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
and

PharmaceuticalIndustry

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 counttry out.tsidethe socialist bloc.
The soci(ll im.portance of thte pharmaceutical iLdaustryis suichith(at in receut years it has beeui suibjected 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
induistry, highlighting the a(iomalies (hid distortions thatit exist becauise of the puccdulir
pharmnaccnu'ical
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
embodies all
less developed countries
the essential features of the industry in
the West. Most of the large international
concerins operate in those less developed
couinitries (LDCs) which actively promote import stibstituttioin in drml manufacturing though, in most cases, the
maniufactturing operationi consists simply
of formultlatiingand packaginlg imiported
chemicals.' In a feNv relatively inidtistrialised countries, subch as Inidia, Mexico, Argentinia,
Brazil, anid the UAR,
behiand
the inldustr-y has imaniaged to achieve consiprotective barriers derable backward initegrationi wvith the
growth of an inbdigenous finie cheiiicals
sector; in others, however, imnport dependenaice remains verv heavy.
The technology of drug manulaetuire
is, of coUrse, almiost eintirely inmpor-ted
fromii the developed countries, and the
the marketing
sy-stem of patentinig,
methods, and the levels of profitability,
are all very simnilar to, those described
in the previous
sectionis. As in the
developed couintries, the more iin(lu5strialised LDCs have large nunubers of
local firins which
suipply very small
of
total p)harimiacetitical
proportions
sales, in the foreign nmultinational firnms
possessing
overwhelmingly
dominiant
positions in their nmarkets.2 Given the
profitability of their own manufacturing
investments,
the
miiultinationals are
naturally uinvilling unless forced to
(io so by local laws - to license indigenous firms to manufacture their patented products; and, given the existence of patent protection as well as
1990

the enitire paraphernalia of drug marketing backed l)y the prestige of estal)lished foreign
l)rand and company
names,
the mutltinationaals can easily
imiaintain - and have done so till now
-their
dominanit positions in perpetuity.
The social costs of this structure, as
inote(l for the developed couniitries, apply even miore strongly to the LDCs
in tlhat, there are certain special
factors in the latter wNhich further raise
the burden on the host economiiies:
(i) Thouigh there is little original B
and D) done ini LDCs by the pharimaceuitical miultltinationials,heyond relatively minor a(laptive research, their control over patenits is even
more conmplete than in developeed countries.3 In
many LDCs, including the more industrialised
ones (with the rather odd
exception of Brazil), the percentage of
total patents (including non-pharmaceutical ones) owvned by foreigners borders oni or exceeds
90 per cent;; of
the 10 per cent owned by nationals,
there is reason to suspect that a large
proportion is of little commercial importance.5 Though figures are not generally available on pharmaceutical
patenits separately,
somiec data for Chile
inldicate that foreign ownev-rship in this
industry was the second highest of 10
induistrial groupings in 1967,6 while information from the UK,
where only
6 per cent of phairmaceutical patents
filed in the mid-1960s were nationally
owned as opposedl to 14 per cent some
12 years
previously,7
suggests that
there is an increasing tendency in all

countries with multinational drug firms

to have foreign-owned patents.
What are the
implications of this
trend for LDCs? Do they have reason
to dislike it any more than, say, the
UK? Recent analysts of the patent system in LDCs agree that the rationale
of its existence there is not so much
to provide an indutcemlent to innovative activity since the innovating
firmlls invest in 1I anld D primarily with
a view to their maini mlarkets in the
leveloped countriesas to stimulate
the infloxv of foreign (lirect investnment
anid the transfer of new technology.
These analysts, especially Vaitsos,9 also
express grave doubts ab)ont the acceptalilitv of this rationale, on the ground
that the patent system serves primarily
to incerease the m(onopoly power of
foreign
investors and so enables
them to restrict technological transfers,,
raise import prices,
and
indulge in:
variotus other restrictive practices.
There is little reason to doubt, orl)
the basis of the exper ience of develop-ed conintries, that the patent
systemn
does increase the monopoly power of
multinational firms in this particular industry, thouigh it Nvould be incorrect to
put the entire blame for the monopolistic practices in LDCs on patents as distinct from
other
sources of market
power, especially
marketing practices.
It is, however, impossible to envisage
what the
structuire of the industry
would be if the
entire international
patenting *system were scrapped;
patents may he only one of the supports
of the present svstem, hut it may he,

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 multinationals to buy up most of the patents
in LDCs aznd not use the vast majority
of them, thus providing a captive market 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 conditions in contracts, or to charge excessive prices for the technology transferred.
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 reasons 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, presumption that LDCs "gain little or nothing,
and may even lose, from granting patents on inventions developed, published, 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 technological transfer and its implantation in the
local economy".12 The circumstances in
which this is particularly true are those
requiring a lot of technological backing, beyond the mere sale of patented
knowbow, and when, consequently, the
of foreign firms is
wvilling support
valuable. This is not, however, true of
the pharmaceutical industry: the production technology is simple, the backing 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 international patent system permits or enhances monopoly in this industry the
system does appear to have more costs
than benefits.
(ii) These costs, which we can attribute to the overall structure of the industry, and not simply to patents, are
of two general kinds financial and
social. The financial costS of the multinational 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 governmuents.13They arise from various factors, the most important b)eing the iise
of tr.ansfer-pricing (which wve have noted( ab)ove, but which, for reasons disto work
elsewhere,"- tends
cussed
of
against the welfare
particularly
LDCs), the charging of excessive royalties even on technology purchases from
within the same firm, and the imposiAll these
tion of export restrictions.
have been discussed in recent literature
and
corporations
on
multinational
LDCs and need not be elaborated here.
It need only he pointed out that most
of the evidence on transfer-pricing has
of the
been based on investigations
phairmaceutical industry, and that the
export-restrictive clauses
incidence of
particularly common here.
has been
To return for a moment to Roche, investigations in Colombia for the late
sixties showed that this firm was overcharging its subsidiary (as a percentage
of wvorld market prices) by 94 per cent
for Atelor, by 96 per cent for Trimatoprium,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
industry in the LDCs
phairmaceutical
arise from the peculiar configuration of
circumstances in such countries, where
extreme poverty, lack of effective social 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 noted the reasons for the excessive drug
prices in the developed countries. In
poor countries the welfare cost of such
Not
prices is immeasurably greater.
only do expensive pharmaceuticals put
a great deal of medication out of the
reach of vast sections of the population
treatment to an
and confine proper
elite preserve, they also prevent a more
spread of medication to nonrapid
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
the ones
quite apart from
LDCs which were described in Part I. While
the general structure of the industry
and the
is similar in the developed
less-developed areas, there is one major
The developed
countries
difference:
produce the technology and will continue to do so, the less-developed ones
import it and may expect to do so in
of
Since the operation
the future.
that the latter
multinationals ensures
also pay in full for the proliferation
of products and for famous international brand-names, the problem of policy
different.
in the two areas is quite

Both are concerned with minimising

the cost of medicines, but for the
developed countries the pro)lem is to
iiiaiiitain or imiiproveresearch while
cutting
ments,

problem
research

out its present wvasteful elefor the LDCs

the
whereas

is to obtain the results

done abroad as cheaply

of
as

possible. We shall return to this when

we, discuss
policy options
for the
LDCs; let us first consider the position of the industry in India.
PHARMACEUTICAL INDUSr1BY IN INDIA

In 1970-71, the total production of

pharmaceuticals in India was approximately Rs 250 crores, ($ 333 million at
the cuirrent exchange rate of Rs 7.5 =
$ 1); of this 80-90 per cent was accounted 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 pharmaceutical industry as well as some finished 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
39 'medium
Indian-owned;19 of the
and large' public limited pharmaceutical 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 assuined
to have provided 70-80
per
cent of total pharmaceutical demand
in the country, the 33 foreign coutrolled 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 branches 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 investment in pharmiiaceuticals, 87 per cenit
was in braniches and subsidiaries (i e,
or over foreign share50 per cent
holdings), 12 per cent in foreign-controlled minority companies,
and only
1 per cent in
non-foreign
controlled companies. The high proportion
of foreign co2itrol in this industry contrasts 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 profitsbefore-tax. The per-ceintages of profitsbefore-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 public limited companies in the same period. Fturtherimiore, the 39 medium and
large drug firms recordecr profits-beforetax 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 profitable of all 23 sectors (including nonmanufacturing) 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 always more profitable
than the local
ones; in fact, the latter six firms recorded net losses in 1968 to 1970 when
the former were earning extremely high
profits. Thus, the foreign drug companies in India have been nIot only
the most profitable among manufacturing firms in the country generally but
also among all types of foreign conbtolled enterprises,
including those in
non-nmanufacturing sectors.
Of the foreign firnms in the pharmaceutical 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 profits1992

before-tax (net of depreciation) to sales

was 37 per cent in 1968, as compared
to 18 per cent for the 33 foreign companies, 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 declarede profits as indicators of true profitabilitv.
India is less vulnerable to
this particular practice than most other
if only because the govcountries ernment's strentuous efforts at importsul)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 subsiand its further reduction to
ciaries,
about 8 per cent for the induistry as a
wbhole by 1972,23 shows that the industry has managed to achieve a fair degree of self-sufficiency. With the planned
increase in production of chemicals by
public sector plants, the extent of import 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 substantial difference to the profitability of
the firms concerned. There is a shortage of 'hard' data on the use of transfer pricing by multinational firms in
India, thouigh plenty of impressionistic
and indirect evidence exists that it is
there are
widely ulsed.24 Certainly,
high
incducements to use it many
tax rates, price controls, political presand no effective
stures, and so on suich as the direct checks
deterrents,
exercis2ed by the Colombian governIn Roche's case, for inmiient, eist.
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
were simply the transfer of
imports
profits (a conservative estimate, on evidence 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 pharmaceutical prices in India and on its perverse
r-elationship to levels of per capita income.25 The preceding discussion has
explained why pharmaceuticals are high
and also why the
priced in general,
of prices fixed by the leading
level
firms has little to do with the actual
costs of producetion. With the obvious
eAxceptionlof heavy R and D expendiulres, all the other ulsual costs of producing and marketing pharmaceuticals

are present in India: there are heavy

promotion expenditures (thotugh the exis not available);
act 'cost breakdown
there are high profits and a proliferation of b)randed products; and there are
between brand name
vast differences
and generic name products.
products
Roche's Librium was sold in 1972 for
Rs 16 (per 100 tablets of 10 mg each)
name equivalents were
when generic
available from small units for prices as
low as Rs 1.52.26 Similarly, public sector units were supplying Phenobarbitone
at 1 paisa per tablet and Diethy Carbamazine Citrate at 3 paise per tablet
when brand name foreign equivalents 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
but this is
being very large indeed;
hardly surprising, in viewv of comparable differences observed in developed
countries.
The position of foreign brand name
products is, if anything, stronger in a
country such as India than in developed countries. Not only is there a longprejudice against local prostanding
ducts in every industry, "medical pracconsumers have a rigid
titioners and
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 discussion. First, the cost of internediate
supplied by public sector
chemicals
plants is high, relative to intemational
prices; foreign firms often blame high
retail drug prices on the high cost of
Second, quality
their raw rmaterials.
by the authorities is neither
control
comprehensive nor very efficient, and a
number of cases of drug adulteration
ly small producers has been recorded.
points may seem to support
These
the caseo for promoting foreign drug
firms and reducing public sector production. The first, however, is not very
becauise the retail prices
convincing,
charged by these firms is very much
higher than is justified with reference
to raw material prices. Generic equivalents are marketed much more cheaply
by smaller firms which use the same
Even in
chemicals as raw materials.
cases where the public sector prices
are over three times the import costs
as with Phenobarbitone, or Vitamin
B the prices of competing foreign
are much
equivalents
brand name
higher (about 50 per cent and 300 per
The cost of raw
cent, respectively).
materials is always such a small proportion of the selling prices in this industry that it is in any case difficullt
this argument at its face
to accept
sector
public
value. Of course, the
be made more efficient, but
should

even an tnefficient one provides cheaper 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 lacking drug control staff altogether.30 The

dangers of drug adulteration are very

great, and, given the enormnousprofit
margins, the inducement for small producers to indlulge ian it are also very
great. To the extent that the foreign
firms eniforce rigid quality control, certainly 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 public 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 lowvpriced products, with adequate (quality
safeguards.

The Indian government's policy toin(lustry has

wards the pharm-lacetutical
been a comibination of extreme stritigetncy in somiie respects with gross
leniencV in others. Let uis briefly consider the salient aspects of its policy.
(i) Pr-ices: In 1970, the governControl
Price
ni nt issued a Drug
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
on net
cent pre-tax return
15 per
capital employed for manufatcturers, and
formulators,
aniother 15 per cent for
xvas used. The implementation of the
Order eventuially led to a reduction in
drugs,
prices of the controlled
the
thouigh we (1o not possess iniformation
maganittude of savings
exact
on the
These 18 druigs accotunted,
achieved.
however, for only 9 per cent of the total
value of drrugs marketed in India; the
Order had the perverse effect of inducing 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 inprices was instituted.
of
vestigationWhatever the merits or faults of the
Order within its context of 18 drugs,
therefore, it certainly did not provide
a means of checking overall pharmaceuitical prices in the cotuntry.
(ii) Patent.s: We have already noted
early objecthe Indian government's
tions to the effects of the patent systeml. After a great dleal of prolonged
dlebate, a Patents Bill wvas passed in
the period of patent
197{0, reducing

proteclion from 16 to 7 years, ruling out

product patents and providing for comafter 3 years for a
pulsory licensing
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.
Production:
Sector
Public
(iii)
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
of the negotiations
stages
the early
wN7ith the Soviet bloc for technical assistance. Kidron cites this as one of the instainces of political pressture wvielded by
the foreigni investors in collaboration
xwith their Indian couLnterparts. In this
case, a Ruissian offer was rejected in favour of more expensive private deals.34
'problem' is one of
The main present
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
rnot be resolved
indutistry, it shotuld
since economies of scale
with tiie or production technology are not partiTo
cularly important or sophisticated.
repeat an earlier point, eceni an inefficienit public sector nmarkets drugs at
loe or prices th(an an efficienit private
for eigni sector.
The govern(iv) Transfer Prices:
ment has not formtulated an effective
policy to deal with this aspect of the
despite
operations,
drtug companies'
many indications that foreign firms in
sectors use arbitrary
this and other
The
pricing to remit profits abroad.
growving canalisationi of imiports through
Corporation may
the State
Tradinig
the risks, along with
have alleviated
the reduction in the degree of import
dependence, but a substantial amount
exchange is still spent on
of foreign
imports bought directly by the private
companies. Given the inhereint arbitrariin the international
ness in pricing
indlustry, the neglect
pharmaceutical
(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-

pharmaceuticai
to cut
vest attempts
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).
as also in
In all the-se respects quiality control and removal of export
there are gaps
restrictive clauses $ aind defects in official policy. However,
piecemieCal meastures to remedy one aspect 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 policies open to the less (leveloped countries, and especially to the Indian government, to achieve a practical solution.
POLICYOPTrINS FoR LDCs
fundamental
the
tis r-state
Let
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
of research
results
cost, using the
which is generally condlucted in developed countries;36 they want to bring
the lowest
with
them to consumers
possible expeniditure on marketing, and,
provide adequate
at the same time,
and honest in ormation on new preparations and their prices to prescribing
andl they -want to eliminate
(loctors;
in pricing of
elements
monopolistic
brand name produicts and every possibility of drug adutilteration.
Hlow is all this hest achieved? One
a
perhaps the best from
solution vould be a
global point of view thorough reform of the pharmaceutical
capitalist
in the developed
in(lustry
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
apavailable to the LDCs at prices
proximating the real costs of production, most of the undesirable elements
structure
in the present international
of the industry would disappear. The
the
LDCs would still be faced with
and
problems of internally processing
marketing the drugs, but any sensible
to
listribution system wzould he able
deliver the goods at prices far below
present ones.
I0owever, this is not a policy which
is open to the LDCs. Despite the octhe
of protest,
outbursts
casional
is likely to
pharmlaceultical ind(ustry
its present
unrlisturb
continue
led in
if the
countries;
form in developedl
Ll)Cs wsant to lowser their costs, they
1993

will have to do so on their own, within 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 betthose countries xvhich possess
ween
developed chemical industries and can
therefore produce
most pharmaceuticals 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 marketing system
on a nationalised
basis
(with no help from the
international
drug fli-ms) aznd those which are not.
Countries wN7hichhave simple processinig facilities l)ut
possess
neither
developed chemical inidustries nor an
administration
capable
of
handling
sophisticated information and marketing
systems can choose betwveen the following alternative 'packages' - in ascending order of desirability:
First, an industry dominated as at
present, by muiltinationals, which performs all the requisite functions but
at very high cost, and against whose
brand names and patents local enterprises have little chance to compete.
Second, similar to the first, but with
patenits eliminated, in wNhich case local
enterprises can legally copy the multinationals' products but may still find it
impossible to
compete
against their
brand names.
Third, the next stage, the stubstitution of generic for brand names, wvhich
may still be ineffective because the multinationals
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 manufacturers buying intermeidiate products
from the
lowest-priced world sources
from small firms selling under generic names in developed countries,
or
from producers which copy nexv technology cheaply (Italy). or from the Socialist
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 involved in the private selling of medicines. Thus, local firms would probably 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 remain internal, rather than flowing
abroad in the form of foreign profits,
but the most important aim of reforim
would still not be achieved. Furthermore, 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 implementing proper controls. The ultimate
advantages of reform may be substantial, 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 chemical industries and relatively welldeveloped administrations are much
broader. To continue from the fourth
'package', therefore:
Fifth, a more or less complete selfreliance in the production of intermediate chemicals, in either the public
or private sectors, copying technology
from abroad whenever necessary wvithout paying royalties, and completely
locally owned production of pharmaceuticals (again without eliminating
private marketing costs), with strict
quality control measuiresby the government.
Sixth, continued reliance on private
pharmaceutical production but with a
national purchasing service which determines 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 consumer. 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 whether 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 determined moves in this direction. The problem 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 provision of regular and up-to-date information 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 technology 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 resolve 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 present 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 description of the pharmaceutical industry in LDCs.
2 The market shares of multinational
pharmaceutical firms in the late

sixties were as follows in some

3
4
5
6

7
8

10

11
12
13

14
15

16

17

18
19
20

selected LDCs; Brazil, 78 per cent,

Argentina, 65 per cent, Peru, 95
per cent, Venezuela, 90 per cent,
the Philippines and Central America, over 80 per cent. See Wortzel, 1971, and Vaitsos, 1973. See
below for details on India.
On the effects of patents in LDCs
see Penrose, 1973, Vaitsos,
1973,
and UN, 1964.
UN, 1964, pp 94-5.
Vaitsos, 1973.
Vaitsos, 1973, p 75. The foreign
ownership of pharmiaceutical patents wvas 98.4 per
cent as compared to 94.5 per cent for all indu.stry.
Cooper, 1967, p 40.
This is probably even more true
of the phannaceutical industry, in
which all the LDCs together account only for about 16 per cent
of total non-Soviet Bloc pharmaceutical consumption.
See Wortzel,
1971, p 40.
Vaitsos, 1973. See also the views
of the Indian Government as expressed to the UN, in UN, 1964,
p 57.
Vaitsos, 1973, estimates that 98-99
per cent of patents taken out by
foreigners
in Colombia and Peru
were
unexploited
in 1970, the
bulk of them in the pharmaceutical industry. The Indian Government, quoted in UN, 1964, levels
the same charge, though the exact
propartion of unexploited patents
is not mentioned.
Penrose, loc cit, p 783.
Ibid, p 784.
Here we
are
considering costs
above the 'normal' ones of excessive profits, which also results in
foreign exchange drains, and high
marketing
expenses,
which
are
generally in local currency unless
the
advertising
firms are also
foreign oxvned.
See Lall, 1973.
These two figures are derived from
details of public
prosecutions of
pharmaceutical firms published by
a Bogota newspaper (El Tiempo,
1971); the annual savings achieved
by reducing
the prices of these
two chemicals came to US $ 384.6
thousand.
The last
two are from Vaitsos,
1973, Table 7; where Diazepam
is mentione(l as 'substance of Valium'. These two figures are the
highest recorded for overpricing in
this table, but are not very startling wNhencompared with the 4,000
per cent and 4,500 per cent overpricing respectively found by the
British Monopolies Commission's investigation of Roche (p 38).
Agarwal, et al, 1962, and Ministry
of Foreign Trade,
1972.
A different estimate for 1966 puts the
share of the largest
25 firms at
74 per cent of the total market,
anrd claims that this has not changed
much
till now. (Mote
and
Pathak, 1972).
OECD, 1969, Tab)le 2.
Mote and Pathak, 1972.
RBI Bulletines, 1972 and 1973. The
definition of 'foreign conltrolled' used by the Reserve Bank of India
includles firms wvith 40 per cent or

21

22

23

24
25
26

27

28

29

:30
31
32
33
34
35

36

more foreign equity and other

firms which are foreign managed
and have 25 per cent of their
equity held abroad. As these firms
cover only public limited companies, wholly owned branches of
foreign firms are not included;
these account for 12 per cent of
total foreign direct investment in
the pharmaceutical industry (RB1
Bulletin, 1971).
This range may be slightly higher
if branches of foreign firms are included, bringing it to 70-80 per
cent.
From Roche's annual accounts. The
firm has now been in operation in
India for over 25 years with a
foreign shareholding of 89 per
cent in 1968.
See RBI, 1968, and Ministry of
Foreign Trade, 1972. This may be
compared with an, average of 31
per cent for a sample of 20 pharmaceutical firms in Colombia. (Lall
and Mayhew, 1973).
See, for instance, Kidron, 1965,
Agarwal, et al, 1972, and Government of India, 1971.
See Kidron, 1965, p 251.
Agarwal, loc cit, Table 3. Roche's
price was slightly lower than the
equivalent in the UK (about Rs 18),
but is much higher than the
price recommended by the Monopolies Commission, and now enforced by the British government.
Ibid, Table 1. Both these products
were introduoed over 25 years ago,
so they are in no way an embodiment of heavy recent research
expenditures.
Ibid, p 2,290. Doctors also mention that high priced treatment is
considered more effective, and is
sometimes treated as a status symbol by rich patients.
This has also been noted for Egypt
in an unpublished study by Handoutssa,mentioned in a footnote on
p 777 of Penrose, 1973.
Agarwal, et al, 1972.
For details, see Mote and Pathak,
1972.
Agarwval,1972.
Sea Gupta, 1970.
Kidron, 1965, pp 163-5.
RBI, 1968, notes the heavy incide:ce of restrictive clauses in technical agreements of foreiga subsidiaries in this industry, p 38. Despite official efforts, restrictive
clauses are still present in many
agreements.
While the following discussion does
not go into the role of local R and
D in LDCs, clearly indigenous research is not excluded; there is no
reason why local efforts should not
complement research done abroad,
th ;ugh it is unrealistic to envisage
comnplete self-sufficiency in this
field. For reasons explained above,
there should be no detrimental
effect on the amounit of R and D
done in developed

coutirics

if less-

developed ones do not buy patents

from the innovating firms; this is
as.sumed throughout.
37 Total dependence on the Socialist
bloc may, of course, lead to mono-

polistic pricing on the part of the

suppliers. The role of continuously
'shopping around' is vital.
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Rangarao, B V (1972), 'Anomalies
in Drug Prices ard Quality
Control', Economic and Political
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Cain, J C (1967)) 'State Support for
Research', in G Teeling-Smith
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Comanor, W S (1965), 'Research and
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Comanor, W S (1966), 'The Drug
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'Patented Profits',
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Financial Times, (1973), 'Roche: What
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London, June 22.
'Why
(1974a),
Times,
Financial
Roche i Fighting to the Finish',
London F'ebruary 20.
Finiancial Times, (1974b), 'Strained
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London, May 9.
Government of India, 1971, Report of
the Study Team on Leakage of
Foreign Exchange through InvoiceManipulation, Delhi.
Guardian, (1974), Various Articles on
the drug industry by A Raphael,
especially on May 13 and 14.
Gupta, A (1970), 'Restricted Patents
and the Drug Industry', Economic
anid Political Weekly, September
26, pp 1585-6.
Hacrris,S E (1964), "The Economics of
American Medicine", New York,
Macmillan.
Johnson, H G (1970), 'The Efficiency
and Welfare Implications of the
Interniational Corporation', in C P
Kindleberger (editor), "The International Corporation", Cambridge
(Mass), MIT Press, pp 35-56.
Kefatuver,E (1966), "In a Few Hands:
Monopoly Power in America,"
Harmondsworth, Penguin.
Kidron, M (1965), "Foreign Investments
in India", London, Oxford University Press.
Lall, S (1973), 'Transfer-Pricing by
Multinational Manufacturing Firms
Oxford Bulletin of Economics and
Statistics, August, pp 173-95.
Ministry of Foreign Trade (1972),
Profile of Indian Industry, New
Delhi, Govemnmentof India.
Monopolies Commission, (1972). "Beechain Group Limited and Glaxo
Group Limited, The Boots Company and Glaxo Group Limited",
1995

London, HMSO.
Monopolies Commission, 1973, "Chlordiazepoxide and Diazepam", London
HMSO.
H N (1972)
Mote, V L, and Pathak,
An Eva'Druig Price Control:
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Weekly, July 15, pp 1369-79.
NEDO (1972), "Focus on Pharmaceuticals", London, National Economic
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New Scienitist (1974), 'Can We Handle
MIodern Drugs?'
pp 460-71; and
the Drug Trade',
'Cleaning up
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OECD (1969),
"Gaps in Technology:
Pharmuacetuticals",Paris, Organibation
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Economic
Co-operation and
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Parker, R C and Kelly, W II (1968),
'Profitability in the Drung Industry:
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1966-69,
Government, pp 144-83.
E T (1973),
'International
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RBI (1968), "Foreign Collaboration in
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RBI (1971), 'India's International Investment Positioin in 1967-68', Reser-ve
Banik of Inidia Bulletin, March, pp
552-93.
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RBI (1972), 'Finances
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Reserve Bank of In4a
September, pp 1425-1584.
RBI (1973), 'Finances of Branches of
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Sainsbury Coi-nmittee (1967), Report of
the Committee of Enquiiry into the
Relationship of the Pharmiaceutical
Ilndustry wvith the National Health
Service, 1965-67, Londoni, HMSO.
Scherer, F M (1971), "Indiustrial Market
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Ethical
'The
Schifrin, L G (1967),
Drug(JIndustry: the Case for Compulsory Iatent Licensing', in Part
5 of the US Senate's "Competitive
Problems in the Drug IndustrY", pp
1890-1900.
Steele, H (1962), 'Monopoly and Competition in the Ethical Drugs Market', Jour1nalof Law and Economics,
reprinted in
October, pp 131-63,
US Senate's "Competitive Problems
in the Drug Industry", pp 1950-70.
'Patent Restrictions
Steele, H (1964),
and Price Competition in the Ethical Drugs Industry',
Journal of
Industrial Economics, July, pp 198in US Senate's
223, reprinted
"Competitive Problems in the Drug
Industry", pp 1973-97.
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'Do all drugs
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*
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The Times (1973),
The Times 1000,

1996

The Times (1973), 'Americans Pay La

Roche "Three Times as Much" for
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8.
Trade and Industry (1974), 'Research
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U N (1964),
"The Role of Patents in
the Transfer of Technology
to
Developing Couintries", New York,
United Nations.
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Various,
"Competitive
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Vaitsos, C V (1973), 'Patents Revisited:

Their Function in Developing Countries', in C Cooper (editor), "Science.
and
Technology
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Walker, 11 D (1971),
anr(l Pirice Levels in the Ethical
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UNITAR.
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Re scarch Report, NO 14.

Semi-Feudalism, Usury Capital, Etcetera

Ashok Rudra
IT is a pity that such a discerning and
carefuil observer as Pradhan Harishankar
Prasad shouldi make such careless sweepin g statemnenits as he does in his
article on the role of usury capital in
Ecoionoic and Political Weekly, Special
Numher, 1974. By Prasad's owvn statement his observations are based on his
"intimate
contact
with some of the
rurial areas of Bihar", and by his ownv
judgment his data-base is
"too small
for any generalisation for the countrv
as a whole". This, however, does uot
d-ter him from mnaking the statement
that "the aforesaid
semi-feudal model
(but for variations in details) is, by and
large, valid for most parts of the rural
India". The few correlation co-efficients
he calculates for this purpose are
thoroughly inacle(utiate to support such
a strong proposition. If Prasad has got
intimate knowvledge of some parts of
Bihar, the present writer has also
acquired, during the last five years or
so, some direct first hand knoxvledlge of
conditions
prevailing in WN'estBengal
agriculture. In particuilar, during
the
last onie year he has been carrying out
aIn enquiry in the different (listricts of
WXest Ben(gal in to precisely the type of
(question in which Prasad is interested
anld the information so gathered will be
5021
released.
While we have
no
"model" for WNestBengal agricuilture as
a w hole, let
alone for conditions in
"most par-ts of the country", we
can
only point outt that many of the con(litions described by Prasacl does not
seem to hold true for most parts of
West Bengal. Let us quote in exten-so
from Prasad such
characterisations as
do not seem to hold for West Bengal
in the same way as Prasad finds them
to hold for Bihar. Speaking of the "big
landoxvning class" Prasad writes: ".
it is this class which shuns rapid development because it is likely to improve

the economic
condition of the semiprol-tariat -who can thereby free itself
fromii bondage". Speaking of consumptioIn
loanis taken
by
the
"semiproletariat' from the big landowTiers,
he wvrites "The stipulatedl rates of interest on these
loans are very high.
Ofteni as high as 100 per cent per
aninumi . Usury,
according
to him.
creates an "indissoluble bond between
senmi-proletariat and his overlord".
N K Chandra, writing in the same
issuie of this journial, gives an identical
of
characterisation
"semi-feudalism",
thouigh he is much less sweeping and
very much more cauitiotus in assertiang
that suich "semi-feuidalism" prevails in
the whole country, though he tends to
think so. In his xvords, two characteristics of
semi-feudalismii are "perpetual
indel)tedness of the small tenants" and
its preventing of "capital
investments
in agrictulture, for
such
investments
wouldl increase prodtuction and if the
tenant's share remainiedl conistant
the
tenanit might get out of his debts".
In the course of our investigations in
the different districts of West Bengal
we have failed to enicounter the land
owvning class that finds it more in its
economic an(l social-power interest to
resort to uistury rather than to capital
investments.
In many
parts of West
Bengal we have encounitered laandowners
w ho are very much engaged in capital
investments in the form of irrigation.
fer-tilisers and
high-yielding
variety
seeds, and wvhere this tenadency is present, it is fouind to be equally shared
by landowners who give their land otit
on lease to sharecroppers
and
those
who cutltivate it
themselves with the
help of hired
labour. In the former
case, it has become almost a universal
practice in West
Bengal for owners
and tenants to share the costs of seeds
and fertilisers in the same proportion