The Crisis Continues
Only coherent, consistent, long-term policies will resolve the sector difficulties
By SHABBIR H. KAZMIThe present crisis in the pharmaceutical industry is an outcome of combination of various factors. Stubbornness of revenue collectors to impose new taxes and duties even on an industry of crucial importance, attitude of ministry of health to deal with problems with a stick, lust of the trade to make more money by creating artificial shortages and blaming the manufacturers for something they had nothing to do with, and failure of negotiators to arrive at a workable and mutually beneficial agreement.
Aug 10 - 16, 1996
It is true that the depreciating rupee and high rate of inflation and imposition of new taxes and duties has pushed the prices of all commodities up and pharmaceutical products cannot remain immune from this trend. However, as a first precaution the government could have avoided this by not imposing new taxes and duties on this industry. And if it was inevitable, lower rates should have been fixed to avoid heavily increased prices. Most of the medicines are exempted from duties and taxes to offer better facilities for the ailing people.
However, the biggest problem has been created by the ineptness of the ministry of health in allowing a realistic increase in prices which has resulted in suspension of supplies from the pharmaceutical companies and the stocks are exhausting fast, providing an opportunity to the trade to satisfy their lust to make money through black marketing. If it is true, which it would seem to be, that the depreciating value of the rupee and high rate of inflation necessitate adjustment of prices upwards at regular intervals, a formula should be developed like the one the government had devised for the oil refining industry basing the price of POL products on dollar-rupee parity rate and a minimum rate of return.
The pharmaceutical industry could have followed the example of the transporters who had achieved their objective by stopping the movement of their vehicles. When the capital was without petrol, the people concerned realised the gravity of the situation and accepted their demands within a few days of the strike. However, they could not do the same for two reasons, the nature of their products forced them to keep on producing the medicines even in the worst scenario and their head offices did not approve of such extreme steps, said the CEO of a pharmaceutical company.
"We have been working in periods of great uncertainty but why should the period drag to infinity. There should be an immediate end to this. Of course, we want a decent rate of return on our investment made in Pakistan to justify continuation of our operation in Pakistan. The industry has the largest percentage of foreign investment but it still needs more investment to provide healthcare for all by the year 2000", was the opinion of another Pakistani heading a transnational company.
The pharmaceutical companies in Pakistan comprise two distinct groups in terms of ownership the nationals and the multinationals. Whereas the total number exceeds 270 there are only 31 multinationals and the number may reduce further as a result of worldwide mergers. However, the interesting point is that these multinationals have nearly 75% share of the total market.
Another important point is that although for acquiring a manufacturing licence or its renewal, membership of Pakistan Pharmaceutical Manufacturing Association (PPMA) is compulsory. However, the list of its members is confined to slightly more than 150 companies. The points worth probing are: which are the non-member companies, what do they manufacture and how much percentage of raw material imported by them goes into actual manufacturing . Also why are their licences renewed if they are not doing any manufacturing? The present scenario provides enough reason to suspect that some of these companies import duty-free raw material and dispose of it in the local market.
There have been rumours that many companies have acquired manufacturing licences but are not manufacturing anything at all. More than 30 pharmaceutical companies have acquired licences for basic manufacturing or intermediate products but excepting a few, none are involved in basic manufacturing. A government-appointed sub-committee in its recently prepared report on pharmaceutical industry has expressed concern on the fact. However, there is a relatively high degree of self-sufficiency in the formulation and packaging of finished pharmaceutical products.
This clearly indicates gross negligence on the part of the government. On the one hand, it has failed in checking the affairs of erring companies and, on the other hand, the trade has been left free to charge prices according to their whims and fanicies on the pretext that manufacturers have increased the prices. In addition to this, the government has also failed to stop the entry of medicines in the country through carriers, particularly from India and via Middle Eastern countries.
The dubious role of trade has been visible ever since the government announced the budget for 1996-97 and imposed new duties and taxes while the manufacturers were busy negotiating with the government and all supplies were suspended, the trade started over- charging and even started floating new enhanced prices.
According to manufacturers, there is always a 90-day stock with the wholesalers as well as in the pipeline. Since the enhancement of prices is inevitable in the month of July as a result of re-adjustment in the duties and taxes, the stocks are always higher during the months of June and July. However, as apprehensions rose this June that the government would impose GST, the manufacturers released a much bigger quantity of stocks. Negotiations with the government are always a nerve wracking exercise, but this year the situation was even tougher. The government was under pressure to increase its revenue by imposing tax on every conceivable product and chances of arriving at workable/mutually acceptable rates were low. The trade meanwhile did not miss the opportunity to grab an extra buck.
Almost 72% of the products fall under government control and the manufacturers cannot increase the prices without permission from the ministry of health. Therefore, it was not possible for the companies to increase the prices. Knowing this fact very well and suspension of deliveries traders not only started charging higher prices but also started accusing the manufacturers, particularly the multinational companies of raising the prices.
According to the chief executive of an MNC, the foreign companies are handicapped because they cannot even clarify their position without the approval of their head offices, but the traders often issue misleading statements. Although they were blamed for the price hike after the budget, it was absolutely baseless, he added.
Referring to constant increase in prices he said that only the government and its poor management of the economy are to be blamed. It is very unfortunate that the rupee is depreciating so fast, fuelling inflation and forcing the pharmaceutical manufacturers to adjust the prices upward.
Another chief executive added that perhaps Pakistan is the only country in which the government has imposed duties and taxes on such an essential industry. Sales tax on medicines is unheard of in most countries of the world, especially in the developing countries. It is for the first time that 5% sales tax has been imposed on pharmaceutical products besides imposing regulatory duty on the import of raw materials, intermediaries and packing material.
Generally, medicines are exempted from customs duty and sales tax both on raw materials (imported and locally available) and on finished products based on the fact that these are essential and their use cannot be avoided at any cost in the treatment of ailing persons.
Although the government has decontrolled the prices of many products, the prices of more than 70% of products have to be approved and notified by the government. Since the demand for medicines is usually inelastic, even if the prices are pushed up, the consumer cannot put up any resistance though the consumption may decrease with high prices.
Pakistan is still among those countries which have the lowest per capita consumption. According to a report by Pharma Bureau, a Pakistani spends around Rs.0.50 per day on drugs and medicines. This, indeed, is a deplorable figure indicating the poor health conditions of the people in the country.
According to other studies while the government-controlled healthcare services are capable of providing such services to less than half of the population, the medicines have to be bought by the patients. Hospitals do not have enough resources to provide medicines to out-patients as well as those admitted in various wards.
While the general impression is that pharmaceutical companies make fabulous profits and expenditures, the companies in general and MNCs in particular refute the allegations. They say that when people look at return on equity they get the impression that pharmaceutical companies are involved in profiteering. But it is also a fact that while the paid-up capitals of these companies are low, over the years these companies have developed huge reserves. Also, since the companies enjoy very good cash flows, optimize cost of production and wastes are low resulting from strict quality assurance programmes, and soft-term financing arrangements are available, their profitability is higher. This is better utilization of resources, not over-charging the customers as prices of medicines are still low in Pakistan as compared to other countries.
They are also of the view that if the government or any other agency has views to the contrary, their financial accounts are open for scrutiny at least for public limited companies enjoying the major share of the total market..
But some people connected with finance say that almost all the pharmaceutical companies are, one way or the other, involved in transfer pricing. However, another group believes it was because of the faulty tax system and restrictions on repatriation of profit that had led the foreign companies to indulge in this. They still believe that there should be some check on this practice after the government has withdrawn all such restrictions.
The insistence of the ministry of health that medicines should be sold at pre-budget prices is rather unreasonable in the present circumstances. If all industries and traders have a right to transfer the burden of new taxes to the consumer, why should there be a restriction on the pharmaceutical industry. That was the question some members of the pharmaceutical industry posed.
According to the chief of a national pharmaceutical company, the government of Pakistan has always patronized the foreign companies as this sector has the highest amount of foreign investment. The lobby of these companies is also very strong and pulls different kinds of strings to maintain its control. However, he was also of the view that national companies have failed to exploit their own potential. He pointed out that some of the national companies are now producing medicines for foreign companies which was a clear indication of the fact that their production facilities as well as quality assurance procedures conformed to international standards.
The operations of foreign companies in Pakistan are a small percentage of their global operations and the profits earned from the country are insignificant but the companies would never like to withdraw from Pakistan simply because the situation at the moment was not conducive to their operations. The conditions here are at least better than those prevailing in a number of other developing countries. "We do not need favours but certainly are justified in demanding a conducive environment for making more investment, coherent and long-term policies and adhering to the policies once they are announced", were the remarks of an expatriate head of pharmaceutical company.B
The biggest problem has been created by the ineptness of the ministry of health in allowing a realistic increase in prices which has resulted in suspension of supplies from the pharmaceutical companies.
The operations of foreign companies in Pakistan are a small percentage of their global operations and the profits earned from the country are insignificant.