Reshuffling the Deck: The Philippines Turn Vision into Reality

September 2, 2006

What if your country, even amid political turmoil, has been growing at a fast pace over the last several years and keeps doing quite well, but is nevertheless home to more than 14 million people living below the poverty line? What if, given this context, the retail prices of medicines are among the highest in the world and the major distributor is granted the privilege of a near monopoly? And what if, because of a huge predominance of multinational companies, lower-priced generic medicines are struggling to establish themselves (even though you passed a "generic drugs law" back in the '80s)? Well, if you are a proud and committed citizen of such a country and, above all, you deal on a daily basis with pharmaceutical-related issues, you must be very disappointed, if not upset. And yes, it's quite probable that you are a Filipino, as Roberto Pagdanganan, chairman of the Philippine International Trading Corporation (PITC), is. In fact, for a foreign observer, the problem of drug prices is one of the most..

What if your country, even amid political turmoil, has been growing at a fast pace over the last several years and keeps doing quite well, but is nevertheless home to more than 14 million people living below the poverty line? What if, given this context, the retail prices of medicines are among the highest in the world and the major distributor is granted the privilege of a near monopoly? And what if, because of a huge predominance of multinational companies, lower-priced generic medicines are struggling to establish themselves (even though you passed a "generic drugs law" back in the '80s)? Well, if you are a proud and committed citizen of such a country and, above all, you deal on a daily basis with pharmaceutical-related issues, you must be very disappointed, if not upset. And yes, it's quite probable that you are a Filipino, as Roberto Pagdanganan, chairman of the Philippine International Trading Corporation (PITC), is. In fact, for a foreign observer, the problem of drug prices is one of the most relevant challenges the inhabitants of the 7,107 islands known as Philippines are currently facing.

Papers released by the Department of Health and the Department of Trade recently revealed that five out of every nine medicines cost more in the Philippines than, for instance, in Malaysia or Indonesia. And other research carried out by Health Action International showed that "Amoxil," an original antibiotic, sells at a higher price in the Philippines than in the UK or Canada. On average, medicines in Manila are 16 to 18 times more expensive than those sold in India, and a price survey conducted by PITC showed that several medicines produced by the American conglomerate Pfizer are overpriced by as much as 730% in the Philippines when compared with their selling price in Pakistan. Thus, it is understandable that, consistent with the aims of the Medium-Term Philippine Development Plan 2005–2010, the government, already grappling with problems in implementing a comprehensive healthcare reform program to include increased budgets for local government units for healthcare; wider health insurance coverage for the poorest of the poor; more rural health centers; and programs that restrict doctors, nurses, and health professionals from working abroad and entice more students to take up medicine, decided it was time to act and entrust PITC to set up a state-owned medicine distribution network. The network was named in the local language (significant in a country where even the main newspapers are written in English) Botika ng Bayan (people's drugstore) (BnB).

The Botika ng Bayan concept

Through these now-mushrooming outlets (several thousand already exist, and hundreds of new ones are cropping up all over the archipelago), which operate as a franchise where companies or entrepreneurs might apply for a license, for the first time people can buy 44 types of the most commonly used medicines in the country at half the usual price. At the onset of the program, all the stores are required to sell four specific drug types: antibiotics, anti-hypertension drugs, anti-asthma drugs, and anti-diabetes drugs (sourced mostly from India and China). However, BnB is no longer a mere collection of small drug outlets; it is now turning into a profitable business, particularly for local government officials, who use the money raised to finance other public utility projects, such as schools, roads, and hospitals.

Sec. Roberto M. Pagdanganan, Chairman & President of PITC

It goes without saying that the attempt to sell cheaper generic drugs has been encountering the constant and fierce resistance of some multinational companies. PITC, with its ambitious target of lowering the prices of essential medicines by 50% by 2010 and accrediting 3000 outlets by the same year, has been at the forefront of this confrontation since the beginning. In fact, despite a harsh, protracted quarrel with Pfizer, which sued PITC after it attempted to import samples of "Norvasc" hypertension drug from Pakistan into the Philippines before patent expiration (the patent laws in several countries allow development, testing, and experimental work for the registration of a generic medicine during the patent period of the original product; the Philippines are trying to amend their existing law), Mr. Pagdanganan managed to broker a deal with GlaxoSmithKline, which now regards BnB more as an opportunity than as an obstacle to remove along the profitability path. To show its commitment, the British company signed an agreement with PITC to have its branded line of medicines available in all BnB outlets nationwide. Thus, the stage has been set to further expand cooperation with traditional rivals and to negotiate in the future from a stronger position.

The corporation also has explored new (and controversial) routes, such as parallel trade, the re-exporting of a product that is on sale at a lower price in one country to another country. Because medicines are sold at different prices in different countries, usually because of legislative diktat, a profit can be made by moving drugs from one country where the price is lower to another where it is higher. Although the benefits that parallel trade is said to bring to final consumers by opening up medicine provision and lowering costs have been challenged by serveral academic studies, the Philippine government feels that this is a move worth reflecting upon. PITC's focus is on traditional arguments formed over the years to support the practice: cross-country effect: parallel trade, through a sort of implicit arbitrage, should promote price equalization across countries and favor market efficiency; destination country effect: higher price competition in destination countries tends to reduce overall drug prices; patient benefits: patient access to innovative medicines could improve because of lower direct and indirect costs; industry impact: it should spur the local industry, if not the international players to overall industry efficiency and, thus, cost-effectiveness.

Some, most famously Panos Kanavos, Professor of Health Care Policy at the London School of Economics, have pointed out that "there is no evidence of sustainable dynamic price competition in destination countries, with no corresponding indirect cost savings" and "the supposed benefits of this system need to be seriously reviewed," although what is valid for Europe is not necessarily valid in a developing country. Of course, that's a subject destined to be debated for a long time. PITC believes that it is only through decreased production costs that drug companies can sell their products at a lower price. That's why, at least on paper, among its stated aims is to assist local drug producers to acquire raw materials at much more convenient prices and to exploit scale economies. "We would like to cooperate more closely with our local manufacturers," says Mr. Pagdanganan. "Given the high brand sensitivity of the Filipino market, we would like to help them further develop the concept of branded generics, as United Laboratories, in particular, is trying to do." Nevertheless, national manufacturers are not always tender in their comments towards the effort of implementing parallel trade and importing cheaper drugs from outside the country, which they think they would be able to produce even better if given more consideration within the PITC program.

The government has been successful in bringing in cheaper medicines, and trade department officials said the department "would likely stop buying drugs from India and elsewhere only if local manufacturers could offer the same quality and low price for the drugs." But perhaps this is already the case, and the anxiety of reining in multinationals has so far overshadowed the vital role local firms could play. It's indisputable: PITC, with its Botika ng Bayan, has triggered a small revolution in the Filipino pharmaceutical market. No less incontestable is that, in pursuing the ambitious strategy Mr. Pagdanganan has mapped out, a relevant part of the final outcome will depend on his ability to get a greater number of national players on board.

USEFUL CONTACTS

Indonesian Pharmaceutical Association

Jakarta, Indonesia (GP FARMASI)

Tel: +62 21 4203040

www.gpfarmasi.org,

Malaysian Organization of Pharmaceutical Industries, Petaling Jaya, Malaysia, (MOPI)

Tel : + 603 7957 3070/1004

www.mopi.org.my

Singapore Association of Pharmaceutical Industries, Singapore (SAPI)

Tel: +65 67 38 0966

www.sapi.org.sg

The Singapore Pharmaceutical Manufacturer's Council, Singapore, (SPMC)

Tel: +65 6826 3000

www.smafederation.org.sg

Philippine Chamber of the Pharmaceutical Industry, Inc. Manila, Philippines, (PCPI),

Tel: +63 2 535 4835

www.pcpi-org.com

Thai Pharmaceutical Manufacturers Association, Bangkok, (TPMA),

Tel: +66 28 63 5106

This report was prepared by Executive Country Reviews. Authors are Gilles Valentin gilles@ecreviews.com Emmanuelle Berthemet emma@ecreviews.com Marco Parigi marco@ecreviews.com Amicie de Bodinat amicie@ecreviews.com and Yaz Yazicioglu yaz@ecreviews.com

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