The importance of the country’s pharmaceutical industry in improving the quality and/or protecting the life of every Filipino by means of preventing, alleviating and curing diseases is recognized. The study presents vital information on the said industry as well as identify the taxes imposed thereon and its contribution in terms of tax payments.
The pharmaceutical industry is involved in developing, manufacturing, and selling of drugs and non-drug products. Drugs are articles intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease in man and/or intended to affect the structure of any function of the human body, but which do not include devices or their components, parts and accessories. On the other hand, non-drug products include nutritionals (health food) and infant milk preparations, baby care, cosmetics, diagnostic and other medical devices.
The production of drugs in the country is carried out by diverse players such as drug manufacturers and drug traders while the local retailers partake in the distribution of drugs. Drug distributors in the country can be classified as wholesalers, importers or exporters.
As of 2012, there were 55,491 companies engaged in drug distribution in the country, 49,447 of which were retail outlets and 6,044 were drug distributors as sourced from the Food and Drug Administration (FDA). It is worthy to mention that there were 17 drug manufacturers, 12 wholesalers, and 10 retailers which made it in the Business World’s (BW) 2012 Top 1,000 Corporations in the Philippines.
In 2012, the 17 top manufacturers generated a total gross revenue of PhP108.83 billion. United Laboratories, Inc. registered the highest gross revenue amounting to PhP33.13 billion or almost one-third of the total gross revenue of the 17 manufacturers. On the other hand, Sanofi Pasteur, Inc. posted the lowest gross revenue of PhP1.89 billion. Wyeth Philippines, Inc. recorded the highest net income of PhP2.65 billion while AstraZeneca Pharmaceuticals (Phils.), Inc. incurred a net loss of PhP98 million. The gross profit margin (GPM) varied from a high of 61.7% (Amherst Laboratories, Inc.) to a low of 16% (Interphil Laboratories, Inc.) or an average of 39.3%.
The BW’s top 12 wholesalers generated a total of PhP99.08 billion gross revenue. Zuellig Pharma Corp. posted the highest gross revenue amounting to PhP55.77 billion while A. Menarini Philippines, Inc. recorded the lowest gross revenue amounting to PhP1.47 billion. Except for Merck, Inc. with the highest GPM of 51.3%, closely followed by Merck Sharp & Dohme (I.A.) Corp. with 49.2%, the rest of the drug wholesalers have GPMs between 2.3% to 17.1%.
Meanwhile, the BW’s top 10 retailers of pharmaceutical products earned PhP133.61 billion in gross revenue and PhP2.57 billion in net income in 2012. Mercury Drug Corp. generated the highest gross revenue and net income amounting to PhP90.7 billion and PhP2.0 billion, respectively, but was only able to achieve a GPM of 15.1%. Conversely, Natrapharm, Inc. which recorded the lowest gross revenue of PhP1.6 billion and with PhP40 million net income achieved the highest GPM ratio of 50.8%. The average GPM of the top 10 companies engaged in the retail sale of drugs and pharmaceuticals stood at 18%.
Drug products in the country can be categorized as ethical products and over-the-counter (OTC) drugs. Ethical or prescriptions drugs are drug products prescribed by a medical practitioner and are only exclusively promoted ethically by drug companies via deployment of professional medical representatives while OTC drugs refer to drug products which can be bought by the consumer in a drugstore, pharmacy, pharmacy-licensed supermarket or grocery even without a doctor’s prescription. The industry is dominated by ethical or prescription drugs representing more than two-thirds (69%) of the entire pharmaceutical market, followed by OTC drugs (25%) and non-drug products or nutritionals with a minimal share of 6%.
Foreign pharmaceutical companies captured almost two-thirds or PhP417.2 billion of the PhP649 billion total Philippine pharmaceutical market. However, the share of local pharmaceutical companies in the total pharmaceutical market was on an increasing trend from 30.2% in 2006 to 38.5% in 2011 while the share of foreign pharmaceutical companies was declining from 69.8% in 2006 to 61.5% in 2011.
The pharmaceutical industry, just like any ordinary business, is subject to national taxes under RA 8424 and local taxes under RA 7160. National taxes imposed on the industry are: (1) regular corporate income tax (RCIT) or minimum corporate income tax (MCIT) under certain conditions; (2) dividends tax; (3) branch profit remittance tax (BPRT), if applicable; (4) value-added tax (VAT) or percentage tax; (5) documentary stamp tax (DST); and (6) taxes on importation. On the other hand, the local taxes are the local business tax (LBT) and the real property tax (RPT), among others.
As of December 2012, there were a total of 15,811 tax filers in the pharmaceutical industry, of which 97.1% or 15,357 establishments were engaged in the retail sale of pharmaceutical and medical goods, cosmetic and toilet articles, and 2.9% or 454 establishments were in the wholesale on a fee or contract basis of chemical and pharmaceutical products, and in the manufacture of pharmaceuticals, medicinal chemicals and botanical products. It is worth mentioning that there was a big discrepancy in the number of FDA-registered pharmaceutical companies vis-à-vis BIR registered tax filers from 2006-2012. This is because the FDA counts the pharmaceutical industry players based on the number of approved License to Operate (LTO) certificates given to drug companies. There are instances when a pharmaceutical company holds several LTOs if it is engaged simultaneously in various activities, e.g., drug manufacturing, wholesaling/importing/exporting, and retailing. In the case of drug retailers, they are required to secure an LTO per branch. On the other hand, the BIR counts pharmaceutical companies in terms of submitted income tax return (ITR) forms.
Not all tax filers under the pharmaceutical industry had tax payments to the BIR. Tax filers without payments include establishments that had a “break-even” profit or those that incurred net losses, no recorded operations/transaction during the specific year, or stop filers, which were subject to BIR audit. Also, some establishments could have filed tax returns jointly with their parent company. On the average, about 1,328 out of 14,168 tax filers or about 10% of the total tax filers annually did not contribute any tax payments during the period under review.
In terms of tax payment, from 2006-2012, the BIR collected a total of PhP118.8 billion taxes from the pharmaceutical industry. Of the amount, PhP73.9 billion or 62.2% came from manufacturers; PhP44.2 billion or 37.2% from retailers; and PhP646.6 million or 0.6% from wholesalers of pharmaceutical products.
Of the PhP118.8 billion tax revenue from the pharmaceutical industry, PhP76.1 billion (64%) were income tax payments, PhP40.8 billion (34.3%) VAT, PhP 1.5 billion (1.2%) percentage taxes, PhP20.1 million (.02%) excise tax and PhP0.5 billion (0.4%) other taxes.
Among the pharmaceutical companies registered with the BIR for the period under review, 32 to 38 pharmaceutical companies were categorized as large taxpayers. They contributed PhP93.3 billion of the PhP118.8 billion (78.58%) total collection of the entire pharmaceutical industry.
In 2009, 22 pharmaceutical companies landed in the BIR Top 500 Non-Individual Taxpayers. In 2012, there were only 17 top taxpayers included in the list. From 2009-2012, the BIR collected a total of PhP15.7 billion corporate income tax from top taxpayers of the pharmaceutical industry, 74.1% or PhP11.6 billion of which came from manufacturers and 25.9% or PhP4.1 billion from retailers of pharmaceutical products.
In 2012, the effective tax rate (ETRs) of the top taxpayers in the manufacture of pharmaceutical products ranged from a low of 1% to a high of 6.6% while their GPM ranged from 21.4% to 62.2%. On the part of the top taxpayers engaged in retail sale of pharmaceutical products, the industry’s lowest ETR was 0.5% in 2011 and highest at 16.5% in 2009. In general, retailers had relatively lower GPMs than manufacturers of pharmaceutical products.
It is worthy to note that ETRs varied even if they belong to the same line of business. Moreover, there were some corporations which have low ETRs although their GPMs show that their business is profitable. It may also be noted that not all pharmaceutical companies included in the BW Top 500 Corporations for the years 2009-2012 were in the BIR Top 500 Non-Individual Taxpayers. These companies may, therefore, be subject to audit.
