina Microbiología Neurociencias

Brasil M éxico Argentina

Argentina, Brazil and Mexico impact on ISI articles by scientific field, 1999-2003

0

1

2

3

4

5

6

7

Biol. Molecular Biología Farmacología Inmunología Medicina Microbiología Neurociencias

Fuente: Inst itute for Scient if ic Information, 2004.

Argentina Brasil México

4. TAXONOMY OF FIRM’S TECHNOLOGICAL CAPABILITIES BY CONSIDERING THE NSI AND IPS

The aim of this section is to propose a taxonomy for Argentina, Brazil and Mexico bringing

together the main characteristics of their patent systems and the nature of the innovation systems

in the national and bio-pharmaceutical sectors. Firstly, we characterize technological efforts by

the national and the bio-pharmaceutical sectors (R&D and innovation activity), the specialization

on human capital skills, the scientific production and the links between universities and firms of

each country. Secondly, we establish the level of strength of the patent system in each country.

For that purpose, we have used two proposed taxonomies as reference. The first one developed

by Lall (2003), links technological efforts and local activity of countries to their capability to

appropriate benefits in the international homogenization of patent systems.6

The classification is based on a technology intensive index derived from the national

technological activity using two variables: R&D financed by production enterprises and number

of patents taken from USPTO. Both deflated by the population and adjusted by economic size.

The second taxonomy proposed belongs to Aboites and Cimoli (2002). According to this,

divergent patent systems are characterized by their low level of domestic innovative activity

associated with a limited expenditure in R&D, poorly trained human resources, limited private

industry participation, weak enterprise-institute links, and low tech-laden exports. Poor

innovation is found mainly in mature technology sectors, such as mechanical and some chemistry

areas. Furthermore, diffusion ratio (penetration in USPTO) has been low for the last three

decades despite patent reforms.

By contrast, countries in convergent systems devote a substantial budget to R&D in which

enterprises have an important participation. Their trade balance is positive. They have well

developed education systems which train high quality human resources and networks creating

favorable synergies between enterprises and institutions, and their exports have a high

technological content. 6 Lall (2003), studied 87 countries (22 industrialized economies, 7 transition economies and 58 developing countries) and found that patent necessity varies with the level of development. Indeed, Lall confirmed that many countries which had lax or no intellectual propriety systems at the start of their industrialization processes increased protection as they funneled more innovation efforts and reached lead positions. Such are the cases of several European nations, Japan and others recently industrialized.

Additionally, we have considered the 1987 CEPAL classification, which establishes the

evolution of technological stages in the pharmaceutical industry of a country. According to it,

countries whose pharma industry is in Stage I, are capable of carrying out all technological

stages, from basic research to marketing the drug.

Countries with a pharmaceutical industry in Stage II have reasonable industrial capability

for fine chemistry and produce their own raw materials. Contrastingly, countries in Stage III

keep a reasonable capability for the formulation of drugs and for production activities. However,

they must import practically all raw materials they need.

Finally, countries in Stage IV are typically characterized for being small, having no local

production. Finished drugs are imported, leaving enterprises with marketing activities only. This

reveals they have no production capability at all.

The previous classification is shared with other authors in the analysis of the

pharmaceutical industry in Latin American countries. (Frenkel, 1978; Bermudez, 1992; Queiroz,

1993; Queiroz y González, 2001; Palmeira y Pan, 2003).

According to these authors, Argentina, Brazil and Mexico are generally situated in Stage

II, the evolutionary technological stages. The authors consider that it is the ability to master these

technologies what determines the industrial maturity, the technological pattern of a given

country’s pharma industry and its competitive insertion. Those countries which have covered all

technological stages and dominate production (such as US, UK and Germany) are at the forefront

in chemical and pharmacological research. The dominance of the first two (the most critical and

complex) grants advantages to big pharma companies to keep a highly competitive position in the

global market. Generally, multinationals focus their most technology intensive activities

(strategic research included) in their home countries. This ensures strong intellectual and

regulatory protection, and macroeconomic and institutional conditions apt for innovation.

According to Palmeira Filho and Pan (2003), this is due to the proximity to the decision

making center, the secrecy before the registration of a molecule, the need to take advantage of

scale economies in R&D, and the technical and economic infrastructures of developed nations.

Multinational companies prioritize the acquisition of active principles for finished products

(drugs), for their extraordinary profits rely on the monopoly of the technology used in the process

and in the drug itself. These can reach up to 70 and 80 per cent of the final price of the drug. (Da

Motta Viera V. M., P. Ohayon y M. G. D. Fonseca, 2005).

We consider that each of the three countries owns a specific dominant model in the field

of innovation systems for the pharma sector regarding the agents which dominate the market,

their technological efforts and their proficiency in intellectual propriety. Based on the previous

analysis, we consider that the dominant model in Argentina is entrepreneurial given the

importance local entrepreneurs have in the domestic market, and in strengthening

competitiveness. However, their technological efforts are limited and their patent system is

divergent.

Brazilian enterprises have been concerned with achieving technological modernization

and reach a higher market participation, yet, institutions have played the lead role in increasing

technological efforts and promoting innovation. Moreover, Brazil has sought to strengthen

production of generic drugs using public institutions as a basis.

Lastly, the dominant model in Mexico would have to be multinational. Not because

foreign based firms deploy technological or innovation efforts in the country, but because they

have increased their control over the domestic market and have benefited from the patent

systems, while technological and innovation efforts and market participation from local firms

and institutions remains limited7

In all three countries, the patent system is characterized for being divergent. Certainly, a

high dependence relationship is found in Argentina, Brazil and Mexico implying a greater

number of patent applications from non residents in local offices than those applied for by

residents. Accordingly, inventive coefficient (patents per million inhabitants) is marginal. This

shows that new technological knowledge (pharmaceutical products and processes) protected in

each country belongs to foreigners (mostly multinationals), and so do the benefits from the

monopolistic exploitation of patents.

The number of patents from residents in Brazil has been on the rise, as a result of

improved efforts aimed at increasing R&D and forming science specialists. Yet, this still falls

short of the possibility of a convergent model. If the number of patents registered in each country

by residents is low, the diffusion ratio (patents applied in USPTO) is even lower. Such conditions

prevent the three LA countries against appropriating the fruits of domestic innovation.

The weak culture of patents and of intellectual propriety in general among enterprises,

universities and individuals is a contributing factor to low patenting levels, since access to cutting

edge knowledge is reduced as is the likelihood of technological spillovers. Considering the

importance of generic drugs among the populations of all three countries, the absence of a more

developed patent culture can have an unfavorable impact. The more limited the access to

information regarding expired or soon to expire patents, the less likely it is for companies to take

advantage of the opportunities generated by the commercial exploitation of generic drugs in the

local markets. In that sense, intellectual propriety offices ought to further promote patent

databases identifying technology which is free or becoming.

Without a doubt, multinational firms have received the biggest benefit from the reforms

made to intellectual propriety. Since new judicial legislations constitute a strong barrier for local

firms, institutes and individuals to tap into the market, these last will have to develop

technological capabilities within stronger, more articulated innovation systems. As more

sophistication reaches the pharmaceutical sector, strong patent systems will tend to yield better

benefits. Countries are likely to take advantage of opportunities as long as they create national

and sectorial innovation systems which contribute to higher technological intensity, and stronger

export and production specialization. Table 4. Bio-pharma innovation systems and patent patterns Bio-Pharma innovation systems

SSI partially linked and little oriented at innovation. Not integrated industry.

SSI partially linked with growing incentives to innovation. Partially integrated industry.

SSI partially linked with limited incentives to innovation. Not integrated industry.

Dominant Model National Generics market with important participation from local producers. Argentinean firms have considerable marketing capabilities and strategic alliances are an important source of learning. However, technological efforts are still limited.

Institutional Similars over prescription drugs. Important institutional participation in technological capability development. Transnationals dominate the market, but local firms participation is on the increase.

Transnational Prescription drug market dominated by transnationals. Local generics industry with moderate imitation capabilities. Limited local innovation. There has been some attempt to form bio-pharmaceutical clusters (Mexico City-Morelos, Guadalajara-Monterrey)

Technological effort

GR&D/sales Reduced Reduced but growing

Reduced with little growth

Researcher Predominant Specialization level /inhab million

Predominant PhD formation in the fields of exact science and natural science. 6.5 pr million inhabitants.) Predominant BA/BS researchers (66%) PhD follow with 22% and 7% with MDs.

Higher specialization in PhDs in the fields of health, and exact and natural sciences. 8.1 and 9.2 per million inhabitants. PhD researchers outnumber others (56%); MDs (30%) and BA/BS (14%).

Predominant PhD formation is found in the field of engineering 4.5 per million inhabitants. Health science 0.7 and exact and natural science 2.1 per million inhabitants. In the field of health science, researchers from the national research system focus on chemistry and biology.

Part of total world scientific publications

Marginal. Biology is outstanding (0.7%), pharmacology (0.6%) and molecular biology (0.6%). Impact factor in medicine and neuroscience. Focalized strengths.

Marginal but growing. Microbiology is outstanding 2.1%; biology 16.%; and molecular biology 1.3%. There are relative strengths.

Marginal but not growing. Microbiology is outstanding (0.9%) as is pharmacology (0.7%). Impact factor in molecular biology, immunology and microbiology. There are relative strengths.

Institutional Framework

Sectorial regulation

Adoption of TRIPs, but with shortcomings.

Adoption of strong regulations extending to generics.

Adoption of strong regulations extending to generics. Registration of drugs is connected to the existence of patents.

Intellectual property system classification / Patent systems

Divergent. Strong dependency and inventive coefficient almost nil. Little diffusion ratio (applications from Argentineans in USPTO and domestic offices.) Adoption of TRIPs in 1996 with shortcomings. Second use patents and pipeline systems are not accepted. Patent system questioned by transnationals. Allows parallel imports. Lack of some safeguards in the process of mandatory licensing, including timing and justifications in case of licenses awarded for absence of exploitation.

Divergent. Strong dependency and inventive coefficient almost nil. Little diffusion ratio (applications from Brazilians in USPTO and domestic offices.) Adoption de TRIPS en 1996. Strong patent system. Adoption of transitory protection (pipeline). No parallel imports are allowed. Considers the absence of exploitation or incomplete exploitation of patents for not manufacturing in Brazilian soil as grounds for mandatory licensing. Regulation of mandatory licenses in case of national emergencies or public interest.

Divergent. Strong dependency and inventive coefficient almost nil. Little diffusion ratio (applications from Mexicans in USPTO and domestic offices.) Adoption of TRIPS in1991. Strong system of patents. Adoption of pipeline system.

IPR culture Little IPD (patents) culture from firms and universities to protect the yields of R&D. Little number of pharma-related patents from residents

Little IPD (patents) culture from firms and universities to protect the yields of R&D. Upward trend in resident patents at NIIP in the pharma sector.

Little IPD (patents) culture from firms and universities to protect the yields of R&D. Slow patent growth from residents at the Mexican Institute of Intellectual Propriety in the field of pharmaceutics.

Monopolistic Dominant Positions

Transnationals are the main beneficiaries. Local firms hold strong positions in the generics market.

Transnationals are the main beneficiaries.

Transnationals are the main beneficiaries.

Source: self elaboration, based on Cimoli, Ferraz and Primi (2005) and Aboites and Cimoli (2002).Innovation Survey. Various interviews.

Conclusions

The technological efforts made by Argentina Brazil and Mexico in the pharmaceutical sector are

still small. Firms continue to avoid R&D spending which is needed in patent development.

Although local firms in the three countries have started their way into modernization, starting

certification for their generic drugs, few have aimed their efforts at research and development of

new drugs. The little R&D expenditure found is focused mainly on imitation strategies, in other

words, on the exploitation of patent-expired drugs, with a few exceptions. The importance of

Argentinean firms is greater, but the technological effort is limited as happens in Brazil and

Mexico. Brazilian universities and research institutions have played a leading role in the

biopharmaceutical research.

Knowledge generation capabilities in science are relatively low in all three countries. However,

certain international recognition is given to publications in the biopharmaceutical field from the

scientific communities of these countries. Yet, academic strengths in the production of scientific

knowledge are not necessarily reflected in the corporate world. This evidences an absence or

weakness of the communicating vessels between firms and universities and research institutes.

In the field of innovation systems of the pharmaceutical sector, each country has a

prevalent model with regards to the agents dominating the market, the technological efforts and

their proficiency in intellectual propriety systems. Based on the previous analysis we found that

Argentina’s model is predominantly corporate, due to the importance enjoyed by local

entrepreneurs in the local market and in the creation of competitiveness. Yet, the technological

efforts are still small and its patent system is divergent. Companies in Brazil have strived to

modernize themselves technologically to reach higher market participation. However, institutions

have played a major role in increasing technological efforts and promoting innovation. Besides,

production of generic drugs has been strengthen taking public institutions as a basis. Therefore,

we consider the dominant model as being institutional. Last, Mexico displays a multinational

model, not because multinational firms deploy technological and innovation efforts in the

country, but because they have increased their control over the national market and have been the

sole beneficiaries of the patent system, while technological and innovation efforts from local

companies and institutions remain limited.

The type of patenting system in the three countries is divergent. Indeed, a high

dependence relationship is found in them, implying greater number of patent applications in the

local offices from foreign (non resident) researchers than from locals (residents). Accordingly,

inventive coefficient (number of patents per million inhabitants) is marginal. This reveals that,

with a few number of exceptions, the new technological knowledge (pharmaceutical products and

processes) protected in each country belongs to foreigners (multinationals), and so do the benefits

of the monopolistic exploitation of patents.

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1 For Mexico see: Nora Lustig, México Towards the reconstruction of an Economy, El Colegio de México- Fondo de Cultura Económica, México, 1994. 2 Although CEPAL statistics suggest the three countries have low and similar levels. In the case of Mexico, the Ministry of Health: Mexico 2001. INEGI, published that 5.8% of Mexican GDP was devoted to this sector. 3 Industrial policy oriented to generics has been crucial for developing competitiveness of Brazilian firms. This has translated into important advancements in the production capability, marketing of products and access to distribution channels for drugs. (Quental, De Abreu and Bomtempo (2005). For more detail of the structural analysis of the Brazilian industry of generics and the competitiveness profile of firms see Abreu 2004. 4 Although INTERFARMA (Associaçao da Industria Farmacéutica de Pesquisa) claims that foreign companies finance a high number of R&D projects in universities in an environment of cooperation between firms and universities. INTERFARMA was created in 1990 and represents 27 private foreign companies which held 54% of the local pharmaceutical market and employed 21 thousand employees in 2004. 5 In 2002, pharmaceutical exports in Mexico climbed to 1,053 million dollars. The average growth rate from 1997 to 2002 was

16.8%. 6 Several enterprises were forced to shut down operations in the 90’s during the trade openness and the new system of intellectual propriety. 7 The top ten pharmaceuticals in Mexico control almost one third of sales revenues (3.3 bn dollars) in the private sector. Nine of them are foreign.-Pfizer, Bayer, Boehringer–Ingelheim, Novartis, AstraZeneca, Merck Sharp & Dhome and Procter & Gamble; one national –Laboratorios Senosian- (World Pharmaceutical Market, 2005). Out of 70 firms concurring in this segment, 20 of them hold 60% of the market. They are mainly multinationals. The firms in this market supply prescription drugs and generics. (Scripps Pharmaceutical Industry League Tables, 2004).