International Pharmaceutical Industry and Less-Developed Countries: II: Costs and Alternatives

Author(s): Sanjaya Lall

Reviewed work(s):
Source: Economic and Political Weekly, Vol. 9, No. 48 (Nov. 30, 1974), pp. 1990-1996
Published by: Economic and Political Weekly
Stable URL: http://www.jstor.org/stable/4364206 .
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 International PharmaceuticalIndustry
and Less-DevelopedCountries
II- Costs and Alternatives
Sanjaya Lall

The p)h(lrm(ceutical ijdustry is onie of the mt1ost 'muldtinational' mtod(ler'ntma;'ufactmiin i;;clstries;

the finrs whichi doninate it in the develol)ed coInutiies Cilso operalte in almtiostevery less-develop1ed count-
try out.tsidethe socialist bloc.
The soci(ll im.portance of thte pharmaceutical iLdaustryis suichith(at in receut years it has beeui suib-
jected to increasing enq(uiiiry ald criticism in several counItries. It i.san indication of the iniduistry'spocer
that few of these cuiticismushlave led to reforms in its baisic srtructulre.
Part I of this paper, which aippearedlast week, examitned the maini chlaracteristics of th1einternational
pharmnaccnu'ical induistry, highlighting the a(iomalies (hid distortions thatit exist becauise of the puccdulir
structutre of the drugs m(larket(li}d because of the grealtoligopJolistic powter exercied lby theC'leadinig firmlS.
The implic-ations of the structure of the inter- ation7al pharm(lceutical i.;dustry for the develop;ing
counltries, to tciich miianyof its less desirable feature.s are tranisferredcl wholesalle, aire discuissed in. Part II
of the article puiblished below. The additional social costs imposed o,n these cotunitries by their playi:ig
host to the drugt muiiiltinatitionlelis
ar)e described, tusinigthle Inidiani.case as an examlple. Thle options open to
the goverlnmenits of the developingy couniitries to reduice the cost of obtaining drug,s (ar-ea(lso considered.
THE pharmiaceutical industry in the the enitire paraphernalia of drug mar- countries with multinational drug firms
less developed countries embodies all keting backed l)y the prestige of esta- to have foreign-owned patents.
the essential features of the industry in l)lished foreign l)rand and company What are the implications of this
the West. Most of the large international names, the mutltinationaals can easily trend for LDCs? Do they have reason
concerins operate in those less developed imiaintain - and have done so till now to dislike it any more than, say, the
couinitries (LDCs) which actively promo- -their dominanit positions in perpetui- UK? Recent analysts of the patent sys-
te import stibstituttioin in drml manufac- ty. tem in LDCs agree that the rationale
turing - though, in most cases, the The social costs of this structure, as of its existence there is not so much
maniufactturing operationi consists simply inote(l for the developed couniitries, ap- to provide an indutcemlent to innova-
of formultlatiingand packaginlg imiported ply even miore strongly to the LDCs tive activity - since the innovating
chemicals.' In a feNv relatively inidtis- - in tlhat, there are certain special firmlls invest in 1I anld D primarily with
trialised countries, subch as Inidia, Mexi- factors in the latter wNhich further raise a view to their maini mlarkets in the
co, Argentinia, Brazil, anid the UAR, the burden on the host economiiies: leveloped countries- as to stimulate
the inldustr-y has imaniaged - behiand (i) Thouigh there is little original B the infloxv of foreign (lirect investnment
protective barriers - to achieve consi- and D) done ini LDCs by the pharima- anid the transfer of new technology.
derable backward initegrationi wvith the ceuitical miultltinationials,heyond relative- These analysts, especially Vaitsos,9 also
growth of an inbdigenous finie cheiiicals ly minor a(laptive research, their con- express grave doubts ab)ont the accep-
sector; in others, however, imnport de- trol over patenits is even more conmp- talilitv of this rationale, on the ground
pendenaice remains verv heavy. lete than in developeed countries.3 In that the patent system serves primarily
The technology of drug manulaetuire many LDCs, including the more indus- to incerease the m(onopoly power of
is, of coUrse, almiost eintirely inmpor-ted trialised ones (with the rather odd foreign investors - and so enables
fromii the developed countries, and the exception of Brazil), the percentage of them to restrict technological transfers,,
sy-stem of patentinig, the marketing total patents (including non-pharmaceu- raise import prices, and indulge in:
methods, and the levels of profitability, tical ones) owvned by foreigners bor- variotus other restrictive practices.
are all very simnilar to, those described ders oni or exceeds 90 per cent;; of There is little reason to doubt, orl)
in the previous sectionis. As in the the 10 per cent owned by nationals, the basis of the exper ience of develop--
developed couintries, the more iin(lu5s- there is reason to suspect that a large ed conintries, that the patent systemn
trialised LDCs have large nunubers of proportion is of little commercial im- does increase the monopoly power of
local firins which suipply very small portance.5 Though figures are not gene- multinational firms in this particular in-
proportions of total p)harimiacetitical rally available on pharmaceutical pa- dustry, thouigh it Nvould be incorrect to
sales, in the foreign nmultinational firnms tenits separately, somiec data for Chile put the entire blame for the monopolis-
possessing overwhelmingly dominiant inldicate that foreign ownev-rship in this tic practices in LDCs on patents as dis-
positions in their nmarkets.2 Given the industry was the second highest of 10 tinct from other sources of market
profitability of their own manufacturing induistrial groupings in 1967,6 while in- power, especially marketing practices.
investments, the miiultinationals are formation from the UK, where only It is, however, impossible to envisage
naturally uinvilling - unless forced to 6 per cent of phairmaceutical patents what the structuire of the industry
(io so by local laws - to license indi- filed in the mid-1960s were nationally would be if the entire international
genous firms to manufacture their pa- owned as opposedl to 14 per cent some patenting *system were scrapped; pa-
tented products; and, given the exis- 12 years previously,7 suggests that tents may he only one of the supports
tence of patent protection as well as there is an increasing tendency in all of the present svstem, hut it may he,

1990
 the vital one to its existence.
If we accept, then, that patents are
of some value in enhancing monopoly
in the pharmiiaceutical in(dtustry - as,
indleed, they are initended to be - the
charges which can be levelled against
them are: (a) that they allow multi-
nationals to buy up most of the patents
in LDCs aznd not use the vast majority
of them, thus providing a captive mar-
ket for exports for the producers in
developed countries, while preventing
emergence of indigenous enterprise or
the purchase of cheaper imports;10 (b)
that they stifle local research efforts;
and (c) that they allow foreign sellers
of technology to im1pose restrictive con-
ditions in contracts, or to charge exces-
sive prices for the technology trans-
ferred.
The most balanced reviewv of these
criticisms is by Penrose, 1973, who
argues that mainy of these effects would
exist even without the patent system,
that there may be valid economic rea-
sons for the non-working of patents,
and that a ill)re stringent official check
could couniter most of these abuses.
However, she enids by saying that there
is a strong, lbut not conclusive, presump-
tion that LDCs "gain little or nothing,
and may even lose, from granting pa-
tents on inventions developed, publish-
ed, and primarilv worked abroad." It
The reasoni why the case against
patents is not conclusive is that they
may in some indiustries and in some
circumstances ... promote technologi-
cal transfer and its implantation in the
local economy".12 The circumstances in
which this is particularly true are those
requiring a lot of technological back-
ing, beyond the mere sale of patented
knowbow, and when, consequently, the
wvilling support of foreign firms is
valuable. This is not, however, true of
the pharmaceutical industry: the pro-
duction technology is simple, the back-
ing of foreign firms is not necessary,
and the concomitant monopolistic costs
foreign control are particularly heavy.
Thus, while abolition of patents may
not by itself remove the existence of
foreign monopoly in drugs in particular
LDCs today, to the extent that the in-
ternational patent system permits or en-
hances monopoly in this industry the
system does appear to have more costs
than benefits.
(ii) These costs, which we can attri-
bute to the overall structure of the in-
dustry, and not simply to patents, are
of two general kinds - financial and
social. The financial costS of the mul-
tinational dominance of this industry
are particularly important for those
LDCs which are extremely short of
foreign currency, since they all accrue
in foreign exchange and benefit the
foreign investors or their home govern-
muents.13They arise from various fac-
tors, the most important b)eing the iise
of tr.ansfer-pricing (which wve have not-
ed( ab)ove, but which, for reasons dis-
cussed elsewhere,"- tends to work
particularly against the welfare of
LDCs), the charging of excessive royal-
ties even on technology purchases from
within the same firm, and the imposi-
tion of export restrictions. All these
have been discussed in recent literature
on multinational corporations and
LDCs and need not be elaborated here.
It need only he pointed out that most
of the evidence on transfer-pricing has
been based on investigations of the
phairmaceutical industry, and that the
incidence of export-restrictive clauses
has been particularly common here.
To return for a moment to Roche, in-
vestigations in Colombia for the late
sixties showed that this firm was over-
charging its subsidiary (as a percentage
of wvorld market prices) by 94 per cent
for Atelor, by 96 per cent for Trima-
toprium,15 by over 6,000 per cent for
Diazepam, and by over 5,000 per cent
for Chlordiazepoxide.'6
(iii) The social costs of the present
phairmaceutical industry in the LDCs
arise from the peculiar configuration of
circumstances in such countries, where
extreme poverty, lack of effective so-
cial welfare systems, high incidence of
illness, and absence of modern medical
treatment in rural areas are combined
with the unreasonably high prices of
medicines charged by the multinational
druig companies. We have already not-
ed the reasons for the excessive drug
prices in the developed countries. In
poor countries the welfare cost of such
prices is immeasurably greater. Not
only do expensive pharmaceuticals put
a great deal of medication out of the
reach of vast sections of the population
and confine proper treatment to an
elite preserve, they also prevent a more
rapid spread of medication to non-
urban areas where most of the people
live and where illness is rife.
These are the special problems which
the modern drug industry creates for
LDCs - quite apart from the ones
which were described in Part I. While
the general structure of the industry
is similar in the developed and the
less-developed areas, there is one major
difference: The developed countries
produce the technology and will con-
tinue to do so, the less-developed ones
import it and may expect to do so in
the future. Since the operation of
multinationals ensures that the latter
also pay in full for the proliferation
of products and for famous internation-
al brand-names, the problem of policy
in the two areas is quite different.
Both are concerned with minimising
the cost of medicines, but for the
developed countries the pro)lem is to
iiiaiiitain or imiiproveresearch while
cutting out its present wvasteful ele-
ments, whereas for the LDCs the
problem is to obtain the results of
research done abroad as cheaply as
possible. We shall return to this when
we, discuss policy options for the
LDCs; let us first consider the posi-
tion of the industry in India.
PHARMACEUTICAL INDUSr1BY IN INDIA
In 1970-71, the total production of
pharmaceuticals in India was approxi-
mately Rs 250 crores, ($ 333 million at
the cuirrent exchange rate of Rs 7.5 =
$ 1); of this 80-90 per cent was ac-
counted for by some 100 large units,
and about 70 per cent by the 30
largest firms.17 Approximately 2,300
smaller units supplied the remainder
of the market. The total consumption
of pharmaceuticals in India in 1966-67,
when comparable figures are available
for other countries, was about $ 250-300
million, while it was $ 4,667,000 million
in the US, $ 640,000 million in Italy,
and $ 71,200 million in Belgilun (the
smnallest constumer in the OECD)."8
There are several plants in the public
sector in India which produce both
hasic chemicals for use by the pharma-
ceutical industry as well as some finish-
ed pharmacistical products. However,
the bulk of pharmaceutical production
still lies in the private sector, and
here foreign firms are in a dominant
position. Of the top 15 firms ranked
lby sales in 1966, only 4 were wholly
Indian-owned;19 of the 39 'medium
and large' public limited pharmaceuti-
cal companies (which include nearly
all firms of moderate size), 33 were
foreign controlled in 1968-70.20
The 33 foreign-controlled drug firms
accounted, in 1969-70, for 93 per cent
of the value of sales of the 39 medium
and large drug companies, for 96 per
cent of their net fixed assets, and for
109 per cent of their profits-before-tax.
If these 39 large companies are as-
suined to have provided 70-80 per
cent of total pharmaceutical demand
in the country, the 33 foreign coutroll-
ed firms supplied about 65-75 per cent
of the total market.21
These 33 firms - exactly 10 per cent,
in numbers, of the 330 total 'foreign
controlled rupee companies' surveyed
by the Reserve Bank for 1969-70 -
accounted for 9 per cent of the value
of net sa]es of the total sample, for 8
per cent of net worth and for 6 per
2ent of net fixed capital employed. An
earlier survey of India's international
investment position (IRBI Buslletin, 1971),
as at end of March 1968, shows that
1991
 total foreign direct, investment in bran-
ches and foreign-controlled firms in the
pharmaceutical sector (Rs 38 crores)
canme to 11 per cent of total such
foreign manufacturiing investment in the
country. Of total foreign eq(uity invest-
ment in pharmiiaceuticals, 87 per cenit
was in braniches and subsidiaries (i e,
50 per cent or over foreign share-
holdings), 12 per cent in foreign-con-
trolled minority companies, and only
1 per cent in non-foreign controll-
ed companies. The high proportion
of foreign co2itrol in this industry con-
trasts with manuifacturing indtustry
generally, where 12 per cent of total
foreign e(Iqiity capital wvas invested in
non-foreign controlled enterprises.
Though the 33 f'oreigin contiolled
pharmaceuitical firmls accouInted for less
than 10 per cent of sales ancd net
worth of the 330 foreign controlled
firms in 1969-70, they accotunted for
nearly 18 per cent of their total profits-
before-tax. The per-ceintages of profits-
before-tax on total capital emiiployed
came to 15 per ceint for the 330 firms
and 30 per cent for the 33 drug firms;
while those of profits-after-tax on net
worth came to 14 per cent and 22 per
cent, respectively. These ratios w,vere,by
way of contrast, 8 per cent and 7 per
cent, respectively, for 1,926 Indiani pub-
lic limited companies in the same pe-
riod. Fturtherimiore, the 39 medium and
large drug firms recordecr profits-before-
tax on capital employed of over 20 per
cent in every single year from 1965 to
1971, when the average for the total
of 1,501 mediuim and large firms was
always 10 per cent or less. Thec drug
industry was consistently the most pro-
fitable of all 23 sectors (including non-
manufacturing) covered for the six-year
period, with one exception in 1970-71
when mineral oils achieved somewhat
higher profits. The foreign companies
in the pharmaceutical industry were al-
ways more profitable than the local
ones; in fact, the latter six firms re-
corded net losses in 1968 to 1970 when
the former were earning extremely high
profits. Thus, the foreign drug com-
panies in India have been nIot only
the most profitable among manufactur-
ing firms in the country generally but
also among all types of foreign con-
btolled enterprises, including those in
non-nmanufacturing sectors.
Of the foreign firnms in the pharma-
ceutical sector, Roche is one of the
most profital)le. In 1968, for instance,
when; the 33 foreign controlled drug
firms earned profits-before-tax of 24
per cent on capital employed, Roche
recorded pre-tax profits of over 60 per
cent on net capital employed and about
65 per cent (Lfter tax on net worth.u
Similarly, the firm's ratio of profits-
1992
before-tax (net of depreciation) to sales
was 37 per cent in 1968, as compared
to 18 per cent for the 33 foreign com-
panies, and to only 8 per cent for the
total 1,501 medium and large public
limited companies.
The existenice of transfer pricing, of
course, reduces the reliability of de-
clarede profits as indicators of true pro-
fitabilitv. India is less vulnerable to
this particular practice than most other
countries - if only because the gov-
ernment's strentuous efforts at import-
sul)stitution have forced down imports
to a relatively low level. The fall in
imports as a percentage of prodtuction
from 25 per cent in 1960-61 to 10
per cent in 1963-64 for foreign subsi-
ciaries, and its further reduction to
about 8 per cent for the induistry as a
wbhole by 1972,23 shows that the indus-
try has managed to achieve a fair deg-
ree of self-sufficiency. With the planned
increase in production of chemicals by
public sector plants, the extent of im-
port dependence will probably continue
to fall in the next few years.
This is not to argue, however, that
transfer pricing is not used by foreign
firms, nor that it does not make a sub-
stantial difference to the profitability of
the firms concerned. There is a shor-
tage of 'hard' data on the use of trans-
fer pricing by multinational firms in
India, thouigh plenty of impressionistic
and indirect evidence exists that it is
widely ulsed.24 Certainly, there are
many incducements to use it - high
tax rates, price controls, political pres-
stures, and so on - and no effective
deterrents, suich as the direct checks
exercis2ed by the Colombian govern-
miient, eist. In Roche's case, for in-
stance, im)orted(l chemicals came to 19
per cent of the value of production in
1968; if 90 per cent of the value of
imports were simply the transfer of
profits (a conservative estimate, on evi-
dence from the UK and Colombia), the
real profits-after-tax of the firm would
be almost exactly double the declared
profits. The figuires are pure conjecture,
of couirse, but there is little reason to
doubt the real dangers inherent in the
system.
India is a high drug-price country;
even the Kefauver Committee in the US
remarked on the level of pharmaceuti-
cal prices in India and on its perverse
r-elationship to levels of per capita in-
come.25 The preceding discussion has
explained why pharmaceuticals are high
priced in general, and also why the
level of prices fixed by the leading
firms has little to do with the actual
costs of producetion. With the obvious
eAxceptionlof heavy R and D expendi-
ulres, all the other ulsual costs of pro-
ducing and marketing pharmaceuticals
are present in India: there are heavy
promotion expenditures (thotugh the ex-
act 'cost breakdown is not available);
there are high profits and a prolifera-
tion of b)randed products; and there are
vast differences between brand name
products and generic name products.
Roche's Librium was sold in 1972 for
Rs 16 (per 100 tablets of 10 mg each)
when generic name equivalents were
available from small units for prices as
low as Rs 1.52.26 Similarly, public sec-
tor units were supplying Phenobarbitone
at 1 paisa per tablet and Diethy Car-
bamazine Citrate at 3 paise per tablet
- when brand name foreign equiva-
lents were being sold at 3 paise and 8
paise, respectively.27 Many such cases
have been recorded for a wide range
of products, with the price differentials
being very large indeed; but this is
hardly surprising, in viewv of compara-
ble differences observed in developed
countries.
The position of foreign brand name
products is, if anything, stronger in a
country such as India than in develop-
ed countries. Not only is there a long-
standing prejudice against local pro-
ducts in every industry, "medical prac-
titioners and consumers have a rigid
faith in the quality of the high-priced
drugs from foreign companies".28 Two
special factors in the Indian situation
must, however, be noted in this dis-
cussion. First, the cost of internediate
chemicals supplied by public sector
plants is high, relative to intemational
prices; foreign firms often blame high
retail drug prices on the high cost of
their raw rmaterials. Second, quality
control by the authorities is neither
comprehensive nor very efficient, and a
number of cases of drug adulteration
ly small producers has been recorded.
These points may seem to support
the caseo for promoting foreign drug
firms and reducing public sector pro-
duction. The first, however, is not very
convincing, becauise the retail prices
charged by these firms is very much
higher than is justified with reference
to raw material prices. Generic equiva-
lents are marketed much more cheaply
by smaller firms which use the same
chemicals as raw materials. Even in
cases where the public sector prices
are over three times the import costs
- as with Phenobarbitone, or Vitamin
B - the prices of competing foreign
brand name equivalents are much
higher (about 50 per cent and 300 per
cent, respectively). The cost of raw
materials is always such a small pro-
portion of the selling prices in this in-
dustry that it is in any case difficullt
to accept this argument at its face
value. Of course, the public sector
should be made more efficient, but
even an tnefficient one provides chea-
per drugs thant the multinatiotnals.29
The second point is more serious.
The einforcement of quality control
varies greatly from state to state
with Bihar and Madhya Pradesh lack-
ing drug control staff altogether.30 The
dangers of drug adulteration are very
great, and, given the enormnousprofit
margins, the inducement for small pro-
ducers to indlulge ian it are also very
great. To the extent that the foreign
firms eniforce rigid quality control, cer-
tainly a strong plea can be entered in
their favour; the situation, however, is
not one which calls for extending the
scope of foreign manuifacturersso mtuch
as for enforcing better quality control,
or, as argued below, for extending pub-
lic sector production. After all, there
ore goocl generic c(1uiivalents available
from smiiallpro(licers and fromi puublic
sector firms, and at mulch lower prices
than foreign branded products; the
obvious solution is to proanote lowv-
priced products, with adequate (quality
safeguards.
The Indian government's policy to-
in(lustry has
wards the pharm-lacetutical
been a comibination of extreme stritig-
etncy in somiie respects with gross
leniencV in others. Let uis briefly con-
sider the salient aspects of its policy.
(i) Pr-ices: In 1970, the govern-
ni nt issued a Drug Price Control
Order, Ibased on recommilendations of a
Tariff Commission study, to determine
the prices of 18 basic dcrugs and their
69 formulations.3' A formula, giving a
15 per cent pre-tax return on net
capital employed for manufatcturers, and
aniother 15 per cent for formulators,
xvas used. The implementation of the
Order eventuially led to a reduction in
the prices of the controlled drugs,
thouigh we (1o not possess iniformation
on the exact maganittude of savings
achieved. These 18 druigs accotunted,
however, for only 9 per cent of the total
value of drrugs marketed in India; the
Order had the perverse effect of in-
ducing an increase in the orerCall drug
price inclex, of 12 points in 1970-71
the highest annual increase recorrled
since 1960.32 The pace of increase in
drtug prices quickenede, in fact, after
1966, when the Tariff Commission in-
vestigation- of prices was instituted.
Whatever the merits or faults of the
Order within its context of 18 drugs,
therefore, it certainly did not provide
a means of checking overall pharma-
ceuitical prices in the cotuntry.
(ii) Patent.s: We have already noted
the Indian government's early objec-
tions to the effects of the patent sys-
teml. After a great dleal of prolonged
dlebate, a Patents Bill wvas passed in
197{0, reducing the period of patent
proteclion from 16 to 7 years, ruling out
product patents and providing for com-
pulsory licensing after 3 years for a
royalty not exceeding 5 per cent of the
value of production.33 These measures
put India among the countries with the
strictest of patenting provisions, though
clearly not in the class of Italy which
allows no drug patents at all.
(iii) Public Sector Production:
While the government is, in line with
its general industrial policy, continuing
to expand public sector production of
rlrugs and related chemnicals (in various
plants of Hinddustan Antibiotics and
Indian Drugs a-ad Pharmaceuticals), far
more cotuld have been achieved by now
had the private sector not interfered in
the early stages of the negotiations
wN7ith the Soviet bloc for technical assis-
tance. Kidron cites this as one of the in-
stainces of political pressture wvielded by
the foreigni investors in collaboration
xwith their Indian couLnterparts. In this
case, a Ruissian offer was rejected in fa-
vour of more expensive private deals.34
The main present 'problem' is one of
high- costs of production; it is hardly
relevant to our present cliscussion to go
into its solutions, thotugh th-re seems
to be no special reason why, in this
indutistry, it shotuld rnot be resolved
with tiie - since economies of scale
or production technology are not parti-
cularly important or sophisticated. To
repeat an earlier point, eceni an ineffi-
cienit public sector nmarkets drugs at
loe or prices th(an an efficienit private
for eigni sector.
(iv) Transfer Prices: The govern-
ment has not formtulated an effective
policy to deal with this aspect of the
drtug companies' operations, despite
many indications that foreign firms in
this and other sectors use arbitrary
pricing to remit profits abroad. The
growving canalisationi of imiports through
the State Tradinig Corporation may
have alleviated the risks, along with
the reduction in the degree of import
dependence, but a substantial amount
of foreign exchange is still spent on
imports bought directly by the private
companies. Given the inhereint arbitrari-
ness in pricing in the international
pharmaceutical indlustry, the neglect
(even in calculating costs for the 18
price controlled drtugs) is u-nforttunate.
(c) Marketinig: As xvith most other
cotuntries, the marketing of drugs is left
entirely to the devices of the private
mantufactturers, and so it involves all the
wsNastagesalready noted. This aspect of
the indtustry is so fundainental to its
present structurle and fulnctioning, that
it is dlifficullt tol envisage reforms wvhich
leave it out of consideration. Yet the
government has showvn little awvareness
of the issues involved even in its bra-
vest attempts to cut pharmaceuticai
prices. Not only has it not considered
the setting ulp of a nationalised drug
marketing system, it has even failed to
implement measures to sell drugs by
generic rather than brand names (which
other cotuntries, like Pakistan, have
done).
In all the-se respects - as also in
quiality control and removal of export
restrictive clauses $ - there are gaps
aind defects in official policy. However,
piecemieCal meastures to remedy one as-
pect or another of the drug industry
will nlot result in the elimination of
social wvaste and the lowering of drug
prices. Only a comprehensive approach
can resolve the basic anomalies in the
induistry. Let us now consider the poli-
cies open to the less (leveloped coun-
tries, and especially to the Indian gov-
ernment, to achieve a practical solution.
POLICYOPTrINS FoR LDCs
Let tis r-state the fundamental
problem: the LDCs want the benefit
of haviang the best drugs available to
modern me(licine; they want to import
or produce themii at the lowest possible
cost, using the results of research
which is generally condlucted in deve-
loped countries;36 they want to bring
them to consumers with the lowest
possible expeniditure on marketing, and,
at the same time, provide adequate
and honest in ormation on new prepa-
rations and their prices to prescribing
(loctors; andl they -want to eliminate
monopolistic elements in pricing of
brand name produicts and every possi-
bility of drug adutilteration.
Hlow is all this hest achieved? One
solution - perhaps the best from a
global point of view - vould be a
thorough reform of the pharmaceutical
in(lustry in the developed capitalist
coutntries, alonig the lines mentioned at
the end of Part I. If the undertaking
of pharmaceutical research, production
and marketing were socialised, and the
prodcucts (finished or intermediate), made
available to the LDCs at prices ap-
proximating the real costs of produc-
tion, most of the undesirable elements
in the present international structure
of the industry would disappear. The
LDCs would still be faced with the
problems of internally processing and
marketing the drugs, but any sensible
listribution system wzould he able to
deliver the goods at prices far below
present ones.
I0owever, this is not a policy which
is open to the LDCs. Despite the oc-
casional outbursts of protest, the
pharmlaceultical ind(ustry is likely to
continue unrlisturbled in its present
form in developedl countries; if the
Ll)Cs wsant to lowser their costs, they

1993
 will have to do so on their own, with-
in the given structure of the industry
in the West.
The policies wNhich a particular LDC
can adopt are determnined, of course,
ly its own in(lustrial capacity and the
abilities of its domestic entrepreneurs
and administrators. Th-ere are crucial
differences on the produiction side bet-
ween those countries xvhich possess
developed chemical industries and can
therefore produce most pharmaceuti-
cals entirely on their own, and those
which have to import the finished
drugs or the intermediates in an almost
finished form. On the distribu-ition side,
similarly, there are crucial differences
between countries wN.hichare capable of
managing an informatioan and market-
ing system on a nationalised basis
(with no help from the international
drug fli-ms) aznd those which are not.
Countries wN7hichhave simple proces-
sinig facilities l)ut possess neither
developed chemical inidustries nor an
administration capable of handling
sophisticated information and marketing
systems can choose betwveen the follow-
ing alternative 'packages' - in ascend-
ing order of desirability:
First, an industry dominated as at
present, by muiltinationals, which per-
forms all the requisite functions but
at very high cost, and against whose
brand names and patents local enter-
prises have little chance to compete.
Second, similar to the first, but with
patenits eliminated, in wNhich case local
enterprises can legally copy the multina-
tionals' products but may still find it
impossible to compete against their
brand names.
Third, the next stage, the stubstitu-
tion of generic for brand names, wvhich
may still be ineffective because the mul-
tinationals can,
as they do now in
Pakistan, continue to persuade doctors
that their procllicts are superior,
and
so still create a monopolistic privilege
by inducing constumers to buy drugs
made by particular companies.
Fourth, the elimination of foreign
enterprise altogether, with local manu-
facturers buying intermeidiate products
from the lowest-priced world sources
from small firms selling under gene-
ric names in developed countries,
or
from producers which copy nexv tech-
nology cheaply (Italy). or from the So-
cialist bloc37 - which may save a
great deal of the foreign exchange cost
of multinational profits, but may not
prevent the social wastage inherent in
private marketing of drugs.
Thuls, a nationally-owvned, but private,
dlrug processing indutstry wvould be able
to take advantage of price differenltials
and non-patent-observing producers in
world marketos,but it wouldl continueto
1994
be dependent on imports and it would
not resolve the basic contradictions in-
volved in the private selling of medi-
cines. Thus, local firms would probab-
ly end up using tactics of advertising
and promotion similar to those used by
large firms in the developed countries
- and this would occur even if brand
names were banned, as long as the
manufacturer's name were identifiable
- thus raising the final price to the
consumers. The social costs would re-
main internal, rather than flowing
abroad in the form of foreign profits,
but the most important aim of reforim
would still not be achieved. Further-
more, the dangers of inadequate quality
control may be higher if local firms are
less stringent than foreign ones, and if
the government is incapable of imple-
menting proper controls. The ultimate
advantages of reform may be substan-
tial, however, if this particular risk is
averted, and if the local oligopolists are
able to sell at prices lower than the
present ones.
The options open to LDCs, such as
India, which have sophisticated public
sector production units, advanced che-
mical industries and relatively well-
developed administrations are much
broader. To continue from the fourth
'package', therefore:
Fifth, a more or less complete self-
reliance in the production of inter-
mediate chemicals, in either the public
or private sectors, copying technology
from abroad whenever necessary wvith-
out paying royalties, and completely
locally owned production of pharma-
ceuticals (again without eliminating
private marketing costs), with strict
quality control measuiresby the govern-
ment.
Sixth, continued reliance on private
pharmaceutical production but with a
national purchasing service which deter-
mines individual drug prices on a fair
basis, markets drugs purely by generic
names, and provides doctors with the
requiisite inforrnation on druig uses and
innovations.
Seventh, a complete socialisation of
drug production as well as marketing,
thus minimising the extent of private
profit and, if so desired, ruinning the
induistry as a non-profit making public
uitility. It is obvious that this seventh
package can, if it is practicable, provide
medicines at the lowest possible cost
1)oth to the couintry and to the consu-
mer. That it is in principle practicable,
is illustrated by the Egyptian example
(and by the nmorelimited one of
India); international patents can be
dlisallowNed, as inl Italy; an)dsocialised
dlistrib)utioncanlbe inltroduced,as in the
.Socialist countries. Whether the actual
co)sts ~vill reach the o)ptimullmlevel
envisaged or not will depend on whe-
ther public sector units can be run
efficiently, whether quality control can
be enforced, whether a govermment
distribution and information system
operates smoothly, and, of course,
whether the political situation of the
country will compell such a radical
change.
In the particular case of India, while
there is bound to be considerable
political opposition to a complete
public take-over of the pharmaceutical
industry, matters have changed greatly
from the fifties, when the private
sector could actually hinder determin-
ed moves in this direction. The pro-
blem of quality control is, if anything,
worse under the present system of
thousands of small producers than it
would be with a few large public
sector units; the elimination of the
small units would by itself rule out
many of the present abuses. The pro-
vision of regular and up-to-date infor-
mation on drugs to doctors should not
prove very difficult, especially if the
government uses the results of clinical
te.sts and official checks done in the
developed countries. Since the techno-
logy of drug production is basically
not very complex, the copying of
foreign products should be fairly
straightforward.In the few cases where
there are lags or difficulties, the drugs
could always be imported from cheap
sources abroad. The only remaining
question concerns efficiency. However,
as long as one accepts that there is no
intinswic reason why public sector units
shouild be less productive than private
ones, experitnce and effort should re-
solve it with time.
We conclude, therefore, that in the
long-run, the best way to deal with
the various complex problems of the
present int.-ernational pharmaceutical
industry, as it operates in the LDCs,
is to move towards a socially-owned
indigenous pharmaceutical industry;
which copies foreign technology, bans
brand names, and markets the products
through official agencies. Given the
social importance of this industry, and
the human costs involved in the pre-
sent high-price structure, it is vital
that the reform be undertaken as a
matter of urgency. Prevarication can
only serve to worsen the dependence
on mnultinationalfirms and increase the
social costs of such operation.
Notes
1 See, Wortzel, 1971, for a brief des-
cription of the pharmaceutical in-
dustry in LDCs.
2 The market shares of multinational
pharmaceutical firms in the late
sixties were as follows in some
 selected LDCs; Brazil, 78 per cent, more foreign equity and other polistic pricing on the part of the
Argentina, 65 per cent, Peru, 95 firms which are foreign managed suppliers. The role of continuously
per cent, Venezuela, 90 per cent, and have 25 per cent of their 'shopping around' is vital.
the Philippines and Central Ame- equity held abroad. As these firms
rica, over 80 per cent. See Wort- cover only public limited com- References
zel, 1971, and Vaitsos, 1973. See panies, wholly owned branches of
below for details on India. foreign firms are not included; Agarwal, P S, Ramachandran,P K, and
3 On the effects of patents in LDCs these account for 12 per cent of Rangarao, B V (1972), 'Anomalies
see Penrose, 1973, Vaitsos, 1973, total foreign direct investment in in Drug Prices ard Quality
and UN, 1964. the pharmaceutical industry (RB1 Control', Economic and Political
4 UN, 1964, pp 94-5. Bulletin, 1971). Weekly, November 18, 2285-92,
5 Vaitsos, 1973. 21 This range may be slightly higher Cain, J C (1967)) 'State Support for
6 Vaitsos, 1973, p 75. The foreign if branches of foreign firms are in- Research', in G Teeling-Smith
ownership of pharmiaceutical pa- cluded, bringing it to 70-80 per (editor), "Innovation and the Bal-
tents wvas 98.4 per cent as com- cent. ance of Payments: The Experi-
pared to 94.5 per cent for all in- 22 From Roche's annual accounts. The ence of the Pharmaceutical Indus-
du.stry. firm has now been in operation in try," London, Office of Health
7 Cooper, 1967, p 40. India for over 25 years with a Economics, pp 84-96.
8 This is probably even more true foreign shareholding of 89 per Comanor, W S (1965), 'Research and
of the phannaceutical industry, in cent in 1968. Technical Change in the Pharma-
which all the LDCs together ac- 23 See RBI, 1968, and Ministry of ceutical Industry'; Review of Eco-
count only for about 16 per cent Foreign Trade, 1972. This may be niomics and Statistics, pp 182-90.
of total non-Soviet Bloc pharmaceu- compared with an, average of 31 Comanor, W S (1966), 'The Drug
tical consumption. See Wortzel, per cent for a sample of 20 phar- Industry and Medical Research:
1971, p 40. maceutical firms in Colombia. (Lall The Economics of the Kefauver
9 Vaitsos, 1973. See also the views and Mayhew, 1973). Committee Investigations', in Part
of the Indian Government as ex- 24 See, for instance, Kidron, 1965, 5 of US Senate's "Competitive
pressed to the UN, in UN, 1964, Agarwal, et al, 1972, and Govern- Problems in the Drug Industry",
p 57. ment of India, 1971. pp 2086-91.
10 Vaitsos, 1973, estimates that 98-99 25 See Kidron, 1965, p 251. Cooper, M H (1967), 'Patents and
per cent of patents taken out by Innovation in Britain, India, Italy,
foreigners in Colombia and Peru 26 Agarwal, loc cit, Table 3. Roche's Japan and the USA', in G Teeling-
were unexploited in 1970, the price was slightly lower than the Smith (ref No 2), pp 37-48.
bulk of them in the pharmaceuti- equivalent in the UK (about Rs 18), Economist, (1974), 'Patented Profits',
cal industry. The Indian Govern- but is much higher than the London, February 16, p 88.
ment, quoted in UN, 1964, levels price recommended by the Mono- El Tiempo (1971), 'Income Rebaja
the same charge, though the exact polies Commission, and now en- Precios' Bogota, September 15.
propartion of unexploited patents forced by the British government. Financial Times, (1973), 'Roche: What
is not mentioned. 27 Ibid, Table 1. Both these products the Lords will be Deciding Today',
11 Penrose, loc cit, p 783. were introduoed over 25 years ago, London, June 22.
12 Ibid, p 784. so they are in no way an embo- Financial Times, (1974a), 'Why
13 Here we are considering costs diment of heavy recent research Roche i Fighting to the Finish',
above the 'normal' ones of exces- expenditures. London F'ebruary 20.
sive profits, which also results in 28 Ibid, p 2,290. Doctors also men- Finiancial Times, (1974b), 'Strained
foreign exchange drains, and high tion that high priced treatment is Relations in the Drug World',
marketing expenses, which are considered more effective, and is London, May 9.
generally in local currency unless sometimes treated as a status sym- Government of India, 1971, Report of
the advertising firms are also bol by rich patients. the Study Team on Leakage of
foreign oxvned. 29 This has also been noted for Egypt Foreign Exchange through Invoice-
14 See Lall, 1973. in an unpublished study by Han- Manipulation, Delhi.
15 These two figures are derived from doutssa,mentioned in a footnote on Guardian, (1974), Various Articles on
details of public prosecutions of p 777 of Penrose, 1973. the drug industry by A Raphael,
pharmaceutical firms published by :30 Agarwal, et al, 1972. especially on May 13 and 14.
a Bogota newspaper (El Tiempo, 31 For details, see Mote and Pathak, Gupta, A (1970), 'Restricted Patents
1971); the annual savings achieved 1972. and the Drug Industry', Economic
by reducing the prices of these 32 Agarwval,1972. anid Political Weekly, September
two chemicals came to US $ 384.6 26, pp 1585-6.
thousand. 33 Sea Gupta, 1970.
34 Kidron, 1965, pp 163-5. Hacrris,S E (1964), "The Economics of
16 The last two are from Vaitsos, American Medicine", New York,
1973, Table 7; where Diazepam 35 RBI, 1968, notes the heavy inci- Macmillan.
is mentione(l as 'substance of Va- de:ce of restrictive clauses in tech- Johnson, H G (1970), 'The Efficiency
lium'. These two figures are the nical agreements of foreiga subsi- and Welfare Implications of the
highest recorded for overpricing in diaries in this industry, p 38. Des- Interniational Corporation', in C P
this table, but are not very startl- pite official efforts, restrictive Kindleberger (editor), "The Inter-
ing wNhencompared with the 4,000 clauses are still present in many national Corporation", Cambridge
per cent and 4,500 per cent over- agreements. (Mass), MIT Press, pp 35-56.
pricing respectively found by the 36 While the following discussion does Kefatuver,E (1966), "In a Few Hands:
British Monopolies Commission's in- not go into the role of local R and Monopoly Power in America,"
vestigation of Roche (p 38). D in LDCs, clearly indigenous re- Harmondsworth, Penguin.
17 Agarwal, et al, 1962, and Ministry search is not excluded; there is no Kidron, M (1965), "Foreign Investments
of Foreign Trade, 1972. A dif- reason why local efforts should not in India", London, Oxford Uni-
ferent estimate for 1966 puts the complement research done abroad, versity Press.
share of the largest 25 firms at th ;ugh it is unrealistic to envisage Lall, S (1973), 'Transfer-Pricing by
74 per cent of the total market, comnplete self-sufficiency in this Multinational Manufacturing Firms
anrd claims that this has not chang- field. For reasons explained above, Oxford Bulletin of Economics and
ed much till now. (Mote and there should be no detrimental Statistics, August, pp 173-95.
Pathak, 1972). effect on the amounit of R and D Ministry of Foreign Trade (1972),
18 OECD, 1969, Tab)le 2. done in developed coutirics if less- Profile of Indian Industry, New
19 Mote and Pathak, 1972. developed ones do not buy patents Delhi, Govemnmentof India.
20 RBI Bulletines, 1972 and 1973. The from the innovating firms; this is Monopolies Commission, (1972). "Bee-
definition of 'foreign conltrolled' us- as.sumed throughout. chain Group Limited and Glaxo
ed by the Reserve Bank of India 37 Total dependence on the Socialist Group Limited, The Boots Com-
includles firms wvith 40 per cent or bloc may, of course, lead to mono- pany and Glaxo Group Limited",

1995
 London, HMSO. The Times (1973), 'Americans Pay La Vaitsos, C V (1973), 'Patents Revisited:
Monopolies Commission, 1973, "Chlord- Roche "Three Times as Much" for Their Function in Developing Coun-
iazepoxide and Diazepam", London Tranquillisers', London, November tries', in C Cooper (editor), "Science.
HMSO. 8. Technology and Development",
Mote, V L, and Pathak, H N (1972) Trade and Industry (1974), 'Research London Frank Cass, pp 71-98.
'Druig Price Control: An Eva- and Development by Manufactur- Walker, 11 D (1971), "Market POwN7er
luation', Economniic and Political ing Industry', May 2, pp 210-17. anr(l Pirice Levels in the Ethical
Weekly, July 15, pp 1369-79. U N (1964), "The Role of Patents in Drung IncILIstry", Bloomington, In-
NEDO (1972), "Focus on Pharmaceuti- the Transfer of Technology to diana University Press.
cals", London, National Economic Developing Couintries", New York, Wilder, R P (1974), 'Advertising and
Developiment Office. United Nations. Inter-Industry Com11petition',Journal
New Scienitist (1974), 'Can We Handle U S Senate, Various, "Competitive of Industrial Economics, March.
MIodern Drugs?' pp 460-71; and Problems in the Drng Industry", pp 215-26.
'Cleaning up the Drug Trade', Hearings l)efore the Suib-committee Nr'ortzel, L -II (1971), "Technology
p 491 May 25. On Monopoly, of the Select Com- Transfer in the Pharmaceuitical
OECD (1969), "Gaps in Technology: mittee on Small Buisiness, Washing- Incdiustry," New Ynrk, UNITAR.
Pharmuacetuticals",Paris, Organibation ton, DC, US Government. Re scarch Report, NO 14.
for Economic Co-operation and
Development.
Parker, R C and Kelly, W II (1968),
'Profitability in the Drung Industry: Semi-Feudalism, Usury Capital, Etcetera
A Result of Monopoly or a Pay-
ment for Risk?', in Federal Trade
Commission's Economic Papers, Ashok Rudra
1966-69, Washington, D C, US
Government, pp 144-83. IT is a pity that such a discerning and the economic condition of the semi-
Penrose, E T (1973), 'International carefuil observer as Pradhan Harishankar prol-tariat -who can thereby free itself
Patenting and the Less-Dleveloped Prasad shouldi make such careless sweep-
Countries', Economiiic Journal, fromii bondage". Speaking of consump-
September, pp 768-86. in g statemnenits as he does in his tioIn loanis taken by the "semi-
article on the role of usury capital in proletariat' from the big landowTiers,
RBI (1968), "Foreign Collaboration in
Indian Industry", Bombay, Reserve Ecoionoic and Political Weekly, Special he wvrites "The stipulatedl rates of in-
Bank of India. Numher, 1974. By Prasad's owvn state- terest on these loans are very high.
RBI (1971), 'India's International Invest- ment his observations are based on his Ofteni as high as 100 per cent per
ment Positioin in 1967-68', Reser-ve "intimate contact with some of the aninumi . Usury, according to him.
Banik of Inidia Bulletin, March, pp rurial areas of Bihar", and by his ownv creates an "indissoluble bond between
552-93. judgment his data-base is "too small senmi-proletariat and his overlord".
RBI (1972), 'Finances of Medium and for any generalisation for the countrv N K Chandra, writing in the same
Large Public Limited Companies',
Reserve Bank of In4a Bulletin, as a whole". This, however, does uot issuie of this journial, gives an identical
September, pp 1425-1584. d-ter him from mnaking the statement characterisation of "semi-feudalism",
RBI (1973), 'Finances of Branches of that "the aforesaid semi-feudal model thouigh he is much less sweeping and
Foreign Compainies and Foreign (but for variations in details) is, by and very much more cauitiotus in assertiang
Controlled Rupee Companies, 1969- large, valid for most parts of the rural that suich "semi-feuidalism" prevails in
70', Reserve Bantk of India Btulletini, India". The few correlation co-efficients the whole country, though he tends to
March, pp 344-68. he calculates for this purpose are think so. In his xvords, two characteris-
Sainsbury Coi-nmittee (1967), Report of thoroughly inacle(utiate to support such
the Committee of Enquiiry into the tics of semi-feudalismii are "perpetual
Relationship of the Pharmiaceutical a strong proposition. If Prasad has got indel)tedness of the small tenants" and
Ilndustry wvith the National Health intimate knowvledge of some parts of its preventing of "capital investments
Service, 1965-67, Londoni, HMSO. Bihar, the present writer has also in agrictulture, for such investments
Scherer, F M (1971), "Indiustrial Market acquired, during the last five years or wouldl increase prodtuction and if the
Structture and Economiiic Perform- so, some direct first hand knoxvledlge of tenant's share remainiedl conistant
ance", Chicago, Rand McNally. the
conditions prevailing in WN'estBengal tenanit might get out of his debts".
Schifrin, L G (1967), 'The Ethical agriculture. In particuilar, during the In the course of our investigations in
Drug(JIndustry: the Case for Com- last onie year he has been carrying out
pulsory Iatent Licensing', in Part the different districts of West Bengal
5 of the US Senate's "Competitive aIn enquiry in the different (listricts of we have failed to enicounter the land
Problems in the Drug IndustrY", pp WXest Ben(gal in to precisely the type of owvning class that finds it more in its
1890-1900. (question in which Prasad is interested economic an(l social-power interest to
Steele, H (1962), 'Monopoly and Com- anld the information so gathered will be resort to uistury rather than to capital
petition in the Ethical Drugs Mar- 5021 released. While we have no investments. In many parts of West
ket', Jour1nalof Law and Economics, "model" for WNestBengal agricuilture as
October, pp 131-63, reprinted in Bengal we have encounitered laandowners
US Senate's "Competitive Problems a w hole, let alone for conditions in w ho are very much engaged in capital
in the Drug Industry", pp 1950-70. "most par-ts of the country", we can investments in the form of irrigation.
Steele, H (1964), 'Patent Restrictions only point outt that many of the con- fer-tilisers and high-yielding variety
and Price Competition in the Ethi- (litions described by Prasacl does not seeds, and wvhere this tenadency is pre-
cal Drugs Industry', Journal of seem to hold true for most parts of sent, it is fouind to be equally shared
Industrial Economics, July, pp 198- West Bengal. Let us quote in exten-so
223, reprinted in US Senate's by landowners who give their land otit
from Prasad such characterisations as on lease to sharecroppers
"Competitive Problems in the Drug and those
Industry", pp 1973-97. do not seem to hold for West Bengal who cutltivate it themselves with the
Sunday Times (1973), 'Do all drugs in the same way as Prasad finds them help of hired labour. In the former
cost too much?', London, 27 May, to hold for Bihar. Speaking of the "big case, it has become almost a universal
p 59. ) * landoxvning class" Prasad writes: ". practice in West Bengal for owners
The Times (1973), The Times 1000, it is this class which shuns rapid deve- and tenants to share the costs of seeds
lopment because it is likely to improve and fertilisers in the same proportion
1996