Knowledge-Intensive Business Services in Brazil: Entrepreneurship in

Chapter 14

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Knowledge-Intensive Business Services in Brazil: Entrepreneurship in a Stimulating Scenario Thais Guaratini* Lychnoflora, Rua Ângelo Mestriner, 263 Vila Virgínia, CEP 14030-090 Ribeirão Preto, São Paulo, Brazil *E-mail: [email protected].

The economic development and competitiveness of a nation are related to the capability of its companies to innovate and to upgrade. The consequent interest in the results has contributed to the establishment of national policies that encourage the creation and maintenance of favorable scenarios for innovation. Thus, Brazil has been implementing improvements since 1980’s focusing on industrial development. An important step towards promoting innovation in Brazil was the passage of the Technological Innovation Act, Law No. 10,973 on Dec. 2, 2004. This document was meant “to provide incentives to increase innovative activities, as well as to facilitate scientific and technological research by private companies, especially by Small and Medium-sized Enterprises (SMEs).” In this scenario, a group of academic researchers gathered to initiate a business. They had at that time, besides scientific knowledge, some promising results, which have encouraged them to submit their project to a funding agency in Brazil (FINEP) that focused on projects for the development of medicines for neglected diseases. After funding approval, they applied to an incubator program with well-established relations with universities. The business model is based on two complementary goals: development of products for technology transfer and scientific knowledge-based services. At this time,

© 2016 American Chemical Society Cheng et al.; Chemistry without Borders: Careers, Research, and Entrepreneurship ACS Symposium Series; American Chemical Society: Washington, DC, 2016.


the support of two other Brazilian funding agencies (FAPESP and CNPq) is essential for a healthy and sustainable growth. After seven years, under the same corporate constitution and relocation to its own building, the company has overcome challenges and is now known as a knowledge-intensive service business, acting as a facilitator, carrier, or source of innovation, interacting symbiotically with clients, and providing scientific solutions to pharmaceutical, veterinary and cosmetic industries, via an innovative model, for Brazil. This article gives reflections on the nature and the relevance of innovation in Brazil as well as the experience of researchers and entrepreneurs who offer chemical solutions to industries.

A History of the Brazilian Pharmaceutical Industry Evolution and Growth Let us begin with a few historical events that have taken place in the Brazilian pharmaceutical industry. Between 1994 and 2000, many events took place that forced industrial players to change their strategy. By 1997, Brazil had become dependent on foreign technology and there were very few businesses in the country. Moreover, the businesses that did exist were not very large. Then, when the market opened up as a result of denationalization, several of the larger pharma companies acquired some of the businesses, which had already been suffering. At that time, there were no technical or financial resources for R&D, and only the simplest facilities for manufacturing within the country were available. Moreover, there was no existing law on patent protection; thus intellectual property was copied freely. In 1996, Brazilian industry celebrated its first major milestone in recent history with the passage of a patent law. The ratification of this law put a quick end to the “copy” industry. In 1999, Brazil followed in the footsteps of several other countries and passed a Generic Law allowing for the production of generic drugs after the original patents had expired. As a result, a new market was introduced into the country. Also in 1999, Brazil created the ANVISA organization (1), which serves as the regulatory agency in the Brazilian market. Taken together, all of these policy changes forced the industry to rethink their strategies. The generics market was of great interest to the government at that time as a mechanism for alleviating problems with public health. However, the international companies operating in the country had no interest in the production of generics. Responding to this, the government decided to support Brazilian pharmaceutical industries by allowing them to produce generic drugs. This resulted in the first real push toward the growth of the national pharmaceutical industries that we still see in operation today. It has been reported that as of mid-2013, the revenue from sales of Brazilian produced drugs on the international market has reached the same level as in the Brazilian domestic market. Taking into consideration that there about 200 million people living in Brazil and that the domestic pharma market generates roughly 124 Cheng et al.; Chemistry without Borders: Careers, Research, and Entrepreneurship ACS Symposium Series; American Chemical Society: Washington, DC, 2016.


$26 billion dollars revenue per year, the combined revenue of the domestic and international markets is quite an impressive number. Moreover, Brazil now finds itself well-established in the emerging markets industry, alongside Russia, India, and China. From a financial perspective, Brazil ranked 10th in global pharmaceutical sales in 2007. However, by 2012, it had jumped to 4th to 6th. What is more, with the current growth rate, by 2017 Brazil is projected to move to 4th, below the United States as 1st, China as 2nd, and Japan as 3rd. Although Brazil is growing, it is still reflects a need of developing huge market and generics policies. Moreover, an imbalance is seen: from one side, there is a very high production of high quality generics and a strong and competitive local market. But from the other side, just few companies have Research and Development laboratories and the industries have a high dependence on imports and a very low level of innovation. Industrial Development It was not until 2004 that the government approved the Innovation Law (2) to encourage innovation and technology transfer from universities to industries. The law aimed to accomplish several objectives: to increase competitiveness and dynamism within the economy, to increase technological density through new and innovative products, to increase both industry and government spending on R&D, and to promote a favorable environment for innovation. Following the open innovation model, the goal was to produce results through a combination of efforts by the industry, government labs, and universities. A result of the 2004 Innovation Law was the creation of public policies. In 2008, the Productive Development Policy (PDP) was enacted with the goal of increasing innovation, investments, and exportation. Additionally, the law was also designed to increase the number of patents being filed, spur industrial competitiveness, provide a sustainable environment for new businesses, strengthen small and micro national enterprises, and improve the R&D chain. The law was also designed to achieve developmental goals in certain areas that the government had deemed important for economic development, many of which were not pharmaceutical. These included industrial health, information and communication technologies, nuclear energy, military industrial complex, nanotechnology, and biotechnology. Perspectives for a Spin-off in Brazil, 2008 The incentives for creating a “spin-off” in Brazil were rather strong. On the private side, the level of technology was quite low and there was a need for innovation. Moreover, the government was providing stimuli (funding) for collaboration on projects, and there were several instances of human resources being directed to focus on R&D within the industry. Meanwhile, on the governmental side, special funding was being allocated for innovation, in addition to the creation of several technological parks and company incubators to help stimulate new companies and startups. Innovation offices were also constructed 125 Cheng et al.; Chemistry without Borders: Careers, Research, and Entrepreneurship ACS Symposium Series; American Chemical Society: Washington, DC, 2016.

and filled with high-quality researchers in conjunction with funds being set aside for the creation of academic spin-off companies. When all these factors came together, the result was a symbiotic environment. This made it possible to develop new companies that could not only work in production and the transfer of technology, but also in knowledge services, which was a new niche market. It was under these circumstances and in this environment that Lychnoflora was born.


Overview of Lychnoflora Company Structure Lychnoflora (3) is an academic spin-off that was founded at the end of the author’s PhD studies. At this time it became apparent that a different idea could be developed into a new product. The mission of the company is “to translate scientific knowledge into creative and innovative solutions to the health industries, in a sustainable manner, for the organization and for society.” Lychnoflora has two different business tracks: product development and knowledge-intensive business services. Product development is focused on the transfer of technology to companies for production, while knowledge intensive business services focus on providing solutions to analytical, phytochemical, and project management problems. The interaction with the university, through the development of R & D & I projects, is a major source of generating new ideas, new projects and scientific growth of the team.

Summary of the Spin-off Growth 2008 – Lychnoflora was born in an incubator environment. It was at this time that the formal constitution of the company was drafted. However, the company remained small and confined to the incubator. 2009 – By then, the company had begun to move beyond the incubation stages and received its first governmental funding along with the acquisition of its first lab. 2010 – Feeling the need to make improvements, the company moved to a bigger laboratory, in addition to developing a structure for providing services. 2011 – Lychnoflora received approval for “Lei do Bem” and stepped up the level of services it provided. 2012 – Four years since its birth, Lychnoflora left the incubator and began to exist entirely independently. 2013 – Lychnoflora was approved for the production of standards from natural products and continued to expand the services it provides as well as its client pool. 2014 – Finally, the company gained Enterprise Resource Planning (ERP) implementation capability (SAP) and developed an advertising program. 126 Cheng et al.; Chemistry without Borders: Careers, Research, and Entrepreneurship ACS Symposium Series; American Chemical Society: Washington, DC, 2016.


Revenue Over the past three years, Lychnoflora has experienced major revenue growth. In the period between 2012 and 2013, the company increased their revenue by 68%, and from 2013 to 2014, revenue grew by 76%. These massive revenue increases were due, in part, to the support the company received from the Brazilian government as a private enterprise, qualifying as a micro-business and a spin-off, as well as a technology-based company. In 2011, the company’s income was derived almost entirely from government funding; however, Lychnoflora’s profits began to soar since, reducing government funding to around 20 % at present. Additionally, the success of the company also has to do with the timing of its inception. Considering the trends in the industry in conjunction with legislative action and financial support from the government, the company was born at the “right time”. Finally, the company does not currently have any private equity investments. This is not because they are undesired. Lychnoflora is, in fact, open to investment; it is simply because this type of investment is new and little widespread in Brazil and just beginning to gain popularity.

Product Development at Lychnoflora An Overview Lychnoflora focuses on developing active ingredients from natural products, taken primarily from Brazilian biodiversity. These ingredients are then used in the human and animal pharmaceutical industry, as well as in the food and cosmetics industries. Some of the products produced by Lychnoflora include extracts for use as anti aging cosmetics, new natural compounds against leishmaniasis in both humans and dogs, and analgesic and anti-inflammatory compounds for chronic pain. Additionally, Lychnoflora also develops analytical standards from plants for the quality control of phytomedicines. One example of a new product is a new active ingredient for cosmetics. This was developed by taking the residue from extract production and developing a green chemistry purification procedure to produce a flavonoid-rich extract that can be used as ingredient in cosmetics. Leishmaniasis Treatment Every year, 700,000 to 1.3 million new cases of cutaneous leishmaniasis (CL), a disease causing destructive injuries and high morbidity, are reported. The World Health Organization estimates that roughly 12 million people across 88 countries live in areas where CL is endemic. Yet this disease is largely neglected and goes untreated. As a result, one of the major products currently being produced by Lychnoflora, in collaboration with the University of São Paulo, is for the treatment of CL. The product is a compound from a plant extract that was discovered 127 Cheng et al.; Chemistry without Borders: Careers, Research, and Entrepreneurship ACS Symposium Series; American Chemical Society: Washington, DC, 2016.


through extensive research. The partnership involved development of synthesis of an analogue compound and scale-up, on the chemistry side, and testing the compound in vitro, on the biology side. Following successful in vitro tests, pre-clinical pharmacological studies were conducted, and the drug toxicity was also evaluated. Finally, after all these research efforts, Lychnoflora and the University of São Paulo have now a form of the drug that will be submitted for human trials. However, the development of new products in the pharmaceutical area for human use can take 10-12 years. Recognizing these timelines, Lychnoflora has begun investing also in the development of new drugs that can be used on animals; as it takes less time to get drug approval. Specifically, the company has been exploring treatments for CL in dogs, using a similar formulation. Brazilian Agribusiness Another growing market in Brazil is the agribusiness, which makes up roughly 22% of Brazil’s gross domestic product and represents about 30% of total exports of Brazil. Within this market, the soybean industry and the meat industry, representing $31.4 billion and $17.4 billion in annual revenue, respectively, are the largest segments. When we look at the beef market specifically, we see annual revenue of $7.1 billion dollars. Because of these numbers, it is expected a very strong market for veterinary products. One of the largest problems in the Brazilian cattle market has to do with the losses incurred as a result of cattle tick infestation. Ticks can wreak a lot of havoc on the industry, resulting in lost income due to money being spent on acaricides to keep ticks off of cattle, bovine weight loss, blood loss of 500 ml per day, milk loss of 95 liters per lactation period, and damage to cattle hide. Furthermore, cattle ticks increase the mortality and disease susceptibility of cows and negatively affect the population’s birth rate. In order to reach this market and provide a solution to the tick problem, Lychnoflora, in partnership with Decoy, another spin-off company, is developing an ecological solution to control ticks. The product works by using pheromones to attract ticks to a trap that is placed on the cattle’s tails. Once in the trap, the ticks cannot escape and remain there until removed. This innovation is great for the agribusiness because there are no drugs or residues used when combating the issue of ticks; it is 100% ecological.

Knowledge-Intensive Services at Lychnoflora When providing knowledge-intensive services, Lychnoflora focuses on giving solutions to analytical problems, access to high technology that is not available to other industries, as well as scientific support for researchers. Many of the projects the company carries out deal with reference compounds, degradation products, characterization and chemical analysis, natural products, clinical and non-clinical pharmacokinetics, as well as technical and scientific consulting services for the development and implementation of new projects. 128 Cheng et al.; Chemistry without Borders: Careers, Research, and Entrepreneurship ACS Symposium Series; American Chemical Society: Washington, DC, 2016.

Anti-inflammatory Drug development


A project, which was one of Lychnoflora’s first interactions with Brazilian industries, was the development of an anti-inflammatory drug. In developing this drug, the producers were using all natural ingredients, and were having trouble with extraction standardization, determination of chemical profile, characterization of constituents, and with obtaining reference compounds. Lychnoflora was able to help them on this project, with all of these issues. The resulting drug that was created as a result of consultation with Lychnoflora’s and using its services looks promising and is a truly innovative Brazilian product.

Current Situations It has been well documented in the news that Brazil is undergoing a governmental crisis which has been followed by an economic crisis. This has resulted in a very large reduction in federal support to the industry and a cessation of future governmental support. The government is no longer giving support for startups, so the prospects have changed. Funding must now be sought in the private sector or from international funding programs. This is why the author mentioned earlier that Lychnoflora was born at the right moment. Brazil is still highly dependent on imports in the pharma market, with a high demand for innovation. Thus, Lychnoflora is still determined to push ahead and continue to grow and offer chemical solutions to industries.

References 1. 2.

3.

ANVISA, Brazil Health Surveillance Agency; http://portal.anvisa.gov.br/wps/ portal/anvisa-ingles (accessed Aug 1, 2015). BRASIL. Lei de Inovação Tecnológica (Lei n.o 10.973/2004). Brasília, DF: Congresso Nacional. Atos do Poder Legislativo, DOU, 232, of Dec. 3rd, 2004. Lychnoflora; http://lychnoflora.com.br/lychnoflora/ (accessed Aug 1, 2015).

129 Cheng et al.; Chemistry without Borders: Careers, Research, and Entrepreneurship ACS Symposium Series; American Chemical Society: Washington, DC, 2016.

Knowledge-Intensive Business Services in Brazil: Entrepreneurship in

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