China a goldmine for drug makers, but it has its perils
Several, including Merck and GlaxoSmithKline, are making huge scientific investments in the country, including building research and development centres. In the next few years, China is poised to surpass Japan as the world's second-largest pharmaceutical market.
The booming Chinese demand for drugs could not come at a better time for Western manufacturers, whose sales have been slumping because of patent expiration in the US and price controls in Europe.
But selling drugs and other healthcare products in China is fraught with peril, as shown by allegations this week that Glaxo funnelled payments through travel agents to doctors, hospitals and government officials to bolster sales.
Chinese officials have compared the company's operations to organised crime and have detained four executives for questioning.
Shortly after government investigators raided Glaxo's Shanghai offices last month, the British executive in charge of the Chinese operations left the country. He has not been back.
Earlier this month, the top makers of infant formula, including Abbott and Nestle, lowered their prices in China under government pressure, while officials are investigating the pricing policies of up to 60 foreign and domestic drug companies. The rash of investigations is one measure of how critical the healthcare market has become to global companies, and to the Chinese government.
The Chinese have made no secret of their goal of pushing the country's domestic drug industry into more direct competition with the world's top manufacturers.
Several factors are contributing to the boom in China. The growing economy has given rise to a middle class that is increasingly able to afford expensive Western drugs.
And under a new healthcare program, China has expanded insurance coverage to hundreds of millions of new patients - 95 per cent of the population had insurance in 2011, up from 43 per cent in 2006, according to a report by consulting firm McKinsey & Co.
By 2020, China's spending on healthcare is expected to grow to $US1 trillion from $US357 billion in 2011. Even as foreign companies raise their investment, the Chinese are also looking to capitalise on the booming healthcare market. The government identified the medical industry as one of seven areas for development in its most recent five-year plan, and the country's medical sector invested $US160 billion in R&D in 2012.
But some believe Western companies will have an edge because consumers might be willing to pay more for brands that are known for high-quality ingredients.
"There are so many drugs that are poor quality in China, so the ability to differentiate yourself is important," said Craig Wheeler, chief executive of US drug maker Momenta Pharmaceuticals.
Mr Wheeler said the crackdowns were to be expected. "These markets are maturing and are going to be ... more highly regulated."
Glaxo has been struggling to rebuild its image after a $US3 billion fine in the US last year when the company admitted improperly promoting its antidepressants and failing to report safety data about the diabetes drug Avandia. Andrew Witty, who took over as chief executive in 2008, has repeatedly pitched the company as a global leader in ethical practices and said it had moved on from its lapses.
Chinese investigators told a different story this week, however. They said senior executives had organised fake conferences, overbilled for training sessions and paid kickbacks in cash and luxury travel. The illegal activity was funnelled through travel agencies, some of which hired young women to engage in "sexual bribery" with Glaxo managers to win long-term contracts with the company.
The Chinese government said it had detained four senior executives - all Chinese nationals - but noted that the British head of the Chinese operations, Mark Reilly, had left the country. Glaxo confirmed Mr Reilly was working from the company's offices in Britain.
On Monday, one of the detained executives admitted to much of the activity, according to news reports. Liang Hong, the vice-president of operations for Glaxo in China, said the payments to doctors and government officials contributed to the higher prices of the company's drugs in China. Glaxo said it was "deeply concerned and disappointed" by the accusations.
Frequently Asked Questions about this Article…
China's pharmaceutical market is expanding fast: multinational drug firms now employ more sales agents there than in the US, companies like Merck and GlaxoSmithKline are building R&D centres, and China is poised to surpass Japan as the world's second-largest drug market. The country also expanded insurance coverage dramatically (about 95% insured in 2011 vs 43% in 2006) and healthcare spending was forecast to grow to roughly US$1 trillion by 2020, all of which points to big demand growth investors notice.
The article highlights regulatory and reputational risks: Chinese authorities have launched high‑profile investigations and detained executives (as in the Glaxo case), pricing crackdowns have forced firms like Abbott and Nestlé to cut infant formula prices, and officials are probing up to 60 companies' pricing. There’s also increased scrutiny over sales practices and potential legal fines, so investors should factor regulatory and compliance risk into any exposure to China pharma.
Chinese investigators accused Glaxo of funneling payments through travel agents to doctors, hospitals and officials, organising fake conferences, overbilling training sessions and paying kickbacks — allegations that led to detentions of four Chinese executives. The case underlined how aggressive local enforcement and corruption probes can damage a company's operations and reputation in China.
According to sources in the article, Western firms may keep an edge on brand and perceived quality — some consumers are willing to pay more for trusted global brands given concerns about poor‑quality drugs in China. That said, the Chinese government is actively pushing its domestic industry into stronger competition, so this advantage may face pressure over time.
The government has pressured major producers (for example, Abbott and Nestlé lowered infant formula prices) and was investigating pricing practices across many foreign and domestic drug companies. This shows pricing controls and investigations can directly squeeze margins and force price cuts, affecting profitability for foreign drug makers operating in China.
Multinational firms such as Merck and GlaxoSmithKline are making substantial scientific investments and building research and development centres in China. The country’s medical sector also invested heavily in R&D (the article notes about US$160 billion in 2012), suggesting local R&D is a strategic way for companies to participate in long‑term market growth.
The article points out that China’s healthcare market is maturing and becoming more highly regulated. Executives quoted in the piece expected crackdowns and tighter rules as markets mature. For investors, that means higher compliance costs and policy risk are ongoing considerations alongside growth potential.
Watch for regulatory actions (investigations, detentions, fines), pricing pressure or government mandates (like the infant formula price cuts), company disclosures about local sales practices and executive changes, and investments in local R&D and sales infrastructure. These signals, highlighted in the article via cases such as Glaxo’s troubles and broader government probes, can materially affect a company's prospects in China.
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