‍

On October 22, 2024, the Interministerial Commission of Public Procurement for Development (CICS), linked to the Ministry of Management and Innovation (MGI), published Rule #4/2024 establishing two types of preference margins (MPs) to be applicable within government procurement (only in competitive biddings). The first is the normal MP (NMP), which allows a drug manufactured locally to be paid up to 5% above the best price offered for an imported drug. The second is the additional MP (AMP), which allows a drug manufactured locally with an API also produced locally to be paid up to 15% above the best price offered for an imported drug (already including the 5% of the NMP) or up to 10% above the best price offered for a drug manufactured locally but with an imported API. The Rule came into force on November 11, 2024.

This is not the first time Brazil has introduced MPs for the procurement of drugs. While the old Government Procurement Statute was in forced (Law #8,666/1993), Decree #7,713/2012 regulated its Article 3 and attributed different MPs to drugs and APIs. As a whole, the MPs were only applied until March 30, 2017. Since the new Government Procurement Statute came into force in January 2024 (Law #14,133/2021), the topic regained momentum. Article 26 of the Law #14,133 maintained the possibility of MPs being applied and was regulated by Decree #11,890/2024 in the same month. Decree #11,890 established that the NMP may be up to 10% for “national manufactured goods and services”, and that the AMP can be increased by up to 10% for goods “resulting from technological development and innovation done in the country” (i.e., up to the limit of 20%).

When published, Decree #11,890 allowed the use of MPs only for competition between locally manufactured and imported products, a dynamic that did not appear to be in line with Article 26 of the Law #14,133. After all, the lawmaker clearly chose to grant an additional MP for locally manufactured products “resulting from technological development and innovation done in the country”, in order to differentiate them from locally manufactured products without this technological distinction. This is probably why, on October 11, 2024, Decree #11,890/2024 was amended by Decree #12,218/2024 to further allow the application of AMP to competition between locally manufactured products and locally manufactured products that meet this additional technological criterion.

Decree #11,890 also created the CICS, giving it the power to define the products to which MPs should be applied and the criteria for doing so. And it was in the exercise of this capacity that CICS published Rule #4/2024[1], determining the application of MPs of up to 15% (5% of NMP + 10% of AMP) for procurement, by the Federal Government (and by the State, District and Municipal, when there is a transfer of funds from the Government[2]), of drugs that are listed in the annex to Rule#4/2024 and meet the defined criteria.

To be considered a locally manufactured drugs and to be entitled to the NMP, the product must be registered with Brazilian FDA (ANVISA) and have been “manufactured” within the country. The term “manufacturing” was defined as the performance of “all operations involved in the preparation of a given drug, including the acquisition of materials, production, quality control, release, storage, dispatch of finished products and related controls” (Article 2, VII).

This definition allows two interpretations. The first: carrying out any of the stages described in the definition would constitute “manufacturing” of the drug in the country. The second: it is necessary to carry out all the stages described in order to benefit from the NMP. The latter seems to be the most appropriate considering the MPs objective, which is to maximize the production of drugs within the country. The first interpretation would allow companies that perform few or simple stages in the manufacture of the product to benefit from the NMP. In any case, the definition allows for some flexibility, since, by including the “acquisition of materials” as a stage, it appears to allow the import of inputs necessary for the manufacturing, such as the API itself. So much so that, when the API is manufactured locally, the AMP can be applied, benefiting the company that carried out the nationalization of this stage. However, it is clear that only the acquisition of “materials” is permitted, that is, inputs for manufacturing the product, and not of already produced parts of said product. This also seems to be the view of CICS, see Technical Note SEI #44259/2024[3] (which instructed the publication of Rule #4/2024).

In order to be considered a locally manufactured drug resulting from technological development and innovation carried out in the country and entitled to the AMP, the drug must, in addition to meeting the NMP criteria, have been manufactured “using exclusively APIs whose production stages were entirely carried out in Brazil, from the starting material” (Article 2, XI). In other words, Rule #4/2024 only allows the import of the starting material, and from then on, all stages must be carried out in the country[4].

The dynamics explained so far, established by the aforementioned legislation (Law #14,133/2021, Decree #11,890/2024 and CICS's Rule #4/2024), do not constitute a substantial innovation to the previous MPs regime. The tricky part of the new regime seems to be the dynamics of proving compliance with the criteria for applying the MPs. Rule #4/2024, Article 7, even requires bidders to prove that their product meet the requirements. However, it does not specify how or when this proof should be provided within the scope of the tender.

In fact, it seems that this proof may not even be required in practice. As soon as the first CICS's Rule was published (Rule #1/2024), the Brazilian Government made available a tutorial entitled “Registration of items entitled to a preference margin”[5], which indicates that the bidder must inform the country of origin of the bided item and, if applicable, indicate whether it falls under one or both MPs. In other words, a simple declaration by the bidder is enough. The Brazilian Government also clarifies that, if the winning bidder wrongly declared that he was entitled to the MPs, it will be up to the contracting officer to carry out due diligence to clarify the situation and, if applicable, disqualify the proposal[6].

Technical Note SEI #44,259/2024 also does not clarify the issue. It only mentions that marketing approvals holders must provide ANVISA with all information about their production process (which is already done as part of their regular interaction with the Agency). And, based on this information, it will be possible to “monitor production conditions and, if applicable, verify whether a given batch of medicines was actually produced in national territory”. In other words, the Technical Note seems to rely on ANVISA's help in verifying compliance with the requirements for obtaining the MPs, which is understandable. But the question is: how?

There is some degree of public information on where a product is manufactured, but it is not comprehensive, nor is it specific enough to identify the stages performed in the country. That is, competitors may have difficulty monitoring each other's compliance with the requirements. ANVISA itself may also have difficulty in providing the desired support. Firstly, because it would be yet another function for the Agency, which is already very busy, with a workforce that has been drastically reduced in recent years. Second, because ANVISA will always be limited to the information contained in the product registration process, and cannot certify what happens in practice (for example, consider a product for which there is more than one approved manufacturer – one national and one foreign –, in which case it would not be possible for the agency to certify which of them manufactured a given batch of the product).

There are, therefore, gaps that have not yet been filled, but which are essential to ensure that the MPs will only be applied to products that meet the respective requirements set by Rule #4/2024 and, therefore, will fulfill their purpose: leveraging the State procurement power to boost the development of the health industrial complex, strengthening the Brazilian Public Healthcare System (SUS).

To view all formatting for this article (eg, tables, footnotes), please access the original here.