• Brazilian biotech companies are starting to deliver breakthroughs, with one becoming the first in Latin America to register a biosimilar drug, giving access to a market promising $35bn in global sales by 2020.
• Despite having good science and a ready market for both pharmaceutical products for consumers, and plants and animal remedies for agribusiness, Brazilian companies need venture capital or tech funds to replace flagging state support. But this demands a more investor-friendly regime.
• FT Confidential Research believes biotech in general, and more specifically clusters around Campinas and São Carlos universities in São Paulo, offers significant opportunities for early-stage investors.
With a modest but growing pipeline of scientific breakthroughs, Brazil’s fledgling biotech industry needs extra funding to bridge the gap between research excellence and commercial viability.
The technical advances come as the young industry – which focuses both on pharmaceutical products and on plant and animal health products for Brazil’s burgeoning tropical agribusiness sector – faces up to faltering state support.
We believe private equity funds and early-stage venture capital investors should stay alert for opportunities emerging at biotech clusters where the first commercial fruits of drug discovery are coming on stream.
In the highly regulated human health sector, São Paulo-based pharmaceutical lab Eurofarma has become the first Latin American company to win regulatory approval for a biosimilar drug – a biopharmaceutical product designed to have active properties similar to one that has previously been licensed. While only 20 such drugs have been approved globally since 2006, the sector is expected to generate $35bn in sales by 2020, according to consultancy Deloitte.
For Brazilian pharmaceutical companies accustomed to earning their bread and butter by churning out generic drugs (synthetic copies of older patents that are typically priced at a discount of 80-90%), entering the higher margin biopharmaceutical sector is a big step.
Yet the shift from pure copycat manufacturing towards research innovation is risky and demands greater investment – hence the importance of state funding agencies. An interventionist government has been directing research funding into two fields in which there is less competition from northern hemisphere multinationals: tropical medicine and tropical agribusiness.
Advances for Brazilian biotech
Eurofarma’s breakthrough catapults it into the booming market for biosimilar drugs – complex molecular medicines produced in living cells through genetic engineering. Eurofarma will finally be able to release Fiprima, which boosts immunity in cancer sufferers after nine years of development, including four spent jumping through hoops established by Brazil’s health regulator, Anvisa, and R$25m ($6.5m) in investment.
“Although [Fiprima] is not patented,” says Martha Penna, vice-president for innovation at Eurofarma, “we are entering into a market with a high technological barrier and few participants, it will never be crowded.”
Another Brazilian company, Recepta Biopharma, achieved a notable coup in July, signing an $86m deal that will allow a US company to use one of its innovations – the first such intellectual property (IP) deal signed by a Brazilian firm. The pharmaceutical technology deal with Cambridge, Massachusetts-based Mersana Therapeutics gives the US company the right to produce Recepta’s monoclonal antibody (mAb) for cancer treatment.
Federal support for game-changing breakthroughs
The federal government’s interest in fostering such innovation is underpinned by the need to reduce the cost of distributing these advanced drugs through its public health system, the SUS. Advanced biological drugs – which accounted for just 12% of drugs distributed by volume – devoured 61% of the ministry of health’s budget last year, contributing to a balance of payments deficit of $11.5bn for the health sector.
As well as establishing a list of strategic drugs it wants to see made by local labs, Brasília invested R$690m from 2011-2014 to help them. It estimates the investment has already generated cost savings of R$1.8bn. Among the ventures it is backing are two consortiums of private firms focused on producing biomedicine:
1. A R$739m venture made up of local firms Aché, EMS, Hypermarcas (HYPE3:SAO) and União Química in partnership with the multinationals Merck (MRK:NYSE) and Janssen (owned by Johnson & Johnson [JNJ:NYSE]).
2. Orygen, in which Eurofarma is partnered with local firm Biolab. The latter is in the process of building a R$500m laboratory in São Carlos in the São Paulo countryside.
Andrew Simpson, Orygen’s scientific director, highlighted how the global pharmaceutical industry is totally dominated by companies in Europe, the US and Japan: “All the research and development is geared around these markets [rather than] the diseases that are important in Brazil such as dengue, malaria and other infectious diseases. And the products they develop in the northern hemisphere come at a much higher price. If we develop products in the southern hemisphere it is a game-changer.”
Separately, drugmaker GlaxoSmithKline (GSK) (GSK:LSE) in November chose São Carlos as the location for one of two drug discovery labs in which it will jointly invest R$88.4m. The other centre is at the Butantan Institute in São Paulo.
Agribusiness: Brazil’s next biotech frontier
Boosting the efficiency of the tropical agribusiness sector is another potential game-changer. “Biotechnology related to agriculture is our single best competitive advantage,” said Carlos Henrique de Brito Cruz, scientific director at Fapesp, the São Paulo state research foundation.
The foundation, which last year disbursed R$1.2bn for science and technology research, is sponsoring a biotech cluster based at the University of Campinas in São Paulo state. These labs are led by a tropical plant biologist, Paulo Arruda, with experience in high-tech mergers and acquisitions (M&A).
In 2008, Mr Arruda led a group of other scientists and majority shareholder industrial conglomerate Votorantim in the sale of the sugarcane breeding companies Alellyx Applied Genomics and CanaVialis, two biotech outfits spun off to Monsanto (MON:NYSE) for $300m.
Mr Arruda told FTCR: “There are niches that can be exploited and that can have a major impact in global science and technology. We are a tropical country with a magnitude of biodiversity that is still unknown and which can have an impact on animal production.” The country contains 20% of the world’s biodiversity, including 103,870 animal species and 46,000 plant species, according to data from the office of the Brazilian presidency.
Building an ecosystem for biotech
For Mr Arruda and his team to transform the potential of early-stage drug discovery at Campinas into investable assets, they will require the kind of support ecosystem visible in existing developed economy biopharma clusters around US universities in the San Francisco bay area and in Boston/Cambridge: contract research organisations, venture capitalists, tech funds, plus IP and patent lawyers.
The groundwork for this is already being laid by the Toronto-based Structural Genomics Consortium (SGC), a research alliance funded by Merck, GSK, Novartis (NOVN:VIE), Bayer (BAYN:PAR) and others, which has invested over $400m in early-stage drug discovery. In March 2015, SGC picked Campinas as one of three global centres for protein kinase discovery, opening a new lab with the support of a $6.2m grant from Fapesp.
But realising this investment promise will require significant cultural change. This includes reducing the still-considerable level of mistrust of the private sector within academia, and cutting red tape and taxes.
Venture capital starting to flow in
Nevertheless, the sector has begun attracting venture capital (VC). One player, SP Ventures, has already invested in Imeve, which produces probiotics for animals, Proimp, which produces predator mites to help control pests, and Imprenha, which makes a genetically modified bacteria that produces a protein to improve the fertility rate of cows.
Other investors include Santa Catarina-based CVentures, which is in the process of investing a R$55m fund that is financed by, among others, the International Finance Corporation and CAF, the Development Bank of Latin America. “We’re interested in life sciences,” CEO José Eduardo Fiates told FTCR, “because internationally it has the potential to attract strategic investors and it has an attractive return on capital and ebidta.”
Individual investments by the fund are R$1m-10m, and it targets companies with annual turnover of up to R$16m. One such deal was a R$4m investment in bio IT firm Neoprospecta, which has a platform for analysing molecular microbiological material based upon DNA sequencing.
São Paulo-based Aqua Capital is also investing in the biotech space, and has a 90% stake in Aminoagro, a producer of specialty fertilisers.
Francisco Jardim, a founding partner of SP Ventures, believes that “the biological revolution is the solution” to a growing rejection by consumers of Brazilian agriculture’s heavy use of pesticides, which has in turn led to the emergence of chemical-resistant pests. “Brazil is one of the largest purchasers of agrochemicals in the world,” he says, pointing out that regulators could soon call time on often-indiscriminate use of these substances.
Acquisitive multinationals are on the lookout for deals in the field of genetically modified agriculture. The M&A deal value in the agribusiness sector globally increased 213% from 2011-2014 to reach $22.4bn last year, according to Dealogic.
Investors sizing up opportunities in Brazil’s infant biopharma clusters will certainly be getting in on the ground floor. Compared with the San Francisco area, which, according to the National Institutes of Health, in 2013 was responsible for 3,492 patents, received $119.8m in government grants plus $1.4bn in VC funding and generated 110,337 life sciences jobs, Brazilian biotech is still tiny.
Recession hits innovation funding
However, innovation funding is far from immune to the economic crisis that is now taking hold of the country. The 2016 budget for the ministry of science, technology and innovation has been slashed by 24%, having already been cut by R$2bn this year. The two main research funding agencies, CNPq and Capes, are to be merged.
This contrasts with years of rising funding during the first administration of President Dilma Rousseff. Finep increased the value of loans it approved 333% between 2011 and 2014 to R$8.62bn. There was also a significant increase in the total amount disbursed by Fapesp, which rose 24% to R$1.15bn over the same period. These increases are being sharply reversed: Fapesp president José Goldemberg told FTCR that funding from São Paulo state for the agency would fall by an estimated 10% this year, with Fapesp relying on its cash reserves to maintain research funding levels.
As such, Brazil’s economic travails create investment opportunities of all types for far-sighted investors and vulture funds (LatAm Oct 1, Finance).
And the rewards could be great. Mr Jardim of SP Ventures says that the first of his two funds, a R$100m fund he co-managed that finished investment in 2011, is aiming for average returns on investment of three to four times. But his hopes for the second fund, which has R$105m in capital, are even more ambitious: “We entered in a low period and expect that when we start divestment from 2017 the economy will pick up and the investment ecosystem will be more mature. Our goal is multiples of five times.”