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 booming demand, a growing middle class and major expansion of health insurance have made it very attractive. The article notes companies such as Merck and GlaxoSmithKline are building R&D centres and hiring more sales agents in China than in the US, while consulting firm McKinsey reported insurance coverage climbed to about 95% of the population by 2011.
China is poised to surpass Japan as the world’s second-largest pharmaceutical market. The article cites McKinsey figures showing national healthcare spending rising from about US$357 billion in 2011 with projections to reach around US$1 trillion by 2020.
The article highlights significant regulatory risk: Chinese authorities have investigated pricing policies of up to 60 companies, pressured firms to cut prices (for example, infant formula makers), and have detained executives in bribery probes. These kinds of investigations can hurt sales, reputations and share prices.
Chinese investigators accused Glaxo of funneling payments through travel agents to doctors, hospitals and officials, organising fake conferences, overbilling training sessions and even paying kickbacks and ‘sexual bribery’. Four senior Chinese executives were detained and one admitted parts of the activity. Investors should note such allegations can lead to legal penalties, operational disruption and reputational damage—Glaxo had already faced a US$3 billion fine previously.
Some industry voices quoted in the article believe Western firms may have an edge because Chinese consumers may pay more for well-known brands and higher-quality ingredients. However, markets are maturing and becoming more highly regulated, so brand strength must be balanced against compliance and regulatory risk.
The article describes government pressure forcing price cuts—infant formula makers like Abbott and Nestlé reduced prices in China—and broader probes into drug pricing. This shows the government is actively intervening to control prices, which can compress margins for foreign and domestic drugmakers.
According to the article, investigators uncovered practices including bribery and kickbacks paid in cash and luxury travel, fake conferences, overbilling of training sessions, and the use of travel agencies to channel payments. Such misconduct has triggered detentions and public crackdowns.
Based on the article’s themes, investors should assess a company’s China revenue exposure, compliance and ethical track record (the article cites Glaxo’s prior US fine and image-rebuilding efforts), level of R&D and local investment, brand strength, and potential regulatory risk from Chinese investigations or price controls.
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