**Comments Submitted**

**To**

**Department of Commerce**

**International Trade Administration**

**August 12, 2004**

**Pedro Reyes-Ortega**[^1]

**Some comments on patented drug prices in Mexico. A non-paper prepared
for the public hearing on prices and trade practices in the OECD
pharmaceutical markets, convoked by the ITA on August 3, 2004.**

These comments are prepared with the purpose of showing:

-   That drug price controls applied in Mexico actually lead to have
    drug prices lower than the US's ones, but not because of the control
    itself, but rather due to: i) A very high price ceiling, for each
    patented drug to be sold in the Mexican markets, which is set up
    between the producer and a governmental officer, turning the control
    into an empty concept. ii) A lower per capita GDP for Mexicans,
    compared to the US one.

-   That the suggestion of increasing drug prices in the OECD economies
    will end up reducing producers' revenues in some of the OECD
    countries, compared to the present situation, contradicting the
    argument offered by someone during the hearing in the sense that
    higher prices will generate larger both revenues , R&D funds and
    employment.

1\. On the first point, maximum drug prices in Mexico, in private
markets, are presently set by the Ministry of the Economy and the drug
producer. The producer makes a proposal, based on his costs, estimated
profits and drug prices observed in some other markets, namely the US
one, among others. The drug producer is a highly rational agent and
wants to extract the "consumer surplus" to other users involved in the
pharmaceutical markets, as does any agent that possesses some
non-competitive power. Here, the drug producer remains as a price maker,
and is fully protected by the intellectual property rights of the WTO,
agreed and signed by Mexico. This is why maximum prices are set up quite
high, allowing for starting to diminish them until the surplus is
extracted.

Drug distributors and final sellers are quite sensible to the disposable
income of potential consumers of drugs, and of course are interested in
a long term business with feasible profits. So, they utilize disposable
income information of their customers and proceed to offer discounts to
drug users on detailed prices. These discounts are also a result of
competitive strategies for those important drug chains which buy drugs
at wholesale prices. Discounts are set between 0 up to 35% of the
maximum price, and are determined according to the forces of spatial
markets.

As a consequence of the above, market (detailed) drug prices in Mexico
are freely determined, and on the average equal 80% of the US average
price level. At this level private suppliers and users feel satisfied.
(See graph 1, below). This shows how a price control mechanism which set
maximum prices at a very high ceiling becomes an empty control.

In our view, detailed Mexican price levels are presently too high if
referred to the Mexican GDP per capita, which is 15% of the US one, as
shown below in graph 1.

On the extreme, considering drugs as wage goods, if relative index
prices of selected OECD economies, as a percentage of the US's one, were
standardized by each economy's per capita GDP as a percentage of the
US's one, the Mexican drug price index is overvalued at more than
fivefold the US level. (0.8/0.15).

![](media/image1.wmf)

As an additional argument to support that drug prices in Mexico are not
affected by the maximum price setting, let me mention that the inflation
rate index of drugs is above the inflation rate of the CPI, as shown
below in graph 2.

![](media/image2.wmf){width="5.904166666666667in"
height="2.6979166666666665in"}

One can conclude that drug price controls in Mexico is an empty concept,
which does not interfere with price market solution, and that due to a
lower Mexican GDP compared to the US one, prices are set at the drug
market values lower than the US drug prices.

Before leaving this point, I want to make a couple of clarifications:
Mr. Jesus Gonzalez, US commercial attaché at the US Embassy in Mexico,
said at the hearing that drug prices in private markets in Mexico are
1/3 to ¼ of the US value, which is not supported with the figures
provided above. This mistake distorts some of his views and
recommendations against price controls. Also, he does not seem to be
very familiar with the process of setting maximum prices in Mexico. The
PhRMA representative mentioned at the hearing that the Mexican per
capita consumption of drugs is US\$483, which is false using his own
figure (US\$6.1 billions of consumption) and a population of 104 million
people. Once again figures provided by the some speakers are not really
reliable.

2\. We stated above that increasing drug prices in the OECD economies
will end up reducing producers' revenues in some of the OECD countries,
contradicting the argument that higher prices will allow to generate
larger both revenues, R&D funds and employment.

If drug prices in Mexico were set at US levels, they will equate, on
average, maximum prices in Mexican markets, and as we argued above,
these price levels are too high to extract the users' surplus. Putting
it in another way, sales volumes will diminish as well as producers'
revenues. This price increase will lead to other undesired effects: Drug
users will turn back to traditional remedies as substitutes (which might
be bad for health purposes), which in turn will contract demand for
drugs gearing prices downward to lower levels. If income is increased
(decreased), demand for drugs will increase (decreased), which simulates
an income movement from the US's per capita GDP to the Mexican one.

Consequently, price increases in economies such as Mexico and Chile,
seem to be a very pervasive and damaging suggestion, socially and
economically, and has negative impacts to increase funds to R&D and
creates unemployment in the pharmaceutical sector.

One can conclude that if the US patented drugs want to increase profits,
they should lower prices and lower their profit margins by a unit sold,
allowing US citizens to buy cheaper drugs either outside of US or within
US.

[^1]: At present, Pedro Reyes is consultant and researcher on economics
    of health, and had been researcher at the Center for Researching and
    Teaching Economics (CIDE) in Mexico City.