The recent evolution of the Biotech local innovation system of Minas Gerais: university local firms and transnational corporations

1. The Evolution of the Biotech Innovation System of Minas Gerais
During the last decade, the Brazilian private biotechnology sector has quickly expanded. In 1993, there were 76 biotechnology firms in Brazil; by 2001, their number had increased to 354. Approximately 70% are local private firms, 25% are multinational and 5% are state-owned firms. Of their combined products, 26% are for the health care market and the rest are for agricultural, environmental and industrial fields.

Health biotech evolved in Brazil through a combination of high scientific capacity and policies geared towards fostering spin-off firms from university research. One of the most interesting experiences happened in the Southeast State of Minas Gerais. Belo Horizonte, the capital of Minas Gerais State, has played an active role in building up biotech capability in Brazil. By 2000 the city hosted thirty-five biotech firms located in both its urban metropolitan area and smaller regional cities of Minas Gerais, as shown in Table 1.

In that region, a successful local effort in building up biotechnology knowledge infrastructure from a significant local scientific base and a favourable institutional environment has been observed in the last 30 years. This effort has been supported by incentives from Federal tax-breaks, City Municipality financing of building facilities, and entrepreneurial mobilisation in creating seed money and venture capital.

The local scientific and lab base in molecular and cellular biology, animal genetics and biochemistry involves four federal universities and three institutes, which have been crucial to the development of this biotech agglomeration. The Federal University of Minas Gerais (UFMG) has been the main source of enterprise spin-offs, pioneered by BIOBRAS spin-off in the 70s from the Biochemistry Department. The Federal University of Juiz de Fora (UFJF) has also contributed to the biochemical capability with Quiral, a specialised chemotherapy drug firm, being its main spin-off (Fundação Biominas, 1994).

The Federal University of Viçosa (UFV) has also contributed significantly to biotechnology innovations in Minas Gerais, especially in plant and animal genetics. The Biotechnology Department, for example, developed the first pure lineages of pigs in Brazil in the early nineties (Lemos, 1992). This department’s Centre for Applied Agricultural (Biagro), has twenty-seven (27) laboratories, 350 scientists e technical personnel and U$ 5 millions applied to specific projects (Estado de Minas, 1998: 15). Two smaller universities, Federal University of Lavras (UFLA) and Federal University of Ouro Preto (UFOP) are also involved in biotechnological research, the former in agronomy and the latter in minerals.

Local research institutes also have laboratory and scientific biotechnological capability. The Centro de Pesquisas Rene Rachou, a local affiliate of the national health research institute (FIOCRUZ), has a noted molecular biology laboratory. Two state government institutes have some specific capability, the Ezequiel Dias Foundation (FUNED) focused on vaccine research and industrial production and the Technological Centre (CETEC) on biometallurgy. Finally, in agri-biotechnology the National Research Centre for Maize and Sorghum (CNPMS), an affiliate of EMBRAPA in the town of Sete Lagoas, has recently created a specialised department in applied molecular biology (Ibid: 15-16).

The story of the health biotech system is also strongly linked to the story of Biobrás. The first (and perhaps most successful) Brazilian biotechnology company, Biobrás developed as a spin-off from UFMG Faculty of Medicine in 1971 and began its industrial operations in 1976. The founder was a young biochemical PhD who since the beginnings of his professorship had carried out research in the area of enzymatic protein that was potentially applicable to industrial use. Most of the biotech firms in Minas Gerais that are focused on human-health biotechnology have benefited in some way from Biobrás market success.

BIOBRAS was the key enterprise of the local system. From its origin and evolution it has been active in institutional building, that resulted in the creation of Biominas Foundation and Biotech Enterprise Incubator, and in establishing a high performance level, which had a contagious effect on the local competitive environment for the emergence of new biotech ventures.

At the pre-start up phase this company had some specific technical capability but no market expertise to search for technological opportunities. Its business focus was generic due to lack of relevant market information. Before reaching maturity, its cumulative technological capability came from heuristic market searches of product-line niches that might provide opportunities for its growth under a relatively stable competitive environment. As mature company, BIOBRAS faces a dilemma in relation to its growth strategy.
Within the biotechnology market BIOBRAS could be considered a medium-sized and fast-growth enterprise, with gross sales of around US$25 million in the early 200s and an annual growth rate of more than 10% during the 1990s. This performance refleced an upgrade in its product line to higher value-added products. BIOBRAS was an internal market-driven enterprise, whose exports constituted around 12% of sales in 2000 The technological evolution of BIOBRAS involved upgrading its capability from a pharmaceutical enzyme producer to a high-grade purifier of protein, especially insulin formulates.

Table 2 shows BIOBRAS’ technological progress starting from its entry into the insulin market in 1979 till the early 200s. A joint venture with LILLY enabled it to pioneer production in Brazil of single-peak insulin crystals a seven years lag after its introduction to the world market. This lag was reduced to four years when both final formulates of highly purified insulin and human insulin were introduced in 1984. In the late 1990s it developed human insulin obtained from recombinant DNA techniques based on in-house R&D, also introduced after a four-year lag.
This evolutionary path suggests that growth of BIOBRAS has been based on a strategy of searching for business opportunities by exploring an initial technological capability, which then evolved through imitation of foreign products under market inducements. In the 1990s this company was one of four in the world to develop recombinant human insulin and managed to patent its invention in the US. At the end of 2001 the company was was incorporated to the Danish pharmaceutical and insulin producer group, Novo Nordisk, for US$31 million, after losing a public tender of the Brazilian Health Minitry for the acquisition of insulin which led to a deep financial crisis. The acquisition of Biobrás was the first of a series of merger and acquisition (M&A) processes involving local biotechnology companies in Minas Gerais.

The research project aims at analyzing the impact of these major changes within the regional/local biotechnology system of innovation in Minas Gerais. The emergence of these new trends offers the main motivation for this study, as expressed in the following research questions:

1. How are public and private knowledge flows and networks evolving for biotechnology innovation, in Minas Gerais, concerning innovation performance?

2. What is the present role university research in the local system

3. What is the impact of these M&A (merger and acquisition) processes on technological and innovative capabilities?

4. How other firms survived after the key enterprise Biobrás was acquired by Novo?

In the next section the general and intermediate objectives of the project are detailed.

2. Objectives of the project

2.1 General:
This project aims at analysing the recent evolution of The Minas Gerais biotechnology innovation system in Brazil, adopting the Redesist’s model of IS analysis (www.sinal.redesist.ie.ufrj.br).

2.2 Intermediate:

2.2.1 To analyse the Minas Gerais Biotech IS in terms of knowledge flows and networks and M&A processes;

2.2.2 To investigate M&A (merger and acquisition) processes and deals, involving biotech SMEs and large pharmaceutical (and other) companies in Brazil and in Minas Gerais.

3. Methodology

The research will be focused on the evolving knowledge flows and networks in two levels of analysis:

1. Public and private sector: university knowledge and research flows to biotechnology university spin-offs, to the industrial and service sectors; human resource training processes in public institutions (universities, R&D centres and other related institutions) and its absorption by the industrial and service sectors.

2. Private and private sector: biotechnology spin-offs, SMEs and large companies.