BY SILVIA CHAVEZ
Foreign direct investment (FDI) in the Mexican pharmaceutical industry increased over 200 percent from 1999 to 2006, reaching US$346 million. The Mexican pharmaceutical market is Latin America’s largest, growing at 12 percent per year and a good entry point into the region. The industry represents 1 percent of Mexico’s GDP and 37 percent of Latin America’s pharmaceutical sales, with Mexican exports reaching over US$1 billion in 2006.
The growing influx of FDI in the last years is partly due to the government’s efforts to expand healthcare and health regulations to a growing and ageing population, the protection of intellectual property, and the signing of free trade agreements (FTAs). Pharmaceutical FDI represents 1.3 percent of the total FDI in the manufacturing sector and 11.4 percent in the chemical sector, growing 30 percent over the last eight years. It is expected to continue at similar growth rates until 2010. Multinational companies invested over US$200 million in 2006 on modernizing medicine production facilities and clinical trials.
Over 60 percent of pharmaceutical FDI in Mexico comes from five countries: United States (31 percentof total), Netherlands (10 percent), Germany (9 percent), Switzerland (8 percent) and Spain (6 percent).
Mexico’s central region (including Mexico City, Mexico State and Jalisco) is the stronghold of FDI in the pharmaceutical industry. Proximity to the client base, a qualified workforce and a location on essential distribution networks make this region attractive to setup operations.
Healthcare has been a priority issue for the PAN, the country’s governing political party. Under the Fox administration, the PNS (National Health Program) was created, simplifying the healthcare system and giving medical access to more than 6 million families. In doing so, OTC sales increased and created an opportunity for generic medicines within the government health service.
Although the PNS focused on reaching families that did not have healthcare, the government still faces the challenge that 40 percent of Mexico’s population is under 30 years of age, indicating that healthcare principles have to be established today in order to avoid social problems in the future, as this young group comes of age. Pharmaceutical companies are also conscious of this situation and see it as an opportunity. By penetrating the Mexican healthcare market today, companies not only ensure market presence for the future, but also establish a stronghold for penetrating the rest of Central and South America in the upcoming years. Meanwhile, companies take advantage of the lower production costs in order to increase competitiveness in the North American markets.
The most important incentive for investment flows within the pharmaceutical industry is the establishment and enforcement of intellectual property rights. In 1991 Mexico enacted legislation according to international standards, providing the pharmaceutical industry the necessary institutional security required to increase international operations. The enactment of the Ley de Fomento y Protección de la Propiedad Industrial (Law to Promote and Protect Industrial Property) gave pharmaceutical companies the opportunity to develop and patent products in Mexico as well as patent foreign pharmaceutical formulas. This gave multinational companies the exclusive right to produce a product, even if the formula was not developed in Mexico.
These patents are commonly known as pipeline patents and represent 96 percent of Mexico’s patents, indicating that most of the multinational firms operating in Mexico bring their already-made formulas and active substances into the country in order to manufacture the medicine in their local laboratories and gain competitiveness in the local market. To that end, investment is not focused on research and development, but rather on manufacturing existing product—an expansion of the maquila business.
Patented drugs are mostly bought by higher income families (SES A/B/C+ — 22 percent of the population) which benefit from private healthcare; however, lower income families that cannot afford to buy OTC medicines recur to generics and copy drugs (SES C/D/E — 78 percent of the population). With the expansion of healthcare, generics and copy drug sales are increasing and with approximately 5,000 patents expiring in 2007-2008, the generic industry is expected to continue strengthening its presence.
FTAs also promote the inflow of investment and strengthen the rule of law regarding intellectual property rights. For example, the signing of the North American Free Trade Agreement (NAFTA) required Mexico to assure its members protection of intellectual property rights. The trade liberalization gave Mexico access to the biggest drugs markets in the world. In 2006, both Germany and the United States accounted for the 46 percent of pharmaceutical imports and 51 percent of exports.
The Mexican pharmaceutical industry has a dynamic international trade posture, showing import and export value growth of 25 percent per year. Nevertheless, Mexico is a net importer of pharmaceuticals with a trade deficit of US$1.3 billion in 2006. The largest exporters to the Mexican market are countries with a significant research-based pharma industry such as the United States and Germany.
Furthermore, Mexico is a strong entry point for the rest of Latin America, especially to countries which have small proprietary pharmaceutical industries (such as Venezuela, Panama, Costa Rica and Colombia) and other large regional economies (such as Brazil). In 2006, exports to the rest of Latin America accounted for 24 percent of all of Mexico’s exports.
Although R&D has been growing in Mexico over the last couple of years, there is very little original research carried out—Mexico has only one professional researcher per 2,000 labor workers, as opposed to an OECD average of 6.39 in more developed economies.
Due to the nature of the business, pharmaceutical companies are traditionally shy about expanding their R&D efforts. That said, Mexico is a stronghold for regional production. As it currently stands, resources are currently being spent on the manufacturing of drugs and not to research, with a major part of the active substances being imported.
Government agencies, such as the Pharmaceutical Industry National Chamber (Camara Nacional de la Industria Farmaceutica—CANIFARMA), aim to promote the development of new products and technology that will attract FDI to fund more R&D within Mexico. Meanwhile, FDI focused on production will continue on a positive trend due to pipeline patent reinforcement and international trade trends.
Silvia Chavez is a Consultant for at InfoAmericas. This article originally appeared in the company's Tendencias magazine. Republished with permission.