INTERFARMA BRIEFS CHARGE ON DIFFICULTIES IN DOING BUSINESS

UNCLAS SECTION 01 OF 03 BRASILIA 000271 SIPDIS DEPT FOR EB/IPE SWILSON, AMADAMO AND WHA/BSC DEPT PLEASE PASS TO USTR MSULLIVAN, VESPINEL DEPT PLEASE PASS TO USPTO FOR JURBAN USDOC FOR 3134/USFCS/OIO/WH/EOLSON USDOC FOR 4332/ITA/MAC/WH/OLAC/MWARD NSC FOR SCRONIN AID/W FOR LAC/AA HHS FOR WSTEIGER SENSITIVE SIPDIS E.O. 12958: N/A TAGS: KIPR ETRD TBIO ECON BR SUBJECT: INTERFARMA BRIEFS CHARGE ON DIFFICULTIES IN DOING BUSINESS IN BRAZIL REF: 2005 Brasilia 2729 (Notal) ¶1. (SBU) Summary. During a recent trip by Charge to Sao Paulo, officials from Interfarma - the local industry group representing international pharmaeuticals firms - described the challenges member companies face in operating in Brazil. Chief among Interfarma complaints was that the high tax burden had lowered pharmaceutical industry sales (and employment as well) and that the Brazilian government did not afford adequate protection to intellectual property rights (IPR). Interfarma reps worried that legislation, currently in the Brazilian Chamber of Deputies, prohibiting the patenting of AIDs drugs might move forward to the Brazilian Senate. In a side conversation, the Brazil President of Merck told us that his company was in the process of negotiating with the Ministry of Health so as to avoid issuance of a compulsory license for that firm's anti-AIDs drugs; talks were proceeding smoothly. Finally, given their negative experiences in the 1990s with then-Minister of Health Jose Serra, company officials stated that they strongly preferred that the PSDB candidate opposing Lula in the upcoming presidential elections not be Serra - but instead Sao Paulo Governor Geraldo Alckmin. End Summary. An Industry in Steady Decline -------------- ¶2. (SBU) On January 18, Charge, Sao Paulo Consul General, and various Consulate/Embassy officers received a briefing in Sao Paulo from Interfarma spokesmen. Founded in 1990, Interfarma represents 27 international pharmaceutical laboratories based in Brazil - with these companies accounting for 54% of the domestic pharmaceutical market. Among the U.S. firms that are Interfarma members are Abbott, Merck, Eli Lilly, and Bristol-Myers Squibb. Our interlocutors declared that all was not well in the Brazilian market as sales, in dollar terms, had declined since 1997 through 2004 (from US$7.68 billion to US$5 billion) as had units sold (from 1.35 billion to 1.32 billion). In terms of relative rankings, Brazil had fallen from the 7th largest pharmaceutical market in the world in 1998 to 13th in 2004 - just behind Mexico and Australia. ¶3. (SBU) The principal reasons for the industry's decline, Interfarma reps told us, was the high value added taxes imposed by the government (18% just for the ICMS) and the high margin charged by retail pharmacies (28%). When combined with freight costs, the cumulative effect of these fees/levies meant that for a drug sold wholesale by the industry for R$1, a prospective retail customer would pay R$2.08. Worldwide, this compared to a 1.14 mark-up ratio in the United Kingdom, 1.44 in Mexico, 1.76 in Argentina, and 1.8 in Germany. (Note: this calculation reflects 2002 data.) The high prevailing cost structure, Interfarma declared, had contributed greatly to the stagnation of the industry during recent years. From 1997 to 2004, both employment and investment had decline, from 23,074 to 20,393 and from US$256 million to US$109 million, respectively. Interfarma officials estimated that had conditions for doing business been better, over the past six years the industry could have generated over 15,000 new jobs and an additional US$2.2 billion in fixed asset investment. Weak IPR Protection -------------- ¶4. (SBU) Yet another problem, we were told, was the government's lack of commitment to providing protection for intellectual property. After the passage of the 1997 Industrial Property Law - which first allowed pharmaceuticals to be patented - the government had not adopted an investor-friendly regulatory stance. Specifically, industry officials complained that Article 229-C of the IPR law, added to the legislation in 1999, was TRIPs-inconsistent as it made the issuance of a pharmaceutical patent contingent upon prior approval by Brazil's drug regulatory agency (ANVISA). ANVISA, they continued, while nominally independent in practice, was subservient to the Ministry of Health. The biggest problem, they felt, however, was that ANVISA and INPI (i.e., the patent agency) were just plain slow. Out of 20,000 BRASILIA 00000271 002 OF 003 pharmaceutical patents applied for in 1996, the year after IPR law as enacted, to date only 149 had been approved. ¶5. (SBU) Our interlocutors opined that the situation could get worse if Sao Paulo Mayor Jose Serra received the PSDB presidential nomination and ended up beating Lula in the upcoming October 2006 elections. As Minister of Health during the previous Fernando Henrique Cardoso government, they said, Serra took a number of industry-unfriendly steps. For instance, he was the driving force behind Article 229-C, he imposed retail price controls on pharmaceuticals, and he threatened the manufacturers of anti-AIDs drugs with compulsory licensing unless they lowered the prices they offered to Brazilian government purchasers. Serra, they stated, was loathe to dialogue with the industry. They much preferred the rival candidate for the PSDB nomination - Sao Paulo Governor Geraldo Alckmin. Bill 22 - the Biggest Challenge -------------- ¶6. (SBU) While our Interfarma contacts flagged a number of, in their view, objectionable bills currently pending in the Brazilian Congress, they made clear that the item which was receiving most of their attention was Bill 22 - a measure which, if enacted, would prohibit the patent of new anti-AIDs drugs. Introduced by PT Federal Deputy Roberto Gouveia, the bill had already been approved by three lower house committees. The bill was headed for debate (as yet unscheduled) on the lower house floor, although Interfarma lobbying had resulted in the creation of an additional hurdle: after the floor debate, it would need to pass through the Foreign Affairs committee prior to returning to the floor for a plenary vote. Given popular sentiment in favor of the bill, Interfarma officials stated that it would be difficult to stop in the lower house. Its sponsor was a member of President Lula's party and the Speaker of the lower house had, on his own, previously introduced similar legislation. Preparing for the worse, Interfarma was already reaching out to its Brazilian Senate contacts in an effort to stop the legislation there. ¶7. (SBU) In response to Interfarma's request for assistance with respect to Bill 22, Charge stated that he would raise this issue with the Speaker of the Lower House the next time the two spoke. In addition, Charge offered to host a strategy session with other affected embassies the next time Interfarma came to Brasilia to lobby the congress. Good News on Compulsory Licensing -------------- ¶8. (SBU) In a side conversation with Merck's Brazil President, we were told that Merck's talks with the Ministry of Health regarding the GOB purchase of anti-AIDS pharmaceuticals were going well. (See Reftel.) The company had offered to co-produce its anti-retrovirals with government-owned labs, with any cost savings reaped being returned to the GOB in terms of lower prices. Merck emphasized that this arrangement would not be a voluntary license. The only problem, our Merck contact said, was that the GOB was slow in responding to Merck's proposal and if the Minister of Health ended up departing the cabinet in March to seek elective office, the talks might have to end up restarting from ground zero. In post's continuing discussions with Gilead Science, the remaining U.S. pharmaceutical maker at risk, officials representing that company have expressed similar fears - while adding that the tenor of the talks to date had been positive. AVIAN FLU -------------- ¶9. (U) Finally, in response to a query from FCS Senior Commercial Officer, Interfarma officials stated that Brazil was well-situated with respect to a possible avian flu. The GOB, they stated, was buying up the necessary stocks of anti-flu medicines. BRASILIA 00000271 003 OF 003 CHICOLA