Best not to invest
Pharmaceutical concerns facing potential bankruptcy include both small domestic wholesalers and some of the biggest investors on the local pharmaceuticals market.
Since 1993, with the full knowledge and blessing of the government, drug importers have followed a practice of declaring the customs value of drugs obtained at discount prices at the full rather than the discount value. Many of the drugs imported by pharmaceutical companies are refunded by the government, while the law at that time prevented pharmaceutical importers from establishing profit margins outside the then government fixed level of 14.3 percent of the drug's value, shared by all those involved in the distribution process. Therefore, on the suggestion of the then government, in order to make a profit, importers initiated a practice of declaring the customs value of drugs at an amount higher than the producer's price at that time, thus increasing the value of the 14.3 percent margin.
This practice was condoned by subsequent governments which, given the resultant higher incomes from VAT, also made a good profit from the arrangement.
Yet an ordinance introduced by the government in May 2000 which made the practice of inflating profit margins illegal was in 2001 declared to be unconstitutional by the Constitutional Tribunal. The tribunal ruled that the government must change the ordinance within one year.
Nevertheless, the tax investigation office (UKS) has initiated auditing procedures into 80 pharmaceutical importers on the basis of that very ordinance, with the aim of determining the sums that these importers allegedly owe the State Treasury for illegally inflating the customs value of imported drugs. Importers face fines that could, in some cases, lead to their bankruptcy. The potential zł.100 million fine facing Hexal Polska, for example, far exceeds the total value (zł.60 million) of Hexal's investment in Poland. Leading global pharmaceutical concern, GlaxoSmithKline, faces potential fines of zł.752 million.
While pharmaceutical companies would theoretically be able to challenge the legality of the government's actions in court, this legal process will only be able to begin after the fines have actually been paid. In many cases, the legal process, if not the original fine, could mean certain bankruptcy.
"So what are they saying? We'll finish you off first and then we'll see if its legal?" says Andrzej Trzeciakowski, general director of Hexal Polska,
Despite the enormity of the fines involved, in Trzeciakowski's view, the ruling SLD party's aim may be not so much to liquidate firms as to extort quick cash out of pharmaceutical companies in order to fund the government's cash-strapped budget.
"Of the zł.60 million that Hexal has invested in this country, 80 percent still actually belongs to the bank," he points out. "So if we had to pay the kind of sums we're talking about within 14 days, which is the usual legal procedure, then the government would get nothing - except perhaps for some of the office furniture."
"It would be better for the government, in many cases, to have us pay smaller amounts over a longer time period rather than to have us go bankrupt," he says. This is how he interprets the motive behind the Legal Chamber of the Council of Ministers' bulletin which, on December 3, announced the government's schedule for its intended actions. The schedule proposes that investigations to establish how much individual concerns allegedly owe the treasury be followed by 'negotiations which aim to come to an agreement as to the form of compensation of the liabilities owed to the State treasury.'
What the term 'negotiations' is intended to mean, not known for certain. "The fact is, there is no direct communication with the government, so we don't really know what their intentions are," explains Aldona Zygmunt, press spokesperson for GlaxoSmithKline. In Trzeciakowski's opinion, though, the planned 'negotiations' with pharmaceutical concerns may be intended to establish a series of payments by installments - with the alternative of certain bankruptcy being held as a threat to encourage pharmaceutical companies to cooperate.
"It's blackmail, crystal clear," he says.
It is probable that any money gained from the pharmaceutical companies would eventually have to be returned, with interest, since any legal appeal by the companies would almost inevitably be upheld. Yet, since the legal process would probably last two years, and as few expect the current ruling party to return to office in the next elections (planned for 2005), it's very likely that it won't be the present government, only its successor, that will have to foot the bill. Aldona Zygmunt concedes that this may actually be part of the plan.
"They want a loan," is how Trzeciakowski puts it.
Pawel Piotrowski, president of the Association of Representatives of Pharmaceutical Firms in Poland, also lends support to this view, drawing attention to the fact that Health Minister Leszek Sikorski has specifically compared the sum of the potential fines to the 2002 level of hospital debts, which reached zł.5 billion. This despite the fact that the investigations establishing the sums allegedly owed are by no means completed.
"This is one of countless examples of how - particularly foreign - pharmaceutical businesses have been treated unfairly by the government," says Paulina Kieszkowska, legal expert at international law firm, Baker and McKenzie. Like many, she points to government propaganda, which routinely links its difficulties in finding the means to reimburse medicines to the artificially high prices of foreign - particularly innovative - pharmaceuticals.
In this case, those affected include small domestic wholesalers and locally owned producers which also import medicines, such as Polfa Kutno, as well as some of the biggest investors in this country.
"All the profits we have made on imports have been put back into our investment in Poland," says Trzeciakowski. Hexal Polska has just invested zł.60 million in a new factory, employs 200 people, and has been planning to invest another zł.60 million over the next few years. Other substantial investors facing penalization include Slovenian Lek Lubljana, and Yugoslavian Kirka, both of which could face fines reported at zł.100 million.
"If this is the way that investors are treated, then I don't know how Poland is going to get the investment it so desperately needs," Trzeciakowski says.
It's a view dismissed by analyst Andrzej Trzymanski at CAIB financial advisers, in whose opinion: "Poland is such an attractive market that investors will have to come all the same."
Portal editor at the British-Polish Chamber of Commerce, Michał Dębinski, however, disagrees, pointing out that as of May 1, Europe will be a single market, and that serving Poland's 38.6 million consumers does not, in many cases, actually require any kind of physical presence in the country.
"Poland can be served just as well from the Czech republic, Slovakia or Lithuania," he says, "all of which have made it considerably easier than the Polish bureaucracy for investors to place their capital."
In his view, Peugeot's decision to invest in Slovakia rather than Poland may well be followed by that of other investors, including Polish investors looking for a more favorable business environment.
"Things like this don't do Poland any favors," he adds.
Meanwhile, Swiss investments in the country have already been frozen in connection with the investigations against Swiss based pharmaceutical concern, Novartis, according to Ryszard Wojtkowski, President of the Polish-Swiss Chamber of Commerce and partner at Enterprise Investors, Central Europe's largest investment fund.
The French, British, German, Swiss and American embassies as well as the EU Commission are among those expressing active concern over the government's actions.
"The seriousness of the charges, questions about their legal basis, and the magnitude of the potential penalties are matters of growing concern for both foreign pharmaceutical companies and the governments of the countries where they are headquartered," says Chuck Ashley, Second Secretary for Economic Affairs at the U.S. Embassy, Warsaw.
Joan Pearce, first counselor at the delegation of the European Commission in Poland is graver still, pointing out that the EU Commission has on several occasions expressed its view that the government's proceedings in this case are not in line with the Europe Agreement. She doubts that the EU Commission will take any further action unless fines are actually imposed, however, if they are, she says that, "...the commission will take any steps necessary." The Ministry of Health spokesperson was consistently unavailable for comment.
Since 1993, with the full knowledge and blessing of the government, drug importers have followed a practice of declaring the customs value of drugs obtained at discount prices at the full rather than the discount value. Many of the drugs imported by pharmaceutical companies are refunded by the government, while the law at that time prevented pharmaceutical importers from establishing profit margins outside the then government fixed level of 14.3 percent of the drug's value, shared by all those involved in the distribution process. Therefore, on the suggestion of the then government, in order to make a profit, importers initiated a practice of declaring the customs value of drugs at an amount higher than the producer's price at that time, thus increasing the value of the 14.3 percent margin.
This practice was condoned by subsequent governments which, given the resultant higher incomes from VAT, also made a good profit from the arrangement.
Yet an ordinance introduced by the government in May 2000 which made the practice of inflating profit margins illegal was in 2001 declared to be unconstitutional by the Constitutional Tribunal. The tribunal ruled that the government must change the ordinance within one year.
Nevertheless, the tax investigation office (UKS) has initiated auditing procedures into 80 pharmaceutical importers on the basis of that very ordinance, with the aim of determining the sums that these importers allegedly owe the State Treasury for illegally inflating the customs value of imported drugs. Importers face fines that could, in some cases, lead to their bankruptcy. The potential zł.100 million fine facing Hexal Polska, for example, far exceeds the total value (zł.60 million) of Hexal's investment in Poland. Leading global pharmaceutical concern, GlaxoSmithKline, faces potential fines of zł.752 million.
While pharmaceutical companies would theoretically be able to challenge the legality of the government's actions in court, this legal process will only be able to begin after the fines have actually been paid. In many cases, the legal process, if not the original fine, could mean certain bankruptcy.
"So what are they saying? We'll finish you off first and then we'll see if its legal?" says Andrzej Trzeciakowski, general director of Hexal Polska,
Despite the enormity of the fines involved, in Trzeciakowski's view, the ruling SLD party's aim may be not so much to liquidate firms as to extort quick cash out of pharmaceutical companies in order to fund the government's cash-strapped budget.
"Of the zł.60 million that Hexal has invested in this country, 80 percent still actually belongs to the bank," he points out. "So if we had to pay the kind of sums we're talking about within 14 days, which is the usual legal procedure, then the government would get nothing - except perhaps for some of the office furniture."
"It would be better for the government, in many cases, to have us pay smaller amounts over a longer time period rather than to have us go bankrupt," he says. This is how he interprets the motive behind the Legal Chamber of the Council of Ministers' bulletin which, on December 3, announced the government's schedule for its intended actions. The schedule proposes that investigations to establish how much individual concerns allegedly owe the treasury be followed by 'negotiations which aim to come to an agreement as to the form of compensation of the liabilities owed to the State treasury.'
What the term 'negotiations' is intended to mean, not known for certain. "The fact is, there is no direct communication with the government, so we don't really know what their intentions are," explains Aldona Zygmunt, press spokesperson for GlaxoSmithKline. In Trzeciakowski's opinion, though, the planned 'negotiations' with pharmaceutical concerns may be intended to establish a series of payments by installments - with the alternative of certain bankruptcy being held as a threat to encourage pharmaceutical companies to cooperate.
"It's blackmail, crystal clear," he says.
It is probable that any money gained from the pharmaceutical companies would eventually have to be returned, with interest, since any legal appeal by the companies would almost inevitably be upheld. Yet, since the legal process would probably last two years, and as few expect the current ruling party to return to office in the next elections (planned for 2005), it's very likely that it won't be the present government, only its successor, that will have to foot the bill. Aldona Zygmunt concedes that this may actually be part of the plan.
"They want a loan," is how Trzeciakowski puts it.
Pawel Piotrowski, president of the Association of Representatives of Pharmaceutical Firms in Poland, also lends support to this view, drawing attention to the fact that Health Minister Leszek Sikorski has specifically compared the sum of the potential fines to the 2002 level of hospital debts, which reached zł.5 billion. This despite the fact that the investigations establishing the sums allegedly owed are by no means completed.
"This is one of countless examples of how - particularly foreign - pharmaceutical businesses have been treated unfairly by the government," says Paulina Kieszkowska, legal expert at international law firm, Baker and McKenzie. Like many, she points to government propaganda, which routinely links its difficulties in finding the means to reimburse medicines to the artificially high prices of foreign - particularly innovative - pharmaceuticals.
In this case, those affected include small domestic wholesalers and locally owned producers which also import medicines, such as Polfa Kutno, as well as some of the biggest investors in this country.
"All the profits we have made on imports have been put back into our investment in Poland," says Trzeciakowski. Hexal Polska has just invested zł.60 million in a new factory, employs 200 people, and has been planning to invest another zł.60 million over the next few years. Other substantial investors facing penalization include Slovenian Lek Lubljana, and Yugoslavian Kirka, both of which could face fines reported at zł.100 million.
"If this is the way that investors are treated, then I don't know how Poland is going to get the investment it so desperately needs," Trzeciakowski says.
It's a view dismissed by analyst Andrzej Trzymanski at CAIB financial advisers, in whose opinion: "Poland is such an attractive market that investors will have to come all the same."
Portal editor at the British-Polish Chamber of Commerce, Michał Dębinski, however, disagrees, pointing out that as of May 1, Europe will be a single market, and that serving Poland's 38.6 million consumers does not, in many cases, actually require any kind of physical presence in the country.
"Poland can be served just as well from the Czech republic, Slovakia or Lithuania," he says, "all of which have made it considerably easier than the Polish bureaucracy for investors to place their capital."
In his view, Peugeot's decision to invest in Slovakia rather than Poland may well be followed by that of other investors, including Polish investors looking for a more favorable business environment.
"Things like this don't do Poland any favors," he adds.
Meanwhile, Swiss investments in the country have already been frozen in connection with the investigations against Swiss based pharmaceutical concern, Novartis, according to Ryszard Wojtkowski, President of the Polish-Swiss Chamber of Commerce and partner at Enterprise Investors, Central Europe's largest investment fund.
The French, British, German, Swiss and American embassies as well as the EU Commission are among those expressing active concern over the government's actions.
"The seriousness of the charges, questions about their legal basis, and the magnitude of the potential penalties are matters of growing concern for both foreign pharmaceutical companies and the governments of the countries where they are headquartered," says Chuck Ashley, Second Secretary for Economic Affairs at the U.S. Embassy, Warsaw.
Joan Pearce, first counselor at the delegation of the European Commission in Poland is graver still, pointing out that the EU Commission has on several occasions expressed its view that the government's proceedings in this case are not in line with the Europe Agreement. She doubts that the EU Commission will take any further action unless fines are actually imposed, however, if they are, she says that, "...the commission will take any steps necessary." The Ministry of Health spokesperson was consistently unavailable for comment.
