Pharma in Mexico: Too Important to Do Without an Industrial Policy

Interview with Mauricio de María y Campos, board member of the Institute for Industrial Development and Economic Growth. He was Undersecretary of Industrial Development and Director General of UNIDO.

By: César Guerrero Arellano

Pharma in Mexico: Too Important to Do Without an Industrial Policy
In this interview, Mauricio de María gives a first-person account of the public policies implemented in the 1980s to promote drug manufacturing in Mexico. He reflects on its scope and limitations, and outlines the essential features of a renewed industrial strategy aimed at increasing the production of drugs and vaccines in the country. He also points out the importance of having robust fiscal and financial policies that accompany the production and technological development of Mexican companies.

What has been the capacity of the Mexican pharmaceutical industry to meet the needs of the national market in recent years and during the pandemic?

In the last two decades, the contribution of drug manufacturing to the total value of the country’s industry fell 50%. Its production has increasingly depended on active ingredients and imported raw materials, and its distribution even on foreign drugs. The pandemic has shown that health is a matter of national security; to protect it, both a solid government structure, and the production and technological capacities necessary to guarantee the supply of medicines and medical devices are necessary.

A group of countries, especially in Asia, have shown an admirable capacity to face the health emergency. Vietnam’s health system, for example, set up a very effective system to track and follow up on cases. In this country with a population of 96 million, only 35 deaths have been registered. It’s a great lesson learned because in several relatively more developed countries, including the United States, which has the most powerful economy in the world, the way COVID-19 was handled was highly questioned during the Trump presidency. Biden has reversed that image with a successful vaccination campaign.

 

What place does the Mexican pharmaceutical industry have in the international market and in Latin America, and what are its main strengths and shortcomings?

In Latin America, the Mexican pharmaceutical industry is one of the strongest—along with Brazil and Argentina—but this region shows significant lags in drug production. In general terms, there is a great dependence on other countries for the supply of drugs and raw materials. A study that I conducted 50 years ago warned about this problem that we—temporarily—managed to reverse in the 1980s. In subsequent decades and as a result of the elimination of industrial policies, our chemical-pharmaceutical sector weakened. Gone are the days when the country had a reasonable production of vaccines and progress was made in the manufacturing of active and biological ingredients, and ingredients for the petrochemical sector. The indiscriminate opening of trade affected this process, it was mistakenly thought that the international market would be an inexhaustible and permanent source of supply. The COVID-19 crisis has made it very clear that, despite our large economy and market size, the shortage of drugs is a latent risk, especially in health emergencies when producing countries meet domestic demand first.

 

In the current situation, what lessons can the measures implemented in the 1980s provide to strengthen Mexico’s pharmaceutical sector?

The decree for the promotion and regulation of the pharmaceutical industry issued in 1985 created favorable conditions in the country for the manufacturing of drugs with a reasonable incorporation of national content. To achieve this, the import of drugs that could be manufactured in Mexico was regulated; fiscal and financial incentives were granted to manufacturers of national active substances, in addition to support for the development of their own technologies. Companies that benefited from this support had to invest at least 3% of their sales in research and development. At that time, several plants with very competitive production came into operation. Unfortunately, some of them had a short life of four or five years since, when the import of raw materials was freed, foreign patent pharmaceutical companies lowered their prices to force them out of the market. They then returned to their usual practices of recording import premiums for tax purposes. It was a dramatic change in a very short time. 

The problem was aggravated when the Calderón administration eliminated a requirement imposed on pharmaceutical companies so they could sell their products in the national market, namely having a production plant in Mexico. Staunch liberals don’t realize that in the pharmaceutical market the consumer is not king; consumers buy what doctors, hospitals, and large international companies recommend. With this measure, even foreign companies that already operated in Mexico made the decision to close production lines and import their products. Now, companies with European capital, through their subsidiaries in South America or China, India and South Korea, bring drugs that are relatively simple to produce.

 

How can public procurement be an instrument to strengthen the Mexican pharmaceutical industry?

The public sector is the first drug buyer in almost all countries. In Mexico, the various federal government agencies—the Ministry of Health, IMSS, ISSSTE, the armed forces, Pemex—and state governments acquire half of the generic drugs supplied by national capital manufacturers. The proportion of purchases of patent products is lower, but still considerable, given their higher unit value. The 1985 decree and the basic list of drugs in the health sector laid the foundations of a consolidated purchasing scheme that promoted a reduction in prices and improvements in the quality of drugs and delivery times. It was a political decision that gave certainty to investments, promoted the development of Mexican laboratories and allowed—during the administration of President Zedillo and Secretary of Health Juan Ramón de la Fuente—to create a generic market that today seems very common to us, but it is key to the operation and subsistence of pharmaceutical companies, especially the smaller ones.

Every system needs to be watched and taken care of to avoid corruption, and this one operated reasonably well with significant savings. In the last two years, federal authorities have sought to clean up irregularities, but given the lack of clarity in the new operating mechanisms, complaints from laboratories, both national and foreign, have multiplied. These products cannot be supplied overnight, the government must calculate its budget well and publish its tenders well in advance to give laboratories the opportunity to adequately schedule their investments, the acquisition of supplies, in addition to planning their production efforts and research.

 

Are generic drugs a good alternative to ensure the supply of medicines?

They are essential in any country. In Europe, almost all drugs handled by the public sector and purchased in pharmacies are generic. The market for specialized drugs is generally dominated by large companies in the sector that, although invest large sums of money in research and technological development, also allocate significant amounts to advertising and other forms of marketing to maintain their high profitability. This isn’t new: when Comercio Exterior published in August 1977 my study on the pharmaceutical sector, I was able to show that foreign companies brought raw materials to Mexico with a price ten or fourteen times higher than the international price and that they incorporated into their products in a show of market power. Mexican companies that were established later and that produced these raw materials on already expired patents, placed the product at less than a fifth of the international price, even with a 100 percent profit. Impressive.

Pharmaceutical companies take great risks to develop new drugs and as an incentive they receive patents for up to twenty years. The problem is that the system has loopholes that allow extending, even doubling, the original period. One of US President Joe Biden’s great concerns is the high price of drugs in that country and the way in which access to new competitors is blocked, which go against the interest of both the consumer and the health system.

 

How can virtuous relationships be generated between the private and public sectors?

The government plays a key role in defining these virtuous relationships. The first thing that needs to be done is to listen to the different positions: industry, doctors, specialists in the health sector and others, and then build spaces for dialog and discussion to reach solutions everybody is happy with. In Asia, the benefits of permanent dialog and adequate regulation are clearly seen. Companies in this region—large and small—have robust information available to define trends and anticipate market needs. They also have the support of development banks to prepare prospective studies that are the basis for expanding their participation in the domestic and foreign markets. A basic forecast of what the government will need, and guarantees about what it will buy and when the bills will be settled are required. If payments are not made on time, companies often face liquidity problems and, in extreme cases, stop operating. All of this requires a very good understanding and a coordinated policy, something lacking in Mexico and in practically all Latin American countries.

 

Does the USMCA include measures that allow Mexico to become an important regional producer and exporter of biopharmaceuticals?

The USMCA doesn’t specify sectors much; the rules that have an impact on the pharmaceutical sector and even mention it are those relating to industrial property. It is a key area in the case of patent drugs, the most profitable market. Fortunately, in the Protocol of Amendment to the USMCA, a reasonable agreement was reached to mitigate the long-term advantages that were granted to the owners of pharmaceutical patents in the original version of the agreement. Everything depends on a good and timely application by the regulatory institutions: Cofepris (Federal Commission for the Protection against Sanitary Risk), in health matters, and the Mexican Institute of Industrial Property.

Despite everything that can be criticized about its modus operandi, we have a pharmaceutical sector with Mexican capital, mainly medium-sized and some large companies, which can work perfectly well according to USMCA rules. Most of the innovations are concentrated in large foreign companies, but some biomedical companies with national capital reverse engineer products whose foreign patents expire—and even conduct original research—that could be promoted in the North American context. Many of them think about the world market and have very good links with laboratories that conduct first-class research with Mexican experts, some of whom would have to be recovered to design vaccines and new products to win the battle against cancer and chronic degenerative diseases, the main demand of aging countries.

 

Can we become a relevant producer of raw materials and active substances? What measures would guarantee their supply?

Many US and Canadian pharmaceutical companies face the same dependency regarding the supply of raw materials and active ingredients from Asia and sometimes Europe. It would be very useful to have a North American production of these substances. Trilateral cooperation, intergovernmental dialog, and the support of public policies agreed with the private sector would be decisive to achieve this goal. We must remember, however, that countries cannot produce everything. International trade is here to stay. Hence, as part of the dialog between the public and private sectors, it is necessary to identify those therapeutic groups and industrial branches that are a priority for the region, and provide them with all the support to generate the production capacities that allow us to adequately meet our needs—present and future.

 

How could the country have more national capital companies that systematically carry out technological research and development?

Achieving this objective in a very imperfect market requires an explicit policy that clearly establishes operating rules and that provides certainty about the criteria with which the support to promote the development of production and technological capacities will be assigned. Nothing is stopping us from recovering a policy like the one we had in the 1980s, similar in principle, different in terms of current market conditions and technological advances. There cannot be strong companies in this sector without their own technological capacity, without a high percentage of their sales being destined to research and development. This is what’s happened in successful countries, such as in Asia, which currently have the most important industries in the world, and some in northern Europe. But agreements now pending are required.

 

How can research and development be strengthened, and how can the private sector and research centers connect?

An industrial policy is impossible without fiscal and financial policies that support it; particularly a financial one that makes development banks and commercial banks channel the necessary resources to bring these projects to fruition. I would say that the three key elements are government procurement mechanisms, financing mechanisms, and direct technology support mechanisms.

 

Are the conditions there for Mexico to consolidate itself as a producer and exporter of medicines?

The first years of this government have been very difficult, including the ravages of the pandemic. There has been trial and error regarding the supply of medicines. There has been hesitation regarding the design and implementation of an industrial policy, but I would hope that with the new head of the Ministry of Economy there will be a change towards the definition of a general and explicit industrial policy for the vaccines and drugs sector. Two elements make me optimistic. One is the fact that the current Secretary of Economy already met with representatives of the sector and expressed her willingness to work hand in hand to implement a public policy that promotes the development of the pharmaceutical industry in the country; I believe this will materialize soon. On the other hand, I would also expect public banking, which has faced a period of continuous change, to effectively fulfill the strategic role of financing development. It’s clear that consolidated purchases by a specialized UN agency have not worked: UNOPS had helped small countries, but had never operated on this scale. Mexico is a different story.

 

What have regional organizations done to address the sector’s challenges in the context of the pandemic and what should they be doing?

I have just participated in a meeting with six Latin American experts organized by ECLAC at the request of CELAC. Together with the Executive Secretary of ECLAC and its specialized officials, we analyzed what should be the basic ingredients of a regional program for the pharmaceutical industry. A first conclusion is that health should be the axis of the regional integration dream. There is a lot of institutional work to be done among Latin American countries, both in the industrial and the therapeutic spheres. An authorization granted to a specific product in Mexico, for example, should also be backed up by government agencies in Argentina or Brazil, and vice versa. The work of the Pan American Health Organization, which also includes the United States and Canada, has been low-key. Studies by WHO and UNIDO, which I headed, show that developing countries double their drug use every five to six years due to population growth and the impact of aging populations, among other factors. In the case of Latin America, that extra consumption could give way to growing imports if we don’t act now. But we’re still on time. Mexico and Brazil—but also Argentina, Colombia, Peru, and Chile—we have no excuse for not developing those capacities. If our needs are growing, we must prepare with joint studies and other country specifics.

 

What is the status of vaccine production? Can Mexico be a producer and exporter of these strategic products?

People think that Latin American countries should develop their own industry in vaccines and key ingredients; it’s a matter of national security. On the other hand, the distribution of vaccines has lagged behind—even in cases where licenses have been obtained—due to a lack of syringes or containers and modern manufacturing practices. Although not all countries have the same market size and capacity for action, better results can be obtained for everybody through cooperation and joint effort. There is much to learn from the Asian experience in this matter.

 

What is the Mexican industry doing to face the current problems and future scenarios?

Many companies, including foreign ones, are concerned about the decision to go to international organizations to purchase drugs. Those with mostly Mexican capital have sought a dialog—to no avail—with the government and they are still waiting for a clear response from the Ministry of Health and Insabi (the Institute of Health for Wellbeing). They’re convinced that, with adequate planning of national needs, favorable conditions will be created for growth and development. Many workers and their families depend on it.

Groups of Mexican capital can and should participate in these international processes. A good part of them, located in Jalisco, are thinking of creating a first-class cluster. Note that, even though in the last thirty years we lacked an industrial policy, very successful regional agglomerations of companies—clusters—emerged in the auto parts, electronics, and aerospace sectors, that may be the basis for future industrial development.

It’s interesting to see pharmaceutical companies with Mexican capital partner up to continue growing. They will achieve this because there are very capable people out there, well connected with technology centers in the United States and other countries. Clearly, these groups would have a stronger position were they supported by a policy concerted with the government. State governments can do a lot about this and they have, but we’re too important a country not to have a federal industrial policy in the pharmaceutical sector. Perhaps not all industrial sectors require it, but health does.

 

What scenarios are emerging for the Mexican pharmaceutical industry? Are you optimistic or pessimistic about its future performance?

The pharmaceutical sector has managed to overcome adverse circumstances, such as when—in the 1980s—the lack of foreign exchange after the nationalization of the banking system and exchange control revealed our enormous dependence on imported raw materials and drugs. With coordinated work and appropriate support, we were able to overcome adversity. Even today, that handful of companies with Mexican capital that continue to operate in the country express their approval of the decree issued, since it made their emergence and development possible.

We now face a similar situation. The gradual decline in the last thirty years in production, the limited technological development, and the dependence on foreign drugs are not justified. Had the right measures been taken at the time, we would not have the problems we now face. Crises bring out the great social problems and, since this is a crisis of great magnitude, the opportunity to find creative solutions is incomparable. If the Mexican state—including development banks—acts hand in hand with companies and measures such as the ones I have mentioned are adopted, we could consolidate a strong industry of Mexican and foreign capital.