Bitter Pills:Medicines & The Third World Poor | Page 67

OVERPRICED RAW MATERIALS
The need to assure high quality is often used by local subsidiaries of manufacturers
formulating drugs in the Third World as a justification for importing high-priced
raw materials, sometimes exclusively from their parent companies. Similarly,
locally-owned companies producing drugs under license may be forced to buy
raw materials from the licensors in developed countries and pay inflated prices:"'
A Third World country can operate strict price controls on finished drugs, and
still find itself paying exceptionally high prices if the cost of imported raw materials
is ignored. A WHO document explains: "The most difficult components in
determining the prices of drugs are the costs of production of raw materials and
especially the cost of active ingredients, which are generally known only to the
producer. Such costs are the most important in determining the prices of drugs
by cost calculation because the pricing system is generally based on a percentage
mark-up of raw materials costs ... As drugs are moving internationally, many
transnational companies decide on the transfer of prices according to their own
interests." 1'""
An industry analyst confirms that the transfer prices of raw materials bear very
little relation to actual production costs. Prices carry a premium for research and
development and "centrally incurred costs". It is very hard for anyone outside
the company to quantify these costs, so in the words of the same analyst it is possible
for "appreciable profits to be transmitted from the local affiliate to the parent
company."' 9 "
This mechanism of transfer pricing is commonly used by transnational
corporations to shift capital around the world, avoiding government controls and
minimising taxes. (9:i Transnational companies, by their very nature are in a
position to set their own rules and get by unchallenged by purely national price
controls. Probably the most notorious instance of transfer pricing came to light
in 1973, in Britain, with the publication of the Monopolies Commission Report
on the supply of chlordiazapoxide and diazepam. Roche had been charging its
British subsidiary £370 and £922 per kilo for the active ingredients used to
formulate Librium and Valium in Britain. The Commission found that these active
ingredients were available from Italian manufacturers at £9 and £20 a kilo. Thus
they estimated that although Roche had been declaring profits generally below
5% on capital employed, its real profits were over 70% between 1966 and 1972.Wl
When developed countries like Britain, with sophisticated market intelligence
sources to hand, are hard put to monitor transfer pricing, it is hardly surprising
that developing countries end up paying high drug prices because raw materials
are overpriced.

HIGH TRANSFER PRICES TO BANGLADESH
The difficuties for developing countries as a whole are illustrated by the situation
in Bangladesh. Figures for imports during 1979/80 show that local subsidiaries
and licensees of major manufacturers paid their parent companies inflated prices
for imported raw mat erials. A number of manufacturers - such as Glaxo - operate
60