Is Equitable Pricing the Answer?

by K. Balasubramaniam

In the early months of 2000, the pharmaceutical industry and international agencies began protracted negotiations on price discounts on selected HIV/AIDS drugs. Negotiations are carried country by country, drug by drug, and company by company. As a result, only a few countries had negotiated price discounts as of 2001. Is equitable pricing a sustainable way forward when required information, such as the manufacturers' selling price of drugs is not made available?, healthcare providers and government officials in one of the wealthiest countries in the world.

Introduction

In order to examine and analyse drug pricing, affordability and accessibility of essential drugs in developing countries, it will be helpful to examine the economic and demographic profile of these countries [i].

Demographic Profile of 110 developing countries :

Population
11 countries have a population of less than 100,000 each, 24 countries have less than one million each, 65 countries have less than 10 million each.

Annual GDP
20 countries have an annual GDP of less than $500 million each, 28 countries have less than $1 billion, 57 countries have less than $5 billion and 75 countries have less than $10 billion each.

Per capita GDP
39 countries have a per capita GNP of less than US$400. The per capita GNP in developing countries is not a realistic measure of the purchasing power of the population, as income distribution is highly skewed. There are people living in sub-Saharan Africa on less than three cents a day. In Brazil with a per capita GNP of US$4,720, over 16 million people are living on a dollar a day. The per capita external debt in some developing countries is higher than the per capita GNP.

Appropriate public policies are the only way by which these people can have access to essential drugs. It has been estimated that over two billion people in developing countries have no access to drugs. They lack access because the prices are high and their purchasing power is low. It is ironic that the retail prices of several essential drugs are higher in poor developing countries than in affluent developed countries. [ii]

Differential pricing or price discounts?

During the early months of 2000, five multinational drug companies - Boehringer-Ingelheim, Bristol Meyers, Squibb, Glaxo-Wellcome, Hoffman LaRoche and Merck, and five international agencies - WHO, UNAIDS, UNICEF, UNDP and the World Bank began protracted negotiations on price discounts on selected HIV/AIDS drugs. Published accounts of these negotiations caused grave concern to consumers [iii]. Conditionalities have been attached to the price discounts, which will have a long-term adverse impact on the affordability and access to essential drugs in developing countries.

• Reinforced and adequate protection and enforcement of industry's patents
• The five drug companies want the UN partners to explicitly renounce the use of two mechanisms that limit the industry's price setting power.
  The two mechanisms are:
  i) compulsory licensing
  ii) parallel imports

These are the two safeguards provided for in the Trade Related Aspects of Intellectual Property Rights (TRIPs) Agreement, and developing countries have the right to use these safeguards. The conditionalities set by the industry for price discounts are contradictory to the global initiatives to ensure affordability and accessibility to essential drugs.

An investigation of the negotiations behind the initiative indicated that the companies were more concerned about protecting their intellectual property rights than in reaching patients. Very little progress had been made. Negotiations are carried country by country, drug by drug and company by company, only. As a result, only Rwanda, Senegal and Uganda had negotiated price discounts as of February 2001, nine months after the negotiations were initiated [iv].

The first essential prerequisite in negotiating price discounts is the need for transparent information on manufacturers' selling price [MSP] of drugs. Unfortunately this is not available since companies do not divulge how their drugs are priced.

Drug prices

Several surveys on retail prices of essential drugs have been carried out and published. All these studies have reported wide variations in the retail prices of essential drugs among countries. Retail prices of several essential drugs are higher in developing countries of Africa and Latin America than in the rich OECD countries.

Consumers have argued that these wide variations are due to the industry setting prices arbitrarily to maximise their profits. Since negotiations on price discounts are based on manufacturer's selling price (MSPs) and these are not available, it will be necessary to understand the relationship between retail prices (which are in the public domain) and MSPs, which are confidential.

The following information on the relationship between retail prices and MSPs have been taken from the background documents prepared for the workshop on Differential Pricing and Financing of Essential Drugs by the World Trade Organization (WTO) and World Health Organization (WHO) secretariats.

• Wholesale and retail margins can be as high as 150 to 200 percent in some developing countries [IFPMA].
• Retail margins in India are about 25 percent [Jayashree Watal].
• Distribution margins and taxes can constitute up to 80 percent of the consumer price [WHO]. This will make the consumer pay four times the MSP.

b) The background paper prepared by the WHO states that:

• Import duties, taxes and wholesale and retail mark-ups, both formal and informal, can double the price of a drug between manufacturer and consumer.

However, it is relevant to ask which of these internal costs can cause a 58 fold increase [v] in price between the manufacturer and the consumer, as seen in the price of Ranitidine. Sold under the brand name of Zantac, this drug costs US$2 in India, and is as high as US$116 in South Africa.

Based on the information in the background documents on the relationship between retail prices and MSP and the published data on retail prices, it can be concluded that internal costs within a country cannot cause the very wide variations in retail prices. It can only be concluded that the variations in retail prices are due to variations in the prices set by manufacturers in different markets. For proper negotiations to take place, it is necessary for the real costs of production be made known.

While consumers welcome initiatives by few drug companies, international agencies and a few developing countries to negotiate discounts on treatments for very visible calamities such as HIV/AIDS, malaria and tuberculosis, the problem of lack of access to the two billion people who have no access to essential drugs cannot be solved by negotiating discounts for medicines on a country by country, company by company and drug by drug basis.

What is needed is a long-term sustainable solution to improve affordability and accessibility to all essential drugs required, to meet the essential needs of the people. The long-term solution is promoting competitive generic production of all drugs that are essential.

The setting up of the United Nations Conference on Trade & Development [UNCTAD] and the formation of G77 (a grouping of developing Member States of the UN) in the 1960s, and the proposals for a New Economic World Order in the early 1970s, set the global scenario for developing countries to explore policy options for the economic technological and commercial development of their countries. One of the sectors identified was the pharmaceutical sector.

Pharmaceutical R&D, innovation and production

United Nations Industrial Organisation (UNIDO) has classified countries in the following categories depending on the stage of development of the pharmaceutical sector (Table 2).

Table 2: A typology of World's Pharmaceutical Production

note 1: These countries are Argentina, China, India, Korea and Mexico

Source: The World's Pharmaceutical Industries: An International Perspective on Innovation, Competition & Policy - by Robert Ballance, Janos Progany & Helmet Forstener, UNIDO, 1992

Table 2 illustrates the following:

• Multinational drug companies [MNCs] in 10 industrialised countries have the R&D base to support a vertically integrated, sophisticated pharmaceutical industry. These MNCs are the innovators of all new chemical entities.
• National drug companies in Argentina, China, India, Korea and Mexico have innovative capabilities for manufacturing generic copies of all new drugs. Brazil is the sixth country capable of this innovative capability.
• National drug companies in eight developing countries have the technology to produce therapeutic ingredients or raw materials from chemical intermediates available in the world market.
• National companies in about 90 developing countries have the technology to manufacture dosage forms or finished products from raw materials available in the world market.

The MNCs in the industrialised countries and the national companies in about 100 developing countries have been able to develop their pharmaceutical industry to present levels because they used the national legislation on patents as policy instrument to develop and strengthen their technological, commercial and economic development. The Paris Convention on intellectual property rights [IPR], adopted in 1883, gave freedom to national governments to define and set standards for pharmaceutical patents.

The therapeutic revolution began in the mid 1940s after the second world war enabled drug companies in the ten industrialised countries to innovate and introduce NCEs which were truly revolutionary. One of the major contributing factors for this therapeutic revolution was that some countries in Western Europe and Japan refused to grant product patents for pharmaceuticals, until they had reached international competitiveness. These countries provide the most convincing argument that a patent-free environment is essential for the technological development of the pharmaceutical industry. France, Germany, Italy, Japan, Sweden and Switzerland, home to some of the most innovative pharmaceutical companies, persistently resisted providing pharmaceutical product patents until their industries had reached a certain degree of development. France introduced product patents in 1960, Germany 1968, Japan 1976, Switzerland 1977, Italy and Sweden in 1978 [vi].

The development of the pharmaceutical industry in the 100 developing countries in Table 2 was possible because of the flexibility the Paris Convention which enabled sovereign states enact appropriate national legislation on patents. None of these countries protected pharmaceutical products. Some of them protected neither products nor processes including Brazil a founder member of the Paris Convention.

Generic manufacture of drugs will increase competition. This has proven to be an effective way of decreasing drug prices, as seen in the prices of antiretrovirals in Brazil. Prices came down by 82 percent within five years after Brazil initiated local production and provided universal free HIV treatment to Brazilians who needed them. Recent offers from generic producers have sparked a price war for antiretrovirals and have brought the annual price for triple therapy down from US$10,000 to US$350 in a single year.

Conclusion

A long-term sustainable solution is needed to improve access to medicines. A first step would be for countries to adopt and implement National Drug Policies based on the concept of essential drugs. Increasing generic competition is a proven method in bringing prices down. It is crucial for countries to incorporate into their national legislation, mechanisms to enable for compulsory licensing and parallel importing as provided under the TRIPs Agreement. Bilateral pressure from multinational drug exporting countries placed on developing countries must be stopped. Countries should be able to exercise their rights in determining their public health priorities and be allowed to take the necessary measures. Countries that do not have the local production capacity in producing medicines, should have the means to issue compulsory licenses to firms in countries that can meet their production needs and have the production shipped to them.

K.Balasubramaniam is Coordinator - Action for Rational Drugs in Asia (ARDA) and Pharmaceutical Adviser to Consumers International Regional Office for Asia and the Pacific.

The writer thanks Beryl Leach, Coordinator - HAI-Africa, Margaret Ewen, Coordinator - HAI-Europe and Roberto Lopez, Coordinator - HAI Latin America, for their valuable input.

References

[i] a. UNDP Human Development Report 1999, and b. World Development Report: Knowledge for Development, World Bank 1998/99.

[ii] i) K.Bala, Oscar Lanza & Shila R Kaur, "Retail Drug Prices: Law of the Jungle" in HAI News No. 100. ii) K.Bala & Kiran Sagoo "Patents & Prices" in HAI News No. 112, April/May 2000. iii) McNeil D.G. "As Devastating Epidemics Increase Nations Take on Drug Companies", New York Times July 9, 2000. iv) WHO background document to the WHO/WTO secretariat workshop on Differential Pricing and Financing of Health Services.

[iii] Barton Gellman, "A Turning Point That Left Millions Behind. Drug Discounts Benefit Few While Protecting Pharmaceutical Companies Profits" in Washington Post, December 28, 2000.

[iv] Gellman 2000 - ibid

[v] K.Bala and Kiran Sagoo, op. cit.

[vi] Sistema Econimico Latinamericano (SELA) "Capitulos De Sela", October/December, 1988, Caracas. Quoted in "Patenting and the Third World: A Historical Appraisal" by Henk Hobbelink, co-ordinator GRAIN (Genetic Resources Action International) Appartado 233398, E08080, Barcelona, Spain, 1990.