Early regulation: Mexico’s generic & 'miracle' drugs

What happens when True Dough is confined to a small space? She writes a lot, she copies and pastes a lot, and she evidently refers to herself in the third person (which she would never, ever do in person.)

I’ve been thinking a bit about Mexico’s current mis-information problem when it comes to generic drugs and "miracle" drugs. I’m convinced: there is a solution in free markets, but certain early government regulation, perhaps even temporary, should have been implemented to get Mexico’s undeveloped generic drug market off on the right foot. First, I’ll admit that most of my information on this subject comes from Global Insight economist Ben Shankland, who has been covering the subject for at least the past few months (although none of his pieces have public links -- sorry). Good reporting on this elsewhere seems hard to come by.

Here’s Shankland’s latest from Feb 9, Generics Industry in Mexico Calls for Help:

Consumers’ confusion over generics and non-equivalent copies continues to present a serious challenge to manufacturers of legitimate, off-patent medicines in Mexico…. There are an estimated 120 firms currently producing non-original medicines of varying quality in Mexico.

Here’s Shankland again, this time in "Miracle Drugs" Under the Spotlight in Mexico, Feb. 6:

The Mexican pharmaceutical market regulator, COFEPRIS, has called for the national competition authority PROFECO to help pursue manufacturers of so-called "miracle drugs". In an interview with the Diario Monitor newspaper, COFEPRIS chief Juan Antonio Garcia Villa estimates that the trade is worth approximately US$900 million per year, and that it has been partly responsible for a surge in Adverse Drug Reactions (ADRs) in Mexico from around 300 per year in 2000 to nearly 9,000 in 2006. The rising rates of deaths and intoxications have come despite the fact that effective pharmacovigilance is still "virgin territory" for Mexico, according to Garcia Villa. Significance: After years of crackdowns, legal reforms and forced inspections (see Mexico: 10 June 2005: ), efforts to halt the trade in these products continue to be ineffectual.

What is Mexico to do? The 2006 NBER Working Paper "Regulating Misinformation," by Edward Glaeser and Gergely Ujhelyi addresses the topic of misinformation in the advertising of drugs (h/t Healthcare Economist)

Here’s what the authors have to say about three methods of government regulation:

We consider the effects of three different forms of government intervention: taxes or bans on advertising, counter-advertising and taxes on profits or goods. If advertising is just misinformation, then taxes or bans on advertising yield second best options that weakly dominate all other government interventions. Counter-advertising where the government tries to refute private firms is sub-optimal because it creates a costly advertising response by the private firms. Price caps and taxes on consumption can be welfare enhancing, but they yield less social surplus than directly taxing or limiting advertising. A change in the tax code that stops firms from deducting advertising expenses is equivalent to a tax on advertising and yields similar results.

But evidence suggests that it is likely that none of these regulations would be effective in Mexico without damaging social surplus. First, bans on advertising have proven to be ineffective in Mexico, partly due to the flow of information across borders.

Shankland (Feb. 6):

Both COFEPRIS and PROFECO are members of the Mexico-U.S.-Canada Health Fraud Group (MUCH), a trilateral body that joins competition authorities and healthcare regulators in the three countries in an effort to stamp out bogus medicines. However, despite a constant stream of enforcement actions on both sides of the border, little can be done to stamp out illegal television advertisements for these products in Mexico, with many ads broadcast from U.S. soil. Within Mexico, a more vigorous attitude from PROFECO would be welcome, as the chronically under-resourced COFEPRIS is unlikely to overcome this threat to public health by itself.

Glaeser and Ujhelyi also propose taxes or bans on advertising. As Shankland pointed out after the Mexican senate refused a 15 per cent tax on medicines last month, "any plan that would have involved increasing the retail prices of medicines would have had direct consequences in a market where out-of-pocket spending remains the norm for most consumers of prescription medicines."

Maybe the market has solutions. I stumbled across a WSJ article dated 14 Feb 2005:

Victor Gonzalez has come up with a novel prescription for business success here: cheap drugs, cheap doctors -- and a dose of sex.

Mr. Gonzalez, 57, is shaking up Mexico's health-care system and changing the way drugs are sold here. By spotting gaps in the country's drug market and regulations, he is able to offer low-cost medicines and inexpensive care to millions who lacked both. By raising awareness of generics as an alternative to pricey brand-name drugs, he has revived the fortunes of domestic makers and posed a threat to the U.S. and European pharmaceutical companies that dominate Latin America.

(The "dose of sex," by the way, has to do with the skimpily-dressed models that help sell Mr. Gonzalez’s services and products.)

In 2005, Mr. Gonzalez had 2,550 stores. What ever happened to him and his Farmacias del Ahorro? Doctors and at least one law firm accused him of selling shoddy drugs, but he continues to expand his small empire. "In Mexico, Farmacias del Ahorro accounts for some 25% of the market in unit terms and 6% of sales in value terms" (Global Insight, 24 Jan. 2007). Last month he opened his first outlet in Chile.

So, a final thought: Perhaps there is a free market solution to Mexico’s misinformation problem, and one that doesn’t involve taxes on advertising, etc.; however, it could have been done better. Perhaps early government regulation should be considered when markets are not able to solve for massive negative externalities (in this case, the health and death of Mexicans).

I’m not suggesting that Mexico should follow the blueprint of the FDA. Further, I’m not the only free marketer who advocates early regulation in undeveloped health markets (check out Arnold Kling’s recent admission – see, I’m in good company*). But think of the market solutions in the U.S. For example, Wal-Mart has a program where they offer cheap prescriptions for some 314 generic drugs to more than 14 states.

Mexico’s market solution is very similar, the big difference being that the quality of drugs offered by Mr. Gonzalez is apparently much lower than the drugs offered by Wal-Mart. Still, Mr. Gonzalez accounts for 25% of the market. This means that individuals aren’t getting the proper medicine, and Mexico’s generic market is suffering (doctor’s find it easier to prescribe something from Pfizer, etc). Early regulation (perhaps even temporary) in this undeveloped market could have corrected this before the mess even began.

* -- I should have made clear that Kling is commenting on an entirely different subject, but following the link will tell you this.