People want cheaper food, cheaper oil, cheaper shoes, cheaper cell phones, cheaper medicines, and so on. This is a perfectly rationale human behavior. But there are certain irrational interventions often done by governments, which make commodities expensive, which results in expensive food, expensive oil, expensive medicines, and so on. Two of such ugly interventions are multiple taxes and trade protectionism.
Medicines in the Philippines are immediately slapped at least with 5 percent import tax and 12 percent value added tax (VAT). Companies that import, manufacture, distribute, and retail medicines are slapped with 35 percent corporate income tax each, 12 percent VAT on office rentals, plus a host of other taxes and fees. The reduction if not abolition of certain taxes that make medicines more expensive is surprisingly among the things that were never considered by the legislators who wanted cheaper medicines. The legislators with bleeding heart concern for the poor patients were too tax-hungry to spare medicines from high and multiple taxes and fees.
More than a month ago, I emailed Sen. Mar Roxas, the chief author of the Senate version. I admired his keen interest in reducing or abolishing the taxes on petroleum products for “cheaper oil”, and asked why he can’t be equally keen in demanding for the reduction or abolition of taxes on drugs for “cheaper medicines”. I never got a reply from him.
The second ugly government intervention is trade protectionism. The 5 percent import tax is one proof of such protectionism. If we want cheaper medicines, we should have free trade – zero tariff and non-tariff barriers – and allow plenty of reliable pharmaceutical companies to come into the country. They will bring their medicines from Europe, US, Singapore, India, Pakistan, and other countries, and let them compete among themselves. But dismantling of trade protectionism in medicines was not considered in the medicines bill. What was put in the new “Cheaper and Quality Medicines Act of 2008” was the institutionalization of parallel importation.
Parallel importation looks cute: the same medicines of the same dosage made by the same pharmaceutical company currently under patent in the Philippines are sold at only one-half, one-fourth, or even lower price, in India, Pakistan, China, or elsewhere. So, import those medicines even without the permission of the IP owner or patent holder and sell them here. Filipino patients get cheaper medicines, importers make money, the State collects taxes, and there is no IPR infringement done on local patent holders. Everybody happy, except the multinational pharmaceutical companies who are demonized to have made “enormous profit” as a result of their monopoly of their medical invention and innovation.
Parallel importation is not equivalent to free trade. The former is allowing non-patent holders and “copycat-ers” to import medicines that are locally-patented without the permission of the local patentees. Free trade is allowing plenty of medicine manufacturers, especially medicine innovators, who are patent holders to bring in their innovative and patented medicines and products, and they compete among each other here both in quality and price.
Under parallel importation, the State can practice double standards: it creates bureaucracies, and collects taxes and fees to domestic-based pharmaceutical companies that applied for patent and IPR, then turn its back and disrespect the same patent that it granted by allowing parallel imports, then further collect taxes and fees from importers and retailers.
On the other hand, free trade has only one goal: give consumers more choices. The State need not practice double standards to achieve this. If it wants to implement the patent system and protect IPR, then all importers should be patent holders. If there are not enough patent holders and local players, then allow more players from more countries to come in. And they will come in if there is enough profit to make, meaning operational costs – like taxes, regulatory fees, and other compliance costs – are low and simple to follow.
Competition, not bureaucratic regulation, is the best disciplinarian among producers and sellers. Customers can mark those who sell expensive products relative to their quality, those who sell bad quality products, especially unsafe and fatal products in the case of counterfeit medicines. Sellers and providers would naturally aspire to sell only good quality and safe products, even if some of those goods have to be sold at higher prices, and gain customer support and patronage.
The key is to encourage the entry of more innovators who will be directly accountable should the medicines they brought in would turn out to be ineffective and unsafe. Parallel importers may not be accountable when they – intentionally or unintentionally – bring in counterfeit drugs because they are not necessarily the ones who manufactured those medicines. Or if they mishandled or misstored the products which may adversely affect the effectiveness and safety of such drugs. Or if they mislabeled after re-packaging those medicines bought in bulk from abroad.
Medicine innovation should be encouraged to come in if we want newer, more effective medicines, to fight evolving diseases in our evolving communities and evolving environment. Innovative medicines are not cheap, with an average industry cost of around US$1 billion just to develop one good medicine. Copycat medicines are always cheap because the “copycat-ers” never spent a single centavo on medical research and development; they only have to spend on glitzy marketing strategies and sales people.
Free Trade 6: Counterfeit Drugs Worldwide, December 21, 2007
Free Trade 7: Class War, Eco-protectionism and Climate, April 02, 2008
Free Trade 8: Global RIce Price, May 13, 2008