Bosses Of Big Pharma Companies Unable To Deny Australia Being Ripped Off On Drug Costs

from the and-that's-even-before-TPP-is-in-place dept

Here on Techdirt, we often write about the bad behavior of Big Pharma, particularly in terms of how it is one of the main driving forces behind far-reaching international agreements like TPP. As a recent leak underlines, drug manufacturers hope to use TPP to extend the monopolies that allow them to charge high prices for their products. Confirmation that drug pricing has little to do with actual costs in at least one part of the world comes from a surprising source — the heads of Big Pharma companies, as this report in the Canberra Times reveals:

Multinational pharmaceutical companies are unable to assure Australians they are not being “ripped off” on the price of medicines as a result of their complex global supply chains.

The Australian heads of nine of the biggest global drug suppliers were forced into the embarrassing admission on Tuesday after backing themselves into a corner by insisting they have no idea what their own sister companies in other countries pay to import the same medicines.

This interesting confession was made during an Australian Senate inquiry into corporate tax avoidance. Apparently, Pfizer paid just AU$21 million (about US$16 million) in company tax in 2014, even though its Australian sales were AU$1.4 billion (about US$1 billion). The company claimed that was because its “cost of sales” in Australia were more than three-and-a-half times higher than those in the US. However, when pressed on those figures:

Pfizer managing director David Gallagher said he didn’t know what any other Pfizer subsidiary paid for drugs manufactured by the company in Ireland and declined repeated requests to explain the “arm’s length” process that determined intra-company transactions, known as “transfer pricing”.

Understandably surprised by this, the Senate Committee chairman asked the heads of Pfizer, AstraZeneca and GlaxoSmithKline to confirm what they seemed to be saying:

“As the CEOs of three of Australia’s biggest pharmaceutical companies, you have no idea what drugs cost in other jurisdictions? You can’t tell us whether we’re getting ripped off?”

As the Canberra Times reported:

All three agreed they could not.

It seems unlikely that TPP will do much to improve the situation.

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Comments on “Bosses Of Big Pharma Companies Unable To Deny Australia Being Ripped Off On Drug Costs”

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24 Comments
That One Guy (profile) says:

"And what are you going to do about it?"

Really, in their shoes I wouldn’t be embarrassed, I’d be smirking. Sure they’re ripping people off, but the politicians will still hand them all the money and power they want, due to a combination of bribes and spineless cowards in office who don’t have the guts to stand up for the public.

They may have played at being ’embarrassed’ before the crowd, but you can be sure all three were smiling as soon as the cameras were off, confident that the farce of an ‘inquiry’ or not, none of those pretending to hold their feet to the fire will have the guts to actually do anything about it.

G Thompson (profile) says:

Re: "And what are you going to do about it?"

Nope they were not smirking.. in fact far from it.. The amount of phone calls made after that questioning sessions with worried looks on all pharmaceutical was a moment of lol’s for anyone else in attendance..

they have sort of stepped on their own cranks with that statement, and the Tax avoidance inquiry is one that both sides of government are pushing for to find ways to actually get the tax and maybe criminally charge directors (breaching the corporate veil) as well.

These statements were not expected and came quite out of left field because they were so confidant in their responses (HA!) and it has now created a major headache for the govt and Big Pharma, and it’s all of there own making!

Again.. they were not smiling one little bit, nervous with lots of calls to counsel and murmerings of OMG, WTF have we done instead 🙂 (Aust is not same as US in political bribery/donations etc and senate at moment is VERY hostile to International businesses)

That Anonymous Coward (profile) says:

Re: Re: "And what are you going to do about it?"

Those with power develop a form of brain damage. Example #87987987

The CEO’s were so sure that they would get what they wanted and face little resistance because who would dare question them?
They are CEO’s and investor value, their bonuses, and making more money trumps little things like making sure people in need get the medicine.

One has to wonder what sort of moral toll it would take on a normal human to know that they put profit over someones survival.

And because I can, maybe they charge more because they have to print the identifiers on the pills upside down for that market. OHAI G! 😀

That One Guy (profile) says:

Re: Re: "And what are you going to do about it?"

Ah, but, is it sufficient to cause enough of an uproar over the relevant parts of the ‘trade’ agreements, where they stand to gain a whole lot more that they risk losing some real money?

Who cares if they have to pay some chump change in penalties, if they’re handed far more on a golden platter via one of the ‘trade’ agreements that they helped write?

andy says:

First world ripp off

pharma is one of the biggest culprits but then you just need to look at pricing in the UK compared to anywhere else.
How can a company for example like ASUS price a device at £500 when the identical device is being sold for under £250 in America and even cheaper elsewhere. I do not know of any 100% tax on imports into the UK although i am sure there must be some but not on tablet pc’s.

The fact is that big business like ASUS knows they can demand a higher price in the UK as people are prepared to pay to get the product and know no better.

I am amazed that governments allow pharma to get away with how they overcharge on products, especially when government’s are paying the higher prices due to socialized healthcare. Surely the UK government for example should be able to demand cheaper pricing if they know the product is sold cheaper in India or Brazil or Mexico.

I refuse to accept that governments cannot put pressure on pharma to sell products that save lives at cost plus 10% at most and even then costs should drop dramatically after the initial funding and r&d which is done freely by Universities is paid for…

1 tablet costing £500 but which can be manufactured for under £5 is not only greed but is i believe enough to make Pharma guilty of third degree murder when people die because they cant afford the medication.

AC (profile) says:

Re: First world ripp off

UK also has VAT, which is somewhat invisible to the end consumer depending on how many hands a product goes through.

If Asus sells their tablet to a local distributor for £200 in America and £200 in the UK, the distributor will actually pay £240 in the UK (20% VAT).

Then they mark it up 10% in both tax jurisdictions, selling to the retailer for £220 in the US and £320 in the UK (10% profit, plus another 20% VAT).

Then the retailer sells the product to the end user. With a 13% profit, that’s £250 in the US, but £435 in the UK. Asus did nothing different in either case, but with just two intermediaries in addition to the government, the price is 75% higher in the UK.

Nop (profile) says:

They should be smiling.

…because when the TPP passes – & Abbott will ensure that it will – Australian courts & politicians will no longer have any influence over Big Pharma drug prices in Australia anyway. I imagine that the only reason they were uncomfortable was that they had been counting on the TPP passing before being called on their pricing.

AC (profile) says:

Very common

Since Ireland has one of the lowest corporate tax rates, lots of multi-nationals run all their profits through their Irish entity (Apple, Google, etc).

Are Australian citizens being “ripped off” by getting charged more? It’s possible. Likely, even. As also discussed often on Techdirt, Australians pay more for just about everything, with little justification beyond ‘that’s what they’ll pay.’

I think, though, that this particular line of questioning was more focused on the tax situation. It’s possible that what’s going on here is more like this:

Pfizer Australia determines what the market price should be for a certain drug (probably this is inflated, but it’s largely irrelevant to the tax question), then Pfizer Ireland charges very close to that price to Pfizer Australia. Pfizer Australia’s COGS are relatively high compared to the sale price, so profits are low, leading to a lower tax burden in Australia.

Pfizer Ireland gets all the profits at the lower tax rate, but the CEO of the Australian subsidiary doesn’t know the relationships between Ireland and all the other subsidiaries.

All that meshes well with what was presented here, and doesn’t necessarily mean consumer prices are too high. They might well be, but the evidence here is weak. The same tax strategy could be used with a company that charges less than the market could bear, and the conversation above would be identical.

As for the corporate tax angle, it is the Board of Directors’ fiduciary responsibility to maximize returns for shareholders. They can be removed and, in extreme cases, be held liable by shareholders for not using every legal trick to maximize returns. This debate has raged for decades, but nobody has come up with a politically feasible solution yet.

DB (profile) says:

This isn’t about the cost of drugs at all.

It’s about tax evasion.

The Australian subsidiary is “paying” a much different price for the drugs than other subsidiaries. This goes beyond tax avoidance. It’s cooking the books to avoid paying taxes.

When a drug sells for $3 in India and $200 in Australia, the subsidiary shouldn’t be “paying” $198 for the drug.

bemrys (profile) says:

Actual Theory

Ok. A short explanation of the actual tax law theory in play – you can agree or disagree as you choose, but this is the actual legal thinking.

1. Australian subsidiary does nothing more than distribution (that was the testimony at the hearing)

2. Completely unrelated distribution companies have a net profit margin of x% of revenue (assume 4% for explanation purposes). See economic studies attached to the tax returns or read the public financials of Australian companies which are solely distribution companies.

3. Australian subsidiary negotiates the highest price it can from Australian customers (including the government)

4. The price the Australian subsidiary pays to its supplier get the drugs is adjusted monthly so that the subsidiary gets a 4% profit margin – the same as unrelated distributors would net.

5. The Australian subsidiary’s management knows the monthly price for them but they don’t know the monthly price to e.g. the Japanese subsidiary because they don’t know the Japanese subsidiary’s sales price to Japanese customers.

From an international tax theory standpoint, there are two questions:

(i) Is is really true that the Australian subsidiary doesn’t do anything more than an unrelated distributor (and if that is true, then why set up the Australian subsidiary)
(ii) What is the appropriate return that should go to other countries: the country where the drug is developed, the country where the strategic resource decisions are made, etc.?

If the Australian subsidiary really does not do much more than an unrelated distributor and Australia wants to tax the embedded profit in the drug, then the parent will simply close the Australian operations and sell through unrelated distributors and won’t have anything in Australia to tax.

bemrys (profile) says:

Not quite. In your example, the distributor who paid £40 in VAT to buy the tablet from Asus will recover that VAT with it’s next monthly VAT return. So net actual cost is really only £200. In your example, it gets marked up to £220 by the distributors in both America and the UK.
The UK distributor charges 20% VAT (so additional £44 added on to the retailer). So the UK retailer’s initial out of pocket is £264. But the retailer also recovers the £44 in VAT that it paid with its next monthly VAT return. After that refund, it has the same £220 cost as the American retailer.
Now the both retailers mark up the cost by £28.6 in your example to get a 13% profit (220 + 28.6 = 248.6).
The UK retailer now includes 20% VAT so the total price to the UK customer is £298.32.
The American retailer now includes applicable sales tax (anywhere from 0% to 12%).
The UK will always be higher, but not as much as your example. Your example assumes that the UK distributor and retailer are marking up the VAT which they get back. It may well be the case, but that is unconscionable (legal but immoral).

Alan Burke says:

Drugs pricing

Ever since “Honest John Howard” sold out Australia,s interests ,with his infamous FTA with America.Remember “OPPORTUNITY OF A LIFETIME!” Odd isn,t it how NO electioneering conservative politician has EVER REFERRED TO IT? So Mr Abbottoir(more cuts than a butcher)having observed this,expects to get away with it too! Please read “HOW TO KILL A COUNTRY!”

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