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Brazil: Serra’s Health Card

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Health could start to play a greater part in Brazil and Jose Serra is in a strong position to claim that he is the right man to handle it.

BY JOHN FITZPATRICK

If São Paulo state governor Jose Serra stands for the presidency next year he will find it difficult to attack President Luiz Inacio Lula da Silva's economic record. Brazil's economy has grown under Lula's administration and has avoided the worst fallout from the global economic crisis. Serra – who is well ahead in opinion polls - might be better advised to play up his track record as health minister from 1998-2002 when he led a successful campaign to combat AIDS and slashed the cost of drugs by introducing generics. Health will cast a shadow over this election in another way as Lula´s favorite candidate, Dilma Rousseff, is being treated for cancer and there are still doubts over whether she will stand.

Serra's hands-on approach contrasts with the government's unimpressive handling of the current swine flu outbreak and the recent dengue epidemic. Health is still near the top of Serra's agenda and he is currently involved in a legal battle to ban smoking in public places in São Paulo. Just as he took on the drugs companies, he is now confronting the tobacco, catering and hotel sectors.

CONSTANT ISSUE

Health is a constant issue in Brazilian politics. The state system which is used by the lower income groups is inefficient and in places primitive. The ending of the CPMF “check tax” on financial transactions in 2008 which was supposed to be destined for the health sector was a blow to Lula who claimed it had deprived the sector of R$40 billion. If Lula had been able to persuade taxpayers that the money had actually gone to improving the health service, then he might have succeeded in retaining it ,but he could not.

Health is also a crucial part of the Bolsa-Familia social welfare program for poor families, which receive a modest monthly grant providing they send their children to school and ensure they have regular medical exams.

If people can afford to, they take out private health plans, but these are expensive and most formally employed workers rely on their employers' health plans, which generally form part of the fringe benefits. More people have started to enjoy this benefit in recent years as the economy has expanded and more people have joined the formal payroll. There are now an estimated 40 million beneficiaries of these plans. This movement has benefited practically every segment involved – the employees, those health plan companies which were strong enough financially to cope with the extra numbers and the increased regulation, along with the drug manufacturers, distributors and retailers. And the government has benefited as higher corporate earnings have brought in higher tax revenues and many people have switched from the state health scheme to the private sector, thereby reducing the government´s burden. 

SALES DOUBLED

Drug sales more than doubled from R$15 billion (around US$8 billion) in 2002 to almost to R$30.7 billion (US$16 billion) in 2008, according to the trade association FEBRAFAMA. The average price per unit also almost doubled in this period from R$9 to R$17, well below the rate of inflation.

Another triumph for Serra was his introduction of generic drugs in 1999 which has slashed the cost of a wide range of medicaments and made them more affordable to the general population. The first question most people now ask their doctor when a drug is prescribed is whether it is available in generic form. The difference in price is usually around 40 percent,  but the discount can be much higher as drugstores compete for what is now a huge market. The fact is that generic medicines are now so popular that they are growing at a higher rate than overall pharmacy sales. Generics are expected to represent 20 percent of the sector by volume in 2010, according to Piribo, a consultancy specializing in the biotech and pharmaceutical industry. They currently account for around 14 percent of sales and 11 percent of total revenues. This compares with the United States where generic drugs have existed for 20 years and have a 35 percent share of all drugs sales.

Serra also took advantage of a World Health Organization resolution that allowed countries to break drug patents in the public interest. This paved the way for Lula to break the patent on Merck´s AIDS drug Efavirenz in May 2007 which he claimed was too expensive. He signed a law which allowed the government to buy a generic version of Efavirenz from laboratories certified by the WHO. It was the first time Brazil had broken a patent since it recognized patent protection for drugs in 1996, according to Bloomberg.

CONTROVERSIAL

This approach has been condemned by the drugs industry, trade bodies like the American Chamber of Commerce in São Paulo and others which have pointed out that drugs companies have to make massive, long-term investments and deserve the profits they make, particularly as expiring patents deprive them of their star products. However, just as few people have sympathy for big oil companies, lawyers or used car salesmen, few electors are likely to vote against any politician who reduces the price of medicine. This is particularly so among those most dependent on drugs, such as the elderly, the chronically ill and those with young children. 

One can understand the arguments of the drugs companies, but it has to be pointed out that no company has pulled out of the profitable Brazilian market because of this decision; the opposite in fact, as we will see below. In any case, the whole sector is something of an oligopoly with around eight companies controlling 40 percent of the world market. This shows the companies have plenty of room to negotiate price cuts or even subsidize prices in some cases if this protects their other products.

Brazil is also a big net importer of drugs (although it exports about 5 percent of production) which is yet another motive for drugs companies to set up business here and for the government to welcome them. For all its public expressions of concern over the wellbeing of the population, the government taxes drug sales at a rate of 35 percent.

GROWING INTEREST

The attraction of lower-priced generics can be seen in the growing interest by multinationals in emerging markets. The French company Sanofi-Aventis announced in April that it was acquiring the troubled Brazilian company Medley for R$1.5 billion. One of the attractions of Brazil is the upcoming end of the patents of blockbuster drugs like Viagra, Cialis and Liptor. Sanofi-Aventis´s CEO said on June 29 that the company was aiming to buy more generic drugs companies. Meanwhile, the UK-based company GlaxoSmithKline has announced a series of licensing deals with generic drugs producers in South Africa and India while Pfizer, the world’s largest pharmaceuticals group, has entered into partnership with two Indian generic groups.

June 29 was also the day the German company Celesio announced that it had acquired a majority stake in Brazil's largest drugs distributor Panpharma. Reuters said Brazil was being seen as a key growth market for the global healthcare industry. It quoted an estimate by a market research company called IMS Health that the Brazilian pharmaceuticals market would grow by 13 percent to 16 percent a year to 2013.

RETAIL PROFITS

Finally, contrary to what might be expected, retail stores and drugs distributors are happy to handle cheaper generic drugs as the profit margins on generics are generally higher than those of branded products.

All this activity shows that health could start to play a greater part in Brazil's future political and business agenda and Serra is in a strong position to claim that he is the right man to handle it.

Note: Sources for this article besides those mentioned above include the Financial Times, the São Paulo state government, the Brazilian Health Ministry, the WHO and reports and presentations by economists, researchers and equity analysts.

© John Fitzpatrick 2009 

 

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