Another Side of Regulation: the Case of the Cheaper Medicines Act

According to economic theories, price regulation is generally disadvantageous to business. Everytime the government imposes price ceilings, it undermines the role of market forces in determining product prices.

Instead of market competition and the interaction of consumer demand and goods supply, the government becomes the all-powerful force, attempting to balance the complex capitalist market.

Economists argue that government intervention fails to reflect real market conditions. The prices are imposed arbitrarily and almost always miss the equilibrium point of supply and demand, resulting in either shortage or excess of goods in the market. These spell disincentive for business players.

The Philippine drug industry, however, seems to be an exception. Decades of unfettered business, instead of lowering drug prices through competition and supply-demand interaction, resulted in exorbitantly priced medicines in the country.

High Prices of Philippine Drugs

Comparative records from other countries reveal that for the longest time, drug prices in the Philippines failed to reflect real market conditions. In a 2007 cheaper medicines forum, Dr. Alberto Roxas, dean of the University of the Philippines College of Medicine, said “Filipinos buy medicines at prices 3.4 to 18 times higher than the international reference index.”

Rep. Emilio Abaya added that the Department of Health Pharma 50 Program revealed that Philippine medicines remain “40 to 70 percent” more expensive than in other Southeast Asian countries.

Rep. Ferjenel Biron, one of the main proponents of the Universally Accessible Cheaper, Quality Medicines Act of 2008, used the asthma medicine salbutamol as a concrete example. He said in India the drug is sold at only 85 pesos. In the Philippines, however, its “identical replica” imported from Australia costs 410 pesos, five times more expensive.

The Issue of Price Controls

These examples moved Biron to include a drug price regulatory board in his version of the Cheaper Medicines Act (CMA). As expected, it was opposed by drug firms through the Pharmaceutical and Healthcare Association of the Philippines (PHAP), the largest group of multinational drug companies in the country.

In a position paper given to Congress, PHAP pushed the idea of price ceiling as a disincentive to business players in the drug industry. PHAP said price control will “dampen innovation” because it “leads to conditions which stifle investment in R&D (Research and Development).”

“By pushing prices of drugs towards a certain ceiling regardless of the amount of investment needed to bring each new product on the market – profits (and therefore the ability to recoup R&D investment) of producers of innovative drugs inevitably fall. Price control has been shown to take away the incentive to invest in new research to develop new products,” it added.

PHAP also said that the artificial prices brought by the control will “stifle competition” in that it produces rogue feedback from unnatural supply and demand interaction. Instead of sending signals to players to increase or decrease supply based on demands, the information is utterly useless because it does not reflect real market conditions.

The Imperfect Market

This position relies heavily on Western economic theories. However, coming from the same school of thought, the late Nobel Prize recipient economist Paul Samuelson argued that “imperfect market competition” can equally blight demand and supply interaction. This may well explain the phenomenon in the Philippine drug industry.

Samuelson wrote that “Imperfect competition prevails in an industry whenever individual sellers have some measure of control over the price of their output.” That is, regardless of the market conditions, business players can dictate the prices of their goods, undermining the signals from consumers and suppliers. Market monopoly, oligopoly, and monopolistic competition are examples of such.

Monopoly in the Philippine Drug Industry

In the final form of the CMA, the drug price regulatory board introduced by Representative Biron bowed to Sen. Manuel Roxas’ version of a price control through a Maximum Retail Price (MRP) in the hands of the president, consulting with the DOH secretary.

Monopoly was the battle cry of CMA supporters in Congress as well as smaller Filipino players in the drug industry. The same argument convinced Senator Roxas to reconsider the MRP which was not part of his original Senate proposal.

The data from drug industry statistics speak for themselves. Records show that 60 t0 70 percent of the industry belongs to multinational firms with much higher prices. Interphil, a multinational company, controls 80 percent of total drug manufacturing. In the case of wholesale distribution, its sister company Zuellig, and another company, Metro Drug, control 65 to 75 percent of the industry. Mercury Drugstore with its over 600 branches in the Philippines and Watsons form the retail monopoly.

In a statement, Dr. Geneve Rivera, Secretary General of the Health Alliance for Democracy (HEAD) said the high prices of multinational medicines are “fueled by their insatiable greed for profits, greed that is perpetuated by their monopoly.”

HEAD worked closely with pro-CMA representatives during the enactment of the law.

According to PHAP, drug prices are high because of the costs of research and development. In their factbook, data show that it takes more than 15 years to develop new drugs, with expenses reaching as high as “one billion dollars.” A third of the expenditures are incurred in the clinical evaluations.

William Fabroa, Director PRO of the Philippine Chamber of the Pharmaceutical Industry, the local counterpart of PHAP and a supporter of CMA, has another story. He admitted that drug R&D is expensive, but whether local or multinational, all drug firms go through the same process.

That is, Filipino-owned companies also incur the same expenses as multinationals, but they can sell at much lower prices. He said multinational drug firms even have the advantage because they recoup their investments much faster because of market dominance. Despite this, they charge much higher prices for their products.

Asked, then, what the deciding factor in the difference of prices, Dr. Fabroa agrees with Dr. Rivera of HEAD. His answer is simple. He said, “Greed. That’s the only thing, greed.”

“When the multinationals entered our market with their patented products, they started with sky-high prices…We had no choice, because we had no drug industry then. We can’t even manufacture paracetamol…And they never reduced their prices even when the off-patents came, unlike in other countries,” he added.

The Work Begins

Recognizing such monopoly, CMA’s MRP provision is eyed as a potent weapon to truly reduce prices. Despite moves from multinationals to stop the signing of Executive Order 821 which will implement the MRP, the president nonetheless pushed for the reduction of 22 of the 647 essential drugs identified by DOH.

Dr. Fabroa said, competition cannot bring down the prices of the essential drugs because more than 400 are exclusively produced or marketed by multinationals. This means, they can set prices according to their whims. Here, monopoly is evident, and a price ceiling necessary.

Unfortunately, with only 22 drugs covered by the MRP and only around 200 influenced by competition, multinationals still have considerable leeway in the control of prices of the remaining 400 essential drugs.

Here, Rep. Satur Ocampo’s thrust for a nationalized drug industry gains ground. In a statement, he said, “we will continue to stress that we should not only focus on mere adjustments in the existing mechanisms. After all, the key to safe and affordable medicines is a nationalized drug industry based on willingness to serve the people and not just to satisfy the thirst for profit.”

Dr. Fabroa shares this vision and encourages support for local drug research and development. In the long run he said this will boost technology and give Filipino firms the capacity to produce more of the essential drugs to bring genuine competition in the market.

Regulation in an Imperfect Competition

The Filipino drug industry reflects imperfect competition that prevents market forces from truly reflecting market condition. This gives a limited number of players the freedom to impose prices without competition and outside the interaction of supply and demand.

In such a condition, regulation becomes a tool against monopoly. Even proponents of CMA, however, recognize the need for a long-term solution, which, unfortunately is beyond regulation. But at the moment, the MRP is doing Filipinos good-- it has reduced a number of medicines direly needed by the poorer sectors of society.

But the promise of accessible cheaper and quality medicines is still a work in progress.

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  1. Ngayon lang ako nakabasa ng gawa mo kuya pau. Ang husay!:) Na-realize ko lang na nate-take for granted madalas ipaliwanag na monopolyado ang karamihan ng industriya sa bansa (ni hindi nga rin mga Pilipino ang may-ari) at nambabash agad ng liberal policies. Hehe. Pero yung style mo ng pagsulat, hindi nang-aaway, pero intelligently at truthfully nagpapaliwanag.:) -pauline